Nicaragua - Farm Mechanization and Highway Construction Projects

RESTRICTED 'FILEC coPY No. P- 18 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on the PROPOSED LOANS TO NICARAGUA June 4, 1951  CONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPIENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON THE PROPOSED LOANS rD) N'.CAPAGUA 1. I submit herewith the following report and recommendations with regard to a request from Nicaragua for loans totalling $4,700,000 for the following projects: (i) Agricultural machinery, $1,200,OOO. Borrower to be the Banco Nacional de Nicaragua; (1U) Highway construction, 83,500,000. Borrower to be the Government of Nicaragua. PART I - HISTORIChL 2, In November 1950, the Bank was informed by the Ambassador of Nicaragua that his Government intended to apply for loans to cover projects in the fields of agricultural machinery, transportation and grain storage. A Bank mission visited Nicaragua between January 11 and February 1, 1951, to study these projects. 3. In view of the preliminary stage at which the mission found the grain storage project, the Bank arranged, at the request of the Government, for the services of an expert from the FAO to make a special study of the country's grain storage program and present a report to the Government. Conversations are now being held with Nicaraguan representatives in respect of the grain storage project which, it is hoped, will be presented to the Board in the near future. 4. Negotiations on the highway and farm machinery projects were opened at the Bank on May 14, 1951. Representing Nicaragua were Dr. Guillermo Sevilla-Sacasa, Ambassador to the United States, Dr. Enrique Delgado, Minis- ter of Economy, Ing. Constantino Lacayo Fiallos, Minister of Public Works, Dr. Leon Debayle, General Manager of the Bapco NTacional and Mr. Alfredo Sacasa, Counsellor at the Nicaraguan Embassy. PART II - DESCRIPTION OF PROPOSED LOANS A. Agricultural Machinery Loan Borrower 5. The Borrower would be the Banco Nacdonal de Nicaragua, an autonomous entity of the Republip of Nicaragua.  -2- Guarantor 6. The Guarantor would be the Rep,ublic of Nicaragua, a member of the Bank. Purpose 7. The purpose.of the loan would be to provide foreign exchange for the purchase and importation into Nicaragua of agricultural machinery and spare parts to be used in the productive development of Nicaraguan agricultural resources. The machinery would be imported through nornial channels of trade, and would be sold to farmers who wo,uld have received loans for that purpose from the Borrower out of the counterpart of the foreign exchange to be sold by the Borrower to the machinery importers. Amount 8. The loan would be in the amount of $1,200,000 and would finance the proposed imports of machinery. It would include an amount of approximately $250,000 for purchases made since January 1, 1951. Terms 9. The loan would bear interest at the rate of A% per annum, incixding the statutory commission of 1%. 10. The commitment charge would be 3/4 of 1% per annum and would accrue from the Effective Date of the Loan Agreement or from August 15, 1951, which- ever would be the earlier. 11. Amortization would be by semi-annual payments of principal commencing May 15, 1954, and calculated to retire the loan by maturity on September 15, 1958. 12. I consider that the proposed schedule for the repayment of principal and the rate of interest and other charges in connection with the proposed loan are reasonable and appropriate. Legal Instruments 13. ADpendix I contains drafts of the following legal instruments to be executed in order to give effect to the proposed loan: (a) A Loan Agreement between the Bank and the Banco Nacional de Nicaragua. (b) A Guarantee Agreement between the Republic of Nlicaragua and the Bank. Justification for the Loan 14. A detailed appraisal of the project to be financed by the Bank has already been circulated to the Board (R-455).  -3- -15. Although Nicaragua is a predominantly agricultural country, its agricultural resources are at present far from being exploited to their full capacity. Large tracts of fertile land have never been opened up and the shortage of farm labor is causing the area currently under culti- vation to shrink still further. Moreover, the present antiquated methods of farming with oxen and manpower are both less 'efficient than power farm- ing and more expensive in operation. 16. Improvement of agricultural production by the use of machinery is urgently needed to reduce costs and increase output. This is particularly desirable in the case of annual crops such as corn, cotton, sesame and beans. For the past decade there has been a steady export market for these products and domestic demand, particularly for cotton, offers prospects of very con- siderable expansion. 17. The program recommended for Bank financing would be immediately beneficial. It would lead to an increase in agricultural output and, at the same time, an improvement in the standards of living of the rural coFi- munity. It would be an important contribution towards developing the whole Nicaraguan economy. 18. It is the, opinion of the Bank's mission that this project would be competently carried out by the Banco Nacional de Nicaragua. 19. Appendix II contaips recommendations of the proposed loan by the Statutory Loan Committee? provided for in Article III, Section 4, Paragraph (iii) of the Articles of Agreement. B, Highwav Loan Borrower 20. The Borrower would be the Republic of Nicaragua, a member of the Banlc. Purpose 21. The proceeds of the loan would provide the Borrower with the foreign exchange required for the purchase of equipment and materials needed to con- struct 266 kilometers of new highways. These fall into three regional groups - the Northern, the East-West, and the Western, and when completed will com- plement the existing trunk roads as well as the Inter-American Highway. 