Madagascar - Second Agricultural Credit Project

The World Bank FOR OFFCIAL USE ONLY Report No. 6040-MAG STAFF APPRAISAL REPORT NADAGASCAR SECOND AGRICULTURAL CREDIT PROJECT April 7, 1987 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contemts may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTSIEQUXVALENCES MONETAIRES 1 Currency Unit M- alagasy Francs (FMG) US$1.00 FMG 752 FMG 100 - US$ 0.13 WEIGHTS AND MEASURESWPOIDS ET MESURES 1 hectare (ha) = 2.47 acres 1 kilometer (km) = 0.62 miles 1 square kilometer (km ) 0.39 square rile 1 kilogram (kg) 2.20 pounds -1 l'ter (X) - 0.26 US gallon 1 tonne (t) 2,204 pounds ABBREVIATIONS APB Association Professionnelle des Banques (Bankers' Professional Association) ADB African Development Bank ASAC Agricultural Sector Adjustment Credit DAMES Banque Malgache d'Escompte et de Credit BCRDM Banque Centrale de la Ripublique Democratique de Madagascar (Central Bank). BFV Commercial Bank (Banky Fampandrosoana Ny Varotra) BNI Industrial Development Bank (Bankin' Ny Indostria) BNM National Development Bank for Madagascar (Banque Nationale Malgache de developpement) BTM National Rural Development Bank (Bankin' Ny Tantsaha Mpamnokatra, CG Consultative Group for Madagascar FOFIFA National Center for Applied Research on Rural Development (also CENRADERU) FMR Rural Credit Program (Financement du Monde Rural) MPAEF Ministere de la Production Animale et des Eaux et Forkts (Ministry of Livestock, Fisheries and Forests) MPARA Minist;re de la Production Agricole et de la Reforme Agraire (Ministry of Agricultural Production and Agrarian Reform) OCD Operations and Credit Department. ODRI Individual Smallholder Credit Scheme PEs Public Enterprises PRDD Planning and Rural Development Department. I/The Malagasy Franc is pegged to a basket of currencies of Madagascar's major trading currencies of Madagascar's major trading partners and the rate of exchange is adjusted quarterly. The exchange rate prevailing in September 1986 has been used in this report.  FOR omcIA us ONLY GOVRNMUENT ADMINISTRATION Fokontany - village Firaisam-pokontany a group of Fokontany (or Firaisana) (former canton) Fivondronsm-pokontany - group of F_raisana (or Fivondronana) (former sub-prefecture) Faritany - group of Fivondronana (former province) GOVERNMENT AND BTM FISCAL YEAR January 1 - December 31 This tOCIUlt hs a _w-d disbbulion ll may be IISO bY lcipioots O*l i11 tho pOfOb l of thi oftk ddti Its ontmts maynot hofnrwbebodbeksed wkhout Wodd Bank audmwnsKn-  SECOND AGRICULTURAL CREDIT PROJECT Table of Contents "a i No. I Protect Backaround -1 U The Asricultural Sector 1 A - Sector Performanc 1 B - Goverument Strategy and Objective. 2 C - bank Group Support 4 III The Bankina Sector. BTM and the First Agricultural Credit Proiect 6 A. Banking Sector Structure 6 - Reorganisation of the Banking Sector 6 - mHnagement 6 - The Three Banks 6 - The Central 8ank (BCRDM) 7 - The Banker's Professional Association (APB) 7 B. Credit Policy 7 - Objectives and Regulatory Instrum4nts 7 - Interest Rates 8 - Agricultural Credit Policy 8 C. Performance 9 - The Banking Sector Crisis 9 - Bwaking Sector Reform 10 D. The National Bank for Rural bevelopment - BTM 11 - Structure 11 - Mnagemnt 11 - Organixation 11 - Staffing 12 - Operations 12 - Resources 13 - Financial Situation 13 - The Action Plan 14 - The Projections 15 E. The History of the First Agricultural Credit 15 Project - Project Objectives and Design 15 - Implementation Exprience 16 - Conclusions- 18 IV The Proiect 18 A. Project Objectives 18  P4ge No. B. Project Design 19 - The Line of Credit Componeat 19 - The Institution Building Component 20 C. Project Costs and Financing Plan 20 Project Costs 20 - Project Financing Plan 21 D. Procurement and Disbursement 22 - - - Procurement 22 - Disbursements 22 E. Accounts and Audit 22 V Project Implementation 23 A. - General 23 B. Organization and Reporting 23 The Annual Work Program 23 - Project Management 24 - Reporting Requirements 25 C. Financial Aspects of Implementation 25 VI Project Benefits and Risks 26 A. Benefits 26 B. Risks 27 VII Agreements and Recommendations 28 ANNEXES 1. Credit Outstanding by Sector and Term 2. Structure of Deposits 3. Actual and Projected Balanco Sheets 1982-1988 4. Actual and Projected Income Statement 198241988 5. Actual and Projected Financial Ratios 1982-1988 6. Projected Sources and Uses of Funds 7. BTM's Interest Rate Structure 8. Project Financing by Component and Source of Funds 9. List of Identified Sub-projects 10. Estimated Disbursement Schedule. 11. Policy Statement 12. TOR for Project Appraisal Coordinator. Chart BTM Organisation Ea a Madagascar - IBRD 19406  M ;|CAR SECOND AGRICULDU9AL CREDIT PROJECT CREDIT AND PROJECT SUMMARY Borrowers Democratic Republic of Madagascar Reneficisrv: - The National Rural Development Bank (BTM). Amount: SDR 8.0 million equivalent to US$10.0 mnillon. - Terms: Standard IDA terms, Re-ending ts (i) The Government would transfer the IDA credit proceeds to BTM as an equity contribution to its capital. (ii) Sub-borrowers will have the option of borrowing sub-loans under the following alternative terms and conditions: (a) the IBRD lending rate at the time of approval plus 42 p.a., the foreign exchange risk to be borne by the sub-borrower; or (b) BTH's prevailing lending rate and commissions for local currency lending, plus a front-end fee of 102 of the proposed sub-loan, and a fee of 3Z p.a. on the outstanding amount of the sub-loan. Interest rates will be reviewed with IDA twice a year to ensure that they are positive in real terms. Repayment periods on sub-loans extended by BTh would be established on the basis of cash flow projections of each sub-project and on the type of asset to be financed. The repayment periods would not exceed the average useful life of assets being financed nor would they exceed a maximum period of 15 years including a three year grace. Obiectives and Proiect The project would provide foreign exchange for new Descriptlon: investment and rehabilitation and expansion of existing businesses in agricultural production, primary processing/marketing, and contribute to the rehabilitation of the BTM. The project would have two components: (i) A line of credit of US$ 8 million equivalent which would finance, over an expected two and a half year commitment period (from about September 1987), the  - ii - foreign exchange cost of sub-projects. Any promoter would be eligiblle, subject to criteria applied to both promoter and sub-projct. (it) An Institution Building component of US$2 million equivalent which vould finance compater equpment, technical asistace for audit, manage_nt consultancy service ond training the cost of consultincy services for sub-prOject prparationg and a study to formulate a suitable agricultural credit policy end system for adgascar. Benefitw: The benfits of ths project would accrue through formers and entrepreneurs to the econamy as a whole, aid to the BT1. Benefits to farmers end entrepreneurs wmld come from alleviation of two key constr*ints, lack of foreign exchange and lack of term funds, and from advice and technical asistance provided to them by the BIN and its consultants. Benefits to BT31 will come through the listitution building component, which would str*nghten It as a development bank and a term lender to agriculture. In addition the Project would enable the creation of net investmont and employment opportunities for Nalagasy nationals by promoting and financing agricultural sub-projects. Risks: There are throe main risks to the project* The first Is that BT51 being called on to play a double role as both co_mercia and development bank, it might continu to emphasize short term commercial activities and would not give sufficient priority to development lendlng. The second risk is that the banking Sector crisis gets worse, and BTI's financial situation could deteriorate furtber. Finally, the project face a risk that the Government might falter in its efforts to iuprove the environment for agricultural development. Safeguards gainst these risks have been built In to the project desiga including saures necessary to streaghen BTi's financial position and the meons to diversify its lending. BTm will lncrease agricultural lending and will not make any new loans to public enterprises in financial difflculties. In addition careful Supervision of the evolution of the banking sector and the Strengthening of BTMi's institutional capability would act to offset the ebove risks. Finally, the Government has reafflrmed its policy of cooperation with the lank and the ID; this overall posture, and continued adjustment lending, should lead to accelerated lmprovement of the environment for agricultural development.  3stimatod Costt Loc For. Tnt *-..-.,... WiIllion...... Credit Compoent .90 8.00- 15.90 Institution luld - --- Component 1.43 2.00 3.43 Total Finang - - - Required iQ1ooIL.k FLn_ancLf lsns frgiJa zelil Totl& cost IDA 10.00 10.00 52 6.15 - 6.15 - 32 Investors 3.18 - 3.18 16 IDA9-.---10.00 19.33 100 Estimated Disbursement: (USSmions) IDA FT MS n89 [MO Y91 Fn92 F293 F4 Annual 0.56 1.48 3.16 1.6I 1.36 1.20 0.56 cumulative 0.56 2.04 5.20 6.88 8.24 9.44 10.00  MADAGASCAR SECOND AGRICULTURAL C1tEDiT PROJECT I. PROJECT BACKGROUND 1.01 Since 1980 IDA has been supporting the Agricultural Development Bank of Madagascar (BTM) through an Agricultural Credit Project (cr.1064- MAG),-which was primarily designed to meet the need for smallholder credit. A number of factors (discussed-in Chapter III below) led to a substantial modification of the design of this project in 1983-5. In early 1984, Government expressed interest in a follow-up project by IDA, to continue with institution building effort at the BTM combined with an investment line of credit directed primarily at the renascent entrepreneurs in agriculture and agro-industxy and a report for . follow-up project waa prepared. An IDA appraisal mission comprising Christopher Ward and Ousmane Sissoko therefore visited Madagascar in September/October 1985 to appraise this Second Agricultural Credit Project. Further processing of this project was delayed pending clarification of IDA's views regarding an overall banking sector reform of which BTM vould be a part. It was subsequently decided that such a reform would be carried out in the context of the sixth IMF standby credit approved in 1986 and IDA Industrial and Trade Policy adjustment Cr%dit appraised in December 1986. The appraisal was therefore amended and this appraisal report has been updated as of January 1987. 11. THE AGRICULTURAL SECTOR A. Sector Performance 2.01 Sector Outline - Agriculture is Madagascar's dominant economic sector; it employs 852 of the population and accounts for more than 802 of export earnings. Production and farming systems vary widely, with many commodities produced, but production-in value terms is dominated by paddy (302) and beef (16X). A small group of export crops, (coffee, cloves, and vanilla) accounts for about 152 of production but some three-quarters of merchandise exports. Industrial crops, notably sugar and cotton, contribute about 72 of agricultural production value. Approximately 802 of total production comes from smallholder activity, and small farmers (in the 1 to 2 ha. range) are the backbone of Madagascar's agricultural economy. Over half of agricultural production by value Is for subsistence and the share of subsistence production has been slowly increased over the past decade. In contrast to most sub-Saharan African countries, irrigation is widely practiced in Madagascar, with water control systems in use on about 1 million hectares, one third of cultivated land. Overwhelmingly, irrigated land is used to produce rice, Madagascar's main crop. The  -2- country's rich aud varied agricultural potential offers excellent prospects for rais'ing incomes, improvfrg the supp:,r of indu.Frial inputs, and for increasing foreign exchange earnings, but this potentia.. is far from being realized. 2.02 Recent Performance- Performance of the agricultural secto . been poor since the mid 1970s. In the 1975 78 and 1984-86 periods, production growth was insufficient to k.ey up with population growt and between 1979 and 1983, agricultural production did not grow at all. The problems have been most serious in (a) the stagnation in rice-and very serious decrease in edible oils production, and (b) the decline in coffee exports (402 of merchandise exports) by about a third from peak quantities,.. uncoupensated for- by-increased export-of other commodities. One of the few bright spots in this picture has been Increased cotton production between 1983 and 1986 but the serious price decline in world markets has recently led to ma:-r pricing and marketing problems. 