Tanzania - Agricultural Credit Project

RESTRICTED Report No. P-458 FILE COPY This report was prepared for use within the Bank and its afliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR AN AGRICULTURAL CREDIT PROJECT November 15, 1965  REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR AN AGRICULTURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed develop- ment credit of $5.0 million to the United Republic of Tanzania to help finance the National Development Credit Agency's (NDCA) program for extending short, medium and long-term credits to co-operatives and, through co-operatives4 to farmers for developmental purposes. PART I - HISTORICAL 2. The Association was first approached by the Government of Tanzania (thenTanganyika) in August 1962 for assistance in the financing of an agri- cultural credit project. An appraisal mission, which visited the country in April 1963, was not fully satisfied as to the suitability of the proposed project and the institutional set-up for administering the proposed IDA credit, although it found a definitive need for an expansion of agricultural credit. In September 1964, the Tanzanian Government made major changes in the institutional set-up for providing credit to the farming sector. The NDCA was established as the main source of development funds for small-scale agriculture. An FAO mission visited Tanzania in December 1964 under the Bank/FAO co-operative program, to help the authorities in the preparation of a suitable project for IDA. 3. The Government's revised project, requiring lending of about $13.2 million from us, was appraised by an IDA mission in June this year. The mission has recommended that a part of the NDCA's program, involving total financing of about $7.1 million equivalent, would be suitable for considera- tion by IDA at this time. About 71% of this total cost, or $5.0 million, would be provided by us. The Government of Tanzania has accepted this approach. Credit negotiations were held in Washington in September/October 1965 between representatives of the Government and the NDCA and of the Association. 4. The proposed credit would be IDA's third lending operation in Tanzania. A credit of $4.6 million (No. 45 TA) was made in December 1963 for secondary schools and another credit of $14.0 million (No. 48 TA) in February 1964 for roads. The undisbursed parts of these credits are $2.5 million and $13.2 million, respectively. The delay in the utilization of the road credit is due mainly to a serious shortage of experienced staff at the Ministry of Works. The Government is aware of the problem and has assured us recently that it would take steps to remedy this situation. We have received from the Government preliminary requests for further lending for secondary educa- tion and feeder roads. It is expected that the second education project would be ready for appraisal in 1966. Progress with the new road project proposal will depend on the satisfactory utilization of the funds provided under the existing road credit. The Tanzanian Government also intends to approach us in the near future for lending for livestock development and for a second program by the NDCA for expanding credit to the farming sector.  -2- 5. The Bank has so far made no loans for a solely Tanzanian project. Tanzania, together with the United Kingdom, Kenya and Uganda, is a guarantor of the 1955 Bank loan of $24 million to the East Africa High Commission for railways. This loan, now an obligation of the East African Common Services Authority (EACSA), is fully disbursed; the Bank holds only $110,000 of the total outstanding amount of $15.7 million. A new loan of $38.0 million to EACSA for railways was made in September 1965. It is guaranteed jointly and severally by Tanzania, Kenya and Uganda. The loan is not yet effective. The Bank is giving active consideration to a proposed lending of about $11.2 million for an East African telecommunications project; the proposed loan would also be guaranteed jointly and severally by Tanzania, Kenya and Uganda. PART II - DESCRIPTION OF THE PROPOSED CREDIT 6. The main characteristics of the proposed credit would be as follows: BORROWER: United Republic of Tanzania. CREDIT AMOWIJNT: The equivalent in various currencies of $5.0 million. PURPOSE: To help finance a part of the National Development Credit Agency's program to provide to co-operatives and, through co- operatives, to farmers: (a) short-term credit to finance ferti- lizers and pesticides for cotton and coffee; (b) medium-term credit to finance farming, dairying and fishing equipment; and (c) long-term credit to finance the development of tea and sisal small- holdings and primary agricultural pro- cessing facilities. The project also includes the provision of technical specialists to assist the NDCA in the execution of its lending program. AMORTIZATION: 50 years with no repayments by Tanzania for 10 years; repayment to be in 80 install- ments, 1/2% of the principal amount to be repaid semi-annually beginning October 1, 1975 and ending October 1, 1985, and V,s semi-annually thereafter to April 2015. The foreign exchange costs of the technical specialists over a three-year period ($0.6 million) would be provided by the Govern- ment to the NDCA as a grant; the remainder  -3- of the proceeds of the credit would be repaid by the NDCA to the Government over a 20-year period, with interest at 3?