22. The projects have been prepared by the Highway Department of Nicaragua, and on the basis of the Bank mission's investigation, it is believed that they have been soundly conceived and will be competently carried out. It is con- templated that the program will take about 3* years to complete. Amount 23. The loan will be in the amount of $3,500,000. This figure represents the forei4gn exchange cost of the project, of which the total cost will amount to the equivalent of about $5 million.  - 4 - Terms 24. The loan would bear interest at the rate of 4-1/8% per annum, includ- ing the statutory commission of 1%. 25. The commitment charge would be 3/4 of 1% per annum and would accrue from the Effective Date of the Loan Agreement or from August 15, 1951, which- ever would be the earlier. 26. Amortization would be by semi-annual payments of principal commencing March 15, 1954, and calculated to retire the loan by maturity on September 15, 1961. 27. I consider that the proposed schedule for the repayment of principal, and the rate of interest and other charges in connection with the proposed loan are reasonable and appropriate. Legal Instr4ments 28. Appendix III contains a draft of a Loan Agreement between the Bank and the Republic of Nicaragua. Justification for the Loan 29. A detailed appraisal of the project has already been circulated to the Board (R-455). 30. Lack of communications constitutes the most serious impediment to the development of Nicaragua. Vast areas of rich agricultural land are at present wholly inaccessible and accordingly have never been developed. Even in the more populous Pacific coast area, economic progress is strangled by the critical lack of roads. 31. Any increase in output of Nicaragua's many agricultural products must of necessity be accompanied by improvement in the country's h4ghxTay system. Roads are urgently required to link the areas of production and of consumption and to carry the increasing volume of exports, both of agri- cultural crops and of minerals, from the interior to the sea. 32. The eight works proposed for Bank financing represent only an urgently needed preliminary step in the development of an adequate road network in the country. They may, however, be expected to yield speedy and striking benefits out of all proportion to the initial expenditure involved by opening up new rich coffee-producing areas, particularly in the Matagalpa regiQn. Further, by expediting the transportation of food- stuffs and cattle to the areas of marketing, wastage will be reduced and production costs lowered. 33. All sections of the community in Nicaragua are unanimous that high- way construction rates first priority in the development of the country. Without it, economic progress becomes impossible.  -5- 34. Appendix IV contains recommendations of the proposed loan by the Statutory Loan Committee provided for in Article III, Section 4, Paragraph (iii) of the Articles of Agreement. PART III - PROSPECT OF FULFILLMENT OF FINhNCIAL OBLIQAN2jNS 35. An economic survey of Nicaragua has already been circulated to the Board (R-456). 36. Nicaraguats present foreign debt is small, amounting to only $4,640,000, including a $600,000 loan for electric power which has just been made by the Export-Import Bank. The service burden on the existing debt amounts to $1.2 million in 1951, or 4.4% of the 1950 rate of exports. The planned amortization schedule on the two proposed Bank loans of $4.7 million has been arranged to take account of the fact that the service bi,rden of the existing debt will decline rapidly after 1952. Including the proposed Bank loans, the foreign debt service burden would reach a peak of only $1.3 million in 1952, or less than 5% of the 1950 exports. The additional indebtedness arising from the Bank's proposed loans would not constitute an appreciable increase in Nicaragua's current debt burden and, in view of the favorable prospects for Nicaragua's exports, should not only be well within Nicaragua's capacity to repay, but also leave a margin for some additional borrowing for productive projects, including the grain storage project presently under consideration. 37. Since the outlook for obtaining necessary fiscal, financial and administrative reforms in Nicaragua appears favorable, the additional local currency expenditures of about $400,000 required annually for the highway construction program should not create any difficult problems, even though it is true that Nicaragua has been facing an inflationary situation. Th'e Government of Nicaragua has given concrete evidence of its interest in improving the situation by welconing the Bank's proposal to send a member of the Bankts staff as Special Representative in Nicaragua, for an extended period, to aid in rehabllitating the Govermnent's financial and administra- tive organization and to help establish and promote conditions for sound economic development. 38. In the light of the above considerations, it is my opinion that the Government of Nicaragua would be in a position to meet its obli.gations under the proposed loans, an~ that in making these loans, the Bankc would be acting prudently in the interest of the Republic of Nicaragua and of the members of the Bank as a whole. PART IV COMPLIANCE WITH.E ARTICLES OF AGREEMENT 39. 1 am satisfied that the proposed loans would comply with the require- meats of the Articles of Agreement of tae Bank. 40. I am also satisfied that, in the prevailing market oonditions, Nicaragua would elsewhere be unable to obtain loans of the amount required on reasonable terms.  -6- PART V - RECOMMENDATIONS 41. I recommend that the Bank make to Nicaragua loans totalling $4,'700,000 for the following projects: (i) Agricultural machinery, $1,200,000: the Borrower to be the Banco Nacional de Nicaragua; (ii) Highway construction, $3,500,000; the Borrower to be the Government of Nicaragua; the terms and conditions of ouch loans to be as specified in the draft Loan Agreements attached hereto. Eugene R. Black President June 4, 1951