Somalia - Agricultural Inputs Program Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 9617 PROJECT COMPLETION REPORT SOMALIA AGRICULTURAL INPUTS PROGRAM (CREDIT 1612-SO) MAY 31, 1991 Agriculture Operations Country Department II Africa Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Official Exchange Rate: US$1.00 = So. Sh.38 (May 1985) Free Market Exchange Rate: US$1.00 = So. Sh.81 (May 2, 1985) Official Exchange Rate: US$1.00 = So. Sh.91 (June, 1987) Free Market Exchange Rate: US$1.00 = So. Sh.172 (June, 1987) ABBREVIATIONS ADC Agricultural Development Corporation AIP Agricultural Irnuts Program ASAP Agricultural Sector Adjustment Program CIP Commodity Import Program ENC National Commercial Agency FRG Federal Republic of Germany MLFR Ministry of Livestock, Forestry and Range MOF Ministry of Finance ONAT Tractor Hire Agency SOMPET National Petroleum Agency GOVERNMENT OF SOMALIA FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY THE WORLD SANK Washington, D.C. 20433 U.S.A. O(fice of Directo-General Opeatkis Evakatkon May 31, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Somalia Agricultural Inputs Program (Credit 1612-SO) Attached, for information, is a copy of a report entitled "Project Completion Report on Somalia Agricultural Inputs Program (Credit 1612-SO)" prepared by the Africa Regional Office. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT SOMALIA AGRICULTURAL INPUTS PROGRAM (Credit 1612-SO) Table of Contents Page No. Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . .. i Evaluation Summary . . . . . . . . . . . . . . . . . . . . . . . . . iii PART I - PROJECT REVIEW FROM BANK'S PERSPECTIVE I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . 1 II. ECONOMIC AND SECTOR BACKGROUND . . . . . . . . . . . . . . . 1 III. THE GOVERNMENT'S ADJUSTMENT PROGRAM IN 1985 . . . . . . . . 2 Role of the Bank . . . . . . . . . . . . . ... . . . . . . 3 IV. AGRICULTURAL INPUTS PROGRAM . . . . . . ......... . 4 Origin and Objectives . . . . . . . * . .... . . . . . . 4 Credit Components . . . . . . . . . . . . . . . . . 5 Conditionalities . . . . . . . . . . . . . .. ........ 6 Implementation . . . . . . . . . . . . . . . . . . . 6 Procurement and Disbursement . . . . . . . . . . . . . . . . 10 Cofinancing . . . . . . . . . . . . . . . . . . . . . . . .10 Organization and Monitoring . . . . . . . . . . . . . . . . 11 V. ACHIEVEMENTS AND LESSONS . . . . . . . . . . . . . . . . . . . 11 Achievement of Objectives . . . . . . . . . . . . . . . . . 11 Lessons Learned . . . . . . . . .. ..... . . . . . . . 12 PART II - PROJECT REVIEW FROM BORROWER'S PERSPECTIVE . . . . . . . . . 15 PART III - Statistical Information . . . . . . . . . . . . . . . . . . 17 1. Basic Data Sheet 2. Conditions of AIP and Their Compliance Annex 1: Comments from Kreditanstalt Fur Wiederaufbau . . . . . . . . 19 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authoriation. PROJECT COMPLETION REPORT SOMALIA AGRICULTURAL INPUTS PROGRAM (Credit 1612-SO) PREFACE This is the Project Completion Report (PCR) for the Agricultural Inputs Program in Somalia, for which Cr. 1612-SO in the amount of SDR 10.1 million (US$10 million equivalent) was approved on June 18, 1985. The credit was closed on October 2, 1987, more than a year behind schedule. About US$400,000 was canceled. The last disbursement was on October 2, 1987. The Federal Republic of Germany also provided a grant of DM 30 million (US$9.5 million equivalent) in support of the program. The PCR was prepared by the Agriculture Operations Division of Country Department II, Africa Region (Preface, Evaluation Summary, Part I and Part III). Due to political turmoil in the country, the Bank was not able to obtain Part II of the PCR from the Government. Preparation of this PCR is based, inter alia, on the President's Report, Credit Agreement, supervision reports, correspondence between the Bank and Borrower and internal Bank memoranda. PROJECT COMPLETION REPORT SOMALI AGRICULTURAL INPUTS PROGRAM (Credit 1612-SO) EVALUATION SUMMARY Introduction 1. The Agricultural Inputs Program (AIP) was the Bark's first policy- based lending to Somalia and was designed to support the Government's economic reform program in 1985. It was in response to a call by donors at a special Consultative Group meeting in January 1985 to provide quick-disbursing aid to support the country's economic reforms and close the financing gap. It was a vehicle for starting a sectoral policy dialogue with the Government, and subsequently led to the Agricultural Sector Adjustment Programs I and II. The latter was suspended in March 1991 because of non-payment of IDA obligations and the country's security situation that hindered program implementation. Objectives 2. The credit as approved by the Board on June 18, 1985 had four objectives: (a) to maintain and increase production in agriculture, livestock and fisheries sectors through provision of foreign exchange to import machinery, spare parts, diesel fuel and other inputs needed for these sectors; (b) to rationalize the role of the public sector and stimulate private sector activities in agriculture; (c) to stimulate the expansion of private traders and retail outlets for agricultural inputs; and (d) to provide agricultural inputs to support the Government's economic recovery program in 1985. Implementation Experience 3. The credit had no condition for tranche release because it was a small credit to be disbursed over one year. However, it contained several special conditions, the main one being the requirement for Government to submit an action plan for agricultural sector reforms by December 31, 1985. The action plan was to be based on the recommendations of five joint Government/donor agricultural sector task forces on policy and institutional reforms. The reports took longer than expected to complete and the target date for developing the action plan was shifted to 1987 as a condition of second tranche release of the follow-on Agricultural Sector Adjustment Program (ASAP I). . 