-4o per annum. SERVICE CHARGE: 3/4 of 1% per annum on the principal amount of the credit disbursed and out- standing. PART III - TI7E PROJECT 7. An appraisal report entitled "Agricultural Credit Project - Tanzania" (TO 498a) on the proposed project is attached. 8. Tanzania has a well-developed co-operative system through which credit is extended to small-scale agriculture. The National Co-operative Bank (NCB) provides short-term seasonal credits to co-operatives for working capital and marketing of crops. The NDCA provides development credit for production, marketing and processing of agricultural products, storage and transport facilities, and for co-operative distribution services, The NDCA's resources consist of grants, non-repayable loans and deposits by the Government and its agencies. A holding company, the National Co-operative and Development Bank (NCDB) controls and coordinates the activities of these two wholly-owned subsidiary lending institutions 0Virtually all the shares of the NCDB are sub- scribed by the co-operatives. NCDB, NDCA and NCB have identical Boards; the NCDB has no staff of its own, This seemingly complex set-up has been working satisfactorily and so far no serious problems have arisen. 9. $4h4 million of the proceeds of the proposed IDA credit would be relent to the NDCA for 20 years with interest at 3z4% and would be applied by the NDCA to help finance a part of its lending program over a four-year period from July 1, l965 to June 30, 1969. This program includes some 18 investment projects, covering practically all the major agricultural products of Tanzania as well as dairy products and fish. Short-term credits, accounting for about $2 million, would be provided for the creation of two revolving funds to extend credits to cotton and coffee farmers for the purchase of fertilizer and pesticides. Through the imposition of levies, the cotton and coffee co-operatives would build up funds to replace IDA funds over a period not exceeding nise year30 Medium-term credits, amounting to about $0.4 million, would help co-operatives and farmers in the purchase of a variety of farming, dairying and fishling equipment. Most of the equipment would be used for food prod'.ction. Long-term credits, accounting for about $2.0 million, would help farmers and co-operatives to develop cash crops, i.e. tea, sisal, wet-processed coffee, pyrethrum, castor seed and tobacco, and would finance co-operatively-owned processing plants for such crops. The bulk of these crops are exported. 10. The proposed credit would also meet the foreign exchange cost of eight experts to be employed by the TDCA for a period of three rears. Four of these experts (an economist, an accountantlan engineer and an agriculturalist) would be employed at the NDCA's headquarters to assist in the administration and supervision of the NDCA's lending program and to train local staff. The  -4 other four (agricultural credit supervisors) would be stationed in the field to supervise the use of credits by co-operatives and farmers ,to as- sist in feasibility studies and to help in the .7DCA's appraisal of loan appli- cations. The services of such staff are essential for the successful implemen- taticn of the NDCA 's program, The $0e6 million of foreign exchange required for this purpose would be made available to the NDCA by the Tanzania Government as a grant, Pending the recruitment of permanent staff, the Government has agreed to make temporary staff assignments to the NDCA, in order to avoid any delays in the execution of its program. 11. The total cost of the NDCA's program which is proposed for financing by IDA, including the foreign exchange costs of the technical specialists referred above, is estimated at about $7.1 million equivalent, net of loan repayments by co-operatives and farmers. In addition to the proposed IDA credit of $5.0 million, about $2.1 million equivalent would be provided by co-operatives, the NDCA, the Government's National Development Corporation and commercial firms. For a 20-year period after the signing of the proposed IDA credit, the Government would undertake to use the proceeds of the NDCA's redemption and interest payments (less any required payments to IDA) for the purpose of agricultural development. 12. Agricultural production in Tanzania has been seriously hampered by the lack of adequate credit on appropriate terms to enable co-operatives and farmers to expand and diversify their production and to have adequate processing facilities for their crops. Improved quality of crops through better processing should strengthen Tanzania's competitive position in the world markets. In many cases, quite small amounts of credit can have a very large impact on output and the estimated economic return on the lending program to be supported by the proposed credit would be high. Moreover, the benefits of the proposed IDA lending would be shared by a great number of small farmers. PART IV - IEGAL INSTRUNENTS AND AUrHORITY 13. Drafts of a Development Credit Agreement between the United Republic of Tanzania and the Association and of a Project Agreement between the Association and the NDCA, copies of which are being circulated to the Executive Directors separately, conform generally to the pattern of the Associationts agreements for agricultural credit projects. 