Tunisia - Second Agricultural Credit Project

Document of ILE CQPYf The World Bank FOR OFFICIAL USE ONLY aw;iab"d-, t! Report No. P-1932-TUN REPORTS DESK REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANQUE NATIONALE DE TUNISIE WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA FOR A SECOND AGRICULTURAL CREDIT PROJECT November 3, 1976 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Unit Tunisian Dinar (D) The exchange rate of the Tunisian Dinar is floating. The rate used in the appraisal report, which approximates the current rate, is: US $ 1 - D 0.416 D 1 - US $ 2.4 D 1,000 - US $ 2,400 D 1,000,000 - US $ 2,400,000 Fiscal Year January 1 to December 31 Abbreviations BNT Banque Nationale de Tunisie SONAMO Socifte Nationale de Motoculture FOSDA Fond Special pour le Developpement Agricole CLCM Caisse Locale de Credit Mutuel SCM Societe de Caution Mutuelle BDET Banque de Developpement Economique de Tunisie  FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANQUE NATIONALE DE TUNISIE WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA FOR A SECOND AGRICULTURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed loan to Banque Nationale de Tunisie with the guarantee of the Republic of Tunisia, for the equivalent of US$12 million to help finance a second agricultural credit project. The loan would have a term of 12 years, including 4 years of grace, with interest at 8.7 percent per annum. PART I - THE ECONOMY 2. A report entitled "The Economic Development of Tunisia: A Basic Report" was distributed to the Executive Directors in January 1975. Since then, two updating economic reports, both entitled "Memorandum on the Economic Position of Tunisia", were circulated on May 23, 1975 and September 17, 1976. The main conclusions of the basic economic report and the updating missions are reflected below. Country data sheets are attached in Annex 1. 3. Tunisia's development has been hampered by scarcity of natural re- sources. Much of thF country is arid or semi-arid, and agriculture is highly depend2nt on rainfall. Minerals are mostly of low quality and, apart from phosphites, limited Ln quantity. Relatively small quantities of petroleum were discovered in thie mid-1960's and have since become an increasingly valuable source of revenue and export earnings. Industrial development has been handicapped by the small size of the domestic market as well as a lack of skills and experience. Tourism has developed rapidly and workers' remit- tances have become a significant item in the balance of payments. Tunisia has enjoyed a large amount of external aid and used it to expand economic and social infrastructure, broaden the industrial base, make available a wide range of social and welfare services to a large part of the population, and increase the rate of growth. Per capita GNP increased by 4.2 percent annually from 1961 to 1975. Like most countries, however, Tunisia has not yet found adequate ways to cope with unemployment and poverty and to achieve a balanced distri')ution of consumption among income groups, between urban and rural areas, and among regions. 4. Government strategy in the 1960's relied heavily on central plan- ning oE investment and resource allocation, with the public sector playing a major role in production as well as providing infrastructure and services. Foreign exchange shortages and concern with inflation led to recourse to a pervasive system of price determination and controls. An unusually long This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  series of poor crop years due to shortage of rainfall slowed the growth of output. Many of the investments in public enterprises proved to be un- economic and private initiat[ve in most sectors except tourism and petroleum was limited. 5. The Government's present development strategy was introduced in the early 1970s. Its principal objectives are: (a) accelerating growth based on export-oriented industries, by encouraging private initiative, reducing direct Government involvement in production and relaxing administrative regulations; (b) creating jobs, primarily in the expanding industrial sector, encouraging worker emigration, reducing population growth and improving education and training; and (c) maintaining internal and external financial stability. The 1973-76 Fourth Plan set a target rate of GDP growth of 7 percent, providing for a 5.4 percent growth rate in per capita private consumption. Investment was projected to increase by 80 percent above the level of the 1969-72 Plan. National savings were to finance three-quarters of investment. Exports of goods and services were projected to grow at 8.8 percent per year at constant prices and imports at 12.2 percent. The Plan foresaw net external capital inflows increasing by 55 percent over 1969-1972 average levels and providing 23.5 percent of total investment. Debt service was to be held to below 20 percent of exports. The original Plan targets were conservative in terms of both growth and savings potential, and have been significantly affected by the impact of the changed petroleum and phosphate prices on the Tunisian economy (paras. 