2.03 Constraints to Growth. The causes of this disappointing performance are mixed and include structural as well as short term factors The main elements have been (a) a major expansion of Government control over production, processing and marketing functionsa this discouraged the private sector to contribute to economic activity, and public sector enterprises proved generally too weak In management to perform their role, becoming a main drain on the budget; (b) pricing policies for major products favoring urban consumers but discouraging farmers from producing for tne market; (c) increasingly over-valued exchange rates which, topether with a deteriorating balance of payments situation, have led to acute foreign exchange shortages, and (d) a public investments policy heavily emphasizing Industrial development which, due to over design, weak management and foreign exchange shortages has had poor results in terms of production. In addition, the economic crisis which hit the country in 1979-80 and the subsequent world recession caused further shortages of local budgetary funds and foreign currency for sector operations. 2.04 The consequences of these converging trends included the breakdown of essential services to farmers in many rural areas, limited availability of production inputs, and inadequate Incentives for Increasing output. In particular, input marketing and investment credit in agriculture deelined markedly, also because the nationalized banks increasingly lacked the financial resources due to the need to finance parastatal debt. B. Government Strategy and Obiectives 2.05 Govermentts New Strategy - The crisis in the agricultural sector, especially the decline in marketed output of food and industrial commodities and shrinking exports, led to a fundamental rethinking of Government strategy in the early 1980s. A new policy framework was developed which was ormally announced at the April 1983 Consultative Group (CG) Meeting and subsequently confirmed at the April 1986 CG meeting. The Government's objectives are to increase production of foodcrops (above all rice and edible oil crops) In order to reduce Imports; revive production  -3- and improve the quality of traditional export crops;.and diversify agricultural exports. Better integration of the agricultural and industrial sectors is an Important medium-term objective. The strategy to achieve those objoctiv.w recognizes that small and larger farmers are the main agricultural producers and that Govornment policy and investments must create an onvironment which stimulates production by these key economic agent.. Equally important,th.ne new strategy recognizes that the private sector has a positive role to play in the process of econamic and agricultural development. The practical consequences of this approach are that the Government now suppoctst (i) moving towards a free market system as a means of improving produzar incentivesa and (Ui) withdrawing mintstty services from activities better porformed by others, whether small farms (e.g. seed production) or commercial companios (e.g. input supply). Public Investments iv the sector are to be limited to rehabilitation over the medium term, and systematic efforts made to program and manage them better. 2.06 Imlementation of the Strstegy - Over the past three years and with Bank Group support, the Government has made steady progress in Implementing this strategy. Perhaps the most significant actions have involved removal of agricultural pricing and marketing controls on rice, meat, and pulses, and Increased farmgate prices for cotton and selected export crops. On resource management, the Government has prepared and reviewed with IDA a public investment trogrsm for agriculture, and is establishing system to update the program annually. Parastatal operations are now being subjec-ted to profitability tests and restructured to assure self-financing; selected divestitures have been undertaken. The Government Is also reinforcing extension and research while vithdrawing from direct production and some commercial activities. The agricultural ministries, the Ministry of Agricultural Production and Agrarian Reform (MPARA) and the Ministry of Animal Production and Forestry (MPAEF) have been substantially reorganized, and management strengthening programs launched. Large personnel reductions have been undertaken to position them to play a more dynamic but lses interventionrst role. 2.07 As a counterpart to the reduction-in Government intervention and the reduced role of public enterprises in the economy, Government has taken actions to promote development of the private sector in order to reduce the bias which merged during the years of economic dirigisme. The steps taken so far include the passage of a new Investment Code in mid-1985 which gives substantial protection, both legal and fiscal, to private businesses; gradual removal of price controls on both prfimary and manufactured goods; easier access to credit and foreign exchange, not only under regular allocation system but under Governmnt-promoted projects. such as the Cotton Development Project (which provides investment funds for cotton farmers, both smallholders and estate farmers alike); and the elimination of state marketing monopolies in major crops, including paddy/rice, beef and beans. Further measures envisaged include a program to foster development of oammercial marketing circuits; the elimination of price discrimination against the private sector In the marketing and processing  -4- of export crops; and the handover of agricultural input and veterinary products Import and distribution to private firms. Finally, under the Agricultural Sector Adjustment Credit (discussed below), all imports are to be made under an open licensing and allocation system that will allow new entrepreneurs to enter the market at will. These measures, taken together, add up to the first phase of a-solid adjustment package which will hopefully revive business confidence and promote private sector Investment in the development of agriculture and its downstream activities. C. Bink GrOUP SUPDort 2.08 Relation to Government Stratelg - lank Group support for agricultural sector development in Madagascar has been comprehensive, including project financing, sector work, institutional develcpment support, sad an intensive dialogue with the Government on key policy issues. The Bank Group has also played an important role in helping the Government to coordinate the activities of external financing agencies in agriculture by encouraging co-financing arrangements and through the vehicle of the Consultative Group (CG) meetings. 2.09 Bank Support to Agriculture as of December 1986 - Agricultural lending in Madagascar accounts for about $224 million for 15 operations over a 13-year period, out of a total Bank Group portfolio of about $640 million. Ten agricultural projects are currently under implementation, including an-IFAD project appraised and supervised by Bank staff. Bank Group lending has been primarily concentrated on priority commodities, such as rice, livestock, and cotton and has sought to address the critical sector issues sketched above. Since 1983, lending has become more directly program and policy oriented. 2.10 Experience with Bank Lending - Project performance has been mixed, with virtually all projects affected both by the combination of policy and institutional problems affecting the agricultural sector broadly and by the direct repercussions of the recent economic crisis. The principal constraints to project implementation have been: (a) the shortage of local funds and foreign exchange created by Madagascar's economic and financial situation. (b) personnel and managerial probles, above all linked to inadequate training, low pay and difficult working conditions. Overstaffing is a frequent problem and reduces efficiency and motivation. Complicated bureaucratic procedures and rigid accounting systems have adversely affected several projects. (c) weak formulation of subsector programs and priorities so investments do not reflect strategic objectives for the sector and there is mch overlap and dissipation of effort. Problems are amplified by difficulties in aid coordination. (d) pricing and marketing policies which, until the turnaround in sector policy in 1983, were incompatible with objectives for increased production and parastatal financial viability.  2.11 The Bank Group has responded to specific project issues, as well as to the sectoralleconomy-wide problems outlined in para 2.10, through intensive supervision of on-going operations, sector work, and preparation and appraisal of a new generation of operations. It has reviewed carefully and taken into account the experience of projects which have been completed. It has adapted new and on-going projects to resource constraints by providing fast-disbursing, balance-of-payments type assistance, through existing and new projects. It has addressed institutional and policy issues through new operations. It is also supporting the formulation of subsector strategies through sector work and -consultant executed studiesj(e.g. livestock exports, oil. crops). 2.12 The lead operation in addressing policy issues is the first Agriculture Sector Adjustment Credit approved in May 1986. This operation provides a credit of SDR 56.5 million for needed imports of agricultural inputs, veterinary products and animal protection materials, tractors and transport equipment, and incentive goods for rural areas. The adjustment program to which the credit is tied comprises the following main elements: actions to improve market efficiency through continued liberalization and development of the private sector; - strengthening producer incentives by relying increasingly on market forces, and in parallel making the Government's remaining intervention in pricing more efficient; - setting up an effective rice management program ending the Government's marketing in the two zones which produce a substantial rice surplus; rationalizing public spending, notably through better choice of agricultural investment; and - preparing the next phase of the agricultural reform program. 2.13 The key component in this operation is the rice security strategy which is designed to provide incentives for increased domestic production, thus reducing import requirements and at the same time to establish a rice intervention stock to stabilise prices during the scarcity period. Another important component is to increase coffee farmgate prices so as to expand coffee production, Madagascar's principal export. 2.14 The Second Agricultural Institutions Development Project, also approved in May 1986, is designed to improve the efficiency of public sector institutions and follows from the successful first phase project which provided institution building support notably to the agriculture ministry (MPARA) and the livestock ministry (MPAEF). The second project  provides technical assistance, short torm consultants, and training and study tours for the ministries Involved In agriculture as well as for the research organisation (FOFIPA). Specific objectives are to improve resource management, strengthen policy analysis capability, and develop management capacity for key Government services - extension, research, data collection and analysis, and market infomation. In addition, specific studies will contribute to policy analysis and preparation of the -nex t slice of the-reform program. 2.15. The proposed Agricultural Credit Project i8 designed to address the third key element in redressing Madagascar's agricultural production,. namely to help private entrepreneurs invest in the agriculture sector. It will also provide funds to support further iAstitutional strengthening of -BTM and complement efforts to support a reform of the banking sector under the forthcoming Industry-and Trade Policy Adjustment Credit-which ts scheduled for Board considetation in the current fiscal year (paras. 3.22 and 3.12). III. -THE BANKING SECTOR, BTM AIRT AGRICULTRAL CREDIT PROJECT A. Banking Sector Structure 3.01 Reortanization of the Bankins Sector - Before 1975, the baking sector in Madagascar consisted of four commrcial banks (largoly foreign owned or affiliated to foreign financial institutions), plus a national development bank, the Banque Nationale Mblgach. de Dmesloppement (BmN), and the Central Bank. The Government nationalized the fcur commercial banks in 1975 and, in 1977 reorganized the banking sector into three government- owned banks, each of which vas to be responsible for a sector of the economy: the National Bank for Rural Development (BTM) for agriculture; the Industrial Development Bank (BNI) for Industry, and the Commercial Bank (BFV) for commerce and trade. 