Ghana - National Investment Bank Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6796 PROJECT COMPLETION REPORT GHANA NATIONAL INVESTMENT BANK (NIB) PROJECT (LOAN 1180-GH) May 22, 1987 Industrial Development and Finance Division West Africa Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its conients may not otherwise be disclosed without World Bank authorization.  FOR OMCIAL USE ONLY THE WORLD BANK Washington D C 20.413 U S A )Mfie nt Daetto'Ceneral Opeat.ons bvulua:'on 1Nay 22, 1987 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Ghana - National Ir.vestment Bank (NIB) Project (Lian 1180-GH) Attached, for information, is a copy of a report entitled "Project Completion Report on Ghana - National Investment Bank (NIB) ProJect (Loan 1180-GH)" prepared by the West Africa Projects Department. Under the modified system for project performance auditing further evaluation of this project by the Operations Evaluation Department has not been made. Yves Rovani By Ram K. Chopra Attachment 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  PROJECT COMPLETION REPORT GHANA: NATIONAL INVESTMENT BANK (NIB) PROJECT (Loan 1180-GH) TABLES OF CONTENTS Page No. PREFACE ......... ............................. i BASIC DATA SHEET ....................... .. , ....... ......... ii HIGHLIGHTS ............. ................. * .... iv I. INTRODUCTION . ......................... ... 1 II. THE ENVIRONMENT ................ . , . . . ... . .... 1 A. Ttie Economic Background .. 1 B. The Industrial Sector . .............. 3 C. The Financial Sector ... ............................ 5 III. THE NATIONAL INVESTMENT BANK ...................... , ... 6 A. The Institution .......... . .. ......... , 6 B. Ownership and Share Capital .................. 6 C. Organization, Management and Staff .......... , 8 D. Policies and Procedures .............. . .............. 10 E. Operations .... .................. *.................. 10 F. Financial Performance and Condition .............. .. 11 IV. THE PROJECT ................................ . ... ...... 15 A. Objectives ................................. ...... . 15 B. Project Implementation ............................. 15 C. Compliance with Loan Covenants ................... 17 D. Utilization of Loan Proceeds . ............... #...... 18 V. CONCLUSIONS AND LESSONS LEARNED . ........................ 20  -2 Page No. TAVLE OF CONTENTS (cont'd) ANNEXES ANNEX I Actual vs. Projected Operations 1976-84 ....... 23 ANNEX II Schedule of Estimated vs Actual Cumulative Disbursements. 24 ANNEX III Comparative (Projected & Actual) Income Statements 1975-84.................. ...... 25 ANNEX 1V Comparative (Projected & Actual) Balance Sheet 1975-83 ...* .............. , .... 26 ANNEX V Resources Mobilization Statement .............. 27 ANNEX VI Financial Indicators 1975-84 .................. 28 ANNEX VII Arrears Situation as of December 31, 1984 ..... 29 ANNEX VIII Listing of Subprojects Financed under the Loan ............ .........................30 ANNEX IX Characteristics of Subprojects Financed under the Loan ....... . ........ . 31 ANNEX X Performance of Subprojects .................... 33 ATTACHMENTS A. Telex from National Investment Bank ............ 34 B. Letter from Bank of Ghana of April 23, 1987 .... 36  - i - PROJECT COMPLETION REPORT GHANA - NATIONAL INVESTMENT BANK (NIB) PROJECT (Loan 1180-GH) PREFACE This Project Completion Report (PCR) relates to Bank Loan 1180-Gi of US$10 million to the National Investment Bank (NIB), for financing the foreign exchange cost of projects in manufacturing, agri-business and tourism. The project was approved by the Board on December 11, 1975 and declared effective on March 2, 1976. Although the loan was fully committed by the original terminal date (December 31, 1979) for subproject submission, the closing date was extended four times from December 31, 1981 to June 30, 1984, due to delays in subproject implementation resulting from country difficulties. A second line of credit (901-GH) for US$19 million was approved by IDA in May 1979 and became effective in May 1980. This credit is now about 98% committed and about 96% disbursed. The date for final disbursement was July 10, 1986. This PCR was prepared by the West Africa Projects Department, based upon the findings in March 1985, data provided by NIB in November 1985, and a detailed review and analysis of the proj^^t files. Comments on this PCR have been received from the National Investment Bank and the Bank of Ghana and are part of the PCR, as Attachments A and B. This project has not been audited by the Operations Evaluation Department.  - ii - GHANA NATIONAL INVESTMENT BANK (NIB) PROJECT LOAN 1180-GH BASIC DATA SHEET ------------------------------------------------------------------__---------__------------- LOAN STATUS As of 3131187 (Amiount in US$ mlllion) Borrower's Original Disbursed Cancelled Repaid Obligation Loan 1180-GH 10.00 9.93 .07 3.21 8.79 -------------------------------------------------------------------__--------__------------- CUMULATIVE LOAN DISBURSEMENTS FY76 FY77 FY78 Y"79 FY80 FY81 FY82 FY83 FY84 (i) PLanned 2.2 6.0 9.0 10.0 10.0 10.0 10.0 10.0 (ii) Actual 0 0 6.2 7.4 8.2 8.9 9.2 9.4 9.9 (iii) (ii) as % of (i) - - 102 82 82 89 92 94 99 OTHER PROJECT DATA Original Plan Actual Board Approval 12/04/75 12/11/75 Loan Agreement 12/23/75 12/23/75 Effectiveness n.a. 03/02/76 Final Subproject Submission 12/31/79 12/31/79 Closing Date 12/31/81 06/30/83 Last Disbursement 06/30/80 03/31/84 Borrower First National Investment Bank (NIB) Guarantor Government of Ghana MISSION DATA HMnth/Year No. of Weeks No. of Persons Man-Weeks Datc' of Report Identification 10/73 N/A N/A N/A N/A Appraisal 3/75 2 3 6 11/10/75 Total - 2+ 3+ 6+ - Supervision I 3/76 2 2 4 5/10/76 II 5/78 2 1 2 5/17/78/ a III 10/78 2 1 2 01/31j79/ b IV 6/80 1.3 2 2.6 9/04/80 N.B: Subsequent supervisions were done mainly under NIB II - 901-GH a/ Full supervision report integrated into SAR. b/ As part of yellow cover SAR for NIB II.  - iii - grAFF MIT Min-eeks) FY72 FY73 FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY86 Total Preparation .5 1.0 11.1 3.9 .2 - - - - - - - 16.7 Appraisal - - - 13.1 13.7 - - - - - - - - - - 26.8 N;egotiations - - - - 4.3 - - - - - - - - - 4.3 Supervision 12.3 8.5 9.8 3.3 3.5 4.8 6.3 .8 2.6 5.1 7.7 64.7 Total .5 1.0 11.1 17.0 30.5 8.5 9.8 3.3 3.5 4.8 6.3 .8 2.6 5.1 7.7 112.5 FPLLUW-M PROJECT NIB II - Credit 901-CH, approved May 8, 1979 for US$19.0 million.  - iv - GHANA PROJECT COMPLETION REPORT NATIONAIL INVESTMENT BANK (NIB) PROJECT Loan 1180-GH HIGHLIGHTS Project Objectives and Background The National Investment Bank (NIB) was the recipient of the $10 million loan, the main objectives of which were to: (a) provide NIB with a portion of the foreign exchange needed to finance viable (mainly small and medium) enterprises, and support NIB's efforts to mobilize other external resources; (b) further strengthen NIB's institutional capabilities, particularly in project appraisal, investment supervision and loan recovery; and (c) harmonize NIB's policies with the government's industrial priorities. The loan was approved by the Board in December 1975, became effective in March 1976 and was closed in June 1983. The environment in which the project was implemented changed drastically during the period 1975-83, as Ghana experienced a period of unprecedented economic, financial and political turmoil (see paras 2.05, 2.15). This delayed project implementation by creating an atmosphere of uncertainty, thereby reducing demand for investments; forcing a number of enterprises to go out of business; and reducing the profitability of the corporate sector and, hence, its capacity to service debt. These developments nave had an adverse impact upon the financial status and performance of NIB. Project Implementation Project implementation was comparatively timely, with commitments progressing as forecast. Utilization of the line of credit commenced immediately following effectiveness: a total of US$3.24 million equivalent was committed to 10 subprojects in 1976. By the original terminal date (December 31, 1979) for the submission of subprojects, NIB had committed almost the entire amount of the loan (US$9.9 million or 99%) to 28 subprojects, with the remainder of US$100,000 earmarked for exchange rate fluctuations (para 4.03). Actual disbursements were slower than appraisal expectations due to problems in the country, and resulting implementation delays. The loan's closing date had to be extended three times from the original date of  - v - December 31, 1981 to June 30, 1983 'see para 4.04 on country economic problems). During the period of the third extension, and at NIB's request, unutilized balances totalling US$211,500 that were no longer required on 11 subprojects were reallocated to another previously-approved subproject. The loan was fully disbursed 18 months after the closing date, however, a noteworthy achievement considering the difficult country economic conditions during the period. The results of the project were mixed. As regards the first objective, namely the transfer of IBRD foreign exchange resources to finance investments through NIB, the project achieved generally satisfactory results. The majority of the subprojects in the sample of 17 provided proved to be viable, with actual financial rates of return exceeding 17%. Six of the subprojects showed returns exceeding appraisal estimates, while three reported negative returns. In terms of economic performance, 13 subprojects reported viable operations, of which 5 had actual returns above appraisal estimates. Of the remaining subprojects in the sample, one had a negative rate of return and 3 provided no actual data (see para 4.12). About 1,926 jobs were created by the sample projects (compared with 1,733 estimated) at an average investment cost per job of about US$20,000 (see para 