9 and 10). 6. The real growth of GDP has accelerated since 1970, reaching 9.2 percent per annum during 1970-75, compared with 4.6 percent during the pre- vious decade. The acceleration can be attributed to fortuitous factors such as good weather, leading to record cereal and olive crops, to important growth in tourism, petroleum and phosphate revenues and workers' remittances, and to the general reorientation of Government policy since 1970 which re- newed self-confidence and initiative in the private sector. Expansion of manufacturing and phosphate production has been significant. By 1975, per capita GNP reached $760 (1976 Bank Atlas estimate). The investment rate, which averaged 23 percent of GDP at current prices in the 1960's, declined slightly to 22 percent during 1970-75. National savings, on the other hand, rose sharply from an average of 13.5 percent of GDP at current prices during the 1960's to 19 percent during 1970-75. Consequently, the share of external borrowing in financing investment dropped from 44 percent in the 1960's to 13 percent during 1970-75. 7. The balance of payments was in overall surplus from 1967 to 1974 and since late 1973 benefitted greatly from sharply improved terms-of-trade. How- ever, in 1975 the terms of trade began to deteriorate, the demand for Tunisian exports sharply decreased, and despite substantial disbursements on external borrowing, international reserves declined by 11 percent. At the end of 1975, net reserves amounted to $344 million, equivalent to about 3 months of imports.  - 3 - 8. Because of price controls and Government subsidies of basic con- sumer goods, and prudent fiscal and monetary policies, Tunisia has maintained relative price stability. Consumer price increases averaged 4.2 percent an- nually during 1970-74. There was, however, a 9.6 percent increase in con- sumer prices in 1975, largely because of increased export and import prices. During 1970-74, the official GDP deflator rose at an average annual rate of 9.7 percent and average investment costs increased by 8.7 percent. The in- creases in these two price indices in 1975 were 5.2 percent and 14 percent, respectively. 9. Despite the terms-of-trade loss in 1975, Tunisia still is on balance a beneficiary of the changes in world market prices since late 1973, but this favorable situation will probably change in later years. Mainly because of sharply higher prices for petroleum, phosphates and olive oil, export earnings rose from $714 million in 1973 to $1,254 million in 1974 and $1,328 million in 1975. On the other hand, increases in import prices, combined with higher domestic demand, caused payments on imports to grow from $782 million in 1973 to $1,242 million in 1974 and to $1,525 million in 1975. The gains from changes in terms of trade since 1973 are projected to disappear around 1978 or 1979, as a result of the expected stabilization or decrease in the prices of Tunisia's major exports, and further increases in the prices of imported industrial goods. At the same time, workers' remittances may continue to be restrained by slower economic growth in Western Europe. Taking into account likely capital inflows through direct investment and external aid, the level of net reserves is projected to be equivalent to about 2.5 months of imports at the end of 1976 and to remain at this level during the remainder of the decade, when the balance of payments may reemerge as a serious constraint on Tunisia's development. 10. The recent changes in Tunisia's balance of payments position and in Government savings do not call for a substantial revision in development strategy. They suggest rather that Tunisia should continue its efforts to achieve high investment and GDP growth rates. Since workers' emigration to Europe and Libya is now limited, the effort to increase investment, particu- larly in labor-intensive industry and agriculture, should be increased. With an adequate savings level and continuing external aid, the Tunisian economy has the financial resources that should enable it to sustain an average an- nual growth rate of between 7 and 8 percent during 1976-80. The level of future growth would also depend on continuing efforts to stimulate private investment, to increase the international competitiveness of industry, and to improve the planning and implementation of public investments. 