3.02 Manatement - The three banks are classed as parastatals responsible to the NMinstry of Finance. Although the establishing legislation called for a broad Policy Council and separate Boards of Directors for each Bank, until November 1986 separate Boards were not established and all three banks were governed by a single Board. In connection with the sixth 1KV stand-by arrangements, separate Boards were appointed for each of the commercial banks. Accordingly, BTM's Board was staffed with 12 members including 5 professional bankers and 2 private sector representatives. The Boards are chaired by the Minister of Finance. 3.03 The Three Banks - Despite their sectoral specialization, the three banks are in competition for collecting deposits and also, to some extent, for extending credit to Individuals or enterprises outside their sector of specialization. Purthermore, because of resource scarcity, the three banks must often pool resources in consortium loans to meet corporate financing needs. The relative Importance of the three banks Is shown in the following tables  -7- As of December 31, 1985 (FMG billion) BTM BNI BFV Total Capital Stock 3 4.5 3 10.5 Total Assets 141 165 120 426 Loan Portfolio 111 113 87 311 of which: Short Term (up to 2 years) 98 103 76 277 Medium Tenm (2-5 years)- 10 3 11 24 Long Term (over 5 years) 3 7 -- 10 Profits - 0.15 0.62 0.42 1.19 Number of staff (no) 1,558 1,198 1,270 4,026 Of which professionals (no) 79 93 129 301 Number of Branches (no) 44 14 -17 75 3.04 The Central Bank (BCRDM) - Following the decision to withdraw from the franc area the Government created the BCRDM on June 12, 1973 to replace the Institut d'Emission Malgache (ISM), which had been jointly owned by France and Madagascar. The Bsanque Centrale de la Republique de Madagascar (BCRDM) closed the account with the French Treasury, in which the IEM had been required to deposit all its international reserves, and took over the management of Madagascar's foreign assets. BCRDM is responsible for regulating all financial institutions in the country and for establishing and administering national monetary and credit policies, including monitoring credit distribution. It also sets credi. and rediscount ceilings for the banks, and minimum liquidity and solvency ratios. At present there is ample room to improve the effectiveness of controls over banks. Under the credit proposed in this report the Government would adopt rules and procedures satisfactory to IDA for bank supervision by December 31, 1988. 3.05 The Bankers' Professional Association - (Association Professionnelle des Banques or APB) is the Bankers' trade association. Its charter gives it a double role. It is to represent the interesta of the banking sector but at the same time to play an advisory role to the Minister of Finance, to whom it reports. The APB began operations in June 1985, with a staff of 5 professionals drawn from public institutions, i.e., a Secretary General who is a professional banker, an industrial expert and three officers seconded from BFV, BNI and BTS. The first major task of the Association's staff has been to begin work on a case by case review of non-performing parastatal debt which is to lead to action programs for financial rehabilitation and recovery of the debt. B. Credit Policy 3.06 Obiective and Reaulatorv Instruments - At present the main objective of Madagascar's credit policy Is to limit credit expansion to a level- consistent with Internal and external stability, while increasing the share of credit for production and for export. To meet this objective, the BCRDM relies on a quantitative control consisting of an overall target on credit growth set in line with IMF recommendations. The credit growth is controlled  -8-.= through the credit ceilings which are revised quarterly for each individual bank on the basis of Its liquidity position and Its expected needs. The BCRDM sets a global ceiling (plafond global) and subeeilings on specific categories of credit (encadrement du credit). There are also qualitative controls including prior authorization by the Central Bank for all credit extensions and renewals above FMH 100 million and the determination-of interest rates for Central Bank rediscounting. The Government is currently reviewing these Instruments with a view towards adopting a comprehensive and coherent credit policy. Its work on the overall credit policy started a few years ago, is to be completed under the second review of the Sixth IMF Stand- by to be carried out in the next several months. 3.07 Interest Rates - The Central Bank has the authority to set the rediscount rate as well as maximum and minimum interest rates on bank credits. Interest rates which remained constant between 1974 and 1981, were increased in June 1982 and again In February 1983. In accordance with the DMF recommendations, Central Bank controls on interest rate structure were siMplified in April 1985 and all interest rates except the Central Bank's rediscount rates and the deposit rate for 6-12 months, were liberalized. At the same time, the Central Bank lowered its rediscount rate by 1.52 to 11.5Z (the standard rate). In line with this, the three banks have reduced their Interest rates to levels ranging from 13.52 to 212 p.a. on short term credits; and to 14.52 to 15.52 for medium-term loans. The rate of inflation in Madagascar, which was 101 in 1984-85, accelerated in 1986 (reaching 17.52). Effective January 1, 1987, the Central Bank raised its preferential rediscount rate (for advances on export bills and on agricultural products) to 11.75Z p.a. and the standard rate (for all other credits) to 151 p.a. Accordingly, BTM raised its interest rates to 15%-242 p.a. on short term credits and to 18Z-192 p.a. for medium term loans. For long term lending, an additional 0.252 spread is charged. On deposits, interest rates vary depending on duration from 1.52 to 32 for demand deposits, to 20.50X p.a. for six-year term deposits. 3.08 Agricultural Credit Policy. Traditionally, banks in Madagascar directed the bulk of their lending to the non-agricultural sectors, and limited agricultural lending to large farms and project authorities implementing specific agricultural development programs. The first coherent attempt at formulating an agricultural credit policy was made during the 1977 banking sector reform, when the expansion of seasonal and medium-term smallholder lending was made one of the major objectives for the newly established BTM. This policy failed for sever-1 reasons. First, the Government's agricultural pricing policies were not conducive to making the sector profitable and made lending to the sector a risky proposition. Second, smallholder lending proved costly and the attempt to involve local governments (fokontany) in the selection of beneficiaries and the recuperation of loans, quickly led to an increase in doubtful debts. Third, especially since 1982, forced lending to parastatals reduced bank funding available to the private sector. Finally, the increasing scarcity of foreign exchange has severely limited the availability of agricultural inputs, thereby restricting agricultural lending.  3.09 The results have been that agricultural lending has remained extremely limited and the great majority of Malagasy farmers have no access to iuistitutional credit. Several of the above factors are now being addresseds parastatal lending is being cut sharply; foreign exchange availability should increase following adjusted macro-economic policies and increased foreign borrowing once banking sector reform has put the banks on a sounder financing footing; an,' changed agricultural pricing policies should make lending to the sector more remunerative. However, the main long-tern Issue is that smallholder lending will remain costly for institutional banks .and in order to overcome this the growth of other lending agencies (such as rural savings and loans institutions) will need to-be encouraged. A study to formulate a long-term agricultural credit policy and system, which would among others address these issues, is included in the proposed Credit (para 5.02). In its new Policy Statement BTM is committed to increase its new lending to agriculture and not to make any new loans to public sector enterprises in financial difficulties. The objective of this policy is to change BTMI's portfolio structure so that agricultural loans will represent a majority of BTM's portfolio. Progress towards this objective will be reviewed annually with IDA. C. Performance 3.10 The Banking Sector Crisis - Following nationalization, the banking sector in Madagascar lived through the years of extreme economic dirigisme and statism that characterized the 1977-82 period. Portfolios gradually accumulated parastatal "paper' but the banks retained a commercial approach that allowed their banking decisions to remain for the most part independent. For example, the BTM successfully resisted Government pressures to lend to smallholders at a time when the financial profitability of smallholder agriculture was nsufficient to generate an adequate recovery rate. From about 1982 however the Government, constrained by ceilings on public sector spending, was no longer able to offer financial support to the parastatal sector, much of which was running heavy losses, and the banking sector was required by Government to allow parastatals to run up short term borrowings. These quickly occupied a large share of the banks' portfolios, and with deteriorating parastatal performance, the recuperation of a major part of these loans became doubtful. This produced a banking sector crisis of major proportions. The BNI auditors for exasmple considered over half of the value of BNI's portfolio at December 1983 to be doubtful and more recent reports are that 80Z of total loans of the banks are non-performing in the sense that interest is not being paid. The BTM situation (described in detail in para 3.20) is somewhat better than that of the BNI but nonetheless very difficult. 3.11 BTM, ahead of the other two banks has its portfolio reviewed by an independent, Internationally recruited auditor since 1983 and has agreed to: (i) a maximum transfer to bad debts reserve each year consistent with retaining depositor confidence and transfer of net profit to reserves (i.e. no distribution); (ii) an overhaul of bank management procedures to improve new lending (e.g. BTM action plan, pars. 3.22; (iII) a review of par"statal  -10- borrowers, starting with the worst. cases, in-order to work out means of generating net repayments to-the banking sector; and (iv) Government's willingness to consider structural reform of the bankin8 sector, including despecialisation of the banks to allow competition, and creation of separate boards for each bank, with the objective o ,romoting autonomous decision- making. Thus a decree establishing an inc._&pendent Board of Directors for each bank was signed by the,President-on August 279 1986. -While Government and the banks have acted to defuse and begin to solve the crisis, the fact remains that the Banks are fully Government-owned and a repeat of similar pressure on the Banks cannot a-priori be excluded. However, Government's acceptance of strict budget and bank debt ceilings under its agreement with IMP-as- well as the creation of Boards of Directors for each bank, should diminish such risks. 3.12 Bankint Sector Reform. Until recently the receptiveness of the Government to proposals for reform In the banking sector was limited. Although a beginning is being made under the sixth IMF stand-by, more significant reforms are necessary in respect to the three state commercial banks. Tho Government has formulated a preliminary program of reforms of the banking sector which has been reviewed by IDA and found satisfactory. A key feature of this program is the adoption, by December 31, 1988, of rules and procedures satisfactory to IDA for the Central Bank's supervision of commercial banks. Furthermore, the Government undertook to maintain positive interest rates In real terms. 