Ecuador - Agricultural Credit Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-2098-EC REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF ECUADOR FOR AN AGRICULTURAL CREDIT PROJECT June 1, 1977 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 authoriztion.  CURRENCY EQUIVALENTS Currency Unit = Sucre (SI.) US$1 = S/. 25 SI.1 = US$0.04 S/.1,000 = US$40.0 S/.1,000,000 = US$40,000.00 Fiscal Year: January 1 to December 31  FOR OFFICIAL USE ONLY Page 1 of 2 ECUADOR AGRICULTURAL CREDIT PROJECT LOAN AND PROJECT SUMMARY Borrower: The Republic of Ecuador Amount: US$15.5 million Terms: Repayable in 14 years, including 5 years of grace at 8.2% per annum. Relending Terms: US$10.0 million equivalent of the loan proceeds would be onlent to farmers, ranchers, agricul- tural consultants and small industries to be repaid in 8-12 years including 3-5 years of grace, at a minimum of 11Z for small farmers and a minimum of 14% per annum for others. Project Description: The project would provide credit for: (a) Livestock development, including pasture im- provement and renewal, fencing and other infrastructure, machinery and equipment and breeding stock, for beef cattle ranches primarily in the Costa and Oriente and dairy and sheep farms primarily in the Sierra; (b) The development of crop farms in selected areas covering a variety of on-farm invest- ments, depending on the area; such as: irrigation canals and pumps; land clearing and development; building (including home) improvements; storage facilities; rehabil- itation of permanent crops, incremental inputs for annual crops; (c) Small local industries, principally in the areas covered by (b) above, involving, for example, processing of meat, poultry, vege- tables oil, balanced feed and wood products; and (d) The development of agricultural consulting services. This document has retricted distrlbution and may be used by recipients only In the performance of their official duti. Its contents may not otherwise be disclosed without World Bank authorization.  Page 2 of 2 In addition to credit, other components of the project would be: applied research with parti- cular emphasis on farm development in the Oriente and Paramo and on pasture development; technical assistance, to improve the administration and accounts of the Cooperative Bank and of selected cooperatives; and technical assistance for the Project Executive Unit. Estimated Disbursements: (US$ million) Bank Fiscal Year Annual Cumulative 1978 0.75 0.75 1979 2.5 3.25 1980 4.5 7.75 1981 4.5 12.25 1982 2.5 14.75 1983 0.75 15.5 Procurement Arrangements: Capital items would be purchased locally from commercial suppliers since bulk purchase would be impeded by the wide geographic distribution and five-year implementation plan. All vehicles and equipment for project adminis- tration would be procured on the basis of local competitive bidding in accordance with proce- dures acceptable to the Bank. Consultants: Consultants would be engaged (i) to assist improv- ing the administration and accounts of the Cooperative Bank and of selected cooperatives; (ii) assist the Project Executive Unit in finan- cial management and supervision of credit to small farmers; (iii) conduct applied research for development of a mixed farming system in the Oriente, and (iv) oversee pasture improvement research in the Sierra. Rate of Return: Estimated 20% (economic) for the agricultural and livestock component, and 20% for the small indus- tries component. Appraisal Report: No. 1499-EC dated May 23, 1977 LAC Projects Department  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF ECUADOR FOR AN AGRICULTURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Ecuador for the equivalent of US$15.5 million to help finance an agricultural credit project. The loan would have a term of 14 years, including five years of grace, with interest at 8.2% per annum. PART I - THE ECONOMY 1/ 2. A report entitled "Current Economic Position and Prospects of Ecuador" (No. 1382-EC), based on the findings of an economic mission which visited Ecuador in August/September 1976 and in March 1977, was distributed to the Executive Directors on April 1, 1977. Annex I summarizes the main economic and social indicators. 3. Until the emergence of petroleum as a major source of export earnings Ecuador depended mainly on agriculture. Its major exports were bananas, coffee, cocoa and sugar. Non-traditional exports, even though they increased rapidly during the 1960s, only represented a small fraction of total export earnings. Ecuador's manufacturing sector has been dynamic, growing at an average annual rate of 8.7% during 1965-75. It consists mainly of small private firms in a great variety of industries. Petroleum exports began in 1972, and they now make up half of total exports. Nevertheless, petroleum exports only average about US$75 per person -- about one-tenth the per capita exports of Venezuela. Ecuador is the smallest exporter in OPEC. In spite of petroleum exports, Ecuador is one of the poorest countries in Latin America, with one of the fastest rates of population growth. Only Haiti, Bolivia, Honduras and El Salvador have lower GNP per capita (1976 Bank Atlas figures). Likewise, Ecuador is among the six Latin American and Caribbean countries with the lowest protein consumption per head; the same is true for its consumption of energy per head. 4. The recent petroleum boom has improved the country's balance-of- payments and fiscal situations and has enabled the Government to expand public investment substantially. Ecuador's longer run development prospects have been greatly strengthened by the petroleum revenues. The main problem of economic management in the years ahead will be to maintain a reasonable balance between the country's petroleum output and exports, on the one hand, and the absorptive capacity of the economy (and, particularly, of the public sector), on the other. Until now this balance has been fairly well main- tained, and the inflationary problems of 1974 and 1975 have come under better control in 1976. The fiscal and balance-of-payments problems attending 1/ Identical to Part I of the President's Report dated May 6, 1977, for the Ecuador Fifth Highways Project.  - 2 - the decline in petroleum earnings of late 1974-75 due to changes in petroleum pricing and pipeline disruptions, have also largely been resolved through a combination of prudent fiscal and monetary policies and the resolution of outstanding issues between the Government and private oil companies. 5. Petroleum policies will have a decisive influence on the country's growth prospects. The main problem is that crude reserves are now being extracted by conventional methods faster than they are being replaced, owing to the virtual absence of exploration and development activity. A resumption of such activity on a substantial scale is warranted by the size of the in situ reserves. The main responsibility for carrying out a petroleum develop- ment program is CEPE's (the State Petroleum Corporation), which recently acquired the assets of Gulf Oil and now controls 62.5% of the Texaco/CEPE Consortium which produces all of Ecuador's petroleum exports. The Govern- ment has recently decided to step up investment in petroleum exploration and development, so as to increase production. To this effect, CEPE will receive a larger share of petroleum revenue than in the recent past for investment, and private petroleum enterprises will be encouraged to invest. These policies could lead to an increase in petroleum production from about 66 million ton/year (1973-76 average) to about 86 million ton/year within two years. Prospects for natural gas development in the Gulf of Guayaquil may be good, and further exploration is warranted. 