4. The only reform measure carried out during the implementation of the AIP credit was partial deregulation of trade in veterinary drugs through the introduction of a system of registration of private traders . licensed to import a list of approved drugs. To meet the condition stipulated in the Credit Agreement, the Ministry of Livestock, Forestry and Range (MLFR) issued a decree on October 14, 1985 in which it approved a list of non-prescription drugs which could be imported and - iv -I distributed by a specific number of private importers. Over 20 applications have reportedly been approved by MLFR, and about US$2 million worth of drugs were imported by private traders to benefit the livestock sector. 5. The organization and implementation of the commodity import components were carried out as designed. Due to fluctuation in the exchange rates, the IDA credit (SDR 10.1 million) and German grant (Dm. 30 million) yielded higher amounts in US dollars than at the time of appraisal. The increased sums were used to finance commodity imports for the private and public sector. Total program costs amounted to US$24.7 million ((US$10.9 million from IDA and US$13.8 million from FRG), 27% higher than the appraisal estimate of US$19.5 million. The funds were disbursed over two years rather than the expected period of one year. Results 6. Overall, the credit made an impact on the agr...ultural sector by injecting resources for imports of agricultural inputs, and stimulated some private sector trade in agricultural inputs as evidenced by the following results: - AIP succeeded in providing an increased supply of agricultural inputs both for private and public sectors. - AIP stimulated the expansion of private sector trade and distribution of agricultural inputs. Although participating private traders were rather small in number (about 50), an important beginning of private sector trading was made. - Monitoring and implementation of AIP and sector analysis in preparation of the action plan provided a vehicle of dialogue with Somali authorities, and paved the way for further reforms under ASAP I. - Production of major crops increased in 1985, 1986 and 1987 as well as the total value added in agriculture. Some of this growth is due to the increased supply of inputs. Lessons Learned 7. Sectoral policy improvement beyond a point requires adjustment at the macro-level (exchange rate, public expenditure etc.). Government made some policy changes in agricultural marketing and pricing, but during AIP implementation, it consistently opposed the use of the market exchange rate for Part A imports, and continued to apply the official exchange rate for diesel fuel. Such an important policy weakness at the macro-level introduced significant distortion in efficiency of resource allocation in agriculture by making imports cheap. Also, if financial discipline is not established at the macro-level, public enterprises can take an unduly large share of available resources at the cost of the -v- private sector. Financial support from the Government budget to loss- making public enterprises enabled the latter to use considerable resources under AIP, which would otherwise be used by private importers. ASAP I and II tried to incorporate macro-level policy conditions in support of sectoral adjustment. Finally, Somali record-keeping and accounting practices need to be improved to a minimum satisfactory level for monitoring use of donor resources for adjustment and their impact on the economy. Technical assistance for improving the Govcrnment's statistical capacity was incorporated in ASAP I. PROJECT COMPLETION REPORT SOMALIA AGRICULTURAL INPUTS PROGA (Cr. 1612-CO) PART I - PROJECT REVIEW FROM BANK'S PERSPECTIVE I. INTRODUCTION 1. In response to changing economic conditions in Somalia, the Bank provided credit for the Agricultural Inputs Program (AIP) in 1985. This was the Bank's first policy-based lending to Somalia and was designed to support the Government's economic reform program to stabilize the ecoaomy and stimulate growth in the agricultural sector. 2. In order to provide the background to this credit this report summarizes in Section II the economic situation in Somalia since the late 1970s and the Government's early efforts in response to the situation. The Government's adjustment program and the Bank's role in support of this adjustment is presented then in Section III. Implementation of the credit is examined in Section IV. The final section attempts an evaluation of Government and Bank performance and points out some lessons learned under AIP. I. ECONOMIC AND SECTOR BACKGROUND 3. Beginning of the crisis. Somalia has been experiencing serious economic and financial crises since the late 1970s, because of a combination of policy-related and exogenous factors (erosion of incentives under pervasive controls; mismanagement in an over-extended public sector; the drought of 1974/75 and the border conflict with Ethiopia in 1977/78). The average annual growth of GDP per capita was virtually nil during the late 1970s. Since 1978, with steep increases in defense expenditures and bank financing of large budget deficits, domestic inflation became rampant. The balance of payments worsened as imports surged while exports stagnated. The cu-rent account deficit rose sharply (from about US$100 million in 1977 to over US$250 million in 1979) and was no longer sustainable with the earlier levels of grants and concessional loans. Moreover, capital inflows decreased, and grant aid dwindled in 1978 and 1979, as the aid from the USSR (which supported Ethiopia) ceased before other donors stepped up their assistance. The second oil price hike of 1979/80 compounded Somalia's financing problems. Somalia resorted to some commercial, non-concessional loans, and short-term balance of payments support from Arab and other international organizations. As a result the country's external debt increased from about US$300 million in 1977 to about US$1200 million in 1983, and debt service obligations increased from US$5 million to US$60 million respectively. Debt service fell into arrears and by end-1984 amounted to over US$200 million, and debt service obligations exceeded export earnings. 