11. Tunisia has made impressive social gains. By 1974, primary school enrollment had reached 88 percent, and secondary enrollment, 19 percent, of the relevant age-groups. Public health services have been greatly expanded with many provided free. A family planning program has been introduced. To- tal social expenditures during 1970-75 increased by about 10 percent per an- num and on average accounted for 9 percent of GDP and for 30 percent of to- tal public expenditures. Nonetheless, major social issues remain. Further  - 4 - progress is needed in land reform and in creating employment. The unemploy- ment rate was estimated at 18 percent in the non-agricultural sectors in 1975, and underemployment in the rural sector is high. There has been a growing concentration of productive activities in a few urban areas, espe- cially in Tunis. 12. So far as can be judged from available data, real incomes increased in all sectors during the 1960's, yet by a higher percentage in the modern sector than in the rural sector, due partly to the series of poor harvests. In rural areas substantial income disparities remain, in part as a result of the structure of land tenure. In the modern sector, especially in industry, increases in real incomes in the 1960's exceeded the rise in productivity; the income distribution trend has favored industrial workers. Thanks espe- cially to the income redistribution effects of free social services, the pro- portion of the total population living in poverty, as defined by the Tunisians (i.e. earning less than D 70 per capita annually at 1970 prices), was substan- tially reduced during the decade. About 90 percent of this group continues to live in rural areas. Since 1970, higher agricultural output, increases in minimum agricultural wages, tax exemptions for low incomes, the inflow of workers' remittances from abroad and the stabilization of basic commodity prices through Government subsidies have improved the absolute, and possibly also the relative, position of the poorest groups. 13. During 1970-75, agriculture provided nearly half of total employ- ment, 29 percent of merchandise exports and 14 percent of GDP. Food process- ing accounted for another 3 percent of GDP and over a third of value added in manufacturing. During this period agricultural production rose substantially, largely as a result of favorable weather. The potential for further growth is clear. While large infrastructure investments were made during the last decade, current policy emphasizes projects that make a rapid and direct con- tribution to production and recognizes various constraints on agricultural development: absentee ownership, insecurity of tenure, inadequate access to agricultural credit, inadequate extension services, insufficient agricultural education, and underutilization of irrigation investments. Under the Fourth Plan, more than $140 million has been allocated to a rural development pro- gram which has been executed by the provincial administrations. 14. Since the early 1960's Tunisia has obtained relatively large amounts of official aid. A Consultative Group provides a forum for aid-coordination among major donors (see para. 23). During 1970-74, annual loan commitments from public sources averaged $136 million, or about $26 per capita. About 69 percent of these commitments came from bilateral public sources, chiefly from France (14 percent), the United States (13 percent), and the Federal Republic of Germany (11 percent); about 12 percent of bilateral public assistance came from oil-producing countries, whose share rapidly increased from 8 percent in 1970 to 26 percent in 1974. Commitments from the Bank Group during 1970-74 accounted for 29 percent of total public commitments. Most aid has been ob- tained on concessionary terms: during 1970-74, the average terms of borrow- ing from bilateral sources were 3.5 percent interest and 23 years to maturity, including 6 years of grace; from multilateral sources, they were 6.0 percent  - 5 - interest and 26 years to maturity, including 5 years of grace. During the same period Tunisia also received annually some $40 million in grants. Loan commitments from private sources average $32 million a year. Direct foreign private investment has been comparatively small, but recently it has picked up momentum following increased activity in the petroleum sector and new in- centives offered to foreign investors in manufacturing. Thus, net direct foreign investment increased from $19 million in 1970 to $76 million in 1975. 