Honduras - Livestock Development Project

RESTRICTED 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 The report may not be published nor may it be quoted as representing their views.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 CREDIT TO THE REPUBLIC OF HONDURAS FOR A LIVESTOCK DEVELOPMENT PROJECT December 19, 1969  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF HONDURAS FOR A LIVESTOCK DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to US$2.6 million to the Republic of Honduras. PART I - HISTORICAL 2. The proposed project was submitted to IDA in July 1968 and was appraised in January/February 1969. Negotiations took place in 1'lashington on November 6 through 17, 1969. The Borrower was represented by Mr. Roberto Ramirez, who is also President of the Central Bank, the Central Bank by Messrs. Guillermo Bueso and Efrain I4eija Nolasco, and the private partici- pating banks by Mr. Paul Vinelli. 3. The proposed credit, the fourth to Honduras, would bring the total of Bank/IDA lending to $65.4 million (net of cancellations). Total loans now amount to $46,9 million, and the previous IDA credits stand at $15.9 mil- lion. The following is a summary statement of Bank loans and IDA credits to Honduras as at November 30, 1969: Loan or Amount (US$ million) Credit Year Borrower Purpose Bank IDA Undis- No. bursed 4 loans 1955-60 20.0 Credit 1-HO 1961 Republic of Honduras Roads - 8.4 - Credit 71-HO 1965 Republic of Honduras Roads - 3.5 - Loan 400-Ho 1965 Republic of Honduras Roads 6.0 - 3.7 Loan 463-HO 1966 Empresa Nacional Ports 4.8 - 1.8 Portuario Loan 495-HO 1967 Republic of Honduras Roads 8.6 - 7.3 continued....e  -2- continued Loan or Axaount (Us$ millicn) Credit Year Borrower Purpose Bank IDA Undis- No. bursed Loan 541-HO 1968 Republic of Honduras Power 7.5 - 5.7 Credit 116-HO 1968 Republic of Honduras Power - 4.0 3.0 Total (less cancellations) 46.9 15.9 of which has been repaid to Bank and others 8.6 lotal now outstanding 38.3 Amount sold: 2.6 of which has been repaid 1.8 0.8 Total now held by Bank and IDA 37.5 15.9 Total undisbursed 18.5 3.0 21.5 4. Four Bank loans and two IDA credits have been fully disbursed. On the remainder, disbursements are now proceeding satisfactorily. However, construction work on the North Road project (Credit 71-HO/Loan 400-HO) has been delayed because the Government's consultants recommended a new alignment on the basis of information that became available after the loan and credit were approved. The proposed new alignment was accepted by the Bank and IDA. The credit is now fully disbursed and further work on the project which is being financed by the loan is proceeding normally. At the outset, delays were also encountered on the Western Highway Paving project (Loan 495-HO) in engaging the supervisory consultants, but con- struction work is proceeding satisfactorily. 5. In April 1964 the IFC approved an investment in Empresa de Curtidos Centro Americana S.A. (ECCASA) consisting of a loan of $0.3 mil- lion and a share subscription of $0.06 million, for the construction of an integrated leather tannery. In August 1968 the IFC also approved a commit- ment of up to $0.5 million as promotional investment in the share capital of Compania Pino Celulosa de Centro America S.A. (COPINO), established in February 1969 to investigate and possibly carry out a pulp and paper proj- ect in Northern Honduras. If the full-scale project is eventually imple- mented (requiring some $77 million additional capital), IFC may consider a further investment in both loan and equity. 6. A number of projects in power, transport, agriculture and edu- cation are being prepared for consideration by the W4orld Bank Group. Of these, a power project may be ready for presentation to the Executive Directors around the end of fiscal year 1970, and a project each in ports and highways in fiscal year 1971.  PART II - DESCRIPTION OF THE PROPOSED CREDIT 7. Borrower: Republic of Honduras. Amount: The equivalent in various currencies of US$2.6 million. Purpose: To assist in financing a five-year lending program to be carried out by the Central Bank through commercial banks for increasing the production of beef and dairy cattle. Amortization: 50 years, including a 10-year period of grace, with repayment in semi-annual installments from February 15, 1980 and ending August 15, 2019. Service Charge: 3/4 of one percent per annum. Estimated Economic Return: 18 percent. PART III - THE PROJECT 8. An appraisal report entitled "Livestock Development Project Honduras" (PA-21) is attached. 9. The Honduran economy is predominantly agricultural, this sector contributing 40 percent of Gross Domestic Product and employing about 70 percent of the total population of 2.4 million. Bananas account for about one-third of agricultural production and half of exports, but this commodity is vulnerable both to fluctuating prices and to windstorm or hurricane damage. Livestock production is about one-fifth of total agri- cultural production and is the third largest exported product (including live cattle). Important cash crops include coffee, cotton, corn and tobacco. 