Tunisia - Industrial Finance Project

F LE COPY 1Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2180-TUN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON AN INDUSTRIAL FINANCE PROJECT CONSISTING OF A PROPOSED SEVENTH LOAN TO BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA AND A PROPOSED LOAN TO THE REPUBLIC OF TUNISIA December 6, 1977 This document has a restrited distributton and way be wed by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorizaton.  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 0.43 D 1 $ 2.32 D 1,000 = $ 2,320 D 1,000,000 = $ 2,320,000 Fiscal Year January 1 to December 31 Abbreviations API Agence de Promotion des Investissements BDET Banque de Developpement Economique de Tunisie FOPRODI Fonds de Promotion et de Dcentralisation Industrielle  FOR OFFRCIAL USE ONLY TUNISIA Loan and Project Summary A. Loan to BDET Borrower: Banque de Developpement Economique de Tunisie (BDET)o Guarantor: Republic of Tunisia Amount: US$30 million, in various currencies, including $2 million for expansion of small-scale enterprises. Terms: The Loan would be repayable in 13 years, including a 4-year grace period, on a level principal payments basis; interest at 7.9 percent per year; commitment charge of 3/4 of one percent .on the principal amount of the loan not withdrawn. Relending Terms a) Interest rate of 9.0 percent per annum on sub- of loans to loans to medium and large scale industrial borrowers; BDET borrowers: amortization depends on individual sub-projects, and may extend for industrial projects over a period of up to fifteen years if justified in the individual case by the forecast financial position of the borrower and the expected lifetime of the assets. Foreign exchange risk would be borne by Government. b) Interest rate of 8.0-8.25 percent per annum on sub-loans to small-scale industrial borrowers. Amortization depends on individual sub-projects and may vary between 7 and 11 years, with grace periods between 2 and 3 years. FQreign exchange risk would be borne by Government. Project To meet part of BDET's requirements for the financing Description: of import components of specific industrial enterprises (US28 million), and to finance expansion of existing small-scale enterprises through BDET (US$2 million)0 Final date for subproject December 31, 1979 submission: Free limit: About $705,000 equivalent for individual sub-loans. (DFC Component) This documnt hs a rutricted distribution and nmy be wd by rciplanta only in tho perfornince of their official duties. Its contents may not othenrie be disclosed withut Word Bank autbonXazon.  Bank loan disbursements: Fiscal year: 1978 1979 1980 1981 1982 Annual US$ million: 1.0 6.0 8.4 9.8 4.8 Cumulative: 1.0 7.0 15.4 25.2 30.0 B. Loan to the Republic of Tunisia Borrower: Republic of Tunisia Amount: US$5 million in various currencies Terms: Repayable in 13 years, including 4 years of grace, on a level principal payment basis; interest at 7.9 percent per year; commitment charge of 3/4 of one percent on the principal amount of the loan not withdrawn. Relending Terms Interest rate of 8.0-8.25 percent per annum; amortization of loans to depends on individual subprojects, and may vary between SSE borrowers: 7 and 11 years, with grace periods between 2 and 3 years. Project To provide financial and technical assistance to 50 to 60 description: newly created small scale enterprises (SSE) in Tunisia. Final date for sub-project December 31, 1979 submission: Bank loan disbursements: Fiscal year: 1978 1979 1980 1981 1982 Annual US$ million: 0.1 1.1 1.55 1.6 0.65 Cumulative: 0.1 1.2 2.75 4.35 5.0 Appraisal Report: Report No. 1734a-TUN dated November 29, 1977. EMENA CPII-B December 6, 1977  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON AN INDUSTRIAL FINANCE PROJECT CONSISTING OF A PROPOSED SEVENTH LOAN TO THE BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA AND A PROPOSED LOAN TO THE REPUBLIC OF TUNISIA 1o I submit the following report and recommendation on an industrial Finance Project in Tunisia consisting of: (i) a proposed seventh loan to Banque de Developpement Economique de Tunisie (BDET) to be guaranteed by the Republic of Tunisia, for the equivalent of US$30.0 million co he^p finance lending for industry, including US$2.0 million to finance the expansion of small scale enterprises (SSEs); and (ii) a proposed loan to the Republic of Tunisia for the equivalent of US$5.0 million to finance the development of new small scale enterprises in industry. The interest rate for both loans wfould be 7.9 percent per annum. The proposed seventh BDET loan and the proposed loan to the Government would be repaid over a period of 13 years. including four years of grace, on a level principal payments basis. PART I - THE ECONOMY 2. A special economic mission visited Tunisia in December 1976 to review the draft Tunisian Fifth Plan, 1977-1981. A special economic report entitled "Economic Position and Prospects of Tunisia, Review of the Fifth Development Plan, 1977-81" (No. 1539-TUN) was issued on May 2, 1977. Country data sheets are attached in Annex 1. 3. Tunisia is rather poorly endowed with natural resources, but it is close to European markets and has large untapped labor reserves and tourism potential. Much of the country is arid or semi-arid and there is an acute shortage of surface water. Most of the agricultural activity is concentrated along the coast and in a few oases. The main crop is wheat, which is subject to sharp year-to-year fluctuations because of irregular rainfall. The main export crop is olives, but good olive harvests are also subject to a natural output cycle. Tunisia's most important raw materials are phosphates, petro- leum and natural gas. However, except for phosphates, proven deposits are relatively small. Tunisian phosphate rock is of low quality and e;:ploitation costs are comparatively high. The production and export of petzoleum have become increasingly important. Recently, deposits of natura' gas were dis- covered off-shore in the Gulf of Gabes, which might become important for the -future development of the country. Industrial development, albeit auite impressive, has been hampered by a shortage of industrial entrepreneurs and skilled labor. The service sector, a quarter of which consists of government administration, remains the most important one, generating about half of GDP in 1976. Tourism has developed rapidly and workers' remittances have become a significant item in the balance of payments. Tunisia has enjoyed a l,.arge  amount of external aid and used it to expand economic and social infrastruc- ture, 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. 4. Tunisia's overall economic performance during 1970-76 has been excel- lent0 Real GDP grew at an average annual rate of 9 percent, about twice as fast as during the 1960's. GNP per capita reached $840 in 1976, which in real terms is 60 percent above its level in 1969. The shift in policy orientation from the centrally controlled inward-looking investment strategy of the 1960's to a freer export-oriented economy and the drive towards industrial develop- ment proved highly beneficial for the country. Two other factors also contri- buted to this performance: favorable weather conditions resulted in good agricultural crops and the change in world commodity prices during 1973/74 brought oizable windfalls. National savings during 1970-76 were high and on average amounted to about 22 percent of GNP. Savings, however, originated mainly in the private sector and Government, and they were temporarily boosted by favorable changes in petroleum and phosphate prices since 1973. Public enterprises, as a group, did not make a contribution to national savings that was commensurate with their importance in the economy, primarily because their sale prices were not raised sufficiently to reflect cost increases, and also because some enterprises were inefficiently managed. National savings financed about 85 percent of investment during the period. Tunisia's dependence on external