15. Tunisia's total public debt outstanding (including undisbursed) in- creased from $846 million in 1970 to $1,444 million at the end of 1974. The disbursed portion outstanding at the end of 1974 was $956 million, equivalent to 27 percent of GDP, compared with 40 percent in 1970. Debt service pay- ments in 1975 were 7.8 percent of export earnings compared with 19.5 percent in 1970. This significant decline in the debt service ratio was mainly due to the sharp increase in export earnings following the changes in world mar- ket prices in 1973 and 1974. In the future, Tunisia will have to continue to rely heavily on foreign financial assistance in order to reach its develop- ment goals. While Tunisia is capable of servicing substantial additional debt on less concessionary terms than in the past, it nonetheless should con- tinue to seek a large part of its externaL resources on concessionary terms in order to prevent the debt service ratio from rising above 20 percent in the long-run. PART II - BANK GROUP OPERATIONS IN TUNISIA 16. Since 1962, Tunisia has received a total of twenty-five loans and ten credits amounting respectively to $314.9 million and $65.7 million, net of cancellations and refundings. Annex II contains a summary statement of Bank Loans, IDA credits and IFC investments as of August 31, 1976, and notes on the execution of ongoing projects. 17. The Bank's lending strategy aims at supporting Government efforts to (a) increase employment, (b) encourage more balanced growth and distribu- tion of income among regions and income groups, and (c) promote export- oriented policies and investments. The key supporting feature of this lend- ing strategy is to encourage Tunisian authorities in timely and well-coordi- nated preparation of projects, with emphasis on technical assistance. The Bank is also cooperating with Government efforts to increase the mobiliza- tion of domestic and foreign resources, in part through encouraging project co-financing; the latter is particularly important in view of the extent of Tunisia's external resource needs, the large scale of many priority projects, and the limited availability of Bank resources. This latter effort is sup- ported through the Consultative Group (see para. 23). 18. Within this broad framework, past Bank Group lending has emphasized support for long-term investments in infrastructure and social development. Lending for urban and social development, including water supply, education,  - 6 - family planning and the Tunis urban planning and public transport project has accounted for 33 percent of Bank/IDA commitments in Tunisia. Lending for transport, power and tourism infrastructure has accounted for a further 33 percent. Agriculture and fisheries have received 12 percent of total commit- ments. Industrial and hotel financing through the Banque de Developpement Economique de Tunisie has accounted for 16 percent, and the Gafsa phosphate development project received 6 percent of total commitments. While there have been some problems, project implementation on the whole has been satis- factory. In a number of sectors, important institutional improvements have been achieved and independent agencies have been created or strengthened. 19. In agriculture, Bank involvement in several sub-sectors has met in some cases with success, in others with difficulties. The first agricultural project financed by the Bank Group was the 1967 Cooperative Farm Project, completed in 1973 after substantial delays and revisions caused by changes in Government agricultural policy in 1969. Funds for the First Agricultural Credit Project (Loan/Credit 779/263-TUN, US$8 million) of 1971 should be fully disbursed by the end of 1976 (see para 40). A 1971 IDA credit for a Fisheries Project (Credit 270-TUN, US$2 million), aimed at development of Tunisia's inshore fisheries, is expected to be fully disbursed in 1977. A loan for an Irrigation Rehabilitation Project (Loan 1068-TUN, US$12.2 mil- lion) became effective in September 1975; project execution is in its early stages. Beginning in 1972, the Bank has also attempted to play a more active role in rural development in Tunisia, initially in connection with the Sedjenane Livestock and Rural Development and the Central Tunisia Integrated Rural Development Projects. Ultimately, however, both projects had to be dropped from the program because of the poor resource base in the project areas and the resulting low economic rates of return. This experience served to underline the necessity for very close coordination and careful preparation of future projects in this difficult but high priority sphere. 