3.13 The current excess liquidity of all three banks, as a result of tight credit ceiling enforcement of the Central Bank, has affected negatively the profitability of the banks. As part of the program mentioned in the above paragraph, to alleviate this situation now and in the future, the creation of monetary instruments such as special issues of short-team treasury bills is being investigated. However, due to the foreign exchange shortage the banks have an increasing need for external financing. Finally, the program includes a study to address the followings (a) the capacity of existing financial Institutions to respond fully to the needs of the sector; (b) the consideration to allow additional financial Institutions to enter tho sector, or to introduce private capital -- local andlor foreign -- into the existing three banks once the financial restructuring is completed; (c) the legal framework In which the banks operate, including the possibility of calling guarantees, foreclosing on companies, and selling off pledged assets; (d) the adequacy of credit ceilings, rediscounting facilities and credit supply; (e) the improvement of financial services to include export financing, leasing, and housing finance; (f) mobilization of savings; and (g) degree of application of the 'liberalized' interest rate structure.  -11- D. The National Bank for Rural Develoument - BET 3.14 Structure BTM is a8 autonomous parastatal with a share capital of PMG 2 billion (US$2.66 million), 902 owned by the Government and 102 by the Contral Bank. Its legal status is that of. "socialist enterprise" (Intreprise Sodaliste) regulated by the Charter on Socialist Enterprises. This status in theory involves wvrker participation on the board, profit sharing, etc. In practice W is run by its managment, reporting to the Board and the provisIons of the charter have never been applied. The articles of thb company set Its objectives as promotion of rural development and the moblllsatlon of national savings. 3.15 Management - NTH's Goneral Manager is appointed by decree of the Prim. Minister and assisted by a deputy and experienced professionals. BTh's anagement is competent. The General MaNager is responsible for the administrative, financial, technical and commercial performance of the bank and is accountable to the Board (para 3.02). He also chairs the Credit Committee, an internal body which examines loan requests and makes recomuendations to the Board. All BTH loan requests except those to small farmers are reviewed by tho Credit Committee. The Credit Committee comprises directors of the four main operational departments. It meets regularly twice a week. 3.16 Ortanisation - Of the three banks, BTM has by far the largest number of branches. Its 44 branches and 22 field offices - which are organized Into fLve geographical groups - are distributed througbout the country with some concentration In the major agricultural and population areas of the Central Plateau and the last Cost. The S regional *groups" - in Toliary, Fiarananteos, Hohajonga, Toamasina and Antsiransna, exercise overall mnagement for the branches and field offices in their areas Its hoadquarters at Antanaarivo comprises the General Management and 8- departments: Internal Audit; Administration and Personnel; Loan Supervision; Operations and Credit; Accounting; Treasury and External Relations; Planning and Rural Development; and Tana Branch Operations. Each department comprises 2-4 divisions which are headed by a Division Chief (see chart). The Operations and Credit department ad the Planning and Rural Development department have had the main rcsponsibility for mplementing the first projoct and will continue to be responsible for execution of the proposed project. Theso departments are responslble for all credit operations lncluding appraisal, monitoring and recovery and for rural development activities respectively. The headquarters and the Gzoups assum administrative and control responslblllties, while the Branches and field  offices perform operational activities. The difference between the latter two is largely a function of their volume of business. The field office is the smallest unit. It performs all banking activities but is above all responsible for the rural credit program --FMR. The branch normally Includes four activities: loans, teller transactions, accounting, and marketing. BITM's organization, which reflects its dual role as a development and a commercial bank, appears to be appropriate. However, there is a need to strengthen BTMHs technical capabilities for assisting sub-borrowers in preparing, appraising, supervising and promoting development projects (paras. 5.06-5.07). 3.17 Staffini - Current staffing levels which represent an 112 increase over 1981 Is adequate. Overall, staff quality Is good, with the majority of the professionals having a solid academic background. In order to iprove further the quality of its staff, BTH provides permanent on-the-job traninag and training seinnars organized by the training specialist. It also sends its staff for external training in project evaluation and financial management provided by the Centre d'Etudes Financieres Economiques et Bancaires (CEFEB) in France. Technical assistance and other institution building support was provided under the ongoing BTM project and will be continued and extended under the proposed project. A personnel evaluation exercise with IDA-financed consultant started in June 1986. Operations 3.18 Loan Portfolio and Provisions - BTM's loan portfolio as of December 1985 amounted to FMG 111 billion net of reserves and is distributed as followss agriculture 36Z, industry and comerce 602, and individual lomas 42. Total loans to Parastatals amounted to FMG 33 billion (302). Short term loans amounted to GHO 98 billion or 88% of the portfolio. Seasonal loans for agricultural production stood at FMG 3 billion (32) while those for crop marketing were FMG 33 billion (302). FMG 1.6 billion or 1.42 of total portfolio were accounted for by smallholder lending. Medium and long term loans were FMG 13 billion (122). Non- performing loans and guarantees in favor of clients were estimated by the auditors at FMG 78 billion in December 1985, Including ?MG 44 billion classified as high risks, of which over 502 comprised public enterprises in precarious financial condition. As of December 31, 1985 only 82 (1MG 2.5 billion) of BTM*s loans to Public Enterprises were covered by Government guarantee. Provisions made for doubtful loans and guarantees totalled FMG 22 billion at the end of 1985 and BTM intends to increase provisions against bad risks to FMG 7 billion per year over the next three years in order to further cover non-performing loans extended to the public enterprises. In addition, prediagnost.ic studies for the rehabilitation of 16 selected public enterprises (accounting for about 40 percent of outstanding bank credit to public enterprises) were completed as part of the sixth IMF stand-by arrangement. Nine of these enterprises are BTM's clients and when their rehabilitation Is completed, it is expected that they will repay part of their loans hitherto classified as irrecoverable by BTM's auditor.  -13- 3.19 Resources. BTM depends largely on deposits for its funds. As of December 31, 1985 total deposits accounted for 73 X of total liabilities. Deposits went up rapidly in 1980-1985, from FMG 43 billion to FMG 103 billion as BTM used a strategic expansion of its network to tap further deposits. Demand deposits and certificates of deposits amounted to FMG 77 billion, i.e. 752 of-aggregate-deposits,-while term deposits amounted to FlG 26 billion (25%). The share of Individuals and private companies in total deposits is 791 and that of public entities 21X. BTM's second source of funds is its equity which accounts for 10% of total balance sheet as of December 31, 1985. BTM's final- source of funds has been a number of external lines of credit which have been transferred as equity funds or-as long term-loans. Disbursements on these funds totalled FMG 2,311 million. as of December 31, 1985 which came principally from IDA (the First Agricultural credit project)#, Cooperation.Suisse, CCCE and the African Development Bank. They form only 21 of B3H's total liabilities, however. In view of the foreign exchange shortage in the country, BTM has an increasing need for external financing which should enable it to expand its development activities. The proposed credit would contribute to alleviate this constraint. The proceeds of the IDA credit would be passed by the Government to BTM as Government equity contribution in view of the illiquidity of BTN's portfolio and the current difficulty for the Government to make any cash transfusion needed to strengthen BTM's equity base. Financial Situation 3.20 Annex 3 shows BT3's balance sheets, Annex 4 the income statements and Annex 5 the basic financial ratios. BTM's balance sheets for the 1983- 85 period are summarixed in the following table. 1983 1984 1985 (7MG million) Assets Current Assets (cash, near-cash..) 28,183 1,483 26,054 Loan Portfolio (net of reserves) 71,180 104,048 111,249 Fixed Assets 2.541 2.889 3,371 Total 101,859 128,420 140,674 Liabilities Current Liabilities 87,467 114,023 124,042 (of which deposits) (65,136) (88,845) (103,O94) Term Borrowings 5,371 2,841 2,309 Equity 8.661 11.556 14.323 Total 101,859 128,420 140,674 While in 1984 both B3M's deposits and loans experienced a record expansion, BTM adopted in 1985 a more prudent approach in loan approval where loan portfolio increased only 72. Most of this took the form of increased credit to the private sector.  -14- 3.21 RIM's financial situation is shaky. (1) Its net earnings after tax are low (return on equity in 1985 was I); (ii) Its equity base Is small (equity to total liabilities wa 10% at December 1985); aud (iiI) the quality of its portfolio is poor, with the auditors classifying 522 of BTM's total commitments about P1G 150 billion in 1985 as doubtful (FM 78 billi3n). The auditors recommended further provisions of nMG 11.5 billion beyond what BTI could provido and qualified the audit report. B1M's main problem is its lack of adequate equity or long term low-cost funding. Its resources are basically ahort term, which makes epausion of development business virtually impossible for a prudent bank. The reasons for this difficult situation are: (i) Govrnment pressure in the 1981-83 period to finance parastatsl losses through the banks whon it ws no longer possible through the budget, which resulted in a sizeable amount of parastattl debts among BTM's high risk loans (about FMG 25 billion out-of the MEG 44- billion); (ii) the Government's continued Insistence on taxing and collecting dividends on what are effectively non-existent profits which resulted in BTH paying about FMG 13 billion to the Government since nationalisation; this money would have better been consolidated to reinforce the capital base and provid some funds for development lending activities. The proposed lending operation would correct this. 3.22 The Action Plan. In the face of this difficult situation, 3T1 and the Government, have worked out and are plementing an Action Plan, that, when completed, should put BT3 back in a sound financial position. In this context BTM has adopted a recovery program, which basically aims at making maximsm bad debts provisions to cover 8T3's doubtful debts over a five-year period (1984-88). The action plan includes (i) an lnventory of substantial non-performing loans and assessment of the risk on these lomans this phase has been completed each year 1983 through 1985, the 1986 inventory is In progress; (ii) the establishment of a management information system aimed at better portfolio management and improved monitoring of current transactions; this phase is under implementationl and (Lit) a rapid growth of reserves against bad debts; this Is also betig implemented and over 1984 and 1985 BTM's reserve against bad dobts has increased substantially, totalling FMG 22 billion or 50% of the high risk portfolio by the end 1985. In addition to the foregoing further actions vould be required from BTE and the Government to further improve BTMs' financial condition. Such actions, which would constitute a part of the proposed project, include the following, and assurances on this wero obtained at negotiations: (a) acceptance by Government that BTM wmould not pay any dividends until 1002 of its bad debts as determined by the auditors as of December 31, 1985 are covered by reserves, and, continue with satisfactory provisions thereafter; (b) payment to BT1 by Government to honor its past guarantees on Irrecoverable loans to parastatals, totalling PUG 2.5 billion, not later than June 30, 1987. A first payment has been made by the Government on schedule in September 1986, and the full payment of the guarantees is a condition of effectiveness;  -15- (c) assurances oy RTH that It would (i) continue to retain an International firm of auditors; (ii) withhold taxes on Interest to holders of Cer,ificates of Deposit (CDs) directly on CD holders' accounts Instead of paying back to the Government these taxes out,of its own income - this was agreed at negotiations; (iII) establish a syqtem of loan portfolio analysis that would include aging of receivables effective September.30S, 1987; and (iv) improve loan collection so as to achieve for loans excluding those that BTh's auditor classified as lrrecoverable, a recovery rate of 801 by end of 1988 and 952 by end of 1989 and thereafter for interests and principal repayments. BTM and IDA would discuss each year measures by BTh to attain this goal. Under the action plan, Irrecoverable loans will be fully'covered by BTM making adequate bad -debt provisions. During negotiations BTM agreed to make provisions for bad debt of at least FMG 7 billion per year, adequate to cover over tae.next three years the full amount of irrecoverable loans determined by auditors at end 1985. In addition BTM undertook to reinforce its internal organization to emphasize loan recovery. A Loan Recovery Division has been created to Implement a more stringent recovery policy and an experienced lawyer appointed as chief of its Legal Division. 