10. While the total cattle population of about 1.3 million head is distributed fairly evenly over the country, some 75 percent of these are on small-scale mixed farms with little potential for economic expansion. These farms are receiving assistance from the Government's National Devel- opment Bank through programs supported by the US/AID and the IDB. The larger and more efficient ranchers traditionally receive credit from the commercial banks which, to the extent that they are willing at all to lend for agriculture, concentrate on short-term production loans. There is thus a gap in the credit structure, which the proposed IDA credit should help to fill.  -h - 11. The project is intended to finance the development of approxi- mately 135 livestock beef ranches and dairy farms and to provide techni- cal assistance. Loans to ranchers would be used for on-ranch improvements such as pasture establishment, fencing, watering facilities, ranch build- ings, parasite control equipment and improved breeding stock. In this way, the project would remedy some of the present inadequacies in animal husbandry, nutrition and animal health, and would increase total cattle numbers and herd productivity. 12. The project would be part of a three-year National Development Plan, 1969-71, designed to increase domestic consumption and diversify exports. In about ten years increased annual production from the proj- ect should be some 10,000 tons of beef (live-weight) and 1.4 million liters of milk with a total value of about US$2.4 million per annum. The additional beef produced, some 70 percent of which may go for ex- ports, would represent 15 percent of present annual production. The combined gross increase in foreign exchange earnings from these exports plus import savings in milk powder would average approximately US$1.7 million annually. The rate of return to the economy would be about 18 percent and livestock producers would gain financial benefits ranging from about 16 to 21 percent on new investment. 13. The executing agent for the project would be the Central Bank. This is an autonomous governmental institution established by the National Congress in February 1950, its Board of Directors being composed of five members from the public and private sectors. Coordination and supervi- sion of the project would be carried out by a Project Commission composed of representatives of the Ministry of Economic Affairs and Finance, Minis- try of Natural Resources, National Agrarian Institute, Central Bank, National Development Bank, participating banks and the National Cattlemen's Association. A Project Director would have the technical responsibility for implementation of the project. Technical assistance to ranchers in the preparation and supervision of ranch development plans would be pro- vided by livestock technicians employed by participating banks, and sec- onded to the Project Director. 14. The total cost of the proposed project is estimated at $5.2 million, of which $h.0 million would take the form of long-term develop- ment loans, $1.0 million would be investment in working capital and $0.2 million expenditure on technical services. The Government would relend the equivalent of $2.45 million from the proceeds of the credit to the Central Bank for 16 years at 4.5 percent, to be sub-loaned at 5 percent to participating banks, and thence to ranchers at 9 percent for ranch development programs. Terms of the initial sub-loans to ranchers (Part A loans) would be for 8 to 12 years with 3 to 5 years of grace. The remaining $0.15 million would be granted by the Government to the Central Bank for technical services related to the project. The proceeds of IDA funds would finance on average 75 percent of development loans (Part A loans) and 49 percent of total costs. Participating banks would finance 35 percent of total costs, including all the working capital, ranchers 15 percent and the Central Bank one percent (in the form of a contribution towards technical services). Where necessary for increasing ranchers' net  -5- cash position, development loans would be supplemented by short-term credits (Part B loans) from participating banks, included in the total project costs, which would also be used to purchase feeder steers. Prin- cipal repayments on Part A loans not needed for servicing the IDA credit would be relent for livestock purposes after the initial 5-year coimnLit- ment period and during the remaining 11 years of the lending program. 15. Goods required for the project would be obtained through exist- ing commercial channels. The several retail sources would ensure ade- quate competition. Individual items of procurement would not be of suf- ficient value to warrant international competitive bidding. All pur- chases of breeding stock.would be subject to the approval of the Project Director to ensure their quality. 