6. Ecuador has enough fertile land to expand agricultural and livestock output at reasonable cost. Over the years agriculture has been the most important source of employment, and improvements in the standard of living of the majority of lower income Ecuadorians will hinge on increased agricultural production and efforts at incorporating farmers more fully into the market economy. Prospects for industrial development are favorable and have been enhanced by better availability of medium-term credit (due partly to the introduction of more realistic interest rates in 1976) and by improvements in physical infrastructure (transport, electricity power, water). 7. While in the past Ecuador suffered from a lack of development projects, project preparation has improved considerably in the public sector, partly as a result of the creation of a National Preinvestment Fund (FONAPRE) supported by petroleum revenues and external financing institutions. The Government's record in the allocation of petroleum revenues is encouraging since they have been largely devoted to economic and social development projects. Out of 1976 petroleum exports of US$565 million (net of barter arrangements with Venezuela), US$480 million accrued to the public sector. The National Development Fund (FONADE) created to channel petroleum revenues into social and economic development projects absorbed US$152 million, and the next largest recipients were the Central Government, the armed forces, the national power authority, and CEPE. The balance went mainly to the National Housing Bank, the Ministries of Labor, Education and Health, as well as the universities. The past allocation of petroleum revenues suggests that the Government will continue to give priority to economic and social projects.  - 3 - 8. Public investment has increased from 5-6% of GDP in the early 1970s to 9% in 1976, while GDP was growing at a rapid rate. If petroleum production rises from its 1976 level of 65.9 million barrels to about 90 million barrels by the early 1980s, Ecuador should be able to command the financial resources required for a further increase in public investment. The growth of public investment, particularly in petroleum, electric energy, agriculture and rural development, transport, industry, health and education, should encourage the further development of the economy, particularly manufacturing, agriculture and construction. Ecuador's public investment effort will require continuing support from external financing institutions. Such assistance is also needed to help finance the substantial balance of payments deficit which would accompany higher levels of public investment. It should include an appro- priate blend of financial assistance from international institutions and of borrowing at commercial terms from other external sources. This would enable Ecuador to receive the external resources required to finance its investment program while limiting the increase in the country's debt service ratio from its 1976 level of near 7% to about 12% by the early 1980s. 9. The prudent fiscal and monetary policies pursued during 1975 and 1976 have been reflected in a significant reduction in inflation and in a substantial increase in foreign reserves (during 1976 these increased by US$189 million to US$515 million, equivalent to nearly five months imports). The 1977 budget confirms that the Government intends to continue to pursue prudent fiscal and monetary policies, thus reinforcing Ecuador's credit- worthiness for further lending on Bank terms. PART II - BANK GROUP OPERATIONS IN ECUADOR 10. Starting with the first loan in 1954, the Bank and IDA have made eighteen loans and six credits to Ecuador totaling US$230.8 million, net of cancellations. On April 30, 1977, the Bank and IDA held about US$186.5 million including about US$113.7 million not yet disbursed. IFC has made six loans and investment commitments in Ecuador, two in a large textile company, three in a development finance company, and one in a sugar mill, amounting to US$9.4 million of which, as of April 30, 1977, US$3.1 million has been repaid, sold, terminated or cancelled. IFC is currently examining other investment prospects. Execution of Bank Group financed projects has, on the whole, been satisfactory, even though it has not been free of difficulties often caused by the insufficiency of the country's managerial and technical resources--a constraint that still is a major obstacle for Ecuador's economic and social development. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of April 30, 1977 and notes on the exe- cution of ongoing projects. 11. Bank and IDA lending were originally concentrated in transportation and power, where there were--and still are--substantial deficiencies to be overcome. At the end of 1976, these two sectors accounted, respectively, for  - 4 - about 42% and 7.3% of total past lending. Most of the lending for trans- portation was to improve the road network of the country, although two loans were made to help finance port facilities in Guayaquil. Lending for power has been concentrated in improving generation and distribution facili- ties in Quito. The first livestock development loan (FY67) marked the begin- ning of a diversification of lending; since then, the Bank and IDA have made seven more loans and credits for agriculture and fisheries, three loans to support industrial development through development finance companies, one loan and one credit for education, one loan for water supply, one loan for improved seeds production and one loan to assist Ecuador in the preparation of rural development projects. Bank/IDA assistance for the directly productive and social sectors has grown to about 50.6% of total lending. 12. External development financing has also been provided by IDB and AID and, to a lesser extent, by other bilateral sources. External financing by sector and by source through December 31, 1976 is summarized below: Other Bilateral IBRD IDA IDB US /1 Sources /1 Lending 1954-64 54.0 8.0 35.3 62.7 0.2 /2 Lending 1964-76 140.5 28.9 349.8 73.0 96.5 /3 Transport 44.0 - 65.1 - 0.8 Power - 6.8 92.7 6.2 67.2 Education 4.0 5.1 4.1 5.3 - Health and Sanitation 23.2 - 49.3 9.5 4.8 Agriculture and Fisheries 15.3 17.0 64.6 29.1 - Industry 54.0 - 53.8 7.8 8.7 Urban Development - - 14.4 - - Other - - 5.8 15.1 15.0 194.5 36.9 385.1 135.7 96.7 /1 Includes official export credits. /2 Statistics on lending during this period were probably incomplete. /3 Through December 31, 1975 only. IDB is the largest single lender, having extended most of its loans to Ecuador from the Fund for Special Operations, which has normally carried a 2% interest rate, a ten-year grace period, and repayment terms of up to 40 years. It is likely that IDB will remain the major development lender in the immediate future, although its terms have become less concessionary than in the past.  Meanwhile, no new AID commitments have been made since FY73. There were in calendar year 1975 over US$205 million of new commitments of external finance, including those from international institutions, suppliers, commercial banks and some bilateral sources. Education, health and other socially oriented activities, as well as agricultural development, have been receiving increas- ing attention from the external lending agencies in recent years. IDB, AID and the Bank Group have coordinated their efforts in these fields to assure the most effective use of all available resources. 