Uruguay - Second Livestock Project

RESTRICTED F ILE COPY Report No. P-420 This report was prepared for use within the Bank and its affiliated 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 The report may not be published nor may it be quoted as representing their views.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 BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLICA ORIENTAL DEL URUGUAY FOR A LIVESTOCK DEVELOPMENT PROJECT February 9, 1965  INTERNATIONAL BANKY FOR RECONSTRUCTION AND DEVELOPMDNT REPORT AN'D RECOIH4ENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLICA ORIEN1TAL DEL URUGUAY FOR A LIVESTOCK DEVELOPMENT PRCJECT 1. I submit the following Report and Recommendation on a proposed Loan for an amount in various currencies equivalent to $ 12.7 million, to the Republica Oriental de! Uruguay, to finance the foreign exchange cost of a second Livestock Development Project. PART I: INTRODUCT ION 2. In December 1959, the Bank made a 1> 7 million loan (245-UR) to Uruguay for a pilot project of livestock development. The nroject was a new endeavor for the Uruguayans. Because of their conservatismn, farmers were slow to accept radical changes in traditional beliefs and methods. ihurthermore, a gooK administrative mechanism had to be created and an adequate number of national teclmicians had to be trained. For these reasons the project started slowly, but from 1962 on it has moved forward speedily and effectively. 3. One of the main purposes of the loan was to demonstrate to the nation's farmers the advantages of modern techniques of pasture iimoprove.;ient and management. This demonstration objective has nowi been achieved, as is evidenced by the steadily increasing demand for the provision of facilit-es and services of the kcind financed under the loan. The results fromr the first 800 farms selected for the pilot project have been even more impressive than had been anticipated. In fact, the economic return on investment in these farms appears to have been of the order of 405) per annum. Consequently, the Government has requested financial assistance to continue, on a ;iider basis, an already very successful livestock development program. 4. Negotiations on the proposed loan were held in TJashington during last November with Mr. Carlos Pereira Iraola, Hr. Benito Medero (President and Vice-President of the Honor,ary Livestock Commission, respectively) and Hr. Walter Delmonte (Agricultural Credit M4anager of the Banco de la Repu'blica) representing the Borrower. The National Council of Governrment approved the proposed loan documents on January 21. 5. The Bank has made five loans to Uruguay aggregating the equivalent of , 89.5 million. As of January 31, 1965, their status was as follows:  - 2- Year Borrower Purpose Amount (equivalent in millions of US:,' 1950 Administracion General de las Power development and 33.0 Usinas Electricas y los Telefonos telephones del Estado (U.T.E.) 1955 U.T.E. Power development 5.5 1956 U.T.E. Baygorria hydroelectric 25.5 project 1959 Repuiblica Oriental del Uruguay Livestock improvement 7.0 1962 Republica Oriental del Uruguay HighlwJays 18.5 TOTAL 89.5 of iwhich has been repaid 21.4 Total now outstanding 68.1 Amount sold 3.2 of which has been repaid 2.8 .4 Net amount now held by Bank 67.7 6. The total of :> 68.1 million includes :, 17.9 million not yet disbursed. The sum of 5 .4 million relates to the first live-tock project, and is expected to be disbursed before July 1965. The balance of 17.5 million is attributable to the highway project. This loan was signed in October 1962, ratified by Parliament in August 1963, and declared effective in November 1963. The delay in rat+ification caused a chain reaction: delays in himring consultants, in initiation of the design phase and calling for construction contracts. Nvioreover, this project was Uruguay's first externally financed highway project and the first time international con- tracting was being done in highway construction. However, the first section of the road has gone to tender and a contract should be awarded in the next two months. The remaining three sectors should be under contract by the end of 1965. Construction should be completed in 1968, two years behind schedule. PART II: DESCRIPTION OF THE PROPOSED LOAN 7. Purpose: To continue supDDort for the livestock development program being carried out under the technical supervision of the "Comision Honoraria del Plan Agropecuario"l (Honorary Livestock Commission). Borrower: Republica Oriental del Uruguay.  -3- Amount: The equivalent in various currencies of j 12.7 -illion. Interest Rate: 5-1/2 per cent per annum. Commitment Charge: 3/8 of 1 per cent per annum. Term and Amortization: 15 years including five years of grace; 20 semi-annual installments from June 1, 1970 to December 1, 1979. Payment Dates: June 1 and December 1. PART III: THE PROJECT 8. A detailed appraisal of the project (To W48a) is attached. The proposed loan would permit the Government to continue its program of livestock development loans for an additional 2,600 medium sized farmas, and to provide imported goods for about 1,000 larger farms not participating in the credit program. The estimated cost of the project is 5 35 million. It will be financed as follows: D 12.7 million by the Bank loan; tp 11.6 million by the farmers, and y 10.7 million by the Government (including Banco de la Republica). About 4OO,COC hectares of pastures are expected to be improved as a result of the project, against 200,000 hectares improved with the first loan. The two projects combined will cover only about 4% of the total pastoral area of Uruguay. It is still too soon to abandon the system of closely-supervised credit which has made the first project a success. By the time the present project is completed, or even before, the accumulated experience may be sufficient to justify a widespread expansion of pasture improvement through non-supervised credit to an extent which would have a major impact on the national economy. 9. The administration of the project would continue to be under the technical responsibility of the nonorary Commission and the lending oneratiolns would continue to be the responsibility of the Banco de la Repi%liea. These agencies have developed a body of experience and are &,orking effectively. Banco de la Repiiblica would contribute from its own resources the additional funds reouired for the lending operations. In the first project this was an obligation of the National Treasury. Direct provision of funds by the Banco de la Repuiblica will permit the Mational Treasury to allocate greater resources to the non-lending operations of the program such as the subsidizing of seeds and fertilizers, the many and increasing ancillary services required and the cost of administration and supervision by the Honorary Commlssion. 