16. The foreign exchange component of the project is estimated at $1.1 million or just over 20 percent of the total. Hence the proposed credit would finance local expenditures to the extent of $1.5 million. Honduras is making a substantial effort to mobilize its own resources for development, but must still rely upon external financing in excess of the foreign exchange cost of individual development projects if it is to carry forward an effective development program. In these circumstances, and in view of the fact that the proposed credit will still not exceed 50 percent of the cost of the project, I consider this amount of local expenditure financing justified. PART IV - LEGAL INSTRUMEWiTS AND AUTHORITY 17. The Draft Credit Agreement betwTeen the Republic of Honduras and the Association, the Draft Subsidiary Loan Agreemeat between the Republic of Honduras and the:Oent?alEBank, the Draft Project Agreement between the Cen- tral Bank and the Association, and the Recommendations of-the Committed provided for in Article V, Section 1 (d) of the Articles of Agreement and the text of a Resolution approving the proposed credit are being distributed to the Executive Directors separately. 18. The Draft Agreements contain covenants normally included in agreements for agricultural credit projects. The execution of the Sub- sidiary Loan Agreement between the Government and the Central Bank is a condition of the effectiveness of the Credit (Section 6.01 (b) of the Draft Development Credit Agreement), and the relending to ranchers through participating banks will be governed by the terms of the Project Agreement and of a Project Administration Agreement satisfactory to the Association to be concluded between the Central Bank and each participating bank (Sec- tion 2.05 of the Draft Project Agreement).  - 6 - PART V - THE ECO1NOMY 19. The economic report on "Current Econoimic Position and Pros- pects of Honduras'! (1EH-193a, dated September 26, 1969) circulated to the Executive Directors on October 21, 1969, concluded that Honduras - the poorest of the Central American countries and one of the poorest countries in the Western Hemisphere - has demonstrated a satisfactory economic per- formance during the recent past. MNP has grown annually by about 5 per- cent in real terms over the past five years, fiscal and financial mmlage- ment has been sound, and relative price stability has been maintained. The Government has become increasingly concerned with diversification and modernization of the economy and has prepared a three-year public invest- ment program which would considerably increase the level of public invest- ment and strengthen the physical and social infrastructure of the country. The Bank economic mission which visited Honduras in early 1969 has main- tained close contact with the Honduran authorities and assisted in the preparation of this program. 20. Military hostilities -wiith E1 Salvador and the subsequent trade embargo had an adverse effect on the Honduran economy during 1969; the situation was further exacerbated in the latter part of the year by a destructive hurricane. The negative effects of these events are expected to be of relatively short duration, provided that there is no further deterioration in relations with El Salvador. Moreover, there are signs that awareness of the country's development problems and the determination to solve them have been strengthened by the recent adversities. 21. Assuming that prudent fiscal and balance of payments management is maintained, the growith prosDects of the Honduran economy are reasonably good, given continued political stability. GNP per capita may be expected to grow by an average of 2-3 percent per annum over the next five years. The financing of the proposed public investment program will require both a significantly greater domestic savings effort and an increase in gross external borrowFing. The present external debt service ratio is about 2 percent of foreign exchange earnings, and is expected to increase to an estimated 5 percent in the mid-1970's. Nevertheless, unless some part of the new external borrowing is made available on concessionary terms, as much as one-third of the projected increase in public revenues could be absorbed by debt service. Moreover, the country's exports, which depend heavily on bananas, are highly vulnerable to changes in world demand and to natural disasters, and it would therefore be imprudent to allow debt service payments to grow too rapidly. In these circumstances, I believe that part of the Bank Group's financing of Honduras development should be extended on IDA terms. PART VI - CODMLIANCE WITH ARTICLES OF AGREEa'!]NT 22. 1 am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association.  - 7 - PART VII - RBCOIIENDATION 23. I recommend that the Executive Directors approve the proposed credit. Attachments Robert S. McNamara President December 19, 1969 Washington, D.C.