4.14). It can thus be concluded that the onlending aspect of the project was fairly successful. In terms of facilitating NIB's mobilization of external resources, however, the results were less satisfactory: following approval of the line of credit in December 1975, NIB was able to raise only one external project-specific loan (Nasia Rice-- $25 million in 1977 from the ADB), followed by a $25 million IDA/EEC credit in 1979. The Bank/IDA support and the ADB loan in 1985 have accounted for about 90% of NIB's total external resources. Thus, there has virtually been no mobilization of foreign resources from the market. This problem may be attributable largely to the difficult economic and political conditions prevailing in the countrv during the period autd their influence on creditworthiness conditions. The project's institution-building objectives, particularly in the areas of investment supervision, loan recovery and general accounting, were not realized. NIB's supervision has remained ineffective, and almost non-existent, loan recovery is low as arrears continue to mount, and accounting reports are frequently delayed and generally of questionable reliability (see paras 3.14, 4.08, 4.09, 5.01). These problems were to a certain degree attributable to the discontinuity in NIB's senior management, especially in the post of Managing Director (see paras 3.06 - 3.07). The institution and its staff have withstood the test uf time reasonably well, however, despite frequent changes in top management and the loss of a number of qualified staff. With the aid of a new and experienced senior adviser, who will also have line responsibllity for finance and administration, and the adoption of an Action Plan soon to be agreed upon by the Bank and NIB, some noticeable improvements are expected.  - vi - Now that the recent Bank-initiated financial restrueturing of NIB is substantially completed (see para 3.19), the prospects are promising in the medium- to long-term for a more financially viable institution. NIB is now seeking new, preferably foreign development-oriented investors. This effort is not sufficient in itself, however, to assure NIB's future. Given the drastically changed economic environment over the past few years (as well as the prospects for future changes), a first prioritv for NIB's management should be the adoption of a detailed action plan of dial measures and a business strategy to guide the institution over tne next years. The third main objective of the project, the harmonization of NIB's policies with the Government's industrial priorities, was not realized since, for all practical purposes, there was no effective industrial sector policy dialogue between the Bank and the Government during the 1975-83 period, nor was there any indication of NIB's contribution to the formulation of sector policies, as was expected in the appraisal report (see para 5.10). The absence of a Government-Bank policy dialogue was understandable as the country situation until 1983 precluded any such meaningful dialogue. It is also noteworthy that while the appraisal report mentioned NIB's future policy contributions among the project's objectives, the project itself did not provide for any specific arrangement to develop NIB's capability in this regard. The project's economic impact, although less than expected, was satisfactory. Financial performance of the sub-projects was also fairly good, as evidenced by the fact that 16 out of the 28 assisted subproiects have already been fully repaid. Another 6 are repaying though irregularly and the remaining 6 subprojects are non-performing loans (see para 4.15). This record is better than NIB's overall portfolio performance, and taken against the background of the difficult economic environment at the time, represents a signiificant ach4evement. Conclusions and Lessons Learned As previously noted, NIB's problems were compounded by a discontinuity in management in addition to economic difficulties and uncertainties. The Bank should have forcefully opposed frequent and disruptlve senior management changes at NIB although, given the political turmoil in the country during that period, it is not clear to what extent such efforts would have been successful. NIB's financial condition deteriorated seriously due to a decline in the quality of its loan portfolio; this was in turn the result of the severe economic deterioration in Ghana from 1978 to 1983, from which the country is only now recovering, and of ineffective loan supervision and collection efforts (see paras 3.15 - 3.16). Despite these macro-economic problems in the country, however, a more organized and vigilant loan supervision and recovery program would probably have reduced NIB's high arrears.  - vii - NIB's largely inadvertent exposure to foreign exchange risks in a country experiencing massive devaluations resulted primarily from its management error and inadequate attention by the Bank to this issue during appraisal and even thereafter (see para 4.06). The Banl, should have also prevented the DFC from assuming exchange risks (directly or indirectly) on any of its external borrowings, in addition to its loan covenant against the assumption of exchange risks by NIB on Its sub-loans (see para 5.13). If this provision had been adopted and closely monitored during supervision of NIB, the situation in which NIB found itself in 1984 could have been avoided. In retrospect, it is clear that the Bank staff should have paid more attention to systems and procedures in NIB to monitor the quality and performance of its loan portfolio, to the effects of massive devaluations on NIB capital and loan portfolio, and to the quality and timeliness of audits. As NIB's contribution to policy-making for the industrial sector (an explicit project objective) never materialized, experience under the project (as elsewhere) would ineicate that whatever the economic environment, DFCs and DFC projects are not generally an effective instrument for achieving policy reforms (see para 5.10). Since 1984 the Bank has undertaken significant initiatives, in particular in providing assistance in the financial restructuring exercise of NIB, in the detailed assessment of the quality of its loan portfolio, and in strengthening of NIB's systems and procedures and management (see para 3.16 - 3.18). The Bank should continue these efforts and its intensive supervision of NIB even after closing of the second NIB loan in June 1986, and even in the absence of new lending to NIB, in order to ensure sustainability of the cumulative efforts at institution building. Finally, it is noteworthy that the Bank's policy dialogue with the Government, an objective which was unrealized during the project implementation period 1975-83, was achieved after its closure. The dialogue intensified from 1983 at both the macroeconomic and industrial sector levels, leading to a comprehensive set of industrial and trade policy reforms contained in the Industrial Sector Adjustment Credit approved in -.arch 1986.  GHANA PROJECT COMPLETION REPORT NATIONATL INVESTMENT BANK (NIB) PROJECT Loan 1180-GH I. INTRODUCTION 1.01 This project was the first IBRD loan to the National Investment Bank (NIB), an institution established in 1963 and owned substantially by the Government and Bank of Ghana (combined holdings of 81%). Substantive discussions on the loan began in 1973, followed by appraisal and Board approval in 1975. At the time of appraisal, NIB was (and still is) the principal source of ter:n financing, providir.g assistance to all sectors of the economy by granting loans, making equity investments, underwriting shares and issuing guarantees. 1.02 The loan's main objective was two-fold: (a) to provide NIB with part of its foreign exchange needs, thereby helping to attract other foreign resources for financing viable (mainly small and medium) enterprises; and (b) to further strengthen NIB's institutional capabili- ties, particularly in the areas of investment supervision and loan recovery. It was further hoped that the discussions and shaping of NIB's policies would lead to an ongoing dialogue with the Government on its industrial policies. II. THE ENVIRONMENT A. Economic Background 2.01 During the project implementation period, Ghana's GDP, which had remained almost stagnant up to 1978, declined by an average of 2% per annum. As a consequence, and given the country's high population growth rate (estimated at 2.9%), the average real income per capita was estimated in 1982 at about US$360, or two-thirds of its level a decade earlier. The country's basic needs indicators were hardly better than those of other low-income Sub-Sahara African countries. Despite the growth in health and education facilities, a large portion of the population was without access to safe water and formal education. Most of the decline was attributable to the agricultural sector, particularly food and cocoa, and to industry. Nearly all basic goods and services were in short supply during the early 1980s. 2.02 The structure of the economy changed markedly during the period. A dramatic shift occurred from the productive sectors, such as agriculture and manufacturing, to trade and services. The share of services in GDP increased from about 31% in 1975 to 36% in 1984. Agriculture's share in  - 2 - GDP declined in real terms between 1970 and 1975 because of the drop in cocoa production. Non-cocoa agriculture declined less rapidly than the other sectors during 1975-84, and the share of food products in GDP increased, thus maintaining agriculture's relative share of GDP. Agriculture remained the largest sector of the economy, providing a livelihood for nearly 70% of the population. Manufacturing and mining declined from a total of 16% of GDP in the mid-1970s to about 9% in 1984. (See Table 2.1) Table 2.1: SECORAL SRUC1RE OF THE FLXXMY (percentage of GDP) In