3.23 The Projections - Financial projections have been prepared on the assumption that the above lmprovements will be carried out. Details are given in annexes 3 and 4. Despite the strength of its project pipeline (para 4.05), BTM plans to maintain a prudent approach to approvals of new loans. Therefore, projections assume a cautious 91 annual increase In loan portfolio from FMG 111 billion in 1985 to FMG 142 billion in 1988. The growth of loan income was estimated to be about 5% p.a. and takes into account the overall 1.51 decrease In BTM's lending rates in April 1985 (par. 3.07). Thus loan income Is expected to grow from 1MG 17 billion to F1M0 20 billion and represent on average 14.31 of year end loan portfolio during the 1985-1988 period. Provisions for bad debts were estimated to range between 3.41 to 3.61 of year ed loan portfolio given BTM's decision to build up substantial provisions. Net profits are expected to range between 0.3-0.2Z of total assets in 1986-through 1988. BTE's financial condition is projected to improve gradually Vor the 1986-88 period. Its EquitylAssets ratio would exceed 111 as BTN's equity base would be constantly reinforced with retained earnings and the proceeds of the proposed IDA credit which would be transferred to BTN as Government equity contribution. The Debt Service Coverage Ratio would also Improve significantly from the current insufficient level of 1.8 to 2.3 in 1988. E. The History of the First Agricultural Credit Proiect (Cr. 1064-HAG) Proiect Oblectives and Desin 3.24 In December 1977, the Government of Madagascar requested that IDA support a line of credit to smallholders through the BTM. The resulting project (Cr. 1064-HAG) was appraised in 1980, and the credit became effective in August 1981. The objectives of the project vere: a) to  -16- support the Goverr_ent's policy to extend credit for smaliholder agricultural development, with BTX as the principal intermediary, and (b) to strengthon BTM's managerial and financial capability as a rural development bank. Potential beneficiaries of the project were to be 1.5 million smallholder familis. The mait project components were: (a) A smallholder Rural C-.dit Program (FMR- Financement du Monde Rural), initiated- by- WI's predecessor, the BN, to provide loans to smallholders with under 5 hectares. The basic principle of the program was that loans were extended to Individuals using local government institutions, specifically the fokontany, as the Intermediary; (b) Credit for experimental projects. including some based. on collective farming; -() Staff training for BTM in financial, managerial, and4compu:er disciplines; (d) Logistical support to BTM, including mobile banks; and (e) Development of a computerised information system. 3.25 Total project costs were estimated at US$14.2 million with an IDA credit of SDR 8.70 million (US$11.5 million equivalent), or 81 S of total costs. The project commitment period was originally set at three years (October 1980-September 1983). Implementation Lxnerience 3.26 The project was clearly set in the context of the Government's credit and rural development policies of the late 1970's (para 3.08). Their failure has thus markedly affected the project's history. In the late 1970's, the Government sought to shift the emphasis squarely to small farmer lendiag, and to accomplish this by relying heavily on the fledgling local government institutions, which were to play a heavy role both in administering loans and In guaranteeing repsyment. Loans to medium and large farmers and to private enterprises were to a large extent ruled out. This would have Implied a major shift In BTH's portfolio and policies, as smallholder lending had been limited up to that time. In practice, BTM'a smallbolder lending did not materialise as planned. Essentially, the Pokonolona system could not fulfill its role and early experience with lending resulted in high arrears. BTf's strict recovery policies called for stopping lending in areas where recovery was poor, and by 1983, only about one-third of Fokontanys remained eligible (open) for credit. Due to BTE's prudent policy of limiting its exposure in smallholder credit, however, actual smallholder lending was so small that IDA and other funds were not used for this purpose. As a result, disbursements from the IDA credit for this component have been minimal (SDR 142,000 to date, against an allocation of SDR 7.5 million). 8mallholder lending remains a priority objective but the realities of lending (high costs, poor incontives) have restricted active programs to areas where major development program are underway, a number of them supported by IDA and IFAD (Lac Alaotra, Central Righlands).  -17- 3.27 In the face of these difficulties, the project was largely redesigned. Since 1982, the Government has moved away from insistence on small farmer lending and has permitted increased lending to commercial farmers, a move fully supported by IDA. As, however, the country experienced increased foreign exchange scarcities, GoverDment requested that funds from the BTH credit be disbursed to finance imports of agricultural inputs and equipment in ordor to ease the severe bottlenecks of these items. 3.28 Towards this end, the credit agreement has been amended three times. The first amendment was made in July 1982 which permitted BTH to --import fertilisers. In October 1983, a further amendment enabled additional Imports of fertilizer and a test operation for the import of tractorsr equipment and spare parts. A third amendment in April 1985, reallocated the balance of funds to import of inputs, tractors, trucks, and minor equipment and supplies for the agriculture sector. The amendments provided that local funds generated from Import sales would be reserved for the original purpose of financing farm credit, on the assumption that the credit program would pick up again as agricultural performance improved. 3.29 The experience of these mports has served, during a period of transition in Madagascar from extreme dirigisme toward a free market approach, to demonstrate the interest and capacity of the commercial importer and distributor in taking over from Government agencies input and equipment import and distribution. It has also demonstrated that, despite constraints of capital, there is a growing market in Madagascar for these Imports. Lessons from this experience have been incorporated in the import and distribution prograt for the Agricultural Sector Adjustment Credit (para. 2.12). As a result of these changes the availability of inputs has improved and the demand from smallholders for credit has begun to pick up. Reflows have been allocated to finance Incremental samllholder and other farm credit in equal proportions. BTM is preparing a pilot smallholder credit project which is designed to establish a field-oriented management and supervision system. Modest project funding has been reserved under the proposed Credit to fund this pilot. 3.30 The institution building comp-onents of the credit assumed an even larger importance with the deterioration of BTM's financial position. They have, on the whole, been successfully implemented. The international auditors, hired at IDA's Insistence, have performed very well, not only in the auditing area, but also with advice on BIH's financial strategy, management improvements, and personnel management. Two technical assistants have since 1983 been providing good support to staff training, the computerised information system is being installed and additional computer equipment is being procured. Three mobile banks were procured as a test, but their operation has not justified further purchases. The credit closing date, initially June 30,1984 was extended to December 31, 1986 with 83% of t e Credit disbursed.  Conclusions 3.31 Project implementation has shown mixed resulta. While the institutiopil strengthening of BTM has to a larg,e extent been attained, the smallholder credit component has been very sub.stantially modified to respond to greatly altered conditions In the agriculture sector. The solution adopted, of converting refinancing of growth in smallholder lending into.financing of Input imports as an Intermediate step to refinancing portfolio growth, was a pragmatic one in the light of Madagascar's extreme balance of payment problem*. The solution has proved successful in easing the input constraint. With the allocation of reflows to funding growth in B3M's portfolio, the project has made a substantial contribution to the recovery of Madagascar"s agricultural economy during a very difficult period. IV. THE PROJECT A. Prolect Oblectives 4.01. The proposed projects a part of an IDA-supported broader agricultural reform program, would respond to several major country development strategy concernss need to reduce state involvement in the economy, to give greater emphasis to market forces to Increase efficiency of resource utilization, and to strengthen key institutions. Within the context of this program, the project would have the following specific objectivest (a) to contribute to further institutional development of BTM, and (b) to meet foreign exchange costs of new investments, and expansion and improvement of existing ventures in agriculture (production and prime l processing/marketing). 4.02 A major objective of this project Is to pull BTh out of its difficult financial condition and put it on sounder tracks. In this, it aims to complete a process already started under the first BTM project which so far has had encouraging results. It is supported by the fact that BTM Is a commercial bank, which gets its resources from deposits and current accounts bought in the market and, therefore, has to remain competitive and profitable. This implies that, at least within the project period: BTM should (a) concentrate incremental agricultural lending to its most solvent clients, primarily medium-sixed enterprises in the private sector, (b) not make new loans to those borrowers classified as poor risk by BTM's auditor (mainly parastatal borrowers) and (c) continue lending cautiously to small farmers, as such operations on a larger scale have proven to be very costly in the past, jeopardizing its profitability and solvency. The Policy Statement approved by BTM's Board as a condition for the IDA credit Board presentation (para 5.05) support these general lines of BTH lending policy.  4.03 In view of the factors listed above, the proposed project has been conceived as an interim lending operation, with the purpose of assisting BTM to complete its full fineaneal recovery and contributing to the Malagasy agricultural sector by extending credit to productive undertakings. Based on the obove criteria, under the project BTM would limit its lending basically to BTM's borrowers Identified under para 4.02 (a) through the uae of selective eligibility criteria. This Implies that the project -will not increase BTM's capability to substantially expand its smaliholder rural credit financing. As the lack of smallholder credit is a maj.or Issue in Madagascar, the project woulds however (a) continue to fin-ance the Incremental cost of the pilot credit management project, started under the first project w<ich alms to improve recovery of rural credit through tight supervision; and (b) finance a consultant study to- formulate a long term agricultural credit policy for Madagascar which would aim at identifying and removing the basic constraints to smallholder lending. B. Project Desi-n 4.04 The proposed IDA credit of US$ 10 million equivalent would be made to the Government of Madagascar on standard terms. It includes a line of credit of US$ 8 million and an institution building component of US$ 2 million. 