13. Bank lending is aimed at supporting the Government priorities out- lined in Part I above. This objective is to be met by emphasizing projects that will help strengthen the institutional framework for development policy-- including project planning, preparation and implementation--in agriculture and rural development, transportation and other high priority activities. The Bank is undertaking institution-building efforts in these fields, which should yield tangible benefits for Ecuador. Considering the extreme poverty in which most of the Ecuadorian population still lives, the current Bank program includes substantial support for integrated rural development projects and important assistance for the development of the country's agricultural potential. All projects programmed for this sector include sizable technical assistance components, as a major part of the overall institution building effort referred to above. Projects in the agricultural sector planned for the next two years include an oil palm project, an irrigation project and two rural development projects. PART III - THE AGRICULTURAL SECTOR 14. Agriculture is the most important sector of the Ecuadorian economy in terms of output and employment (54% of the labor force), and second only to oil as a source of foreign exchange earnings. It has a large growth potential, but it is also the sector with the most serious institutional and social problems, and the one with the lowest growth from the early 1960s up until 1973. Over much of that period, agricultural production lagged behind the needs of the expanding population. Food production per capita showed barely any increase in the early 1970s. The overall annual rate of agricul- tural growth averaged only some 4% in the 1970-73 period. Since other sectors grew faster at the same time, this trend increased the difference between rural and urban income levels, and has also widened the gap between the demand and supply of foodstuffs. This resulted in some shortages, inflationary pressures and increased food imports. Partly because of the low growth rate of agricultural production, and also because of the skewed distribution of farm land in Ecuador, the poorer half of the rural population are outside the market economy and have low income levels. 15. Ecuador's agricultural potential is large enough to permit a pro- nounced reversal of the disappointing trends referred to above. The country is endowed with the resources needed for a varied and far greater output.  - 6 - There are sizable areas of uncultivated land that could be developed for agriculture and livestock. Some events of the past decade--the remarkably fast transfer of banana production from the Gros Michel to the Cavendish variety; the return of rice to the array of traditional exports; and the recent increases in cocoa, oilseed and sugar yields--all suggest a promising capability for achieving greater agricultural output. This potential, however, will not be easily realized. Over 40% of the unexploited arable land and grassland of Ecuador is in the eastern Amazon area of the Oriente which is largely isolated and uninhabited. Another one-third of the potential addi- tional agricultural land is in the Andean highlands where erosion and popu- lation pressures have constrained growth possibilities. The remainder is in the coastal zone whose areas with the best soils suffer from flooding and insufficient drainage. Furthermore, agricultural production in Ecuador has risen in the past by the extension of cultivated area rather than by the adoption of improved techniques. The agricultural sector has operated largely without the support of extension services, credit storage and marketing facilities, improved seeds and other inputs. Technological progress in Ecuador's agriculture--particularly in small farms--has, therefore, been very slow and average yields are low. 16. The Government is aware of these inadequacies and has taken some actions to overcome them. Since 1974, the Government has raised producer prices, increased the flow of credit, reduced import duties on agricultural inputs, and reduced sales taxes on intermediate and capital goods used in farming to offset their rising costs. Producer support prices were increased for rice, meat, milk, sugar, wheat and oilseeds to counter the deterioration of farmers' terms of trade. The Monetary Board made loans to agriculture more profitable for the commercial banks than those to industry and to t-be-commer- cial sectors, while also obliging commercial banks to maintain 20% of tPreir portfolios in loans to farmers. As a result, the supply of credit to the sector increased from about US$60 million in 1971 to US$186 million in 1975. Moreover, a Seeds Corporation was formed in 1973 to promote the production of certified seed. Mainly as a result of these policies, the annual growth rate of agricultural production increased to an average of about 7% in the 1974-76 period. In addition, the Government has also expressed its intention to allocate a higher share of total public expenditure to agriculture and rural development, and prepared plans for reorganization of extension services. 17. These policies are already achieving some success. However, they still need substantial reinforcement. Agricultural program planning and execution have been mostly on a piecemeal basis. Policies affecting commodity prices have been uncertain, thus failing to provide adequate assurances to farmers. At the same time price supports have in some instances exceeded international levels, thus leading to costly effects for the Government budget. Government involvement in the marketing of farm inputs and agri- cultural products has generally been unsuccessful. The physical infra- structure required to get farm produce to markets-especially feeder roads--is still very limited, and the marketing system neither provides strong incen- tives to farmers nor facilities for efficient handling, and distribution.  - 7 - And, in spite of recent government efforts, credit to the agriculture sector is still insufficient. It was estimated in 1974 that only about 7% of Ecuador's farmers had access to institutional credit. Moreover, agriculture credit is largely oriented towards the development of the livestock sub-sector, and a few selected crops--mainly rice and cotton. It is necessary, therefore, to increase overall credit availabilities for this sector; to diversify its utilization, including specific plans for other crops and for integral farm development; and to provide it to small farmers, who up to now have had little access to the use of banking facilities. To achieve these objectives, it will also be necessary to improve the institutions now operating in the field-- mainly the National Development Bank (BNF)--and to increase medium- and long- term lending to agriculture from private banks and the Cooperative Bank. PART IV - THE PROJECT Background 18. The proposed project was prepared by the Ecuadorian Ministry of Agriculture under the direction of the executive unit responsible for adminis- tering the Third Livestock Project (Credit 222), with the assistance of the Bank. It was appraised in September/October 1976 by a Bank mission. Nego- tiations were held from April 26 to May 6, 1977, at which time the Republic of Ecuador was represented by a delegation led by Mr. T. Granizo, Director, Credit 222 Project Unit. It included also representatives of the Central Bank, the Ministry of Agriculture, the National Center for the Promotion of Small and Artisan Industry, the Ministry of Finance, and the National Develop- ment Bank (BNF). An Appraisal Report entitled "Appraisal of Agricultural Credit Project - Ecuador" 1499-EC is being circulated separately. 