Current Prices Tn Co-istant 1975 Prices 1970 1975 1980 1984 1970 1975 1980 1984 Agriculture 46.5 47.7 59.7 52.0 50.7 47.7 54.5 55.6 (Cocoa) (14.0) (10.9) (5.5) (4.0) (16.8) (10.9) (10.0) (8.6) Irdustry 18.2 21.0 9.4 8.0 19.3 21.0 14.8 11.1 Manufacturing) (11.4) (13.9) (5.6) (5.0) (12.7) (13.9) (10.6) (7.6) (Mining & Quiarr.) (1.7) (2.0) (1.1) (1.0) (2.4) (2.0) (1.3) (1.1) Services 31.2 31.0 31.4 40.2 27.4 31.0 32.3 35.8 (Wholes., Retail Trade) (11.6) (12.2) (17.6) (30.0) (11.8) (12.2) (10.2) (10.5) Note: Details may not add up to 100% due to mission of bank charges and inqort duties. Source: World Bank, Ghana: Mnging the Transition, Report No. 5289-CH, Navember, 1984; Giana: Toards Structural Adjustment, Report No. 5854-4G, Setember, 1985. 2.03 Ghana's balance of payments difficulties of the mid-1970s intensified in subsequent years. Import capacity was determined principally by the level of exports, since capital inflows been negligible. Export earnings, based predominantly on cocoa and to a lesser extent on timber, gold and diamonds, all experienced a sharp downward trend. Capital flows and official aid had almost stopped until 1983/84 because of continued political uncertainties, accumulation of large commercial arrears, lack of creditworthiness, and the failure to adjust macroeconomic policies. 2.04 The poor state of public finances contributed significantly to the deterioration of the economic situation. Persistent large budgetary deficits were financed mainly by domestic borrowings, resulting in sharp increases in the money supply and, in turn, inflationary pressures. The deficits were the result of rapidly growing expenditures at a time when revenues were declining sharply in real terms. Recurrent expenditures were still insufficient, however, to maintain existing public assets in the  agriculture, mining and manufacturing industries, or to sustain infrastructures, 2.05 The rapid decay of the economy resulted from a combination of domestic economic policies and adverse external events, e.g., the decline in world prices of cocoa and mining commodities. On the domestic front, large government deficits led to accelerating rates of inflation and further overvaluation of the nominal exchange rate. The growing exchange rate distortion created a major disincentive for exports and contributed to the shift from production to black market and trading activities, where profits were large and relatively quickly realized. Past economic policies had also been characterized by declining real producer prices to agriculture, especially export commodities; high protection against imports of final goods in order to foster import substitution; greater reliance on admlnistered allocative mechanisms than on relative prices; an over-extension of the parastatal sector that heavily burdened the government budget; and negative real interest rates that reduced domestic savings and favored capital-intensive investment. Declining export revenues were also attributable to declining volume of exports (especially cocoa) due to low producer prices and to some extent to smuggling of exports to neighboring countries. Finally, droughts during 1982-83 resulted in a loss of at least US$130 million in foreign exchange earnings. 2.06 In 1983, the government introduced an Economic Recovery Program (ERP) in order to remove the serious cost/price distortions prevailing in the economy and to realign relative prices in favor of productive sectors, especially tradJtional exports, i.e., cocoa, timber, gold and diamonds. The main elements of the ERP included substantial adjustments in the foreign exchange rate, simplification of the customs tariff structure, establishment of realistic relative prices and income (e.g., increases in producer prices of cocoa, tobacco and cotton), removal of price controls on all but eight commodities, a flexible interest rate policy, wage adjustments, restoration of fiscal discipline, phased reduction in external arrears, and rehabilitation of key sectors. This stabilization program represented a significant effort by the government to regain control over its external and internal financial problems; it gained considerable financial support from the donor community, including the Bank and the Fund. B. The Industrial Sector 2.07 The manufacturing sector covers a wide range of activities. The modern sector is dominated by food processing, wood products, textiles, garments, beverages and cigarettes, which account for about 65% of total output and 74% of total employment in manufacturing (excluding petroleum refinery). The remainder consists mainly of building materials, household chemicals, paper, plastic and petroleum products. Ghana's industrial sector has been characterized during the last decade by declining production (an average decline of 13% per annum from 1977 to 1982), declining capacity utilization (from over 50% in the early 1970s to below 25% in the 1980s), and by inefficient and highly import-dependent investments. These problems are attributable to the limitations of three  - 4 - major themes of past industrial strategy, namely: (a) emphasis on import substitution through high levels of effective protection; (b) reliance on admlnistrative controls rather than on market mechanisms to determine incentives and resource allocation; (c) reliance on large-scale, public sector investment as the leading edge of industrial development. 