4. Early efforts for stabilization and adjustment: Since the Government came into power in 1969, it followed a centrally planned economy. When the country became increasingly entrenched in its financial crisis in the late 1970s, the Government became convinced of the need to change its course and move towards a more market-oriented economy. Beginning in 1981, the - 2 - Government decided to introduce policy and institutional reforms towards improving incentives, liberalizing the economic system from excessive government controls and moving to correct policy-induced distortions that had led to output stagnation and grossly inefficient resource use in the 1970s. The reform measures, mainly comprising exchange rate adjustments, fiscal and monetary restraint, increases in agricultural producer prices and de facto elimination of Government monopoly of grain purchases, generated some recovery in the economy especially in agricultural production and exports during 1981- 83 and led to increased external aid. These reforms were supportc1 by IMT standby arrangements. 5. In 1983, the Government prepared a medium-term recovery program comprising a public investment program (PIP) for 1984-86 and a program of policy reform for achieving price stabilization and rationalization of incentive structure to induce supply response and growth. The program called for improvement in macro-economic management through fiscal, monetary, price and exchange rate policies and in public sector financial discipline and investment programming. At the first Consultative Group meeting in October 1983, donors welcomed the reform program and pledged support for a resource- constrained PIP. They welcomed the size and composition of the PIP which put emphasis on rehabilitation and improved utilization of existing facilities. The program reflected Government's intent to extend the scope of liberalization of agricultural pricing and marketing, and to further improve the incentive framework for encouraging the private sector. However, following a ban on Somali livestock imports by Saudi Arabia, its major importer, in 1984, the Government slackened its stabilization efforts, eventually abandoned policy measures ir.cluding devaluation and financial restraint, which precipitated a severe financial crisis in 1984. Inflation reached a record high of 90 percent, and external debt service arrears mounted. III. THE GOVERNMENT'S ADJUSTMENT PROGRAM IN 1985 6. In an attempt to diffuse the economic crisis, the Government adopted an adjustment program in 1985 to (i) stabilize the economy by reducing aggregate demand and the budget and balance of payments deficits, and (ii) improve resource allocation and economic activity by restructuring prices and incentives. This program, formulated with the close involvement of Bank and Fund ataff, constituted a bold attempt towards fostering a more market- oriented economy for financial stabilization, resource use efficiency and growth. The program was supported by a new IMF Standby Arrangement. 7. The main elements of the stabilization program were . ." increase revenue by improving collection of existing taxes, especially import tariffs, limit government expenditures, constrain the size of the publxc investment program to available concessionary financing, limit credit expansion to the public and private sectors and to pursue a flexible exchange rate policy. The structural adjustment measures aimed at improving resource use and productive efficiency of the economy through liberalization of trade and prices, and reforming agricultural marketing, public enterprises and the banking system. - 3 - 8. In addition to devaluing the Somali Shilling by about 28 percent effective January 1, 1985, a free foreign exchange market for most non- government transactions was established. Almost all price controls were dismantled de Jure. Practically all controls with respect to trade and current payments abroad were removed Licensing requirements for most import and export transactions were abolished. The exceptions were certain commodities which, for reasons of public policy, were either prohibited or subject to prior approval. Furthermore, traders were permitted to export and import some goods previously 6ontrolled exclusively by the Government. Exporters were required to surrender 35 percent of export proceeds at the official rate and allowed to use the remainder in the free market. This provided incentives for exports, and access to foreign exchange for the private sector. In agriculture, liberalization of crop prices and marketing was largely accomplished with resultant increases in production of maize and sorghum (main domestic cereals), banana (main export crop) and sugarcane. 