19. The three previous Bank Group projects in this field (the First, Second and Third Livestock Development Projects in 1967, 1970 and 1971 re- spectively -- Loan 501-EC and Credits 173EC and 222-EC) have helped develop Ecuador's livestock industry over the last 10 years. They provided sub- stantial credit and intensive technical assistance to a relatively small group of progressive ranchers, achieving significant technical improvements in project ranches, and substantial increases in pasture yields and herd sizes. The projects have been well managed and implemented. According to the Operations Evaluation Department review of the first two projects, 1/ they achieved their main objectives -- improving productivity in participa- ting farms, and increasing national beef production by roughly 10%. The economic rate of return, however, although still satisfactory (12%), was below the estimate at appraisal because of higher investment costs and lower beef prices relative to input costs. The Report also noted other deficiencies including: (a) the low sanitary standards of slaughterhouses 1/ Project Performance Audit Report, dated October 21, 1975.  - 8 - processing project output; (b) the provision of subsidized interest rates to medium sized and large producers; and (c) the capital-intensive nature of the sub-projects. Assurances have been obtained on stricter enforcement of health standards. Interest rates have been raised, and the subsidy element for larger farmers has been eliminated (see para 35). The capital intensive nature of past lending has been brought to the attention of the Ecuadorian authorities and they agree with the desirability of reducing infrastructure components, as indicated in their new investment models. In addition, a supervision mission found in October 1976 that the accounting and audit arrangements of BNF and other participating banks had been inadequate under Credit 222. In order to remedy this situation, summary project accounts for 1975, certified by the Superintendent of Banks, were submitted to the Bank in February 1977, and similar statements for 1976 are expected to be received in June 1977. Moreover, the Central Bank and the Superintendent of Banks are now proceeding with a review of Credit 222 accounts of BNF and other participating banks during the final stage of execution of that project. These actions, and the assurances received in connection with the proposed project (see paragraph 32), should serve to avoid the repetition of such deficiencies in the future. Moreover, as a result of these projects, a national organization--the executive unit administering these projects--has been established which represents Ecuador's most accomplished entity for the direction of supervised agricultural credit and related technical assistance. This experience has been an important consideration i4 the design of the proposed project. It is likely that during the execution of such project, the Unit will gradual'ly acquire roader responsi- bilities within the Agricultural Ministry for related activities. 20. Encouraged by the results referred to above, the Government decided in late 1975 to maintain the Project Unit's work beyond the execution of the Third Livestock Project; to finance its program until new Bank funds could be obtained and to broaden its scope substantially. It requested further Bank assistance to (a) continue the development program for livestock production that had been executed under the earlier projects; (b) include the development of several important crops in the program; (c) place greater emphasis than before on lending to small producers; (d) include in the program some coverage of small industries in rural areas; and (e) bring to bear on the sector the skills of Ecuador's growing number of agricultural science graduates. The proposed project would, therefore, provide credit for these purposes. In a coordinated approach, the Government would reorganize the extension services, with a view to substantially increasing its assistance to small farmers. Other components of the project also directed toward the same objectives would be: applied research, with particular emphasis on farm development in the Oriente and the Paramo 1/ areas, on pasture development, and on beef/milk production on the coast; and technical assistance, to improve the administra- tion and accounts of the Cooperative Bank and of selected cooperatives; further strengthen the Project Unit and help the National Center for the Promotion of Small and Artisan Industry (CENAPIA) to carry out its program in the project area. 21. The proposed project would provide medium- and long-term investment credit for: 1/ Areas at altitudes of 3,000 m and above.  - 9 - (a) livestock development, including pastures improvement and renewal, fencing and other infrastructure, machinery and equipment and breeding stock, for beef cattle ranches primarily in the Costa and Oriente and dairy and sheep farms primarily in the Sierra; (b) the development of crop farms in selected areas covering a variety of on-farm investment such as: irrigation canals and pumps; land clearing and development; building (including home) improvements; storage facilities; reha- bilitation of permanent crops, and incremental inputs for annual crops; (c) small local agroindustries, principally in the areas covered by (b) above, involving, for example, processing of meat, poultry and vegetables, vegetable oil, balanced feeds, and wood products; and (d) the development of consulting services for commercial agriculture. 22. The proposed project would provide financing for some 2,000 loans to farmers throughout Ecuador whose principal sources of income are the ranches and farms to be improved. It is anticipated that these farmers will be engaged in producing--in addition to beef and dairy--maize, oilseeds, vege- tables, rice, mutton and wool. The project would seek to increase the access of small farmers to the benefits of institutional credit. In order to ensure that access, it has been agreed that 30% of agricultural lending under the project would be earmarked for small farmers. The proposed project, moreover, would create additional non-agricultural employment opportunities in poor rural areas. 23. A separate component of the project would provide a line of credit for small agroindustries in rural areas. These would include such enterprises as slaughterhouses and cold storage facilities; sausage manufacture; hides and skins processing; spinning and weaving; chicken packing; canneries; peanut packaging plants; oil mills; production of animal feedstuffs; and wood pro- cessing. Preliminary studies of market prospects and of the availability of raw materials in different localities have already been prepared or are underway. Total investments for each enterprise would range from about US$50,000 equivalent to about US$200,000, and would average about US$125,000. The number of persons employed in each enterprise would range from about 10 to 30 and would average about 20. The investment cost per job created would average about US$6,000. 24. In conjunction with the greater credit availability, the project plan also contemplates expanded access by small farmers to improved extension services support. In Ecuador, such service has hitherto been organized along crop lines and extension personnel have been limited to transmitting single "technological packages". This has proved to be inadequate, given the generally diversified production of Ecuadorian farms. The Government appre- ciates the problem and is planning a reorganization of the service and a  - 10 - change in its orientation, to concentrate extension work on the farm as an integral operation. This plan involves the relocation of Ministry of Agri- culture professional and technical staff from provincial capitals to more dispersed locations in rural areas, and the establishment of new local service centers which would include marketing and storage facilities. In addition, extension agents would no longer also be responsible for other matters such as distribution of inputs and statistical and administrative work. In view of this new policy, the project envisages the coordination of the provision of credit to small farmers with the support to be offered to them by the reorga- nized extension service. Both would concentrate on the most important crops in each locality. This coordination should also promote the rapid adoption of husbandry practices which could yield quick and substantial economic returns. 