2.08 The emphasis on import substitution was in part a manifestation of the post-independence drive to reduce economic dependence, and in part an unintended consequence of balance-of-payments difficulties caused by rapidly-rising imports and stagnant export earnings. Tariffs and quantitative restrictions (especially on luxury goods) resulted in high protection and curtailed imports. The strategy discouraged the growth of both exports and agriculture, so that foreign exchange earnings failed to keep pace with the rising demand for imports and the volume of exportable raw materials did not grow with the capacity of processing industries. Inefficient and import-dependent industries were also over-protected, and their high financial returns encouraged the expansion of processing capacity, despite its under-utilization. 2.09 The capacity expansion, maintained by means of suppliers' credits despite the foreign exchange shortage, led only to increasing underutilization and deterioration of capacity in the 1970s and 1980s as foreign exchange allocations were cut back for both raw materials and spare parts. Industrial output declined from 14% of GDP in the mid-1970s to about 8% since 1982 (3% in current prices). The industrial sector, after having been the motor of economic growth, fell behind. 2.10 As part of the Bank's recent industrial sector work, the overall efficiency of Ghana's industrial structure and its consistency with the country's comparative advantage was assessed. The analysis revealed five major structural weaknesses: (a) import requirements for full capacity production greatly exceed the amount of foreign exchange likely to be available for this purpose in the foreseeable future; (b) full capacity production exceeds the domestic market in some subsectors; (c) processing capacity often exceeds the availability of local raw materials; (d) direct public sector holdings exceed what can be effectively and profitably managed; and (e) a substantial portion of processing capacity is unlikely to be able to compete with imported goods. The analysis also revealed a wide gap between actual and potential efficiency. Although two-thirds of firms surveyed were operating inefficiently in 1983, most would be efficient if they were operating at, or close to, full capacity. About 40% of the potential full capacity production is in industries that are considered consistent with Ghana's comparative advantage. The comparative advantage is marginal for about 50% of the other industries. These results indicate that the industrial sector needs to be restructured. The restructuring process has been initiated under the industrial sector adjustment credit. At the same time, the analysis shows that a substantial portion of Ghana's industries is, or can become, viable and sustainable in a competitive environment.  -5- C. The Financial Sector 2.11 Ghana's financial system is still at an early stage of development, and is dominated by banking institutions. The banking system, which is oligopolistic, has been expanding: the number of bank branches has doubled since 1976 and, with 3.2 branches per 100,000 inhabitants, the network is quite dense. In addition to the banks, there are a number of non-bank financial institutions, of which the most important is the Social Security and National Tnsurance Trust. The proportion of financial assets held by private savers ln forms other than currency and deposits is small. A well-organized and active capital market does not yet exist. 2.12 Because of the great scarcity of foreign exchange, which has adversely affected the operations of most of the banks' manufacturing clients and catised t1tem to operate at substantially less than economic levels (20-25% of capacity) and prevented them from servicing their loans, the banking system is heavily burdened with non-performing loans which the banks (commercial and specialized) are unable and unwilling to write off for fear of eroding their already fragile capital base. The system also continues to suffer a "crisis of confidence" resulting from past measures taken by various military governments, and a substantial albeit unquantifiable part of the money supply remains outside official circuits. The result is that domestic savings are low and a large part of local business transactions are conducted on the black market. Adjustment for the overvalued exchange rate would yield a substantially higher ratio for 1982. 2.13 The money supply (M2) increased from