Jamaica - Agricultural Credit Project

RESTRICTED F"I L E C0OPY", Report No. P-883 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 The report may not be published nor may it be quoted as representing their views.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 JAMAICA DEVELOPMENT BANK FOR AN AGRICULTURAL PROJECT December 10, 1970  INTERiATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENr REPORT AND RECOlisIvENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE JAMAICA DEVELOPMENT BAINK FOR AN AGRICULTURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed loan in an amlunt in various currencies equivalent to US$3.7 million to the Jamaica Development Bank (JDB) for an agricultural credit project. PART I - HISTORICAL 2. The proposed loan would be the first made by the Bank in the agricultural sector in Jamaica. An economic mission which visited Jamaica in mid-1968 noted the need for supervised agricultural credit. An FAO/IBRD Cooperative Program mission visited Jamaica in 1May/June 1969 at the Govern- ment's request and identified two agricultural credit projects, for one of which the Government decided to approach the Balk. A Bank mission in January 1970 reviewed the organization and policies of the JDB, and further assistance in preparing the project was given at the same time by a separate mission under the FAO/I9RD Cooperative Program. The project was submitted by the Government in April 1970 and appraised by the Bank in June 1970. For the other project, the Government sought assistance from the Inter-American Development Bank (IDB). A $6.2 million loan from the IDB is scheduled for signature very shortly. 3. Negotiations for the proposed loan were held between November 19 and 25, 1970. The Jamaican delegation was headed by MvIr. D. R. Clarke, General Manager of the Jamaica Development Bank, and included Mr. H. Milner, Under-Secretary, Ministry of Finance and Mr. D. MIarsh, Assistant Attorney- General on behalf of the Guarantor. 4. The proposed loan, the seventh to Jamaica, would increase the Bank's total lending (net of cancellations) to US$46.4 mil'lion. 1/ No IDA credits have been made to Jamaica. The following is a summary orBank loans as of November 30, 1970: 1/ Without taking into consideration the $11.2 million loan (No. 481-JMi) made in 1967 to the Jamaica Telephone Company. The loan was cancelled by the Borrower in 1967 after only $13,000 had been disbursed and this amount was repaid in full.  -2 - Loan Year Borrower Purpose Amount Undisbursed No. (US$ million) 408-JM 1965 Jamaica HighwJays 5.5 3.5 454-JM 1966 Jamaica Public Service Company Power 20.7 nil 468-JM 1966 Jamaica Education 9.5 2.6 598-JM4 1969 Water Commission Water Supply 5.0 4.9 690-JivM 1970 Jamaica Population 2.0 2.0 Total (less cancellations) 42.7 Of which has been repaid to Bank and others 0.9 Total now outstanding 41.8 Amount sold: 1.3 Of which has been repaid 0.8 0.5 Total now held by Bank 41 .3 Total undisbursed 13.0 5. The highway project was set back by over two years because of an initial delay in the selection of consultants and a large increase in the estimated costs, on the basis of which a reduction in the scope of the project was agreed to with the approval of the Executive Directors in August 1968. Contracts for the reduced project, based on new bids, were awarded in July 1969. Since then, construction has been proceeding satis- factorily. The education project is proceeding slightly behind schedule, and construction is expected to be completed by mid-1971 instead of by early 1971. As regards the water supply project, since some major bids were re- ceived in the latter half of 1970 and contracts awarded thereafter, it is expected that disbursements will start from early 1971. The population project was made effective only on November 2, 1970, after some delays in finalizing a contract with architectural consultants. Since the work on designing the project buildings has now begun, disbursements can be expected from early 1971.  - 3 - 6. A number of new projects are at different stages of preparation and consideration. Negotiations for the second education project are tentatively scheduled for early 1971. A proposal for financing industry and tourism enterprises through the JDB is due to be appraised shortly. The feasibility study for a sewerage project for Kingston is currently being reviewed. The Government has approached the Bank for future assistance towards financing additional highwiays and airports, and the feasibility studies of these projects should commence shortly. 7. IFC has so far made two investments totaling US$3.14 million in a hotel (Pegasus Hotel) and a cement manufacturing project. PART II - DESCRIPTIONT OF THE PROPOSED LOAN 8. Borrower: Jamaica Development Bank Guarantor: Jamaica Beneficiaries: Approximately 140 citrus and coconut farmers and beef and dairy ranchers. Amount: US$3.7 million Purpose: To assist in financing the Borrower's agricultural lending program for the development and expansion of commercial- sized coconut, citrus, beef and dairy farms involving an additional total acreage of about 23,200, and technical services. Amortization: In 16 years, including a 5-year period of grace, through semi-annual installments beginning July 1, 1976 and ending Janu any 1, 1987. Interest Rate: 7-1/4% per annum Commitment Charge: 3/4 of l% per annum .l1endung Terms: JiDB would relend to participating farmers at an interest rate of 8-3/4 percent per ann:um Economic Rate of ;Return: 17 '  PART III - THE PROJBCT 9. An appraisal report entitled "Jamaica, Agricultural Credit Project" (No. PA-66a) is attached. 