4.05 The line of credit of USS 8 million would be committed over an expected two and a half year period against the foreign excbange cost of sub-projects. Sub-projects would be eligible that cover new investment, rehabilitation or extension of activities in agriculture; agriculture Is broadly defined to Include agriculture proper, livestock, fisheries and forestry. It would mainly finance the fixed investment needs, notably purchase of machinery, equipment, and spare parts, for subprojects in agriculture. While the ongoing Agriculture Sector Adjustment Credit (para. 2.12) already makes foreig exchange available to the sector on a full cash payment basis, the foreign exchange to be made available under project would serve those that would lack the liquidity in local currency and would need credit. At present there is a large demand for foreign exchange investment funds notably from farmers and private entrepreneurs who have been neglected in recent years but who are anxious to take advantage of the new economic climate and more encouraging attitude of Government. The project would help to increase production of -rops and would provide investment opportunities to processing and marketing activities in the agriculture sector. It would allow an increase in foreign exchange earnings through increased exports of pepper, seafood, wine, etc. As private entrepreneurs play a critical role in processing and marketing activities, the project's main target would be those private entrepreneurs owning profitable businesses which operate at a relatively high capacity. Thus it Is not likely that public enterprises would be good candidates to take loans under the proposed credit. The project pipeline already  -20- includes 31 promising projects for which detaile4 preparation is underway. All of these sub-projects are in the private sector and Involve either ciltivation or agro-industries. Total value of these projects is about FMG ,966 million (US$ 15.90 million). IDA would make 1MG 6,026 million (US$8 million) available for sub-project financing. 4.06 The institution buildina comoRnent - This component would finance computer equipment, technical- assistance for audit, management consultancy services and training; and the costs of the pilot credit management project. Thus this component would allow for (i) extension of the present technical assistance to-BTM's training division and to the computer division; (ii) use of 8s0ort-term consultant services to help BTH strengten its,project promotion and appraisal; (III) continued financing of- assistance to audit and Institution building from the internationally recruited firm already helping 8TM; (iv) financing of incremental costs of the pilot field level credit management project aimed at reviving smallholder.credit; (v) Consultancy services to 8assit would-be entrepreneurs with further technical preparation of project ideas that are prime facie viable at the identification stage; (vi) consulting services for a-study on agricultural credit policy; and (vii) procurement of computer hardware and development of specialized banking operation software. This last item, which would require about US$ 1.2 million equivalent is urgently needed by BTM to initiate and monitor portfolio analysis and improve its current banking operations. It would complement the actions taken under the previous project. C. Proiect costs and Financinz Plan 4.07 Project Costs - Total project costs during the commitment period of two and a half years, (expected to be from September 1987 to February 1990) are estimated at about FMG 14,543 million (US$ 19.33 million), of which about MMG 7,527 (US$ 10 million) or 52S represent foreign exchange costs. The investment component of the proposed IDA credit, FMG 6,026 million (US$ 8 million) will help meet the full foreign exchange cost of sub-projects. Project Costs are estimated at March 1987 prices. Project costs including taxes which would not be covered by IDA are summarized in the following table:  -21- PROJECT COS (M MIILLIOWS) } (UMIL) # ot Totlse Local I Foroigni Total LocellforolqnlTotal Coe" I. Cedlt Comoonent - Sub-loan to og9cul- trol .nterpuele 5,940 0,0 1t,966 7.9 0."9 16.90 92 - Total eit componen 6.90 gm 1it.ow 7.9 6.0J 16.90 S IZ. Instiutin sultdid . .g - Comper Equipment 714 902 1,616 9.95 1.29 2.16 l - Technical Assistance 1S 89o 315 9.2 0.40 0.42 2 - Consultin Services 118 169 2" 0.15 0.29 9.85 2 and Trl Tn*9 - Ag. Credit Study 8 22 89 0.01 0.03 0.04 - Incremntal Costa of a pilot cred. mgnt. proj. 226 87 268 9.89 9.95 9.85 8 - Unallocated - 90 90 - 9.12 0.12 - Total Institution butiding omponent 1.A7 1.501 2. 1. 2 48 24 43 18 TOTAL COSTS 7,010 7,527 14,64 0.83 1.00 19.88 1O 4.08 Proiect Financint Plan Financing of Project costs would be shared as follows: FAG Million US$ Million Z of Total Costs IDA 7,527 10.00 52 BiM 4,623 6.15 32 Investors 2,393 3.18 16 TOTAL 14,543 19.33 100 The proposed IDA credit of US$ 10 million would finance 100Z of the foreign exchange costs. Local contributions of FMG 7,016 million (US$9.33 million) would be made by investors and by BTM from its own resources and  -22-- counterpart funds generated by the First Agricultural Credit Project which account for about SDR 5.8 million equivalent. Investors would contribute 202 of total costs of sub-projects. D. Procurement and Disbursement_ 4 09 Procurement - Procurement for the subprojects financed under the line of credit vould be on the basis of competitive quotations from different suppliers, a procedure acceptable to IDA. Given the relatively modest size of procurement packages for subprojectst there is little scope for international competitive bidding.. Technical Assistance-for the project would be open to international recruitment, to be selected in accordance with Bank Guidelines. Computer equipment would be procured through ICB. 4.10 Proceeds of the credit would be used for financing: (a) BTH's subloans: 100I of the cif cost of Imported goods and 100% of internationally procured services needed for the implementation of eligible subprojects. (b) Institution Building Component: 100% of the foreign exchange cost disbursed under the institution building component. 4.11 Disbursement. A special account of US$400,000 would be set up at the Central Bank on terms and conditions acceptable to IDA. This amount represents an estimated average disbursement of funds over a four-month period. The account would be replenished when the balance is below US$200,000. All credit withdrawals, except for the computer equipment, will be financed from the special account unless otherwise previously agreed with IDA. Withdrawal applicstions for replenishment of the special account would be-accompanied by a statement of the special account which would reflect all transactions. Subloan disbursements would be made on the basis of Statements of Expenditure (SOEs). The documentation for withdrawals made under S0K. would be reviewed by independent auditors and by IDA missions. Disbursements under the Institution Building Component would be fully documented. The project disbursement schedule is shown in Annex 10. The estimated disbursement profile for the proposed Project Is in line with the Bank standard profile for financial intermedisiry loans. Disbursements are expected to be completed by June 30, 1994. It is, however, possible that if the project is implemented more efficiently and with fewer delays the Implementation period could be reduced to five years. S. Accounts and Audit 4.12 BTM's annual accounts are audited by an independent local firm, Fivoarana, with support from an international firm, Arthur Andersen. The draft audit report on the 1985 accounts has been submitted to IDA. This report gives evidence of an audit satisfactorily carried out in accordance with acceptable standards and gives a clear picture of BTM's situation.  -23- Assurances were obtained at negotiations that during the project period both project accounts and the accounts of BTM as a whole would be audited by auditing firms acceptable to IDA, and the auditors' report would specifically include the auditor's opinion on SQEs and the special account. The cost of the International firm's fees will be paid from the IDA credit. BTM would maintain separate accounts adequate to show utilization of Project funds and keep development funds separate from the rest of its business. Assurances to this effect were obtained at negotiations. V. PROJECT IMPLEMENTATION A. General 5.01 The project would be implemented by BTM, within the framework of work programs agreed with its Board and IDA. BTM will be responsible for all aspects of identification and promotion, assistance in preparation, appraisal and supervision. BTK will make decisions independently and apply selective technical and solvency criteria included in its current appraisal procedures and Policy Statement. BM has qualified managers and staff which together with technical assistance, enabled BTM to achieve over the last three years, an internal reorganization that tightened up credit review and appraisal, a good training program, a computer master plan, and an assessment of the loan portfolio. In view of the assurances obtained at negotiations on the financial recovery and staffing of the institution (para 3.22), BTM would be able to manage the project satisfactorily. 5.02 As a part of the proposed project, BTM would conduct a study by consultants to formulate an agricultural credit policy for Madagascar, with particular attention to the needs of smallholder farmers. Such a study would supplement on ongoing study, conducted by the Central Bank, concerning the country's overall credit policy. It would cover among other things, aspects such as special provisions for develovm.nt of smallholder credit; preferential rediscount of agricultural credit; and guarantee and promotion (risk capital) funds for agriculture (para 3.09). In conducting its study, BTM has to make arrangements, satisfactory to IDA, with the Central Bank, the Agricultural and Finance Ministries and the other two commercial banks, so that their views on this matter will receive due consideration. The scope of the study, including an outline TOR, was agreed with the Government and BTM during negotiations. BTM would submit to IDA for review and approval, the recommendations of the study by June 30, 1988; the Government would implement the agreed recommendations not later than December 31, 1988. B. Organization and Reporting 5.03 The Annual Work Proaram and Quarterly Report. BTM would prepare a draft annual work program for each project year. The program will include: (i) the pipeline of sub-projects identified, those being prepared, appraised, approved, or implemented plus execution schedule and comments on  -24- each sub-project; (i1) BTf's recruitment and training programs under the project; (lit) the project budgetg (iv) projected comm.metnts and disbursements under the project indicating projected IDA disbursements, BTM's loan, Investors' contribution plus arrears analysis and loan collection data; (v) a comprehensive description of expenses related to the institution building component; (vi) BTM's projected balance sheets, operating accounts and Profit sad Loss accounts; and (vii) discussion of serious problems which may arise and actions to deal with them. 5.04 The annual work program would be submitted to IDA with copies to the technical ministries by end of October of eveTy year for the following year its approval by IDA would be a condition of ennroval of new. spibrojects for that year. For 1987, the annual work program has been reviewed and approved. During the year BTM would convey to IDA with copies to the technical ministries (Ministry of Finance, MPARA, MPARF), a quarterly ptogress report covering all Items Included in the annual work program. Assurances to this effect were obtained at negotiations. 