Honduras - Fourth Agricultural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY 4$A' Report No. P-4803-H0 MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN THE AMOUNT EQUIVALENT TO USt25.0 MILLION TO THE REPUBLIC OF HONDUIRAS FOR A FOURTH AGRICULTURAL CREDIT PROJECT August 22, 1988 This document has a restricted distibution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY AND EQUIVALENT UNITS US$1.00 = L2.00 L1.OO = US$0.5 WEIGHTS AND MEASUREMENTS 1 Hectare (ha) = 10,000 m2 1 Metric ton (mt) = 1,000 kg 1 Kilometer - 1,000 m GLOSSARY OF ACRONYMS FACACH = National Federation of Credit Uni'ori FIs - Financial Intermediaries UPCA - Agricultural Credit Project Unit FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY HONDURA FOURTH AGRICULTURAL CREDIT PROJECT LOAN AND PROJECT SWOAY Borrower: Republic of Honduras Beneficiary: Central Bank of Honduras Amounts US$25.0 mi,lion equivalent Terms: Twenty years, including five years of grace, at the standard variable rate. On-Lending Terms: The Borrower would relend the equivalent of US$22.5 million of loan proceeds to the Central Bank of Honduras on the same terms and conditions as the Bank loan. The Central Bank of Honduras, through its Agricultural Credit Project Unit (UPCA), would relend loan funds to participating financial intermediaries (FIs). The National Federation of Credit Unions (FACACH) would borrow certain loan funds (US$2.5 million) from the Central Bank acting as trustee of the Borrower. FIs and FACACH would receive loan funds in Lempiras at an initial rate of 12% p.a., approximately equal to the marginal cost of funds to commercial banks. This rate would allow a spread sufficient to cover UPCA's administrative costs, and foreign exchange risks. FIs would relend project funds to final borrowers initially at 16% p.a., approximately the market rate. Rediscount and on-lending rates would be reviewed and revised as needed to reflect changes in the marginal cost of funds of the commercial banks and market on-lending rates, respectively. Subloan specific terms and conditions would be consistent with the agreed credit regulations. Finaneing Plan: USS million IBRD 25.0 Central Bank 2.5 Participating FIs 6.3 Sub-borrowers 5.8 TOTAL 39.6 Economic Rate of Return: Not applicable Staff Apptaisal Report: Report No. 7206-HO Maps IBRD No. 20748 This document has a restricted distribution and may be used by recipients only in the perforw nce of their official duties. Its contents may not otherwise be disclosed without World Bank authori. tion.  MEMORANDUM AND RECHMKENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RE(ONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF HONDURAS FOR A FOURTH AGRICULTURAL CREDIT PROJECT 1. The following memorandum and recommendation on a proposed development credit to Honduras for US$25.0 million is submitted for approval. The proposed loan would be on standard Bank terms with 20 years maturity, including five years of grace, and would help finance an agricultural credit project. 2. Background. Agriculture is the most important sector of the Honduran economy, employing more than 50% of the labor force, accounting for over 252 of GDP, and generating two-thirds of exporta earnings. In the early 1980s output virtually stagnated, but in 1983-86 the sector recovered to a growth rate of 2.7%. The recovery was the result of favorable weather for the expansion of coffee and basic grains production, improvement in the export price of bananas, and increases in the production of livestock products for the local market. Although some improvements in productivity have been achieved recently, full exploitation of the sector's potential has been constrained by shortages of medium- and long-term finance in part due to below market on-lending interest rate policies and uncertainties regarding rural property rights which hamper credit operations, in particular, for small-scale producers, Inadequate exten- sion and research programs, and the anti-export biased trade regime including an increasingly overvalued currency and cumbersome procedures and controls on es- ports. 