10. The agricultural sector in Jamaica, which so far has been essentially based on sugar and banana production, has suffered a gradual decline over the last few years. The best agricultural lands in the island have been concentrated in the hands of sugar and banana companies and other large landowmers, who have not been fuUly cultivating the utilizable lands they own. Other lands are owned by farmers with holdings varying from 5 to 99 acres, but the great majority of farmers are eking out a livelihood on very small holdings in the hills. The Government recently recognized the possibility of not only bringing the unutilized good agricultural lands under cultivation, but also of giving an impetus to viable farmers through supervised agricultural credit programs for the production of foodstuffs, which could advantageously substitute imports, and of exportable agricul- tural products. The FAO/IBRD Cooperative Program identified two supervised agricultural credit projects, the first for small and medium-sized farmers having between 5 and 99 acres and the second for comnercial farmers with over 100 acres. The Bank had from the outset indicated its willingness to consider both projects, but since the IDB was prepared to provide financing from its Fund for Special Operations at an interest rate significantly lower than the Bank's, the Government decided to approach that institution for financing the first project, which is to be administered through a different credit channel. The Bank was requested to assist with the project for providing credit to commercial farmers on commercial terms and conditions. 11. The proposed project covers JDB's credit program for the expansion and development of about lbo farms and ranches with about 23,200 additional acres of land and consists of: (a) the development and expansion of: (i) about 50 coconut farms with the planting of Ualayan dwarf coconuts, involving about 5,000 additional acres; (ii) about 30 citrus farms, involving about 3,000 additional acres; (iii) about 45 beef cattle ranches, involving about 13,500 additional acres; (iv) about 15 dairy ranches, involving about 1,700 additional acres; and (b) technical assistance for project implementation.  12. The total cost of the project is estimated to be US$8.0 million. The proposed 1 n of US$3.7 million would finance the foreign component of the project.- or 46 percent of the total project cost. The Bank would finance 45 percent of on-farm investments, the JDB 35 percent and the participating farmers the remaining 20 percent. The Bank would thus provide financing to cover 57 percent and the JDB 43 percent of each sub- loan. 13. The financing provided for on-farm investments would cover land preparation, planting materials, equipment and machinery, buildings, water supply, fertilizers, pesticides, fencing and livestock. The small scale of individual investments and the great variety of items to be procured in small lots would make formal international competitive bidding imprac- tical and procurement would essentially be through existing commercial channels. Competition is keen and servicing adequate. 14. Sub-loans would be extended by the JDB for the farm investment plans developed and recommended to the JDB's management by the JDB's Agriculture Credit Section. Sub-loans would be for a minimum of US$24,000, and those exceeding US$1C0,000 would be subject to prior approval by the Bank. They would be made at 8-3/L percent interest per annum, plus a commitment fee of one-half of one percent on the undran'm balance and a flat service charge of one-half of one percent payable before the first disbursement against the sub-loan. Although the current prime rate for lending in Jamaica is around 8 percent, long-term credit for commercial agriculture has not been available. The proposed interest rate should therefore be competitive and at the same time provide a sufficient spread to JDB for profitable operations. The sub-loans would be designated in Jamaican dollars. The Government has agreed to carry the fall foreign exchange risk arising from the proposed loan, subject to receiving a token payment from the JDB for this service, such payment representing one-tenth of one percent out of the annual interest rate of 8-3/4 percent on the sub-loans. The sub-loans would have maximum repayment periods varying from 10 to 15 years depending on the type of farm to be financed, i.e., 15 years including 4 or 6 years' grace for coconuts, 15 years including 7 years' grace for citrus, 12 years including 5 years' grace for beef and 10 years including 3 years' grace for dairy farms. The amortization period for the Bank loan would be 16 years including 5 years' grace. 15. The JDB, which became operational in September 1969, is a multi- purpose development bank which is designed to lend for industry and tourism as well as for commercial agriculture. It is a successor to the Develop- ment Finance Company, whose assets were taken over by the JDB under the Janaica Development Bank Act of 1969. While the JDB's equity is held by the Government and the Bank of Jamaica (the central bank), its Board represents a fairly diversified cross-section of private businessmen and civil servants. The JDB has requested assistance from the Bank in extend- 1/ Subject to the ininor exception indicated in para. 15 below.  - 6 - ing credit to industry and tourism as well as agriculture. Prior to appraisal, therefore, the Agricultural Projects and Development Finance Company Depart- ments of the Bank together reviewed the organization of the JDB and assisted in formulating a Policy Statement. To facilitate its lending activities in the agriculture field, the JDB has established an Agricultural Credit Section headed by an experienced Jamaican agriculturist with wide knowledge of the country's agriculture. In the initial stages, this new Section would need the assistance of an experienced agricultural economist and a livestock specialist, both of whom would be recruited specially for the project and financed under the proposed loan, irrespective of whether they were recruited locally or abroad. (If either were recruited locally, a small amount of local cost financing would be involved.) The Section would assist applicants not only in preparing viable farm investment plans, but also in implementing them. 16. Arrangements will be made by the Government and by the JDB to ensure that both the participating farmers and the JDB freely obtain the benefits of research work done and technical and extension services provided by the Agriculture Ministry, the Citrus Growers' Association and the Coconut Industry Board. To ensure that programs of agricultural credit and related develop- mental efforts in the agricultural sector are properly coordinated within the context of the Government's policies and priorities, the Government has already set up and has agreed to continue a Coordination Committee. It will include senior officials from each of the Mlinistries of Agriculture, Rural Land De- velopment and Finance, and from the JDB. 17. The project's rate of return to tlhe economy, over an average life of 20 years, is estimated to be 17 percent. In quantitative terms, the project would have as its main direct benefits the improvement in Jamaica's balance of payment position through increases in export earnings (citrus) and through import substitution (vegetable oils/copra, meat and dairy products) amounting to about US$3 million a year, at the project's full de- velopment. About one-third of these benefits to the balance of payments would come from export earnings. By developing and bringing into use about 23,200 acres of mostly idle lands, the project in the long run should stimu- late production beyond this acreage by making considerable earnings available for reinvestment in agriculture. Lending for coconut planting would acceler- ate the current program for re-planting with iIalayan dwarf cocon-ats, which are resistant to the lethal yellowsing disease that is presently devastating Jamaica's tall coconut plantations. In addition to the readily quantifiable benefits already mentioned, there would be secondary benefits such as the domestic value added by processing the project's products and the benefits frcm increased employment on farms and in processing activities. 13. Since the income tax payable by project farmers would depend on their total income from all sources, it is difficult to assess the additional tax revenues that would be generated through the project. Jamaica has one of the more progressive systems of personal income tax in the Western Hemisphere. Assuming that the average income tax rate to be paid by tlie project farmers is about 20 percent, then annual income tax revenue from the project at full development would be significant (in the region of US$400,000).  - 7 - PART IV - LEGAL INSTRUMEITS AJD AUTHORITY 19. The draft Loan Agreement betwufeen tlle Bank and the JDB, the draft Guarantee Agreement between Jamaica and the Bank, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of a Resolution approving the proposed loan are being distributed to the Executive Directors separately. 20. The draft Loan Agreement conforms substantially to the pattern of agreements for agricultural credit projects. However, since the proposed loan is being made to a multi-purpose institution to which the Bank is likely to lend also for the traditional development finance company activities, the Agreement includes some of the basic features of agreements for DFC projects. PART V - THE ECOTIOICY 21. An economic report entitled "Current Economic Position and Prospects of Jamaica" (No. M11-187a) was distributed to the Executive Directors on December 26, 1968. The report concluded that, on the whole, the performance of the economy had been satisfactory and that the ouitlook for further growth was quite favorable. With the expected continuation of sound economic and fiscal policies and a more active government role in fostering agriculture and dealing with the high rate of population growth, Jamaica was considered creditworthy for further external borrowing on conventional terms. A new economic report on Jamaics is currently under preparation; it is not expected to arrive at very different conclusions. A basic data sheet is attached. 