9. Some Remaining Agricultural Sector Issues: (a) While ADC's (Government grain procurement and distribution agency) monopoly was broken, its future role as well as the role and price policy of ENC (National Commercial Agency responsible for importing grains on concessional terms) remained to be determined. Also the appropriate mechanism for achieving the twin objectives of producn incentives and price stabilization needed to be studied and established. (b) Improvement of agricultural input distribution remained an important issue to be studied and resolved. While private traders imported some agricultural machinery and spare parts since 1983 under USAID- funded Commodity Import Program (CIP), there was still no private sector distribution network for inputs, and the parastatal tractor hiring agency (ONAT) remained the largest provider of a full range of machinery services at subsidized prices. Also the small quantities of fertilizers, seeds, pesticides and veterinary drugs were largely distributed through government agencies, although a parallel market existed. Due to the uncertainty of government's intentions, private sector equipment dealerships were slow in getting established. To encourage private sector investmant in distribution inputs and services, government needed not only to legalize entry but also to eliminate subsidized pricing by parastatal agencies. Role of the Bank 10. Prior to 1985, Bank lending to Somalia consisted entirely of investment projects. Over 30 percent of total lending was for agriculture, 25 percent for roads and ports, and the rest for education, water supply, industry and technical assistance. Projects in general, and agricultural projects in particular experienced problems in implementation, often due to lack of local currency funds from the budget. Also completed projects suffered from lack of recurrent funds for operations and maintenance. The Bank reached agreement with Government to restructure several pro4ects. It was increasingly evident to the Bank that economic reforms towards liberalization of pricing and marketing, and improvement in macroeconomic management were essential to Somalia's recovery and longer term development as well as to the effectiveness of external assistance. 11. The Bank has been consistently and strongly supportive of the Government's policy orientation to improve efficiency of resource use through greater reliance on the market mechanism and the encouragement of the private sector. Economic and sec',r work undertaken by the Bank showed the need for economic reform, and prov. d analytic inputs for a dialogue with the Government and for the work of the Consultative Group for Somalia, which the Bank initiated. The Bank cooperated with the Government in the preparation and raview of the periodically updated public investment program, performed collaborative reviews with government and donors on major issues in agriculture, carried out sector work, initiated the discussion on public enterprise reform, and provided assistance to improve macroeconomic management, and devise policies for raising rosource use efficiency in both public and private sectors. The Bank's investment projects tried to emphasize rehabilitation and utilization of existing capacities and to achieve donor coordination in this regard. It also mobilized adequate and appropriate assistance in support of economic reform program for adjustment and growth. AIP became the Bank's first sector policy operation in Somalia. 12. Overall, IDA strategy through sector policy operations was to further liberalization measures in areas still needed to be taken and to provide the Government with quick-disbursing balance of payments support to accelerate the implementation of Government policies in this direction. The policy dialogue started under AIP led'to agreement with Government on further policy reforms which became the basis for ASAP I. In addition to the adjustment programs, IDA also financed investment projects in livestock, rainfed agriculture, agricultural extension, port modernization and power rehabilitation in order to help the economy take advantage of the policy and institutional reforms implemented by the Government. IV. AGRICULTURAL INPUTS PROGRAM Origin and Obiectives 13. The Agricultural Inputs Program was developed in response to the 1984 crisis and to support the government's 1985 adjustment program (noted earlier). At a special Consultative Group meeting on January 23, 1985, chaired by the Bank, donors emphasized the need for quick-disbursing aid to support Somalia's economic policy reforms and to close the financing gap. Already the USAID financed Commodity Import Program (CIP) was providing foreign exchange for commodity importation to assist Somalia's balance of payments position as well as to generate local currency for budget support. In February 1985, the Ministry of Finance requested this credit in support of the government's liberalization measures and to finance agricultural inputs. The project was negotiated and presented to the Board within the next four months. 14. The credit as approved by the Board on June 18, 1985 had four objectives: (i) to maintain and increase production in agriculture, livestock and fisheries sectors through provision of foreign exchange to import machinery, spare parts, diesel fuel and other inputs needed for these sectors; - 5 - (ii) to rationalize the role of the public sector and stimulate private sector activities in agriculture; and (iii) to stimulate the expansion of private traders and retail outlets for agricultural inputs. (iv) to provide agricultural inputs to support the Government's Economic Recovery Program in 1985. Credit Components 15. The total program cost was US$19.5 million and had four components: Part A US$12.2 million (IDA US$5.6 million plus the Federal Republic of Germany (FRG) US$6.6 million) equivalent of commercial imports of agricultural inputs by private traders or public sector agencies at the prevailing market exchange rate of the Somali shilling and under limited international tendering. Part B US$2.7 million (funded by FRG) equivalent of imports by Ministries of Agriculture, Livestock and Fisheries at the official exchange rate of the Somali shilling, and under FRG procurement procedures. Part C US$4.0 million (IDA funded) equivalent of diesel fuel purchase by the government for agricultural purposes at the exchange rate agreed between IMF and Government for petroleum imports, and under international competitive bidding. Part D US$0.6 million (IDA US$0.4 million plus FRG US$0.2 million) equivalent of technical assistance and operating costs for the procurement unit for the credit. 