14. Attention is called to the following provisions of the Development Credit Agreement: (a) a part of the Credit is to be relent by Tanzania to the NDCA on terms and conditions satisfactory to the Association for the purpose of relending by the NDCA for individual Investment Projects approved by the Association (Sections 3.01, 4.02 (a) and 1.02 (b)); Tanzania will make the remainder of the proceeds of the Credit available to the NDCA by way of grant to cover foreign currency costs of certain technical specialists employed by the NDCA (Sections 2.03 (a) and 4.02 (a));  -5- (b) Tanzania is to use the proceeds of payments which it re- ceives under the agreement between the Government and the NDCA on relending a part of the proceeds of the Credit, and Ahich are not currently required to service the Credit, for the purpose of agricultural development for a period of 20 years from the date of the Credit Agreement (Section 4.06); and (c) if the Act establishing the NDCA is amended without the consent of the Association in such a way as to substantially alter the organization, powers or responsibilities of the NDCA, the Association can suspend the right of Tanzania to make withdrawals under the Credit or can require Tanzania to repay any amount outstanding of the Credit (Section 5.02 (c)). 15. The Project Agreement contains a provision that the -DCA is not to incur any indebtedness except that agreed with the Association on a year- by-year basis. PART V - THE ECONO04Y 16. An economic memorandum on the "Current Economic Position and Prospects of Kenya, Tanzania and Uganda,' (AF-35) was circuited to the Executive Directors on September 13, 1965 (R 65-1I8). Annex II of this memorandum analyzes the recent economic trends in Tanzania. The memorandum concludes that Tanzania would have some margin for incurring debt on con- ventional terms, although a substantial part of capital inflow over the next decade has to be on soft terms. There have since been no new developments which necessitate a change in the main conclusions contained in the economic memorandum.The three East African countries' margin for conventional debt Trill be absorbed under borrowiing by EACSA for cormmn infrastructure projects such as the railway and telecommunications programs referred to in paragraph 5 above. It is proposed, therefore, that the proposed lending for tne NDCA project should be on IDA terms. 17. The United Republic of Tanzania was established in 1964 by a union of Zanzibar with mainland Tanganyika. It has a Presidential form of govern- ment. So far progress in integrating the constitutions, political institu- tions and laws of the two constituent elements has been slow. The Tanga- nyika part of the Republic is a one-party state controUed by President Nyerere's Tanganyika African National Union (TANU). Vice President Karume's Afro-Shirazi party controls the Government of Zanzibar. An integration of the two parties is expected in the near future. The centralised political system in Tanganyika, which is closely tied to a unified trade union move- ment and a highly integrated system of co-operatives, is being used to promote the development effort. 18. Tanzania is a poor, sparsely populated country, with an average per capita income of close to $70, Agriculture is the mainstay of the economy, contributing 85% of the total exports and 6013 of GDP. Of the 10 million  -6- inhabitants, 98% are African, the majority of whom are subsistence farmers with varying degrees of participation in the cash economy. This participa- tion is now increasing through Government's efforts to expand the co- operative movement and to provide improved services to farmers. A major problem in this process has been a serious shortage of both fixed and working capital for small peasant farmers and co-operatives. 19. The mining industry contributes little more than 2% of GDP, but accounts for 15% of Tanzania's exports. The share of manufacturing in GDP is also small, only 4%; but expansion in this sector is getting under way, partly due to the Government's recent efforts to attract new industries to Tanzania. The "Kampala Agreement", which was reached with Kenya and Uganda in May 1964, has provided for the allocation of certain new "East African" industries to Tanzania. 20. Since 1960, Tanzania's economy has undergone sharp variations in activity. A fall in production in 1961-62, due to adverse weather condi- tions and political uncertainties, was more than made up in the following years. Thanks to increased production of the main cash crops (sisal, coffee, cotton and cashew nuts), the growth of GDP averaged 5' from 1958 to 1963. In 1964, real GDP increased by 6.5%, partly due to improved world market prices for Tanzania's main exports. 