22. The growth of real GDP at factor cost in both 1968 and 1969 came close to the 1962-67 average of just below 5 percent. Investment concurrently reached 26-27 percent of gross domestic expenditure, ccmpared to a 20 percent average in 1961-67. Hence the prospects for attaining faster growth rates of output in the next few years seem quite good. However, an accelerated growth rate will be consistent with balance of payments equilibrium only if the annual rate of price increases can be reduced below 6 percent recorded during 1968 and 1969. The monetary authorities have recently introduced credit restraints, and a Prices Commission is soon to be established to make a closer study of the factors pushing prices up. Among these factors, wage pressures and rising import prices stand out. 23. Central Government capital expenditures, including transfers and loans to the rest of government and to the private sector, came to US$73 million equivalent last year, accounting for about one-fifth of gross domestic investment, or 7 percent of GNP. Preliminary estimates indicate that public investment may stabilize at about US$85 million annually, with a slight in- crease in the share allocated to transport. Although generally, the public investments presently planned or under execution correspond to Jamaica's development needs, there are some sec-tors in which more could be done to develop projects, particularly in agriculture, education, and urban infra- structure.  -8- 24. In the view of the authorities, the chief limitation on accelerated public investment is one of qualified person-nel, which the Government has found difficult to attract and retain. To correct this condition, the Govern- ment has initiated a comprehensive position classification and pay survey, and as a stopgap measure, is granting substantial pay increases to be spread over the next three years. lHevertheless, fiscal constraints hnave as yet not been serious. Over the 1966-69 period the proportion of the Government in- vestment program covered by the current account surplus increased from 38 to 58 percent, despite current expenditures increasing at a rate of 9 percent annually in real terms. Apart from the effect on revenues of general economic growth, the Government is proposing to introduce substantial new revenue measures which should continue to ensure a relatively com,fortable fiscal position. 25. The public debt is still relatively light. The total internal and external debt of the Central Government came to US$304 million equivalent at the start of the current fiscal year in Mtarch. The service on it, at US$25.6 million, was equivalent to less than 12 percent of current revenue in 1969/70. For the public sectors as a whole, the external debt at the end of 1969 came to US$154 million including undisbursed. The service on it amounted to US$13.8 million in 1969, or to 3.4 percent of exports of goods and services net of in- vestment income payments. However, at present, the Government's borrowing possibilities are limited; at home it now has to compete with ot-her investment opportunities which bring a higher yield to institutional investors, while the high cost of borrowing in capital markets abroad has deterred Jamaica from resorting to them since 1968. 26. The Government's expectations for future borrowing tend to be con- servative, and are focused primarily on possibilities for increased project borrowing from international institutions. Under these conditions, Jamaica should remain creditworthy for significant amounts of additional external borrowing on conventional terms. PART VI - COMPLIAiCE WITH TTE ARTICLES OF AGREUIFN 27. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMENDATION 28. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments December 10, 1970 Washington, D.C.  ANNEX JAMAICA BASIC DATA Area: 10,992 square kilometers Population: (end of 1969, estimated) 1.94 million Density per sq. km. 175 Annual rate of natural increase (1960-1968) 3.1 percent 1967 1968 1969 GNP, current market prices (J$ million) 731 807 887 Per capita (Us$) 468 507 549 Sector origin (percent of GDP at factor cost) (Prov.) (Prelim.) Agriculture, livestock 11.3 10.3 9.0 Mining 9.5 9.6 11.6 Manufacturing, utilities 15.1 15.2 14.6 Other 64.1 614.9 64.8 Use of GNP (in percent) Gross fixed investment 214.2 28.6 28.0 Consumption 83.8 82.8 ... Resource Gap (external) 8.0 11.3 Money and Quasi-money (end of year, in J$ million) 212.2 271.2 3214.14 Change in percent 9.9 27.8 19.6 Price Movements Consumer price index (end of year 1963 = 100) 110 117 1214  1967 1968 1969 1 970 (Revised (Budgeted) Estimates) (F.Y. beginning April 1 Central Government Finances (J$ million) Current Revenues 128.5 145.9 178.0 204.h Current Expenditures 113.8 133.1 148.0 169.4 Current Surplus 14.7 12.8 30.0 35.0 Capital Revernes 2.2 2.5 1.9 2.2 Total Surplus 16.9 15.3 31.9 37.2 Capital expenditures (including amortization) 42.5 47.5 56.5 81.1 Deficit 25.6 32.2 24.6 43.9 Financed by: domestic borrowing (gross) 8.4 16.4 9.0 9.8 external borrowing (gross) 17.2 27.6 23.5 28.7 change in deposits (- = increase) - -11.8 - 7.9 5.4 Balance of Payments (US$ million) (Calendar year) Exports (f.o.b.) 224.0 219.0 257.2 Imports (f.o.b.) -294.0 -327.2 381.2 Tourism (net) 68.1 75.5 78.5 All other invisibles (including transfers; net) -65.6 -71.6 -82.2 Total current account -67.5 -104.3 -127.7 Public capital (net) 6.1 1I4.6 6.9 Private capital (net) 72.6 129.5 108.5 Change in official reserves (- = increase) -11.2 - 39.8 13.9 Concentration of Comiodity Exports (percent) Bauxite and alumina 48.1 52.2 55.3 Sugar and rum 19.7 17.4 14.1 Bananas 7-9 7.1 5.8 External Public Debt (end of year, US$ million) (as reported to IBRD) 145.2 151.7 153.9 of which: undisbursed 53c7 37.0 32.0 Foreign Exchange Reserves (end of year, US$ million) Monetary authorities 101.5 141.6 140.6 Rate of Exchange (end of year, US$ per Jamaican pound/dollar) 2.40 2.40 / 1.20 December 10, 1970