16. Program costs, actual vs. original estimates, are as follows: Original Actual Category IDA FRG Total IDA FRG Total -------------------US$ million---------- Part A (commercial imports) 5.6 6.6 12.2 6.0 10.6 16.6 Part B (Imports for GOS) 0 2.7 2.7 0 3.0 3.0 Part C (diesel fuel) 4.0 0 4.0 4.4 0 4.4 Part D (technical assistance) 0.4 0.2 0.6 0.5 0.2 0.7 Total 10.0 9.', 19.5 10.9 13.8 24.7 Due to fluctuations in exchange rates, the IDA credit (in SDR) and German grant (in DM) yielded a higher amount in US dollars which were used to finance more commercial imports. Total program costs were $24.7 million, 27% higher than SAR estimates. -6- Conditionalities 17. There were no conditions of negotiations or effectiveness of this credit. The credit became effective on July 8, 1985 and had no tranche release conditionalities. However, the credit agreement contained several special conditions. One required the Government to submit to IDA by December 31, 1985 the detailed recommendations of the five joint Government/donor Agricultural Task Forces established to undertake sector review on various aspects of agricultural production and marketing, and a detailed plan of action by Government for the implementation of such recommendations taking into account IDA's comments. The credit agreement also stipulated that no f inds would be disbursed from Part A of the credit for veterinary drugs unless the Government authorized the private sector to import and sell an approved list of drugs and provided IDA with a list of commercial importers authorized to do so. By and large, the credit was provided to facilitate recent liberalization measures and to encourage further reform. Implementation 18. The implementation of the program under the credit may be assessed in terms of the actual imports under the credit and the progress in regard to the expected plan of action for reform in the agricultural sector. Technical assistance provided through the credit to support the costs of the procurement unit for the administration of imports and part of the costs of the agricultural task forces was used in an effective and timely way. 19. Import of Agricultural Inputs. Opening of letters of credit and actual commercial imports (Part A) were much slower than anticipated. (At appraisal, it was estimated that the demand for import of agricultural inputs was US$30-40 million per year.) There seems to be several probable reasons: (a) public sector agencies did not have the Somali Shillings to purchase the foreign exchange; (b) the fledgling private sector required some time to adjust to the new system; and (c) other donor programs (USAID and Italian CIP) offered foreign exchange for a wide range of imports at equal or more favorable terms (in regard to exchange rates, scrutiny of applications etc.). By June 30, 1986 (the original closing date), over US$2 million IDA funds for Part A remained uncommitted. However, IDA funds for Part C (diesel fuel) were disbursed more quickly because it was disbursed through SOMPET, the National Petroleum Agency which was able to obtain Shillings from the Central Bank. The closing date was revised and extended several times, and the credit was fully disbursed and the account closed on October 2, 1987. Based on the letters of credit approved it appears that the credit financed categories of imports as stipulated in the credit agreement. Somali imports data are poorly recorded and do not provide any supportive evidence in this regard. 20. Under Part A of IDA/AIP a total of 56 letters of credit were opened by 22 commercial importers to import US$6 million equivalent of goods financed by IDA. One public enterprise (Juba Sugar), and two private sector companies, each used about US$1 million under several letters of credit. Over 25 percent of imports under Part A were by three public enterprises. The rest was used by private importers. Imports consisted mainly of tractors and other farm equipment and spare parts (cover 90 percent); and other imports were less than 10 percent (See Table 1). The credit stipulated that the imports under Part A would be at the prevailing market exchange rate of the Somali shilling. It was later agreed that the "commercial exchange rate" (which gave higher value to the shilling) was close to the "prevailing market exchange rate" and should, therefore, be used. However, as implementation proceeded the commercial exchange rate was not adjusted to follow the market rate as planned and tended to depart increasingly from the "prevailing market exchange rate". Even after the implementation of the Agricultural Sector Adjustment Program (ASAP), which used foreign exchange auctions to disburse funds, AIP still used the commercial exchange rate. However, by that time, 90% of the IDA funds and more than 70% of the FRG funds had been committed. The difference in the exchange rates for the two programs did seem to have stimulated the demand for AIP funds, which otherwise might have taken longer to fully disburse since it had a much more restrictive list of eligible imports than the auction. Table 1: IDA AGRICULTURAL INPUTS PROGRAM DISBURSEMENT AS OF JUNE 30, 1987 PART A: COMMERCIAL IMPORTS Commodity Value in 2 of Categories USa Million Total Boat engines/Fishing gear 0 0 Veterinary drugs 0.4 6.5 Chemicals and packaging materials 