3. The Government of Honduras has increasingly recognized the importance of reinforcing its commitment to a liberal external trade regime and sound do- mestic macroeconomic management for improving levels of production and resource productivity. It is also supporting ongoing and strengthened proSrams of agri- cultural research, extension, and agricultural credit. The Government is en- couraging expansion of both existing agricultural export commodities and the introduction of new agricultural product lines targeted at promising market niches. The main measures that have been introduced include the streamlining of bureaucratic procedures and controls affecting exports, and the extension of eligibility to trade foreign exchange at market prices to all commodities. These measures are expected to improve agricultural export incentives. The macroeconomic adjustment program developed by the Government, to focus mainly on substantial improvements in the balance of payments and a reduction in fiscal deficit, is expected to be supported by a Bank operation being presented for Board consideration concurrently with the proposed operation. The agricultural sector adjustment operation expected to be appraised in mid-1989 would focus mainly on improving the internal and external trade regime for agricultural covmodities, the land tenure policy framework and sector organization to promote more effective and efficient agricultural extension and research programs. These measures would complement the rural financial sector reforms to be undertaken under this project. The latter would aim at improving rural financial markets so that they can contribute more positively and efficiently to the development of the agricultural sector. As the broad reforms are implemented, increased demand for rural credit for productive purposes is expected. Term funds are not readily available in the financial system to satisfy current demand for agricultural credit. Consequently, there is an urgent need to provide term resources to this priority sector.  - 2 - 4. Rationale for Bank Involvement. The proposed project would provide needed credit to a vital sector of the economy with substantial potential for productivity increases while sector adjustment operations are being prepared. It would also facilitate an active dialogue between the Bank and the Government on needed overall structural reforms while introducing needed reforms in the agricultural credit subsector. Bank involvement in the project would have a positive impact on rationalizing overall agricultural credit policy and on the promotion of innovative ways to channel more creait to low-income farmers. The proposed credit policy reforms and expanded investment would increase export earnings ot reduce import needs. 5. Prolect Oblectives. The project would improve the rural credit system by rationalizing interest rates, imposing monitorable and enforceable perform- ance criteria by financial intermediaries who participate in the project, and identifying and promoting innovative forms of channeling more credit to low- income producers. It would also increase agricultural growth, farm incomes, and the balance of trade by facilitating adoption of modern technologies and crop diversification. 6. Project Description. The project would include a nationwide line of agricultural credit to support sectoral investments of US$38.6 million over a two and a half-year period. This credit line would finance, among others, livestock development, orchards and tree crops, soil conservation and land improvements, farm machinery, on-farm storage, and small-scale agro-processing facilities. The project includes an extension component (US$0.6 million) to strengthen UPCA's capacity to serve project beneficiaries. UPCA, with the assistance of consultants, would organize training courses on financial, managerial and agronomic matters for its own staff and the staff of participating FIs (US$0.1 million). The project would also finance four special studies (US$0.3 million): (a) to evaluate how credit for marketing agencies and other intermediaries could encourage on-lending to low-income farmers; (b) to investigate and propose legal, regulatory and procedural changes which would increase the effectiveness of chattel mortgages for securing agricultural credit; (c) to examine the system of rural property rights and land titles in order to improve the system's ability to use land mortgages to secure agricultural credit; and (d) to study transaction costs on financial intermediation and ways to reduce them. The project would be implemented by UPCA which would revise its Operational Manual to achieve greater decentralization. An Executive Committee would coordinate agricultural credit policies. FIs, including credit unions affiliated to FACACH, would be required to fulfill performance criteria to participate in the project. This would provide them with incentives to improve financial performance and ensure that project funds would be on-lent through sound FIs. About 1O0 of the loan would be channeled through FACACH to small-scale producers who are members of credit unions. Steps would be taken to unify and raise to market levels and marginal cost of borrowed funds, the interest rates and rediscount rates, respectively, on other agricultural credit lines. Administration of externally funded agricultural credit lines would be gradually unified under UPCA to better coordinate agricultural credit policies. 