25. In view of the potentially important results that should emerge from coordinating the work of the Project Unit and the extension service, it has been agreed that the Government: (a) would ensure that the extension service would concentrate on the functions referred to in the previous paragraph; (b) would have the extension service collaborate fully with the Project Unit; and (c) would concentrate these efforts on selected farmers (Section 3.08 of the Loan Agreement). In order to enable the extension service to meet these demands, the project envisages that the service be freed of its past obliga- tions to large-scale farmers. Under the project, the larger borrowers may be required, at the discretion of participating banks to engage professional services (costing around US$500 equivalent a year) to help in, or to review regularly, the extension of their ranch or farm plans during the investment period. Such services would now be financed through subloans to these larger farmers. These arrangements would also enable the project unit to concentrate most of its work in its assistance to small farmers. To facilitate this change, the program includes a small pilot component to stimulate the devel- opment of agricultural consultant services. Qualified agricultural graduates would be eligible to borrow up to US$15,000, for topographical, soil, labora- tory, office and rural transportation equipment under the project. This should assist in the expansion of these services, which had been provided without charge to all borrowers under Credit 222. 26. The project would also support selective applied research programs of -the National Agricultural Research Institute (INIAP). A demonstration research unit would be established in the Oriente's tropical forest area. The area has been traditionally farmed under a slash/burn/shifting cultivation system. With increasing colonization, the resting phase under regenerated bush is so shortened that soil fertility rapidly deteriorates, thus seriously reducing crop yields. An internationally recruited agronomist, with expe- rience under similar conditions, including livestock production, would be appointed mainly for assisting this new research unit. For about three years, he would conduct applied research toward developing a mixed farming system giving sustained yields through the better integration of crops, animals and forestry. He would train local staff to continue the program and to advise local farmers. In addition, one-third of his time would be devoted to assisting the pasture/animal production research and training programs at the existing Pichilingue Experimental Station in the Costa.  - 11 - 27. The pasture research program initiated under the Third Livestock Project in the Sierra and Paramo regions would also be strengthened. The project's main objectives in this regard include: (a) a reduction in the use of nitrogenous fertilizer; (b) a lengthening of the utilization period of improved pastures, which now have to be replaced after five years; and (c) the development of more satisfactory pasture improvement methods in the Paramo region. An internationally recruited specialist would be employed for about three years to assist in the execution of this research program. He would train two teams in trial techniques for the two different zones to continue field trials in those areas for at least five years. 28. It has been agreed that the two specialists would have qualifi- cations acceptable to the Bank, and would be recruited on terms and conditions also acceptable to the Bank (Section 3.07(a) of the Loan Agreement). Assur- ances have been obtained that the project director would continue to serve as a member of INIAP's research planning committee for supervision of the afore- mentioned research (Part BI of Schedule 5 to the Loan Agreement). Project Execution 29. The proceeds of the loan would be channelled through the Central Bank of Ecuador, acting as the Government's fiscal agent, which would make these funds available to participating banks under the arrangements described below (see para. 37). However, the principal responsibility for administering the project would be that of the Project Unit which has directed the execution of earlier Bank-financed projects. The Unit serves under the policy direction of a technical executive committee, chaired by the Under Secretary of the Ministry of Agriculture, and formed also by officials of the same Ministry and of the Central Bank. The Unit, partly through its supervision of technicians of the participating banks, has introduced better lending policies and pro- cedures than were previously used; established farm plans as a basis for systematic analysis of loan requests; and set up an improved delivery system for agricultural farm credit. It has also provided valuable training to farmers and, through the farm visits of its staff, has also contributed to the solution of specific production problems. The Unit provided more technical assistance than that offered through the Bank's other livestock projects in Latin America. 30. Under the proposed project, the Project Unit would be expanded and strengthened, technically and financially. For this purpose, it has been agreed that the Unit will employ a specialist to supervise credit to small farmers in coordination with the expanded activities of the extension service referred to in para. 24 above. A second specialist will be hired by the Unit to improve projections and assessments of financial results. The terms of reference for the work of those two advisors; their qualifications and experience; and, should they be expatriates, the terms and conditions of their appointments, would be acceptable to the Bank. The two positions would be filled by December 31, 1977 or, in the case of the financial specialist, at such later date as may be mutually agreed (Section 3.06(b) of and Part B3 of Schedule 5 to the Loan Agreement).  - 12 - 31. The existing institutional arrangements for the operation of the Project Unit would be maintained. The Unit would thus continue to have operational autonomy and to exercise considerable control. The Project Director would continue to approve farm development plans and, on the basis of those plans, to determine the eligibility of sub-loans under the project. The Unit would also approve disbursement requests submitted by the participating banks, and would define the technical standards to be followed by those banks in the supervision of sub-borrowers, and in the analysis of results of sub-projects. During the second year of implementation of the proposed loan, however, the Unit's relationship with the participating banks may be altered. The BNF and other participating banks have already obtained considerable experience with the type of supervised credit pioneered under the previous pr6jects. Moreover, in the case of BNF, a new management team is now taking steps, described below, which should substantially improve BNF's organization and operational procedures. On these accounts, the authority to approve farm development plans, and the sub-loans related to them might be transferred to the participating banks during their second year of operation under the project, subject to the agreement of the Bank (Part B2 of Schedule 5 to the Loan Agreement). Participating banks receiving this authority would be subject to the same free limit--US$100,000 equivalent--as the Project Unit, and would then also be required to furnish copies of their audited balance sheets to the Bank (Part C4 of Schedule 5 to the Loan Agreement). The Project Unit would in any case maintain all the other functions referred to above. 