Paraguay - Second Livestock Project

RESTRICTED Report No. P-473 FILE COPY 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 The report may not be published nor may it be quoted as representing their views.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 DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF PARAGUAY FOR THE SECOND LIVESTOCK PROJECT March 23, 1966-  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOP1AIENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS O\ A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF PARAGUAY FOR THE SECOND LIVESTOCK PROJECT 1. I submit the following report and recommendation on a proposed development credit in an amount in various currencies equivalent to US:' 7.5 million to the Republic of Paraguay. PART I: HISTORICAL 2. In Decei-mber 1963 the Association granted a development credit of US. 3.6 million to assist the Government in financing a credit program for the increase of cattle production. This credit became effective after ratification by the Paraguayan Parliament in June 1964 and, immediately after, the Government initiated a program of loans to ranchers for farm development. Only one year elapsed before it became evident that the credit would be fully committed by early 1966. Consequently, the Govern- ment, in May 1965, requested the Association to consider granting a second credit to continue with the program. 3. A Bank mission appraised the second project in August - September 1965 and recommended that the Association grant a credit of US; 7.5 million in early 1966. 4. Negotiation for the proposed development credit began in Washington on February 1, 1966. The Government of Paraguay was represented by Dr. Cesar Romeo Acosta and Dr. Oscar Stark Rivarola, President and General Manager respectively of the Central Bank of Paraguay, and Dr. Juan Plate, Paraguayan Ambassador to the United States. 5. The following is a summary statement of Bank loans and IDA credits to Paraguay as of February 28, 1966.  -2- Amount (U.S. '$ilillion) Year Borrower Purpose Bank IDA Undisbursed 1951 Republic of Paraguay Agriculture and Trans- port 4.5 - 1961 Republic of Paraguay Highways - 6.o 4.7 1963 Republic of ParagLuay Livestock - 3.6 1.5 1964 Republic of Paraguay Highways 2.2 - 2.2 1965 Administracion Nacional de Navega- cio'n y Puertos Port 2.8 - 2.8 Total (less cancellations) 9.5 9.6 of which has been repaid 4.5 - Total now outstanding 5.0 9.6 Amount sold: .2 of which has been repaid .1 .1 Total now held by Bank and IDA 4,9 9.6 Total undisbursed 5.0 6.6 11.2 6. As explained to the Executive Directors on December 7, 1965 (Mfemorandum IDA/R65-20) in connection with the postponement of the Closing Date, the highway project was delayed at first; but is now progressing well and'should be completed before the present Closing Date of December 31, 1969. The port loan is not yet effective having been signed on December 16, 1965. PART II: DESCRIPTION OF THE PROPOSED CREDIT 7. Borrower: Republic of Paraguay. Amount: The equivalent in various currencies of US:$ 7.5 million. Purpose: To assist in financing a credit program for the increase of beef cattle, dairy cattle and sheep through loans for farm development, for the importation of machinery and equipment and procure- ment of technical services.  -3-. Amortization: 20 semi-annual installments of one half of one per cent commencing April 1, 1976 and ending October 1, 1985 and 60 semi-annual installments of one and one half per cent commencing April 1, 1986 and ending October 1, 2015, of the principal amount. PART III: THE PROJECT 8. An appraisal report entitled Second Livestock Project (TO-513a) is attacned. 9. The project is a continuation of the existing program under Credit 47-PA. Besides the basic requirements financed by farm development loans under the first project (fencing, water and stock hancdling facilities) which would represent about 2/3 of the cost of the new project, new categories would be introduced, such as drainage works, pasture improvement, purchase of breeding stock, construction of farm houses, and disease control measures including a plant for the manufacture of aftosa vaccine. The administrative arrangements would be the same as those described in my Report and Recommendation with respect to the first project. The Central Bank would have responsibility for overall administration of the project and would act as the agent for the Government in disbursing the credit. The National Development Bank would provide technical services for the appraisal of ranch development dlans and for the supervision of the expenditure and collection of approved loans. A comnittee within the Central Bank, composed of a representative of the Central Bank, a repre- sentative of the National Development Bank, and a technical livestock expert would approve loans to be financed out of the proceeds of the credit. The technical livestock expert who would supervise the technical services to be supplied by the National Develonment Bakc would be employed by the Government and must be acceptable to the Association. The technical lives ock expert who has served in this capacity under the first project has indicated his willingness to continue working in the program. These administrative arrangements and this organizational mechanism have functioned effectively. As of February 28, 1966, 188 ranch loans for about X 500 million have been granted and $ 3.0 million out of `p 3.3 million a'located in the first project for ranch development loans are committed. The balance of I 0.3 rdllion should be committed within the next few weeks. 