7. The total cost of the project would be the equivalent of US$39.6 mil- lion, with a foreign exchange component of US$10.6 million (28%). A breakdown of costs and the financing plan are shown in Schedule A. A description of the proposed procurement arrangements and the disbursement schedule are presented in Schedule B. A timetable of key project processing events and the status of Bank Group operation in Honduras are given in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 7206-HO, dated July 22, 1988 is also attached.  - 3 - 8. Actions to be Aareeds During negotiations agreement was obtained from the Government that: (a) before February 28, 1989, (i) UPCA would sign the contracts to implement the extension service component, and Cii) it would restructure its Executive Committee; (b) before May 31, 1989 UPCA would develop a cost accounting system and implement it by July 31, 1989; (c) the four atudies carried out ander terms of reference and timetable acceptable to the Bank would be completed not later than May 31, 1989 and the recommendations implemented not later than July 31, 1989; (d) FIs would fulfill agreed monitorable criteria to participate in the project and that such criteria would be strictly enforced; and (e) it would unify in accordance with a timetable acceptable to the Bank: (i) rediscount and on-lending rates on agricultural credit lines at levels which reflect the marginal cost of funds and market rates respectively, and (ii) the administration of foreign-financed agricultural credit lines. Conditions of Loan Effectiveness would be the following: (a) that at least two project administration contracts between the Central Bank and FIs have been signed on terms and conditions acceptable to the Bank; (b) that the subsidiary loan agreements between the Government and the Central Bank of Honduras and between the latter and FACACH have been signed; (c) that the adjustments to on-lending rates on agricultural credit lines are being carried out in accordance with agreed levels and timetable; and (d) that credit regulations including limits of authority for subproject approval and requirement to review and revise rediscount and on-lending rates at least once every six months in. accordance with the agreed methodology, have been issued by the Central Bank. 9. Benefits. Principal project benefits would includes (a) a contribu- tion towards the rationalization of agricultural credit policies, in particular with respect to interest rates; (b) greater credit access for low-income produ- cers; (c) improved efficiency in financial intermediation; (d) increased efficiency in production from more intensive utilization of available resources; and (e) greater product diversification. 10. Risks. (a) Implementation of needed macroeconomic structural reforms might fall short of what is necessary to restore stable growth. This could in turn depress future demand for agricultural credit. The actions taken and to be taken as part of the 1988 Government's macroeconomic action plan reduces such risk as they demonstrate the Government's commitment to carry out the adjustment program successfully. Specifically, a more liberal foreign exchange regime, together with very limited alternative investment credit, would mitigate the risk of insufficient demand for project funds; and (b) financial difficulties of FIs may lead to inefficient allocation and poor recovery of project funds. The eligibility and performance criteria for participation of FIs in the project have been designed to reduce this risk. 11. Recommendation. I am satisfied that the proposed loan would comply with the Articles of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. August 22, 1988  Schedule A HONDURAS FOURTH AGRICULTURAL CREDIT PROJECT ESTINATED COSTS AND FINANCING PLAN Estimated Cost: Local a/ Foreian Total --------USS million----------- General line of credit 28.4 10.2 38.6 Extension service to farmers 0.5 0.1 0.6 Training 0.0 0.1 0.1 Special studies 0.1 0.2 0.3 Total 29.0 10.6 39.6 aI Inclusave of taxes and duties, which are negligible. Financing Plan: Local Foreign Total -US$ million--------- IBRD 14.4 10.6 25.0 Central Bank/Government 2.5 - 2.5 Participating FIs a/ 6.3 - 6.3 Sub-borrowers b/ 5.8 Total 29.0 10.6 39.6 cl a/ 15S of subloans made by FIa (Commercial Banks and National Bank for Agricultural Development) to small-scale producers and 25X of subloans made by such FIs to other producers. b/ Small-scale producers would covtribute at least 101 towards investment costs while other producers would contribute at least 202. c/ The Government of the Netherlands is actively considering a grant of about US$2.9 million to the Government of Honduras to finance certain project components, in particular, the line of credit through FACACH, and some of the proposed studies. However, the grant could not be confirmed at the time the project was negotiated. Therefore, the financing plan does not reflect such possible cofinancing. In the event the Dutch grant is provided, the proposed financing plan and project cost, if necessary, will be adjusted.  