20. Lending in the current fiscal year and the period ahead will seek to approach the problems of rural and regional development increasingly through an emphasis on projects promoting agricultural and industrial produc- tion and urban and social development. Complementary to this primary focus, the program would also finance selected priority projects in infrastructure, particularly in power and roads. Thus, the proposed Sidi Salem Multi-purpose project, to be processed in the current fiscal year, would consist of: (i) construction of the Sidi Salem dam and reservoir providing for water for pot- able, industrial and irrigation purposes; (ii) construction of an interconnec- tion canal to the urban areas of Tunis and eventually Sousse; and (iii) ir- rigation infrastructure for some 10,000 ha. To meet the rising demand for power, a second power project is expected to be presented to the Executive Directors later this year. Other projects under discussions with the author- ities include a fourth Water Supply, a second Fisheries, Rural Roads, and development finance. Further direct lending for priority industrial sub- sectors in which Tunisia has a comparative advantage will depend on progress  - 7 - achieved in the formulation of sound projects. In addition, an economic mis- sion to review the Fifth Plan, scheduled for late Fall 1976, is expected to examine the Government's rural development plans in an effort to identify areas where Bank lending could be focused. 21. The Bank Group accounted for about 17 percent of disbursements of official assistance to Tunisia between 1970 and 1974; its share is expected to decrease, while that of other, particularly Arab, sources of funds will rise. The Bank Group's shares in total debt outstanding and disbursed at the end of 1974 (including loans from private sources) and in debt service during 1974 were 17 percent and 12 percent respectively. over the rest of the dec- ade, the Bank Group's share in disbursecl external debt is expected to decrease to below 10 percent, as will its share in debt service. 22. IFC has invested in NPK Engrais (a fertilizer plant), in Banque de Developpement Economique de Tunisie, in Compagnie FLnanciere Touristique (a company to promote and invest in tourism projects), in Societe Touristique et lioteliere RYPI (a large hotel development) and in Industries Chimiques du Fluor, which will produce aluminium fluoride from local fluorspar for export. IFC's most recent investment, in May 1975, was in the Sousse-Nord integrated tourism development project. Including Sousse-Nord, IFC's net commitments in Tunisia -otal $15.9 million. The Board has recently approved the sale of IFC shares in NPK Engrais to the Tunisian Government. 23. Since 1962 the Bank has chaired the Consultative Group for Tunisia bringing together the principal donor countries and the institutions concerned with the country's development. The most recent meeting of the Group was held in Paris in June 1975. New participants in the Group included Saudi Arabia, Japan, the Arab Fund for Economic and Social Development and the Commission of the European Communities. PART III - THE AGRICULTURAL SECTOR Background 24. Although Tunisia's agricultural resource base is quite poor, the sector plays an important role in the economy. In 1975, agriculture employed over one hialf of the labor force, contributed about 16 percent of GDP and provided some 20 percent of total exports. About one third of Tunisia's total land -Area, or about 5.3 million ha, is classified as cultivable; the remainder is r.-;ge land suitable for extensive sheep-grazing and low-yielding forest, and cesert. The cropped area covers about 3.1 million ha, of which 1.3 miLlion ha are under perennial crops, and 110,000 ha, or 3.5 percent, are equipped for irrigation. The most important agricultural areas are the lower and central Medjerda River Valley and the Cap Bon peninsula in the North, and the coastal zones near Sousse and Sfax.  - 8 - 25. Agriculture failed to keep pace with the rest of the economy in the 1960s due largely to unusually low rainfall, the departure of large numbers of expatriate farmers, heavy emphasis on infrastructure investments (particularly irrigation infrastructure) which yield benefits only in the very long term, weaknesses in extension and other supporting services, dif- ficulties in resolving a variety of land tenure issues, and the unsuccess- ful attempt to form viable production cooperatives. When the cooperative experiment, which was intended eventually to include all private farms, was abandoned in late 1969, 4.5 million ha were returned to private ownership; another 800,000 ha were allocated to State management. Despite major prob- lems associated with the return to private ownership, agricultural production in 1971 and 1972 increased by 27 and 30 percent, respectively, in constant prices over the two preceding years. The average annual growth of agricul- tural production between 1970 and 1975 was 10.5 percent, although crop cycles, particularly of olives, caused erratic yearly