32. The aforementioned transfer of authority is particularly signif- icant in the case of BNF. This institution--which is the largest Ecuadorian bank and the main source of medium- and long-term credit for agriculture--has been affected by administrative and financial problems during recent years. The new BNF management appointed last October by the Government has already started the implementation of a comprehensive administrative reform, with the assistance of management consultants. BNF is transferring to other public and private entities most of its non-banking activities--which had been the main source of recent financial losses. It has also informed the Bank that it is modernizing its accounting system and that it intends to appoint, within the next two months, an internationally known auditing firm. Assurances have been received that BNF, and all other participating banks, will provide each year, during the execution of the proposed project, an audited report of their oper- ations under such project, prepared by independent auditors acceptable to the Bank (Part C2 of Schedule 5 to the Loan Agreement). These agreement and the corrective measures adopted in connection with Credit-222 (see paragraph 19); should facilitate BNF's participation under the proposed loan; improve finan- cial accountability of all banks, and provide the basis for the possible trans- fer of authority referred to above. 33. CENAPIA would be responsible for the execution of the small indus- tries component. It would identify suitable sub-projects and borrowers; assist the borrowers in the preparation of feasibility studies, investment plans and loan requests; approve sub-loans; supervise statistical and account- ing data and analyze the results of the sub-projects. Over the period of the project, it is expected that some 50 enterprises, providing employment to about 1,000 people, would be financed. There is a strong demand for this  - 13 - type of credit and the number of operations is considered to be within CENAPIA's technical capacity. It has been agreed that the Government and the Bank would consult on the appointment of CENAPIA's Executive Director (Section 3.09(b) of the Loan Agreement). It is also planned that BNF's substantial credit operations in this field would be appraised by the Bank shortly. This would enable the Bank to determine whether a similar delegation of lending authority can be made to this institution (or other participating banks) for agroindustry sub-projects, apart from the review cited above regarding agri- cultural sub-loans. Project Costs and Financing 34.' The overall cost of the project is estimated at US$36.0 million equivalent, including price contingencies of US$10.0 million, with a foreign exchange component of US$15.5 million. The proposed Bank loan would cover the estimated foreign exchange requirement, or 43% of total project costs. The Government and the Ecuadorian banking system would finance US$14.4 mil- lion or 40% of total project costs; and the balance of US$6.1 million, or 17% of project costs, would be borne by the sub-borrowers. The amounts of the respective contributions of the Government and the participating banks would be US$8.7 million and US$5.7 million. Costs have been estimated at early 1977 prices with price contingencies estimated at 8% per year. The cost per man-month of technical assistance is estimated at US$5,000. The technical assistance to the Cooperative Bank and selected cooperatives (US$200,000) would be passed on under terms and conditions satisfactory to the Bank. The Government would bear the foreign exchange risk of the Bank loan. For its services, the Central Bank would charge the participating banks 1/2%. The Project Unit will be financed by the Government. On-Lending Arrangements 35. Credit would be channeled through any established bank or financial institution that has signed with the Central Bank a subsidiary loan agreement satisfactory to the Bank (Section 3.05 of the Loan Agreement). Several private banks are expected to participate in the project as a result of recent changes in interest rate policy. Until the end of 1976, there was limited interest on the part of the banking system in medium- and long-term lending. The then prevailing interest rates encouraged a concentration on short-term lending and the average spreads for loans to agriculture were less attractive to private banks than those attainable for construction, commerce and industry. Recog- nizing this situation, on November 9, 1976 the Government enacted new regula- tions to permit commission charges on medium- and long-term lending. Ecuadorian banks are now allowed to charge, in addition to the basic interest rates for agricultural lending, a commission ranging from 2% on loans of three to five years to 4% on loans of more than eight years. Within this framework, the Government has committed itself to effective interest rates under the proposed project of not less than 11% for small farmers and 14% for larger farmers and other sub-borrowers (Part A2 of Schedule 5 to the Loan Agreement). These rates are likely to be positive over the long term if, as expected, the anti-inflationary policies adopted since 1975 continue to be successful. (Inflation rates have been brought down from 23% in 1974 to 14.5% in 1975 and 11% in 1976.) The new rates also constitute a substantial improvement over  - 14 - the previous situation in which larger farmers borrowed at 12% under Credit 222 while small scale agricultural credits were granted at 9% interest. 36. For the purpose of determining the rate of interest, a small farmer would be defined as one with assets of less than US$20,000 equivalent, exclud- ing the value of housing, but including land and all other assets owned by the farmers. It is expected that only the loans for crop farms, small dairies and sheep farms--including those granted to cooperatives whose individual members would qualify within the small farmers group--would qualify for the lower rates of interest. Loans for small farmers would cover up to 90% of investment costs, with the remaining 10% contributed by the beneficiary. The maximum loan to any beneficiary would be US$12,000 equivalent. As noted above, 30% of all agricultural credit would be earmarked for loans to small farmers. Other loans for livestock and agricultural operations would be to (a) individuals whose principal source of income also is the ranch or farm to be improved; and (b) cooperatives whose soundness of management, operations and financial position were judged suitable by the participating bank and by the Project Director. Their loans would cover up to 80% of investment costs. The free limit of US$100,000 equivalent--cumulative to any sub-borrower-- established under Credit 222-EC would continue to apply; loans above the free limit would continue to be submitted to the Bank for approval and their total would not exceed 20% of lending for agriculture. Loans to small agroindustries would cover up to 80% of investment costs. The maximum loan amount (cumulative) to any single enterprise would be US$200,000 equivalent. The first three sub- loans requests and all subsequent loans to small agroindustries exceeding US$150,000 equivalent would be submitted to the Bank for approval, together with the supporting feasibility studies, investment plans and financial projections. The terms of sub-loans from the participating banks are mostly expected to vary between 8 and 12 years, with 3 to 5 years grace periods. 