0.1 1.6 Fertilizer, Seed and Planting materials 0.03 0.5 Irrigation equipment 1.2 20.0 Tractors and Spare parts 2.7 45.0 Other Agricultural equipment 1.6 26.6 Total US$ 6.0 100 21. FRG grants under AIP which were being committed in parallel (using the same exchange rate) were also fully disbursed. For Part A, i.e., commercial imports, an equivalent of US$10.6 million were actually -disbursed. (DM 21 million which at appraisal was estimated as equivalent of US$6.6 million actually yielded US$10.6 million due to exchange rate changes since then). The funds were disbursed for 64 letters of credit. About 50 percent of the funds were used by four public enterprises (Juba Sugar, ONAT, Fanole Rice, Hargeisa Water Agency) while the rest was used by about 50 private traders. Categories of imports are shown in Table 2. About one-third of the funds was used for the import of tractors and spare parts, while only about US$0.1 million was utilized for boat engines and fishing gear. Also imports of hand tools, fertilizers, seeds and planting materials were less than $0.4 million. Detailed data show that about $1 million was used for the import of tractor tires and batteries, wheel barrows, buckets and generators which could also be used for non- agricultural purposes. FRG grants for Part B of AIP, i.e., imports by agricultural ministries, disbursed over US$ 3 million which were mainly used by the Ministry of Agriculture, and also by Ministries of Livestock, and Fisheries, in support of agricultural operations. - 9 - Table 2: FRG/AGRICULTURAL INPUTS PROGRAM COMPONENT "A" - COMMERCIAL IMPORTS (DISBURSEMENTS AS OF SEPTEMBER 30, 1987) Commodity Value in % of US$ Million Total Boat engines, fishing gear 0.1 1.1 Veterinary drugs 1.5 14.5 Chemicals & packaging materials 0.9 8.7 Fertilizers, seeds, planting mat. 0.4 3.4 Irrigation equipment 1.0 9.6 Tractor & tractor spare parts 3.7 34.4 Other agricultural equipment 1.0 9.4 Diesel fuel for Juba Sugar Proj. 1.0 9.4 Spare parts & equipmt. for J.S.P. 1.0 9.5 Grand Total 10.6 100.0 22. Progress in Policy Reform in Agriculture. A joint Agricultural Sector Survey prepared by the Bank, other donors and the Government was supposed to be completed by December 31, 1985. The report would build on the recommendations of the five Agricultural Sector Task Forces and identify policy and institutional reforms and possible project support. However, the report took longer than expected to complete due to the illness of the lead staff, and the target date for developing a plan of action for further reform measures was shifted to 1987 as a condition of second tranche release of the ASAP I Credit. 23. The only reform measure carried out during the implementation of the AIP credit was partial deregulation of trade in veterinary drugs through the introduction of a system of registration of private traders licensed to import a list of approved drugs. To meet the condition stipulated in the credit agreement, the Ministry of Livestock, Forestry and Range (MLFR) issued a decree on October 14, 1985 in which it approved a list of non-prescription drugs which could be iWported and distributed by a specific number of private importers. Over 20 applications were reportedly been approved by MLFR, and about US$2 million wortn of drugs were imported by private traders to benefit the livestock sector. 24. Finally, the credit agreement stipulated that the Borrower should allocate diesel fuel to each region in accordance with estimated requirements of users in the region and sell diesel fuel to recover costs fully. However, this was difficult to monitor as the Government did not submit any distribution plan on time, and its distribution was not backed up by acknowledgement of receipts of supplies from the regions. In retrospect, such a stipulation should not have been included since it was impossible to monitor. - 10 - Procurement and Disbursement 25. The proceeds of the credit were used to finance imports of eligible agricultural inputs and fuel (about US$10.4 million). As stipulated in the Credit Agreement, procurement was to follow the Guidelines for Procurement under IDA credits with certain modifications. Limited international competitive bidding with at least three quotations was used for IDA funded imports under Part A and international competitive bidding was used for Part C (diesel fuel) imports. 26. Disbursements were to be made for the total foreign exchange costs of eligible imports against full documentation. To facilitate disbursement for Part A imports, the Government was required to open a special account in US dollars with an international commercial bank, which would be replenished as documents became available which confirmed that the letters of credit had paid for eligible imports. This procedure was followed in practice. Also the stipulation of the Credit Agreement regarding the minimum and maximum amounts (US$100,000 and US$ 1 million) of disbursement for any importer's letter of credit was complied with. All importers under Part A were required to deposit in the Commercial and Savings Bank of Somalia, Somali shillings equivalent to 50 percent of the letter of credit at the time of opening it, and the remainder when goods arrived. 