fluctuations. Nonetheless, ex- cluding olive production, Tunisia's trade balance in agricultural products was heavily in deficit in this period. In 1975, agricultural exports, exclud- ing olive oil, represented only about 10 percent of total farm output while agricultural imports (mainly cereals, dairy products, meat and sugar), having doubled in value between 1973 and 1974, represented an estimated 17 percent of total imports. Thus, one of the major objectives of the Fifth Plan (1977- 81) is self-sufficiency in food production, defined as meeting expected in- ternal consumption needs in grains, meat and milk (or per annum increases of 6.7, 11 and 17.5 percent respectively) and attaining a balanced foreign trade in other agricultural products. Reaching the latter objective and that of self-sufficiency in grains appears feasible; prospects for reaching the pro- jected level of milk and meat production seem less likely. Agricultural Credit Institutions 26. The Ministry of Agriculture is responsible for the overall evalua- tion of credit needs of the agricultural sector. Credit is made available through the banking system, particularly the Banque Nationale de Tunisie (BNT) and the Caisses Locales de Credit Mutuel (CLCMs). The latter were first created in Cap Bon in 1963 to promote savings and provide short-term agricultural credit to people in rural areas who have difficulty obtaining other institutional credit. Because of inadequate management, lack of full Government support, and poor performance in collecting overdue loans, CLCMs now play a relatively minor role, with the exception of those in the Cap Bon and Sahel regions. In 1975, the Government created the Societes de Caution Mutuelle (SCMs), possibly to replace the CLCMs, although no decision to this effect has yet been taken. The SCMs would allow smaller farmers, who are SCM shareholders, to borrow collectively from BNT, being jointly and severally liable to the extent of the share held. At the end of 1975, 22 SCMs had been created and 19 more were being created. Their average membership is 200, and their average capital D 1,200. Several Government agencies provide short- term credit in kind under specific programs (as part of an input package), for producing a particular crop (grain or olives), or for a particular region.  - 9 Banque Nationale de Tunisie (BNT) 27. BNT was created in 1959 as a semi-autonomous majority Government- owned Bank primarily to provide agricultural credit but also more generally to perform all traditional commercial banking and financial operations. BN'I is administered by an 11-man board whose members, representing Government, state companies and the private sector, serve for six years. As the second most important commercial bank in Tunisia, BNT has 28 agencies throuighotL ihe country with a total staff of about 900, about 64 percent of which work iTl Tunis. The staff is adequate for present operations but will need to be in- creased for BNT to expand lending to the agricultural sector, particularlv to small farmers (see para. 46). The Government has agreed to make avail- able to BNT the required technical staff for implementing the proposed proj- ect and particularly for appraising and supervising sub-projects unLder the small farmer credit component (Draft Guarantee Agreement. Section 3.04). BNT's internal organization is generally satisfactory althoughl, from 1969 to 1974, a rapid succession of presidents caused a lack of continuLty in BNT's overall development policy. 28. BNT's paid-in capital, which was increased from D 0.4 million in 1965-67 to D 4 million at the end of 1975, derives from Government (25 per- cent), state-controlled companies and cooperatives (44 percent), CLCMs (17 percent) and private shareholders (14 percent). Reserves have not kept pace with the growth of deposits and lending, but other st:andard financial ratios are satisfactory. 29. BNT's resources fall irto two categories: normal and special. Normal resources, which accounted for D 109 million at the end of 1975, in- clude deposirs, capital and free reserves, and rediscount facilities. Spe- cial resources, which amounted to D 42 million committed at the end of 1975, comprise BNT external borrowings and managed funds, the latter of which con- stitute the bulk of special resources. These include mostly Government funds (FOSDA: Special Fund for Agricultural Development, see para. 33) and foreign aid. 30. BNT's equity investments are mostly.in other financial institutions (43 percent) and in.;agroindustries (122 percentt).. BNT's equity portfolio has more than trebled overwthe,last,f ive years, reaching D 1.5 million in Septem- ber 1975. By carefuliradministration of, lending!operations from its on fLunds, BNT has beenrabilerto-