37. Participating banks would be able to rediscount with the Central Bank up to 90% of the sub-loans made to small farmers. Other sub-loans would be rediscounted as follows: up to 80% for all agroindustries subloans, and for other sub-loans of up to US$50,000 equivalent; up to 75% for sub-loans of between US$50,000 equivalent and $100,000 equivalent; and up to 70% for other sub-loans of over $100,000 equivalent. It was agreed that the spreads for participating banks would be in all cases between 3% and 6%. However, it was also agreed that, to avert subsidies to participating banks for loans to borrowers other than small farmers, the rediscounting rate charged by the Central Bank in those cases would be no lower than 8.7%, i.e. the sum of the Bank loan interest rate and the Central Bank commission (ref. para. 34). Therefore, to obtain the maximum allowable spread (6%) in loans to borrowers other than small farmers, the participating banks would have to raise to 14.7% the interest rate charged in those loans. It was also agreed that these on-lending policies would be reviewed periodically with the Bank, and would not be altered prior to the closing date of the proposed loan without the Bank's concurrence. Moreover, assurances were obtained that participating banks would provide adequate short-term loans and working capital to meet the needs of beneficiaries.  - 15 - Procurement and Disbursements 38. Bulk purchasing would not be feasible in view of the fact that the farm and ranch development sublending program would be executed over a five year period, and be widely distributed. Capital items would, therefore, be purchased locally from commercial suppliers, who maintain adequate stocks and whose margins are in an acceptable range. Vehicles and equipment for project administration would be procured through local competitive bidding, according to procedures acceptable to the Bank. The individual experts and consultants to be employed under the project would have qualifications also acceptable to the Bank, as would be the procedures used in obtaining their services. Loan funds would be disbursed over a five-year period for: (a) 50% of the amount of the sub-loans disbursed by participating banks; and (b) 90% of the total cost of the technical services, research and training components. The schedule of estimated disbursements is contained in the Loan and Project Summary. Benefit and Risks 39. The benefits of the project are expected to be reflected in the incremental output of agricultural products and derivatives. The increase in output anticipated as a result of the project is estimated to be valued at US$12.0 million a year, and is expected to consist mainly of maize, oilseeds, vegetables, rice, milk, beef, mutton and wool. Based upon the expected yield increases, the economic rate of return of the agricultural and livestock components is estimated at 20%. If a shadow wage equivalent to 80% of market wages were employed, in light of underemployment and unemployment levels prevailing in rural areas, the rate of return would reach 21%. In addition, there is an important difference from the approach of the previous projects in which technical success was achieved by channeling credit and technical assistance to a relatively small number of commercial producers. Those projects also were based on the application of relatively capital-intensive technologies, limiting their applicability to medium- and large ranchers. By contrast, this project is aimed at ensuring a greater availability of insti- tutional credit to a significant number of small-scale farmers, thereby contributing to a more favorable distribution of income in Ecuador. It is expected that the project will reach about 1,500 rural families classified as small farmers, most of whom have income levels well below the national average. 40. Since the small industries component constitutes a line of credit, no calculation of the economic rate of return has been possible. Tentative estimates of the financial results of enterprises of the type to be financed, calculated from illustrative profiles, however, indicate rates of return in the order of 20%. The direct employment generated by subprojects of this component, tentatively estimated at about 1,000 people, would contribute to expanding incomes in rural areas. 41. The assurances given by the Government that it would link the proposed project with the improvements in the extension service indicate that the execu- tion of this project would serve to raise the standards of this service and to  - 16 - increase its contributions to agricultural development. This coordination with the extension service would also minimize the risks associated with lend- ing to small farmers. The experience of previous projects and the known demand for credit suggest that there are no special risks related to the livestock component. The expansion of livestock and crop production does not entail any ecological risks. Moreover, assurances were obtained that government standards in health and hygiene applicable to slaughter facilities would be strictly enforced (Section 4.03 of the Loan Agreement). PART V - LEGAL INSTRUMENTS AND AUTHORITY 42. The draft Loan Agreement between the Republic of Ecuador 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 draft resolution approving the proposed loan are being distributed to the Executive Directors separately. 43. Conditions of effectiveness are that contractual arrangements have been made between the Government and the Central Bank (see para. 29) and that a subsidiary loan agreement satisfactory to the Bank has been made with at least one participating bank (Section 5.01 of the Loan Agreement). Other special conditions of the loan are listed in Section III of Annex III along with the timetable of key events. Otherwise the draft Agreement conforms to the normal pattern for loans for agricultural credit projects. 44. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 45. 1 recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 1, 1977  ATJIIU I Page 1 of 4 pagea TAtLE SA ECUADOR - SOCIL INDICATORS DATA SHEET LAND AREA (THOU KNZI --- --------CUAOR REFERENCE COaLNTRIES (19701 TOTAL 283.6 MOST RECENT AGRIC. . 1960 1970 ESTiMATE ALGERIA PERU VENEZUELA I _- - - _- - - - - - - - -- - - _-- - - - -- __ _ - _-- _- - - ___- - --_ GNP PER CAPITA tUS$1 220.0 330.0 550.0 520.0 520.0 1440.0 POPULATION AND VITAL STATISTICS _______________________________ POPULATILON IID-YR, MILLION) 4.3 6.0 7.1 13.4 13.3 10.3 POPULATION DENSITY PFR SQUARE KM. 15.0 21.0 25.0 6.0 10.0 11.0 PER SO. KM. AGRICULTURAL LAND .. .. . 30.0 46.0 /a VITAL STATIS'ICS CRUDE BIRTH RATE (#THOU, AVi 46.3 45.0 41.8 50.0 42.9 42.1 CRUnF DEATH RATE I/THOU,AVI 16.9 12.0 9.5 18.4 14.7 8.7 INFANT MORTALITY RaAE (/THOU) 100.0 /a 76.6 /a 70.2 . 65.L Jb 49.3 /a LIFE EXPECTANCY AT BIRTH fYRS) 51.0 57.2 59.6 50.7 53.4 63.0 CROSS REPRODUCTION RATE .. 3.3 3.2 3.5 2.9 2.9 POPULATICN GROWTH RATE (2) 'TOTAL 3.0 3.3 3.5 2.9 2.8 3.4 URBAN 5.0 /b 4.1 /b 5.6 7.0 4.7 /c 4.7 URBAN POPULATION (R CF TOTAL) 36.0 /lac 38.3 La 41.6 45.4 52.5 75.7 AGr STRUCTURE (PERCENT) 0 TO 14 YEARS 45.0/ / c 47.6 /a 46.1 47.2 ] 45.0 44 47.1 A 15 TO 64 YEARS 51.8 A 49.5 E 51.2 46.4 51.g1b 50.5 65 YEARS AND OVER 3.2 /7C 2.9 La 2.7 4.4 j 3.1 2.4 AGE DFPENOENCY RATIO 0.9 /a c 1 o /8 1. 1.1 .9 b i.O4 a ECONOMIC DEPENOENCY RATIO 1.7 Me I a i.a 2.6 la 1.5 T.d 1.6 lb FAMILY PLANNING ACCFPTOPS (CUMULATIVE, THOUI . 14.2 107.9 .. .. 67.0 USEPS It nF MARRIED WOMEN) . .. 6.3 EMPLOYMFNT TtlTAL LAROR FORCE (THOUSAND) 1Aoo0.Ota 1700.0 1900.0 2600.0o b 4306.0/b 3100.0 LABOR FORCE IN AGRICULTURE 151 57. o.c 5*.0 .. so. o b 45.0E 22.0 UNEMPLOYED It OF LABOR FrPCEI . .. .. 