10. The total cost of the second project is estimated at US$ 12.7 million (o 1,5CO million). In the first cattle project IDA provided 60% of ranch development costs. In this second project, IDA would continue to contribute 60% of farm development costs, the difference between this contribution and actual foreign exchange costs being slight. The ranchers would contribute 25% and the Government 15% of the development costs.  PART IV: LEGAL INSTRTUiENTS kND AUTHCRITY 11. The draft Credit Agreement and the report of the Committee provided for in Article V Section 1 (d) of the Articles of Agreement are being distributed to the Executive Directors separately. 12. The draft Agreement is in the usual form for IDA credits and follows the covenants set forth in the First Cattle project of whicil this is a continuation. The following provisions are of special interest: (a) Withdrawals for loans to livestock producers (beef cattle, dairy cattle and sheep) will be made only on the basis of plans for farm development approved by a technical livestock expert acceptable to the Associaton; withdrawals for loans for the importation of machinery and equipment will be made only after the loans have been approved by the Association. (b) Arrangements for adrministering the project are defined in an Operating Agreement wThich has been approved by the Association. (c) Repayments received by Paraguay on account of the loans extended under the project will be used for the purpose of continuing the cattle development program for a period of 20 years from the date of the credit. 13. After signature, the Credit Agreement would be submritted to the legislature of Paraguay for approval. In order to give the Government enough time to obtain this approval a neriod until July 31, 1966 has been allowqed for the fulfillment of the conditions of effectiveness of the credit. PART V: THIE ECONOMY 14. An economic report (No. 1H-153a, dated December 27, 1965) was distributed last December. The report makes a generally favorable finding about Paraguay's economic performance during the past two years, and about the content of Paraguayts public investment program for the next few years. The external requirements of that investment program are to be financed, to a large extent, by loans and credits already negotiated. 15. Despite recent fiscal improvement the most important problem confronting Paraguay is the inadequacy of public savings to complement the external resources available for the greatly expanded public investment program. The shortage of public sector savings would not impair the execution of projects financed by IDA and the Bank since the bulk of the local currency required for these projects is already assured by earmarking special revenues. However, if the dearth of public savings is not  remedied by appropriate measures to raise additional revenue it could slow down the execution of the rest of the public investment program. 16. Last December this problem was brought to the attention of the Government which was urged to take additional measures. President Stroessner and the ilinister of Finance of Paraguay have now written the Bank reaffirming the Government's intention to persevere with the approved development program without resorting to inflationary financing. The 14inister of Finance in his letter itemized the measures which have already been taken since the Bank's mission was in Paraguay in Hay and June of last year. These measures include a new stamp tax law, a new tax on the capital and reserves of stock companies, changes in the inheritance tax law, a new basis for the assessriient of values of real estate property, and an increase in the tax on foreign exchange purchases. He also listed additional measures which are in various stages of preparation, including an additional tax on the properties whose value has been increased by the construction of the Transchaco road, a modification of the system of granting tax exemptions for import entries by diplomatic personnel, and a modiernization of the income tax law. An increase in the gasoline tax is now under consideration. Effective implementation of these measures should assure the necessary domestic resources to proceed with the rublic investment orogram. 17. In these circumstances Paraguay is creditworthy for nodest amounts of Bank lending, preferably with extended periods of grace. Paraguay can also be considered as eligible for IDA assistance on the grounds of relative poverty, reasonably satisfactory recent performance, and somewhat limited creditworthiness. PART VI: COMPLIANCE -J'ITH THE ARTICLES OF AGRMC E1JT 18. I am satisfied that the proposed credit would comply vrith the Articles of Agreement of the Association. PART VII: RECOMMENDAkTION 19. I recommend that the Executive Directors adopt the following resolution: RESOLUTION No. Approval of a Development Credit to the Republic of Paraguay (Second Livestock Project) in an amount equivalent to USV 7,500,000. RESOLVED: THAT the Association shall grant a development credit to the Republic of Paraguay in an amount in various currencies equivalent to seven million five hundred thousand United States dollars ($Z 7,500,000)  - 6 - to mature on and prior to October 1, 2015, to bear a service charge of three quarters of one percent (3/4 of 1%) per annum and to be upon such other terms and conditions as shall be substantially in accordance with the terns and conditions set forth in the form of the Development Credit Agreement (Second Livestock Project) between the Republic of Paraguay and the Association, which has been presented to this meeting. George D. Woods President Washington, D. C. March 23, 1966 Attachments