27. The Credit Agreement required the Borrower to maintain, and furnish to IDA records and accounts in respect of the credit. However, more than a year after the closing of accounts, IDA/AIP accounts remain unfinalized due to lack of clear and correct statements of accounts from the commercial bank. 28. Disbursement of about US$10.4 million IDA credit for Part A and Part C generated about So.Sh. 719 million, implying an average exchange rate of So.Sh. 69 - US$1. Clearly dollars were sold cheaper than the free market price. The price of the dollar in the free market was So.Sh. 102 in July 1985 and rose to So.Sh. 172 in June 1987; the price in the auctions was So.Sh. 133 in June 1987. The average exchange rate of the dollar used for imports under IDA/AIP was low because of two factors: (a) Diesel fuel import of US$4.4 million by the National Petroleum Agency used an exchange rate of only So.Sh. 42.5 to US$1.00, i.e. the official exchange rate in December 1985. (b) Part A imports of US$6 million used an average exchange rate of So.Sh. 85.5 to US$1.00 which was the average commercial rate of the period July 1985 to December 1986, but much lower than the free market rate. Cofinancinit 29. The Federal Republic of Germany (FRG) made a grant in support of the AIP in the amount of DM 30 million which at appraisal was determined as equivalent to US$9.5 million, but with changing exchange rates turned out to - 11 - be equivalent to nearly US$14 million. FRG grant administration was completely autonomous and parallel, although contact between FRG and IDA was close throughout appraisal and implementation of this project. 30. Part A Imports (equivalent to US$10.6 million) funded by FRG grants were required to originate from thirteen OECD countries including Germany. Some inter-category reallocations were permitted (e.g. about US$1 million equivalent of diesel fuel imports by Juba Sugar were allowed in Part A imports). FRG/AIP Completion Report shows that the money was fully disbursed about US$10.6 million (DM 21.2 million) for Part A, US$4 million (DM 8 million) for government imports and about US$0.2 million for technical assistance. Grants for Part A imports generated counterpart funds of So.Sh.922 million, implying an average exchange rate of about So.Sh. 87 to US$1.00. 31. AIP also stimulated other donor programs for commodity imports, such as the Japanese grant of US$2.5 million (Yen 4) million), followed by a Japanese loan of US$7.5 million (Yen 1.2 billion). These funds were used to import tractors, farm machinery and spare parts, fertilizer, chemicals, packing materials and fuel oil. Organization and Monitoring 32. The credit was expected to be closed in one year and involved no second tranche conditionalities. A second tranche was considered at appraisal, but was believed to be impractical because the credit was small and was to be disbursed in a year. The organization and implementation were carried out as designed. A procurement unit was established in the Ministry of Finance (MO) to publicize the program, receive and screen applications, maintain accounts and assist importers. The unit sabmitted the applications for screening to an Interministerial Committee headed by MOF and included the Ministries of National Planning, Commerce and Industries. Final approval of the applications was obtained from the Minister of Finance. IDA supervision missions and the resident mission acted as catalysts to the monitoring process; they monitored in particular the use of exchange rate for disbursement, progress of work of the agricultural task forces, and the extent of liberalization of trade in veterinary drugs. V. ACHIEVEMENTS AND LESSONS Achievement of Objectives: 33. Since many variables influenced Somalia's agricultural performance since 1985, it is very difficult to isolate the effect of AIP. Also, adjustment is a slow process and interventions do not show quick results. Overall, the credit made an impact on the agricultural sector by injecting resources for imports of agricultural inputs, and stimulated some private sector trade in agricultural inputs as evidenced by the following results: - Pursuant to its objectives, AIP succeeded in providing an increased supply of agricultural inputs both for private and - 12 - public sectors. Considerable agricultural machinery and spare parts, and some fertilizers and pesticides were imported during July 1985 - June 1987. Imports of these agricultural inputs before the start of the program were very low, although exact amounts are not known. - AIP certainly stimulated the expansion of private sector trade and distribution of agricultural inputs. The new channel of foreign exchange made available for imports was used by the private sector. Althougb participating private traders were rather small in number (about 50) and located mostly in the Mogadishu region, an important beginning of private sector trading was made in an area previously monopolized by parastatals. However, expansion of dealership and retail network for agricultural inputs was still facing obstacles in the form of subsidized parastatal operations (e.g. ONAT selling tractor services at less than full cost). - Monitoring and implementation of AIP provided a vehicle of dialogue with Somali authorities on macroeconomic and structural adjustment issues, including further liberalization of key sectors of the economy. 34. In regard to growth of agricultural output, the impact of AIP seems to have been positive. Production of major crops increased in 1985, 1986 and 1987 as well as the total value added in agriculture. A part of this can be attributed to the increased supply of inputs. The impact on the livestock sector is less obvious, although the potentially wider availability of veterinary drugs imported by private traders should be positive. 