5.05 Prolect Management. BTM's Board would have full autonomy to approve or reject any sub-project within the program. In addition, a Policy Statement specifying which decisions can be taken by BTMfs Management was adopted by the newly appointed BTM's Board on March 12, 1987. Such a Policy Statement was acceptable to IDA. 5.06 Two of BTM's Departments would have direct responsibility for project implementation: the Planning and Rural Development Department (PRDD) and the Operations and Credit Department (OCD). While in PRDD* the existing director and his professional staff are capable, a considerable increase in project promotion and appraisal business as onvisaged would need increased staffing. Therefore, under the project, PRDD staff would be reinforced by seven local professionals. Four of the professionals, i.e., an economist, a statistician/economist, a financial analyst and an agronomist, would be assigned to the Projects and Research Division, and to be responsible for project identification, preparation and evaluation. The remaining three professionals including a rural development engineer, a livestock specialist and an economist would be assigned to the Rural Development Division, to be responsible for promotion activities. Similarly, staffing of the OCD would be reinforced with the recruitment of three local professionals, i.e. two financial analysts and an economist to strengthen credit monitoring. Assurances to this effect were obtained during negotiations that all these positions will be filled not later than September 30, 1987. 5.07 Sub-loan appraisal would be done by the PRDD for all BTM loan requests under the project. Appraisal reports would be seviewed by the Director of the PRDD before they are presented to the Credit Committee (para. 3.15). Current appraisal procedures are comprehensive and adequate with the exception of the finascial analysis which needs Improvement. The project would provide funds for training BTM staff in the economic and financial analysis of projects and a technical assistant experienced in project analysis would be recruited to provide short term training to BTM's staff.  -25- 5.08 Renorting Reouirements - BIm would submit to IDA quarterly reports which would Include a summary of operations, financial statements, resource position, statement of arrears, aollection ratios and-notes on projects in difficulty. The reports would also Include details of the subloans approved and committed, and a summary analysis of the status of Implementation and performance of aubprojects financed under-the credit component. BTM would also convey to IDA progress reports prepared by the auditing firm on the progress of the action plan each year. In addition 8TM annual reports and audited accounts prepared by qualified accountants acceptable to IDA will be submitted to IDA vithin six months after the end of the year.- 8TM would also submit a draft Project Completion Report when the -project Is completed. Assurances to this effect were obtained at negotiations. C. Financial Aspects of -Iplementation 5.09 Projects financed will have to be justified on the basis of a full economic and financial analysis, including calculation of the economic rate of return (ERR) and financial rate of return (FRR) for all sub-projects above the equivalent of US$ 100,000 (roughly PMG 75 million). The mn=imum ERR would be 122 while the minimum FMR would be 3 points above the cost of borrowing to the beneficiary. In addition all selected sub-projects should meet the banking criteria of solvency and credit rating applied by BTM which luvo been reviewed and found acceptable. Assurances to this effect were obtained at negotiations. 5.10 A free limit for loans under the project would be set at the equivalent of US$150,000 (roughly PMG 113 million), at or under which BTM will have the right to approve loans without prior reforenco to IDA. IDA would approve each sub-loan over US$150,000 prior to 8TM's authorization. IDA would also approve the first 10 sub-projects prior to BTM's authorization whatever the amount. Assurances. to this effect were obtained at negotiations. The aggregate free limit based on the present pipeline of applications is estimated at US$3.2 million (roughly FMG 2,400 million)* representing 40 percent of the total amount of the credit component. There will be no upper limit on the value of individual sub-projects but, In order to ensure maximum distribution of benefits, the IDA contribution would be set at a maximum of $500,000 per sub-project, vith a minimum size of $20000. 5.11 In view of BTMIs w4ak lone-term resource baset the Illiquidity of its portfolio and the difficulty of attractfrn long-term funds on local markets, it needs an injection of long term capital if it is to function as a development bank.. Assurances were obtained at negotiations that (i) Government would pass on to BTH funds from.the IDA credit as equity contributiong and (ii) BTM would lend the proceeds of IDA credit for loans denominated in foreign exchange to its clients at positive real interest rates. Sub-borrowers will have an option of borrowing sub-loans either in foreign exchange or in local currency under the following terms and conditions: (a) the IBRD lending rate at the time of approval plus 4S  -26- p.a., the foreign exchange risk to be borne by the sub-borrower; or (b) BTM's prevailing lending rste and commissions for local currency lending, plus 8 front-end fee of 102 of the proposed sub-loan, and a.fee of 32 p.8. on the outstanding amount of the sub-loan. 5.12 BTM's local currency lending not related to.the Project would be made at its current interest rates (para 3.07) which are hfgher than present levels of Inflation. However, to protect BTM's income and recapitalization effort, it Is important that its future interest rates remain posittvV across the board. ITl would therefore review twice a year with IDA Its interest rate structure including lending rates under the proposed project to ensure that they are positive in real terms. Assurances to this effect were -obtained during negotiations.- 5.13 Repayment periods on subloas extended by BTM would be established on the basis of cash flow projections of each sub-project and on the type of asset to be financed. The repayment periods would not exceed the average useful life of assets being finoaced nor would they exceed a maximum period of 15 years including three years of grace. BTM would cover its risk through mortgages on the investors' assets (land, buildings, stocks, and equipment) and personal securities, which would be insured as usual. VI. PROJECT BENEFITS AND RISKS A. Benefits 6.01 The benefits of this project would accrue through entrepreneurs to the economy as a whole, and to the BTM. Benefits to entrepreneurs would come from alleviation of two key constraints, lack of foreign exchange and lack of term funds, and from advice and technical assistance provided to them by the BTK and its consultants. The upper limit of these benefits cannot be quantified as it will be the aggregate of benefits of a number of sub-projects which are only under preparation or at the Identification stage. The lower limit however is determined by the minim=m acceptable ERR for eligible sub-projects which has been set at 122. Given the large demand among entrepreneurs, it is likely that the actual ERR willT substantially outstrip this minlm=m. Also, the Improvlng environment, with increasing farngate prices for major commodities and more leeway given by Government to the private sector to develop, should be strongly beneficial to credit demand. Benefits to BTM will coam both through the institution building component, which would strengthen Its role as a development bank, and through encouraging term lending to agriculture. Thus the project would support the sustoenance and further strengthening of BTM's institutional capabilities to play a more effective role in promoting productive agricultural activities. By developing its project appraisal capabilities, BTU would be able to expand and diversify its operations away from lending to industry and commerce. The Project would also enable BTI to create new investment and employment opportunities for Malagasy nationals by promoting and financitg agricultural sub-projects. Finally the project would help to increase production of crops and wuld provide investment opportunities to processing and marketing activities in the agriculture sector.  -27- B. Ri ks 6.02 There are three maifn risks to the proj-et. The first Is that 3B1 Is being called on to play a double rolo - as comorcial sadd s development bank. Over the lost few yers the com rcia bank business h. absorbed practically all of BtH*s energy and-resources. There is a risk that the same tendency will causoe 37W management to over emphasise short-term comuercial activities and not tako aufftc4emt Interest in devolopment lending. -Set against this risk re safeguards In project design that ensure that BTM has the requird trained staff-and that it keeps development funds stparate from the rest-of its business. BTM will increase agricultural lendiSng nd will not make any new loans to public enterprises in financial difficulties. the second risk - is that the banking sector problems intensifies, and that BI's financial situation may deteriorate further. The current actions designed to strengthen BTH*S financial situation provide some confidence that BTMI's financial condition would be restored nonetheless. In addition Government is watching the situation closely and will intervenoe If necessary, while both the MF and IDA are monitoring progress and are considering supporting Government in further refozms. Finally, the project faces a risk that the Government might falter in its efforts to Uiprove the environment for agricultural development. Technical assistance, training, and project support have however been designed to rebuild that capacity. Careful supervision of evolution of the banking sector and of the progress of tho institution building component within B11M will be essential. Finally, the Government has reaffirmed Its policy of cooperation with the Bank and the IMF; this overall posture, and continued adjustment lending, should lead to accelerated improvement of the environment for agricultural developments. Overall however, the importance of positive actions to support entrepreneurs, as the country gradually moves towards a market system, justifies taking these risks.  -28- VII. AGREMENTS AND BCROMMUDATIONS 7.01 During-negotlations the following agroements were reached with Government that a (I) The action plan to complete BTM's financial -rocovery as described In para. 3.22 which consists of tho following measures, will be implementeds (a) acceptance by Government that BTH would not pay any dividends until its doubtful loan as determined by the auditors as of December 31, 1985 are fully covored by BTh making adequate provisions, and that BTH continue with- satisfatory provisions thereafter. (b) payment to BTM by Goverament to honor Its past guarantees on irrecoverable loans to parastatals totalling FMG 2.5 billion. (c) assurances by BTM that it would (i) continue to retain an international firm of auditors for the duration of the project; (Ui) withhold taxes on interest to holders of Certificates of Deposits (CDs) directly on CD holders' accounts instead of paying back to the Government these taxes out of Its own income; (iIi) establish a system of loan portfolio analysis that would include aging of receivables effective September 30, 1987; and (iv) Improve loan collection so as to achieve for loans excluding those that BTM's auditor classified as irrecoverable, a recovery rate of 802 by end 1988 and 95Z by end 1989 and thereafter. BTH and DA would discuss each year measures by BTh to %ttain this goal. (ii) As condition of sub-projects approval 8Th would submit for IDA's review its annual work program by the end of every ye"x for the following year (par&. 5.04); (iiI) BTM would assign ten qualified local staff to Project Implementation by September 1987 (Pars 5.06), (iv) B5T would submit quarterly reports satisfactory to IDA plus annual audited accounts within six months of the end of tho fiscal year and a draft Project Completion Report when the Project is completed (pars. 5.08); (v) Por subprojects requiring financing of more than US$150,000 or PNG 113 million, BTM would seek IDA's approval (pars 3.10). For sub-projects requiring financing of more than  -29- US$100,000 or FNG 75 million to be eligible, a minimum economic rate of return of 122 and a minimum financial rate of return of at least 3 points above the cost of borrowing to the beneficiary would have to be obtained at appraisal (pars. 5.09); (vi) IDA would approve the first 10 sub-projects prior to B31'. authorization whatever the amount (par&. 