10. Benefits to be derived from the project will be substantial. Most important are the demonstration effects which are already becoming evident, although difficult to quantify. The direct benefits are expected to yield an average net economic return of about 17%. The net income in foreign exchange earnings directly attributable to the project (a jS 35 million investment as indicated in para. 10 above) would average about $ 10 million per year after completion of the project.  PART IV: THE ECOTNO-IC STTU'iTION 11. A report (WH-139a) on the "Economic Situation and Prospects of Uruguay" was distrib-ated to the Executive Directors on October 29, 19624. It noted that Uruguay has remained one of the most prosperous and politically stable countries in the WVestern Hemisphere despite the fact th-at since the nid-fifties economic developments have, in general, not been favorable. The stagnation in the nation's income started with a major fall in export prices. Natural calamities and inadecuate economic policies resulted in a levelling- off of livestock and wool output and in a decline in crop production, the countryts main export commodities. With lowxer prices and feduced exDort volumes, export earnings dropped sharply and Uruguay's share in world markets declined. This, without a corresponding decline in imports, and in combination -with liberal credit policies resulted in a strong inflationary pressure and in a generally weak balance of payments. 12. The improvemerit in the countryls export earnings - mostly on account of higher export prices since 1962 - referred to in the econol%ic report, have continued through the first eleven months of 1964. These income gains have stimulated industrial and service activities. Despite the fact that agricultural crops in 1964 suffered from unfavorable natural conditions. 196h is expected to showi the best gain in real income (3-4;) for any single year since the early fifties. The current account balance of payments in 1964 is estimated to close with a small surplus(: 5-lO million). These improvements, however, have not yet been adequately reflected in domestic finances. Public finances have shared little, if at all, in the recovery of the economy. In early 1963 the incoming Government cut a substantial part of subsidy expenditures. As a result the puolic sector had less need to rely on bank finance in 1963 and 196)1 than during 1962. But improvements in public savings during 1964 undoubtedly have greatly lagged befhind the betterment in the current account balance of payments. With continued substantial wage increases and massive credit expansion to the private sector, the pace of inflation has probably accelerated som.ewhat in 1964. The cost of living index rose, in 1964, by 35-40% as against 30-35,, in 1953 (various indices are published b.r difiLerent government deDartments and agencies). These inflationary developments have resulted in an apparently untenable exchange rate which in turn has been reflected in capital flights and pressures on the country's foreign exchange reserves. During the first eleven months of 1964 the net foreign exchange assets of the Banco de la Republica declined by 26 million to around 100 million (net of liabilities with more than one year terms but after deducting a 15 l million payment due to IMF in 1965) or equal to around six months of mierchandise imports. (However, the Banco de la Repiublica also contracted in recent months a not fully ascertained amount of swjaps with local banks not reported in the above figures on external debt with non-residents). 13. Prospects for continued economic growsth primarily depend on future export earnings and on the efforts undertaken by the Uruguayan authorities to coordinate public investnent while at the same time taking steps to deal effectively with the problem of accelerated inflation. A cro;Twin, group of responsilble Uruguayans has recognized the need for a greatly improved  - 5- financial balance - and the key imnportance of public savings - as a precondition for translating generally favorable e-port prospects into a resumption of economic growth. The future of the country's export products is fairly good, primarily because of the increasing inpact of the Plan Agropecuario on livestockc production. If in the future Uruguay will maintain the exchange rate at a realistic Level, earnings from traditional agricultural exports may reasonably be expected to rise by an arnual 5%4 during the remaainder of the decade. Uruguay's external debt service absorbed 10-11,, of current account earnings in 1964. As around one-third of present debt is of mnedium- term character, there is room, during the next five years, for substantial long-term borrowing without raising the level of external debt and debt service. Always provided that Uruguay pursues a realistic exchange rate policy, overall balance of payments and growth prospects are sufficiently favorable to make Uruguay creditworthy -<or assuming additional debt on conventional termis. This is particularly the case if new extcrnai loans are designed to assist in financing high priority projects such as in the livestock sector where most of the additional production directly yields foreign axchange earnings. PART V: LEGAL INSTRUh-iEhNTS AND ALT'IH'DRITY 14. The draft Loan Agreement between the Republica Oriental del Uruguay and the Bank is being distributed tc the Executive Directors separately. 15. The Loan Agreement, will require ratification by_ the Co-ngress of the Repuolica Oriental del Uruguay. PART VI: COIMiPLIAOCE 1ITrH ARTICLES 0?F AGREENi\T 16. I am satisfied that the proposed Loan would comply with thne Articles of Agreement of the Bank. PART VII: RnCi: ENDATION 17. I recoim,end that the Executive Directors adopt the followJing resolution: RESOLVED: TIAT, the Bank shall grant a loan to Repblica Oriental del Uruguay, in an amount in various currencies equivalent to twelve m.illion seven hundred thousand United States dollars (U.S. $ 12,700,00'), to mature on and prior to December 1, 1979, to bear interest at the rate of five and one-hTalf per cent (5-1/2%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions -et forth in the form of Loan Agreement (Second Livestock Project) betwieen Repdblica Oriental del Uruguay and the Bank, which has been presented to this rreeting. Ceorge D. Woods President V.Fashington, D. C. February 9, 1?65