21. In recent years the central government's current budget has been closely balanced, with only limited budget support from the United Kingdom. The total expenditure in 1964/65 increased rather sharply, mainly due to the increased cost of developmental projects, to increases in debt service, and additional costs of defence, internal security and public education. A shortfall in public revenue, aggravated by a fall in world sisal prices, led the Government to take emergency measures to bridge the gap. The 1965/ 66 budget provides for substantial increases in both expenditure and taxation, including a new 5% development levy on incomes. 22. The current 5-year (1964/65-1968/69) development plan is both more comprehensive in scope and ambitious than the preceding three year plan. It aims at achieving a rate of growth of real GDP close to 7%, by developing and diversifying African agriculture and by increasing import substitution, to be followed by investments in large-scale agricultural enterprises based upon irrigation and flood control. Private enterprise is accorded a domi- nant role in the manufacturing sector and private foreign capital inflow is encouraged. The plan envisages total investment over the five years of L246 million, or nearly L50 million per year, compared with an annual average of i25 million which was attained between 1960 and 1963. About half of the requisite finance for the new plan is expected from domestic sources and the balance mainly from external aid. 23. Tanzania has a favorable balance of trade with countries outside East Africa, which is offset by an adverse balance of trade with Kenya and Uganda, and an adverse balance of invisible transactions and net investment income. The trend over the period 1958 to 1964 of deficits in the current  -7- balance of payments was reversed in 1964 which closed with a favorable balance of 19.2 million. Inflow of capital from official sources increased significantly from 1958 to 1964 (from some i1l5 million to about "6.O million). Debt repayments, however, also increased from 10.4 million in 1958 to L4.6 million in 1964 (excluding Tanzania's share of EACSA's debt) and there has been a substantial outflow of private capital, particularly just before and after independence and again in 1964. 24. Tanzaniats economic growth will depend to a large extent on the growth of its exports, which is forecast at about 4% per annum over the next five years, and by the success of the present programs for import substitution and for attracting new industries. These, in turn, will depend upon the success in mobilizing both external and domestic capital for development. While the investment and industrial production targets as set in the current 5-year plan may be too optimistic, the agricultural production targets are reasonable and should be attainable. It should be possible for Tanzania's real GDP to grow at about 4-5% per annum. Service charges on Tanzania's existing debt (including a notional share of the EACSA debt) amounted to about 4% of tlh current earnings in 1964. This figure may increase to 6% around 1970 when Tanzania will have some peak maturities. 25. Tanzania's earlier expectations for a federation with Kenya and Uganda have not materialized. The East African Governments now appear to find it increasingly difficult to relinquish their sovereignty in various fields. Each country, in the circumstances, has been giving priority to policies which would promote its own economic development. The recent decision by the three East African Governments to establish their own central banks and to issue separate currencies reflects the new trend. In an attempt to avoid a possible disintegration of the common services and the East African common market, a special Committee has been set up by the three Governments to review the whole field of East African economic co- operation. The Committee is expected to report by mid-1966 on measures which would strengthen the economic ties among the three countries. 26. Tanzania needs to develop its small-scale agriculture in order to improve the living standards of its peasant farmers and to increase the country's export income. The Government's overall development effort has been reasonably good. The proposed lending for the NDCA's program will support a vitally important sector of the Tanzanian economy and is worthy of the Association's support. PART VI - COMPLIANCE WITH ARTICIES OF AGREEMENT 27. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association.  PART VII - RECOM4ENDATION 28. I recommend that the Executive Directors adopt the following resolution: RESOLVED: THAT the Association shall grant a development credit to the United Republic of Tanzania in an amount in various currencies equivalent to five million United States dollars (U.S. $5,000,000), to mature on and prior to April 1, 2015, to bear a service charge at the rate of three-fourths of one per cent (3/4 of 1%) per annum, and to be upon other terms and conditions substantially in accordance with the terms and conditions set forth in the form of Development Credit Agreement (Agricultural Credit Project) between the United Republic of Tanzania and the Association which has been Dresented to this meeting. George D. Woods President Attachment Washington, DaCO November 15, 1965