35. AIP also fulfilled its objective of starting a process of agricultural sector analysis to provide the basis for a dialogue on continued policy reform. As mentioned in para. 14, AIP was a response to donors' appeal for balance of payment support to Somalia. It was a stopgap measure which did not emphasize policy conditions but laid the groundwork for reaching agreement with Government on future sectoral reforms, which were later supported under ASAP I. Lessons Learned 36. Sectoral policy improvement beyond a point requires adjustment at the macro-level (exchange rate, public expenditure etc.). Government made some policy changes in agricultural marketing and pricing, but during AIP implementation, it consistently opposed the use of the market exchange rate for Part A imports, and continued to apply the official exchange rate for diesel fuel. Such an important policy weakness at the macro-level introduced significant distortion in efficiency of resource allocation in agriculture by making imports cheap. Also, if financial discipline is not established at the macro-level, public enterprises can take an unduly large share of available resources at the cost of the private sector. Financial support from the Government budget to loss-making public enterprises enabled the latter to use considerable resources under AIP, which would otherwise be used by private - 13 - importers. ASAP I and-II 1/ tried to incorporate macro-level policy conditions in support of sectoral adjustment. Finally, Somali record-keeping and accounting practices need to be improved to a minimum satisfactory level for monitoring use of donor resources for adjustment and their impact on the economy. Technical assistance for improving the Government's statistical capacity was incorporated in ASAP I. 1/ ASAP II was suspended in March 1991 due to non-payment of IDA obligations and the country's security situation which hindered program implementation. - 15 - PROJECT COMPLETION REPORT SOMALIA AGRICULTURAL INPUTS PROGRAM (Cr. 1612-SO) PART II - PROJECT REVIEW FROM BORROWER'S PERSPECTIVE IDA was not able to obtain Part II due to the political turmoil and security situation in the country. - 17 - Table 1 SOMALIA AGRICULTURAL INPUTS PROGRAM (Cr. 1612-SO) PART III - STATISTICAL INFORMATION BASIC DATA SHEET As of (Date): June 18, 1990 Original Disbursed Cancelled Repaid Outstanding Credit 1612-SO 10.0 10.9 0.4 /1 (US$ million) Original Actual Initiating Memorandum _185 Letter of Development Policy December 31, 1985 Mrch 1987 /2 Negotiations April-May 1985 Board Approval 6f18f85 Loan/Credit Agreement 6/21/85 Effectiveness 785 Loan/Credit Closing 6/86 10/2/87 Actual Completion 686 6/87 CUMULATIVE LOAN/CREDIT DISBURSEMENT FX86 FY87 FY88 FT FY (i) Planned (US$ million) 10.0 (ii) Actual (US$ million) 8.5 A9 /1 (iii) (ii) as Z of (i) 85% MISSION DATA No. of No. of Staff Date of Supervision Mission Month. Year Weeks Persone Weeks Report Preparation 2/85 4 4 16 3/85 Supervision 985 2 2 4 10/85 Supervision 2/86 1 1 1 2/25/86 Supervision 6/86 1 2 2 f/16/86 Supervision 10/86 1 1 1 11L86 Supervision 11/19-11/26 1 3 3 FOLLOW-ON ADJUSTMENT OPERATIONS (COUNTRY: SOMALIA ) Adjustment Loan/Credit, Loan/Credit No. 1711 approve on 6/24/86 in the amount of US$30M (26.4M SDR's) . /1 The original credit amount of SDR 10.1 million was equivalent to US$10 million at the time of project negotiation. With the devaluation of the dollar during the implementation period, the credit amount increased in terms of U.S. dollars. At the end of the project, there was a balance of US$0.4 million in the credit. /2 The deadline for the agricultural sector action plan was postponed to become a condition of second tranche release under ASAP I. - 18 - Table 2 Status of Covenants Covenant in Credit Aereement Status of Compliance Section 3.03 Establish an In compliance. Interministerial Committee to be responsible for reviewing applications for imports under the Project. In compliance. Section 3.04 Establish within MOF a procurement unit to process applications for imports under project. Section 3.05 Submit to IDA by Completion delayed and the target December 1985: (a) date for developing a plan of action recommendations of the five was shifted to 1987 as a condition of Agriculture Task Forces and (b) a the follow on Agriculture Sector detailed plan of action for the Adjustment Program L implementation of such recommendations. In compliance. Section 3.06 Submit to IDA by December 31 1985 (a) an inventory and assessment of agriculture machinery stored in selected workshops and (b) a plan of action for the disposal of supertuous, unrepairable or inappropriate machinery. Section 3.07 Submit to IDA by In compliance. September 30 1985 a progress report on the status of the import program. In compliance Section 4.01 (b)(ii) Furnish to IDA Audits furnished late. no later than 4 months after the end of the year, a certified copy of the auditor's report. Section 4.01 (b) (iii) Furnish to IDA Not in compliance. a monthly statement of transactions on the Special Account Annex 1 -19 - PalmengarteneaSe 5 Yeleton: (.g$) 74 31.0 World Bank histlec 111141 Telgramdre5se: attn.: Mr. J. Shivakumar, dco PranturtamMain I wtaatolPraniutan Divi-sion Chief Agriculture O te41s260 kwd Operatiom Division T (0.9)74 3120 44 Africa Region 60980 a, K Washington D.C./JSA cesewas 00tum oVIve"enm extMon at Mime roias &nAs1n11 9010 - ah/WSo5 sAT?" 12.o1'79e1 LI 1 /1 - rinancial Cooperation with SOMALIA Agricultural Inputs Programe (AIP) Project Completion Report Dear Sira, we would like to thank you for sending a draft of the comple- tion report for the above project by letter dated January 30, 1991. We have no special recommendations but we would like to give you the actual dates about the financial contribution of the FRG to the AIP: Distlibuti2n(PRGAIP) ' million D Component "A"-Commercial Inputs 21.20 Component "SO-Imports for GOS 8.45 Component "D"-Technical Assistance IM Total Contribution 29.95 *n I - 20 - Annex 1 Diabusemnt schedule (PEG/AIR% million.D 1986 13.21 1987 13.89 1988 2:60 1989 0.22 1990 La.a diabursed 29.95 still undisbursed until March 10, 91: 0.05 We would like to thank you for your fruitful cooperation during preparation* implementation and completion of the AIF and remain, yours faithfully, KREDITANSTALT FOR WIEDERAUFAU (Jahn) Ar"6