5.10); - (vii) The maximum size of a subloan would be US$500,000 or PMG 376 million; the minimum subloan mould be US$20,000 or FMG 15 - million (para. 5.10); (viii) B1M would not use more than US$3.2 million In the aggregate for free liit subprojects under the credit component (par. 5.10)t (ix) The Government would pass to 3T1 the procoeds of the credit component as equity contribution (para. 5.11); (x) BT3 would lend the proceeds of IDA credit to its clients at positive interest rates in real terms (pars. 5.11 and 5.12); (xi) IDA will review with BTM twice a year BTM's Interest rates structure in light of annual inflation (pars. 5.12). (xii) BTM would implement lending criteria included in its current appraisal procedures and Policy Statement (pars. 5.01); (xiii) Government would adopt rules and procedures satisfactory to IDA for bank supervision by December 31, 1988 (para. 3.04); and (xiv) The rcoummendations of the agricultural credit study to be conducted by 3TM would be submitted to IDA by June 1988 and Government would Implement the agreed recommendations by December 31, 1988 (pars. 5.02). 7.02 Prior to Credit Effectiveness: (i) the Government will make full payment of irrecoverable State Guaranteed BTM loans to Parastatal borrowers (pars 3.22 b). 7.03 Subject to the above assurances, the proposed project would be suitable for an IDA Credit of SDR 8 million (US$10 million equivalent) to the Government of Madagascar on standard IDA terms.  Annex 1 Credit Ouetsandinz by Sector (PMO MILLIONS) 981 S 982 ZX I SU S 1984 X 1985 X Agriculture- 27,144 51.4 31,959 51.2 41,161 57.8 34,-319 33.0 40,072 36 Industry, handicrafts and coumerce 22,040 41.7 26,612 42.7 26,535 37.3 63,344 60.9 66,631 60 Other credits 3.630 6.9 3.719 6.1 3.483. 4.9 6.384 6.1 4.546 4 Total 52.814 100.0 62.290 100.Q 71.179 100.0 104.047 100.0 111.249 100 Source: BTM anwual reports Credit Outstandin&Zby Term (ING MILLIONS) 1981 S 1982 1982 3 X 294 X 1985 Z Short term 42,886 81.2 50,055 80.4 59,186 83.2 89,394 85.9 97,571 88 Medium term 8,096 15.3 10,154 16.3 9,539 13.4 10,919 10.5 10,338 9 Long term 1.832 3.S 2.081 2 454 3.4 3.734 I& 3.340 Total .22814 100.0 62.290 100.0 71.179 lQO.O 104.047 100.0 111.249 100 Sources BTM annual reports  31 Annex 2 Structure of Demosits (PffG MILLIONS) .1982 - 1983 X 1984 X -98 Z Demand Deposits 41,711 70 37,510 58 58,909 66 61,118 59 Term Deposits 9,707 16 12,162 19 13,526 15 26,298 26 Certificate of Deposits 8,399 14 15.464 23 16.410 19 15,678 is Total 59.817 100 65.136 100 88.845 100 103.094 10 Source: BTM annual reports  ACTUAL AN POECTED BALANCE SHEETS g . . . ~~~~~~~~~~~~~~1982-1988 (FPU MILLIONS) AMY$ S"E 119" 14 - 195 . 1160 1987 Cu root At 2,96 .1, 21,483 26,045 14,861 10,867 10,#62 Losn Portfolto 42,29 . 71,180 164,68 111,249 129,2W 186,6" 142,400 Eqity InvstmA 45 6on 45 758 o91 913 Nst FPlxd "So" 2 2 2 W 2.28 2A91 2dM 8.487 4.15s T@tel Asset. 91,611 161,659 126,420 140,665 147,152 150,317 $58,434 : LIUBILM'ES C Curret LibtIltles 78,075 87,467 114,023 124,199 129,588 1i,69 17,76 Tore srorro. i 4,774 5,731 2,U41 2,SW 2,51 2,69 2,839 Equity 7,662 ,#61 11,55 14,157 150,20 17,09 18,849 - Pald-ir. *Mt capital . 2,w 2,2W 2,200 8,$ 3,*620 40 96A,4eA - Rs.rv A r0caIned Gramng* 5.862 6.61 91.5 11.1" 11.648 12.14 12.89 Total Liabiliti.. 91,611 101,869 128,420 140,665 147,152 10,817 15W04N Ourasne give on bOOif of theu _t - . - 5,58 11,478 12,4" Cofird cedit op 2,072 5,t70 4,146 Other 8,118 1,1i4 f lnanmci latitotions 562 692  |A- gNvSCTUAOL 1982,-1i (PMG MILLINS) Actuoe I,o.c '!2 I 1984 198 1 log? sTdnr.et a Co_i.i.. oa on Luns 958,6 13,727 16,784 17,540 18,449 19,371 20,340 loco" la~~~1 2 19 6 24 35 8 r txce_ : IJU 1.22, 1.647 3.169 1.951 86gt 2.132 Total toou. 10,935 16,450 16,391 20,726 20,424 21,436 22,607 Financiat~l , C* empw . ,8 4,53 5,258 5,906 6,581 7,117 7,5 Plnrncg ICsip . .2,411 6,182 6,326 7,517 6,68375 6,8 7 ,739 Total 6,229 19,625 11,919 14,06 15,362 16,212 17,106 Profit hefos. provision* & tax*$ 4,706 5,426 6,481 6,675 5,042 6,223 6,462 Extraordinaryle Incoa& (ch r9*s)- 654 (169) (699) 62 Tot l 5-,3B0 5,286 6,562 7,266 5,662 5,223 6,402 Peovli.ons for bod loanv 4,278 4,626 4,749 6,589 4,861 4,075 4,675 TOXOS 8~~* 22 366 671 486 329 167 237 NET PROFIT 65 262 162 156 391 191 290  ACTUAL An PROJEC1EO FINANCIAL RATOS (lOSt-lOSS) ACTUA PROJCTED 19t2 l9S 1964 lOSS 1996 1967 1996 Itemnt.aa *U of AV_IMn Total VMints. Total Inco. 12.7 16.1 14.8 16.0 13.9 14.8 14.2 of whlch: - lnteres, & eomisalos o* s *@10.4 18.t 18.0 12.6 12.6 12.9 12.6 -Othr Incoae 2.8 1.6 1.8 2.6 1.4 1.4 1.4 totrl Charge. 11.5 14.9 14.2 14.9 18.0 14.1 14.0 of whieh: - A dmlnletrativ O*penseo 8.9 4.6 4.1 4.2 4.4 4.7 4.6 * - Interet payemmt 2.6 S.0 4.9 6.8 t.7 6.7 6.6 - DO*rplatlon ..8 0.4 9.8 0.4 O.8 0.4 0.4 - Prowlsion. 4.7 4.6 8.7 4.? 8.0 8.2 8.1 -Othr cOar"s - 9.6 1.2 0.8 0.2 0.3 0.2 NtProfilt 1.2 0.2 0.1 0.1 0.8 0.2 0.2 Prof hb)g I )tw Indiators Not Profits "S of EquIty 18.0 2.9 1.4 1.0 2.6 1.1 1.0 -on Incom *a U of, Lown PortfolIo 16.8 19.8 14.8 16.7 14.8 14.8 14.8 Cost of Debt *a X of Debt 2.9 5.6 6.1 5.9 6.6 8.4 6.2 fInancial Struycture Ind1}ator. Toro Debt as X of Total Llbllibi Ct.2 6.9 6.0 2.2 1.6 1.6 1.7 t.6 Prwoisbon " X of Loan Portfollo 6.9 6.C 4.6 6.9 8.4 8.6 8.4 Term Debt/Equity Ratio 0.6 0.7 0.8 0.2 92 0.2 0.1 Debt SnlICe Coverag ROtio 2.1 1.7 0.9 168 2.6 8.8 2.8  Annex 6 -35- ?ROJECTED SOURCES AND USES OF FUNDS 1986 - 1988 (OFM million) 1986 1987 1988 Total Sources Piofit 391 191 -290 872 Depreciation 456 527 611 1,594 Provisions 4,351 4,875 4,875 14,101 Govt. Equity Contribution 940 789 414 2,143 Loan Collections 12g020 19,846 11)337 43,203 Interest Collection 10,966 14,185 15,001 40,152 Total Sources 29,124 40,413 32,528 102,065 Uses Loan Disbursements 29,971 26,246 18,137 74,354 Equity investments 155 155 - 310 Increase-in Fixed Assets 258 604 722 1,584 Loan repayments 270 270 270 810 Increase (Decrease) in Net Current Assets (1,530) 13,138 13,399 25,007 Total Uses 29,124 40,413 32,528 102,065  -36- Annex 7 BM's ITERES'T RATE STRuUCru (As of Janusry 1987) =1) Delt - local rediscountt 16.752 to 20.752 - overdraftes 202 to 242 - Other short term credits 152 to 232 - nedium term credits ECRDI standard rediscount rate + 3 points (rediscountable); BCRDM standard rediscount rate + 4 points (non-rediscountable); commitment fee of 0.752 (every six months) - long term credit: BCRDM standard rediscount rate + 3.25 points (rediscountable); BCRDM standard rediscount rate + 4.25 points (non-rediscountable); commitment fee 0.752 (every six months) 2) Credit - current accounts: 1.5% to 32 - deposits: 3 to 6 months 102 6 months to 1 year 14.502 1 to 2 yers 16.752 2 to 3 years 17.50Z 3 to 4 years 18.50% 4 to 5 years 19.502 5 to 6 years 20.50S - CD8s -6 months to 6 years 8.52 to 13.52 3) BCRDM rediscount rates s Preferential rate : 11.75S Standard rate : 15.00%  - 37 - PROJECT F t AN SY NO SURCE OF FUNDS COSTS SOUFCE OF FUNDS LoCOl Foreip Total tDA S t1 NVESTORS Crollt iCmnent - Sub-loan to agrlcultural entorprlse 6,.140 $,n 11,9I 6 8, 3,26-547 2,198 - Total -cedit cpennt 6 .94" 11.960 LIII J547 IJ"_ - o of credit componot (1K) (88) (8) (20) II. t"n ulldln - Comuter Equip_mt 714 o02 1,016 0o 714 - Tchnical Aaietno. is am 815 SW6 is - Consultin Sgrvlcee 11 18 26 16 118 and Trainin - Ag. Cred Study S 22 8 22 8 - tncremntal Coat of a pilot creit Mgnt. proJect 226 7 268 87 22 - Unallocated 0- 90 of - - Ttal Inettutlon building componet 1.17 jj ,2? 1.1 1 - S of Inotitutlon biIdling ompot (1) (8 (42) TOTAL COSTS 7.91 Vf 14-57A627 4.A28 2.S98 PERCENT OP TOTAL COST (1) (52) (82) (16)  -38- * - . t*~~~~~~~~~~~~~~~~~~~Pg 1 of 3 IST OF IDENTIfIED SURJECTS AGRICULTURAL ENTERPRISES IWESTOR ACTIVm LOCAIION FPORN LOCAL TOTAL COSTS COSTS FUG COSTS PUG FUG M.ILLIOS MILLI OS MILLIONS 1. MARTIN PECHEUR Flehing MAMAJANGI 49 81 08 2. RADERANDRAI8VE Peppr FIANARANTSOA 221 248 469 Expert 3. S. I.e . O l-sep- AlN 1,17# 472 1,661 rtces fec- tories 4. BONOU Food ANTANARIV 26 tO as S. RAFAMARAm itsc. ANTANANARIVO 21 40 a1 6. CHAN Foul Vineyrd FIAARATSOA 42 122 14 7. LAM SECK Wod PIANtANTSOA 51 St 162 S. FEDERATION Vinyard FIANARA4TSOA 1N 414 S46 VITICtILTEURS 0. TlKO Feod ANTANARIVO S90 170 566 16. ROCHEF0RTAISE Agro- ANTANANARIVO $M 248 68 11. MERCIERt Vineyard FIA1ARANTSOA 62 818 M0 12. TADIAVY Misc. ANTANARIVO 124 76 200 18. HACHIM Youmwot Sugar ANTSIAA 42 46 as can.- cotton 14. C1REMA Proc.ing TOMASIA an0 so900 1:. Henri RAZANA- FiWahryt ANTRIAIVO 262.6 358.4 620.9 TSEHENO east 16. RAZAFY Uonard LIv"tock Gs 06 16 17. S.A. FANDROSOANA As. paekla 10 206 89 18. Andlana export Fruits 2M 71.25 866. 19. RAMAROSAwIY Forestry 122 64 16 20. RAMIARANA Coffee Antonenerivo 57 sO 167 roasting  _ 39 AnU x 9 Pe". 2 of 8 INVESTOR ACTVTm LOCATION FOREIGN LOCAL TOTAL COSTS COSTS FM* COST FlS FM PU -MILLIONS -ILLIO MLLI- 21. SOFIRAC Frox n Fish, Fltnnerantto 280 822 602 seet 22. SOAVITA Vlnstrd 40 4 n 2a. TATIENSN ET CIE Ag. Packaging Antalaha 79 782 "1I 24. STE LNONE * 8 8I ts 25. LA GENERE Metg., RicO Antalranan. 117 es g0 26. SAMICA (CAVADIMI) Miscel llonoue Noby4r 188 607.0 696.0 27. S.P.P.M. P*rtuory * 875 837 782 Plant 28. St Agerteol. Ag. Packnge, Nosy-4e 74.9 122.5 197.4 OEVoAY Process 29. MuArISCOM Livestock Antananarivo 20.2 87.4 67.6 so. Eta MILLOT Cocoa, oil Ambsnja s8 1o2 2ao 31. NOSCIM Wood product. Mehejang 140 140 28 Total 6,20 5,940 11,906  - 40 - Anex 10 Page 1 of 2 ESTIMATED DISBURSEM"NT SCREDULE (US$ 1000) Subloans Znst* Bld. Cumulative Cumulativo component Disbursements in % IDA Fiscal Year and Quarter Endini PY 88 September 30, 1987 - - December 31, 1987 100 80 180 March 31, 1988 110 80 370 June 30, 1988 110 80 560 6 FY 89 September 30, 1988 300 70 930 December 31, 1988 300 7' 1,300 March 31, 1989 300 . 1,670 June 30, 1989 300 70 2,040 20 FY 90 September 30, 1989 420 1,270 3,730 December 31, 1989 420 70 4,220 March 31. 1990 420 70 4,710 June 30, 1990 420 70 5,200 52 FT 91 September 30, 1990 420 -- 5,620 December 31, 1990 420 -- 6,040 March 31, 1991 420 -- 6,460 June 30,1991 420 -- 6,880 69 nT 92 - September 30, 1991 340 -- 7,220 December 31, 1991 340 -- 7,560 March 31, 1992 340 -- 7,900 June 30, 1992 340 -- 8,240 82  - 41 - Ana.x, 10 Page 2 of 2 FY 93 September 30, 1992 300 8,540 December 31, 1992 300 8,840 March 31, 1993 300 9,140- June 30, 1993 300 9t440 94 September 30, 1993 280- 9,720 December 31, 1993 280 10,000 100 March 31, 1994 - - June 30, 1994 - - Expected date of Credit Effectiveness: September 30, 1987. Expected date of Completion: December 31, 1993. Expected closing dates June 30, 1994.  -42- Ane 11 Page 1 of 3 BkNRIN NY TANTSAHA MPAMOKATRA (RIM) POLICY STATEMENT General 1, BT5 shall promote and assist the development of productive activities with a special emph.asis on the agricultural sector. 5TM' activities shall bo in accordance with its by-law and shall conform to the overall framework of development programs and national priorities-established by the Government of the Republic of Madagascar. 2. BTM shall only finance projects which are technically feasible, economically and financially viable and competently managed. When these requirements are satisfied, BT3 shAll give priority to projects contributing towardss (i) creation of permanent employment; (ii) generation of value added; (iiI) use of local raw materials, goods and services; and (iv) local ownership and management; (v) other relevant factors, depending on the nature of the particular project. 3. The maturity periods on loans granted by 5Th shall be established on the basis of cash flow projections of each project and enterprise, and on the type of asset to be financed. 4. BTM shall require all sponsors to give a written commitment to be responsible for funding any additional cost that may be required over and above that of the project cost estimates. 5. Where a project requires finance in excess of that obtainable from BTM, to the extent possible BTh shall try and interest other financial intermediaries in participating in the financing of the project. B3N shall ensure that finance made available to the project by other investors will be provided on terms and conditions acceptable to BTM. 6. BTf ahall extend finance to Individuals or enterprises establishing new businesses, expanding or restructuring existing production capacity with appropriate managerial technical and financial capacity.  -43- Annex- 11~ Page 2 of 3 Investment llmits 7. BTM shall not finance more than 80