Schedule B HONDURAS FOURTH AGRICULTURAL CREDIT PROJECT PROCUREMENT AND DISBURSEMENTS Procurement Goods, services and civil works to be financed under the credit line wc.uld be diverse and procured by large numbers of sub-borrowers. Most of these are expected to be supplied locally. Therefore, bulk procurement through international competitive bidding or other mechanisms would not be appropriate. Sub-borrowers would purchase items of their choice in local markets that offer a broad spectrum of local and international suppliers following normal commercial practices of the sector, acceptable to the Bank. Whenever practicable, but in any event for all purchases of US$100,000 or more, the FIs would require that sub-borrowers obtain quotations from at least three suppliers, and confirmation of the order would require the F1's prior approval. Consultants, most of whom would be internationally recruited in accordance with Bank Gu.1.delines, are estimated to cost US$0.55 million. All terms of reference and draft contracts for consultants would be subject to prior review by the Bank. Disbursements Category Credit through BCH 902 of subloans rediscounted i) to small-scale producers 4.5 ii) to other producers 16.0 Credit through FACACH to 2.5 1001 of subloans on-lerd to small-scale producers credit unions for small- scale producers Extension Services, Training and Special Studies 1.0 1001 of expenditures Unallocated 1.0 TOTAL 25.0 Estimated 1989 1990 1991 1992 Disbursement (Bank FY) -----------------US$ million--------- Annual a/ 8.25 b/ 7.00 6.75 3.0 Cumulative 8.25 15.25 22.00 25.0 a/ Projections consistent with disbursement profile for Bank Group financed agricultural credit projects in Honduras. b/ Includes initial deposit in Special Account of US$4.0 million equivalent and up to US$2.5 of retroactive finanzing.  Schedule C HONDURAS FOURTH AGRICULTURAL CREDIT PROJECT TIMETABLE FOR KEY PROJECT PROCESSING EVENTS (a) Time to prepares 7 months (b) Prepared bys Agricultural Credit Project Unit assisted by the office of the Superintendency of Banks and the Department of Economic Studies of the Central Bank of Honduras and the National Bank for Agricultural Development. (c) Fi.at IBRD M_ssion: November 1987 (d) Appraisal Mission Departure: March 21, 1988 (e) Negotiations: August 17-19, 1988 (f) Planned Date of Effectiveness: December 31, 1988 (g) List of relevant PPARss Honduran Agricultural Credit Project (Cr. 628-HO) PPAR 5755  SCheduge D Page i of 2 STATUS OF BANK GROUP OPERATIONS IN HONDURAS 1/ A. Statement of Bank Loans (As of March 31, 1988) (USS million) Fiscal Amount less Undis- Loan No. Year Borrower Purpose Cancellations bursed -..---.-- -. -- -- -- --- -- - --- -- - . ....... ............... .... ........ . ................... ... ... ...... 27 loans and 12 credits fully disbursed 494.84 1673 1979 Honduras rourism 13.52 1.12 2284 1983 Honduras Agricultural Credit 45.00 1.19 2421 1984 Honduras Water Supply 19.60 13.4S 2583 1985 Honduras Municipal Development 6.90 5.2t 2703 1986 Honduras Industrial Credit 37.40 27.44 2804 3/ 1987 Honduras Primary Education 4.40 4.40 Total 621.66 Of which has been repaid 126.82 Total now r-tstanding 494.84 Amount sold : 4.46 Of which has 3een repaid: 4.46 0.00 Total now held by Bank 2/ 494.84 Total undisbursed 52.87 --------------- ~ ~ ~ ~ ~ ~ ~ ~ u---.- 1/ rhe status of the projects listed in Part A is in a separate report on all Bank/IDA financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. 2/ Prior to exchange adjustent. 3/ This loan became effective on April 5, 1988. LoanStatus:1HON-3-88:al.k60 EBArevalo/LA2CO May 6. 1988  Schedule D Page 2 of 2 HONDURAS B. Statement of IFC Investments As of March 31, 1988 (USS Million) Fiscal ---.-Original Approvals-------- Year Obligor Type of Business Equity Loan Total . .......................................................................... ...... ............. . ...... ........................ 1964-66 Emp. de Curtidos Centro- Tannery Americana S.A. (ECCASA) 0.06 0.30 0.38 1969-70 Cia. Pino Celulosa de Pulp and Paper Centroamerica (COPINO) 0.08 0.00 0.08 1978 Textiles Rio Lindo, S.A. de C.V. Textiles and Fibers 1.00 9.00 10.00 1986 Granjas Marinas Shrimp Factory 0.58 0.00 0.58 Total gross commitments 1.74 9.30 11.04 Less cancellations, terminations, repayments and sales 0.16 6.90 7.06 Total comtmenits now held by IFC 1.58 2.40 3.98 **suffuses wuaunsuun uuwas IFC Investments:HON3-88 EPArevalo:LA2CO June 29, 1988