Mexico - Ninth Agricultural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6802-ME STAFF APPRAISAL REPORT MEXICO NINTH AGRICULTURAL CREDIT PROJECT May 29, 1987 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Unit - Peso (Mex$) On May 12, 1987, the exchange rate in the controlled market was US$1 = Mex$ 1,218.30; the free market exchange rate stood at US$1 = Mex$ 1,214.00. Fiscal Year January 1 to December 31 WEIGHTS AND MEASURES Metric System 1 hectare (ha) = 10,000 m2 = 2.47 acres i kilometer (km) = 0.62 miles 1 square kilometer (km2) = 0.39 sq. miles = 100 ha 1 kilogram (kg) = 2.20 pounds 1 liter (1) = 0.26 gallons 1 cubic meter (i3) = 35 cubic feet 1,000 kg. I metric ton = 0.98 long ton ABBREVIATIONS ACF - Index of Average Cost of Funds to Multipurpose Banks BANRURAL - National Rural Credit Bank BANXICO - Bank of Mexico FF.FA - Special Agricultural Credit Trust Fund FEGA - Technical Assistance and Loan Guarantee Trust Fund FICART - Trust Fund for Credit in Irrigated and Rainfed Areas FIRA - Agricultural Trust Funds in Bank of Mexico FONDO - Trust Fund for Crop, Livestock and Poultry Credit GIRA - General Interest Kate Agreement ICB - International Competitive Bidding IDB - Inter-American Development Bank NAFIN - Nacional Financiera, S.N.C. PRONADRI - National Program for Integrated Rural Development SAM - Mexican Food Program SA.RH - Secretariat of Agriculture and Water Resources SkLCP - Secretariat of Finance and Public Credit SOE - Statement of Expenditure  FOR OMCIAL US ONLY MEXICO NINTH AGRICULIURAL CREDIT PROJECT STAFF APPRAISAL REPORT Table of Contenta Page No. I. LOAN AND PROJECT SUMMARY ......... ......................... 1 II. THE AGRICULTURAL SECTOR ......* ........................... 3 Agriculture in the Economy ................'.... ........*.... 3 Government Strategy .........3.............................. Bank Strategy ...4................................ ...... ** 4 Agricultural Credit .4........... ........... ......... 4 Past Experience With Bank Lending .e*.* ....................... 7 III. THE PROJECT * .... .*.* .......... 8 Background and Rationale for Bank Involvement .............. 8 Project Objectives and Description ........................ 8 Project Costs and Financing ........................ 10 Procurement o 10 Disbursements . ............ .... 10 Project Execution ... ............ 11 On-Lending Procedures and Interest Rates .................. 11 Subloan Appraisal and Supervision ........................ 12 Reporting Requirements ........ ............................ 13 Accounting and Auditing .... .............................. . 13 Project Benefits .... .......... ................. 13 Project Risks * ........................................... 14 IV. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATIONS ........ 14 ANNEXES 1. Table 1 - Project Cost and Financing ......................... 16 Table 2 - FIRA/FICART Combined Investment Program and Financing Plan ..................... ................ 17 Table 3 - Estimated Disbursement Schedule .................... 18 2. Lending for Agriculture through the Banking System by Type of Financial Institution ............................. 19 3. The Trust Funds for Agriculture in the Bank of Mexico (FIRA) . 20 4. The Trust Fdnd for Credit in Irrigated and Rainfed Axeas (FICART) ............................ 30 5. Detailed Project Description ***...... ..3......... ....*. 39 6. Illtistrative Investment Plans ................................ 42 7. Interest Rates Applicable to the Agricultural Sector ......... 45 8. Agricultural Financial Subsector Review - Terms of Reference ......................................... 46 9. Documents Available in Project File .......................... 49 MAP-IBRD 19728R This report is based on the findings of an appraisal mission which visited Mexico during November and December 1985. The mission consisted of Messrs. G. Russell, R. Milford, R. Rafloski and Mrs. Anderson (Bank); and Mr. P. Stroh (Consultant). The report was updated in May 1987 by Messrs. R. Rafloski and A. Byrne. This document has a retricted distribution and may be used by rcipients only in the perfomance of their official dutie its contents may not otherwise be disclosed without World Bak authorzation.  MEXICO NINTH AGRICULTURAL CREDIT PROJECT I. LOAN AND PROJECT SUHMAEY Borrower: Nacional Financiera, S.N.C. (NAFIN). Guarantor: United Mexican States. Beneficiaries: Agricultural Trust Funds in the Bank of Mexico (FIRA) mainly for on-lending by commercial banks, and the Trust Fund for Credit in Irrigated and Rainfed Areas (FICART), for on-lending by BANRURAL, Mexico's largest agricultural credit lender. Aaount: US$400 million equivalent. Terms: Fifteen years, including three years of grace, at the stan- dard variable interest rate. Relendinag Terms: THE BORROWER would transfer the proceeds of the loan to FIRA and FICART under contractual arrangements satisfactory to the Bank. Funds would be oa-lent by FIRA and FICART in local currency to discount subloans on terms and conditions specified in the Project Agreements and the General Interest Rate Agreement (GIRA). Project Description: The project supports the Government's medium-term structural policy reform program and is linked to the 1986-87 external financing plan supported by the Bank and other agencies. It consists of a credit program designed to increase agricultural productivity, exports, and real farm income. The project would directly benefit about 100,000 families (550,000 beneficiaries) and would generate an additional 240,000 jobs. It would assist the Government to improve agricultural policies through the reduction of interest rate subsidies. FIRA and FICART's productive support programs to farmers would be strengthened. Finally, a rural financial subsector review would identify problem areas and improve the agricultural credit system, including further reductions in subsidies in credit and crop insurance, improved efficiencies in the rural financial system, and increased domeatic resource mobilization. Pro eat Risks: The project presents no special risks in terms of the tech- nical and financial soundness of the various investment subprojects that would be financed. The risk of a reversal of progress in reducing interest rate subsidies is small: the Government is codmitted to the gradual elimination of economic distortions and has a close dialogue with the Bank on interest rates-including those charged to farmers- within the context of the Government-Bank General Interest Rate Agreement (GIRA). Govertment commitient to continue rationalization of interest rates was demonstrated by its upward adjustment in agricultural interest rates, relative to the Average Cost of Funds (ACE), on May 1, 1987.  -2- Fstimated Coit: 1 Local. Foreign Total --------- US$ million - I. Investments A. Low-income producers Crops 140 95 235 Livestock 106 70 176 Agroindustries 25 16 41 Subtotal 181 452 B. Other producers Crops 132 89 221 Livestock 114 76 190 Agroindustries 25 16 41 Subtotal 271 181 452 Total 542 362 904 TI. Working Capital A. Low-income producers 24 16 40 B. Other producers 24 16 40 Subtotal 48 32 80 III. Productive Support 10 6 16 Total Project Cost 600 400 1,000 Financing Plan: 11 Local Foreign Total -US$ million -------- Beneficiaries 141 141 Participating banks 141 - 141 FIRA/FICART 318 - 318 Bank - 400 400 Total 600 400 1,000 Estimated Disbursements: 1/ Bank FY 1988 1989 1990 1991 -- -------- US$ million -------