15.0_ 5.0/e 6.0 INCCME CISTRIBUTION I OF PRIVATE INCOME RECtO RY- HIGHEST St OF HOUSFHOLDS .. . -- HIGHEST 20R OF HOUSEHOLDS .. .. .. LOWEST 203 OF HOUSFHOLDS .. .. .. LOWEST 403 OF HOUSFHOLDS .. .. .. OISTq IBlJTION OF LAND OWKFNSHIP T OWNEO BY TOP 101 OF OWNEPS .. .. .. I OWNED BY SMALLEST 102 OWNERS .. .. .. HEALTH AND NUTRITION POPULATION PER PHYSICIAN .. 2870.0 2110.0 7690.0 1920.0 1080.0 POPULATION PER RUPSING PERSON .. .. 2820.0 /b 2400.0 /c 3200.0 520.0 POPULATION PER HOSPITAL BED 520.0tc d 430.0 470.0 7i; 330.0 470.0 310.0 PFP CAPITA SUPPLY OF - CALOEIES tr OF RFCuiFeFNTSI 81.0 89.0 91.0 71.0 98.0 100.0 PROTEIN (GRAAMS PER DAY) 46.0 49.0 47.0 /c 45.0 62.0 62.0 -OF WHICH ANIMAL AND PULSE 24.1) 22.0 . 9.0 Id 24.0 32.0 DEATH RATE (ITHOU) AGEs 1-4 21.! 14.6 .. 12.0 . . . 5.4 EDUCATION ADJUSTED ENROLLMENT RATIO PRIMARY SCHOOL 83.0 95.0 96.0 /b 75.0 107.0 IO.0 SECONDARY SCHOOL 12.0 26.0 25.0 7b 11.0 35.0 41.0 YEARS OF SCHOOLING PROVIDED (tFIRST ANO SFCCND LEVEL) 12.0 12.0 12.0 15.0 12.0 11.0 VOCATIONAL ENPOLLMENT It OF SECONDARYI 29.0 29.0 30.0 1k 20.0 19.0/f ADULT LITERACY qATE (3) .. 68.0 69.0 Lb 26.0 .. 71.0 HOUSING PERSONS PER ROOM (URBANI 2.1 L c 2.8 /a.e OCCUPIEC DWELLINGS WITHOUT PIPED WATER 3II I 58.0 /d 2 77.0 /a ACCESS TO ELECTRICITY It OF ALL DWELLINGS) 32.0 /c .. 41.0 34.0 La RURAL OWELLINGS CONNECTED TO ELECTRICITY (tI 6.0LJ .. 8.0 /e 12.0 in CCNSUMPTI ON RADIO RECEIVERS tPER THOU POP I 41.0 279.0 .. 52.0 134.0 164.0 PASSENGER CARS IPER THOU POPI 2.0 5.0 5.0 Ic 10.0 17.0 55.0 ELECTPICITY (KWH/YR PER CAP) 89.0 156.0 183.0 138.0 407.0 1229.0 NEWSPRINT (KG/YR PER CAP) 2.0 2.3 3.8 0.01 3.6 8.0 SEE NOTES AND OEFINITICNS ON REVERSE  Page2 of 4 pes. ileas. othereise noted, data f.m 1960 ref.r to eny 7yea bets.e 1959 and 1961, for 1970 between 1968 end 1970, end for HMet Reaent EatiMate betweene 1973 end 1975. an Venesuel. has been selected as en Objectiwe country bacesa of its experience in ecoemlo dewelopnot ba..ed en petro,laun eporta. UA 1960 /a Rmclsdfmg no-adie Indin jungle population; Lb 1950-62; /c 1962; -L- Qowecrnent hospital eastablisbeeto. 1970 /a Zolading ncmdic Indian tribes; /b 1962-70; Le Ratio of popul.tion -nder 15 end 65 and owr to total labor foece; Id mnose recipient. xosT RRcwr SSTD(ATR' /a Ratio of population under IS and 63 and ovr to total labor forms; /b 1972; /c 1969-71 average; /d Percetage of occupied housaes not coneacted to public -eter supplies; Ia 1976. A1ZRIA 1970 Li1966; . ./k Excluding military personnel in barracks and 274,663 nationaIs abroad of wh- 229,020 are econoicelly enti-e; also excluding 1,200,000 eminty occupied in agriculture; Li Including nidvlves; /d 1964-66; L. Total, urban end rrl.cI PNU 1970 Ia 1968; -b Excluding Indian jungle population; Ic 1961-70; Id Ratio of population under 15 end 65 and over to total labor force; /g Urban only; If Including eveing school.. VIIIZUKI.6 1970 /a Egadding Indian jungle population; /b Ratio of population under 15 and 65 and owar to total labor forc.. 110, ienuary 21, 1977 DEFmINTONS 0F SOCIAL. INDIC'ATORS ___d_Ar____tho__k_2 PopulatIon par nurs ing Person - Population divided by number of practicing Total1 Total surface sesa coxp,teing lad area and intend watoro. nobtand female graduate nurses. "trained' or "'certifled" nurses,. and =1ri. -Moat recent estissate of agricultural area used tempcr-ily oc auxiliary personnel with training or asperienc.. pernenently for crops, pastures. market & bitchen gerdnen or to lie Population i,. hospital bed - Population divided by number of hospital bede fallow. avilbl in pubic. and pri-cte gene.ral and specialiced hospital and rehabilitation centers; occludes nursing bo..es an d establislhnents for CliP PI' "aI'l ("SI) - GNiP per capita estimate.se atcrrent market prices, cutdial and prevetive cave. calcul.atd bY c- covrion nthod As World Bank Atlas (1973-75 basis); P.r .-pit. supply of celories (7 of renuirementa) - Computed iron enrgy 1960, 1970 and 97 data equivalent of net fund supplies avilable in country per capita per day; availa.ble suPPl ion cunPr i doo-tic production, iports l.ss espOrts, Powuation anvta stiics an chnges in sok; not supplies occlude animal food, sends, quan.ti- Poplto ad-r ilo)- As of July first, if not available, tie usd inoo prcesngad los.es in distribution; requiremets avrage of ten end-year estimates; 1960, 1970 and 1975 data, were etimated by FAO ba...d on physiological ..sed. for normal activity and health considering environmental temperature, body weights, age and Puoula~tliod,n do y - per quar b -Mi-year pepulation par square kilo- sadistributions of population, and allowing 107. for waste at hous.- ester 00 hecares )f tota area,d hold love..!P o PoPulation density - por square ke of aeric. land - Cuoputed as above for Per c.Pit. upyo protein (grass per day) - Protein content of per agricultural land only. cspita net supply of food Per day; net supply of food is defined as above; requirments for all countrieo establiohed by USDA tconoic Vital statistics Research Service. provide for a ninimu allowa.nce of 60 gras of total Crude birllh rats per thou d. average - Annual live birth. Per thousand protein per day, and 20 gr-v of a-nial and pulse protein, of which of "Id-ya ousion;tenyear arithnstric --eeges -ding in 1960 and 10 cr-. should ho animal protein; these standarde are lower than those 1970, end fiv-year avrage ending in 1975 for nOnt recent estimate. ci 75 tra-s of total protein and 23 grnoe of animal protein as an Crude deeth rete par thous..d. evere. - Annual deaths per thousand of mid- aeveragv for the world, proposed by TAD in the Third World Fond Survey. ye- population; ten-year aritheatic aversans ending in 1960 snd 1970 and Pe aiapoeneply iron animal and pulse - Protein supply of food fieya avrage eding in 1975 for cost recent esiat.dr 'ivetrnaiaaadpussi esprdy Infant mortalItyrt /thou) - Annua deaths of infants under one year of Death rote (/thou) .eon 1-4 - Annalc deaths per thousand In age group age per th...an live biths. 1-4 yeuro, to children in this age group; suggested as an indicator of Life expetancy at birthbiyre) - Av-regs number of years of life remaining oalc-tritio.n ate birth; usually five-year -vragas ending in 1960, 1970 and 1975 for develo1PingucountrIes. Education Gros rpoution rats - Av-rgs nuber of lien daughters oanvi Adjuste,d e..nrolmnt rai -piryschool - icrolleent of all ages ae hear in her mornal repreducttc peeled if she esPerlences present.ige1- percontag of primaryt. sc ro-aepopulation; includes children aged specific fertiit rate;usall iv-srvrao enngn1906-1years but adjusetd for different lengths of primary education; 1970 and1975 o dvopin cone.for -outr iso ith universal edcto,crol.tnyeceed 1007. Population rowth rate 17.) - total - ComPound annual growth rates of mid- sinc some.. pupile are below or shov the official school Age.- year populatios for 1950-60, 1960-70 AMd 970-75. AdJusted enrollment ratio - .econdary school - Cnputed an above; Population growth rate (7. - urban - Csputed like growth rate of total aecondary education requires at In-et four Years of approved primary population; different d.finitiens of urban areas nay affect cnp-ra- instruction; Provides general, voctional or teac.her training bility of data amon countries. instruction for pupils of 12 to 17 years of 0gm; correspondence urban population (7. Of tota1l - Ratio of urban to total population; courses are generally sec luded. dlfferest definitions of urban areas may affect com parability of datb Years of schooling provided (first and second levele) - Total year. of erg cou ntriss. shoclieg; at secndr level vctional instruction ney be par- AR. tur. ~.nt)- Childrse (0-14 yer),wrking-age 115-64 yeses), It,ally or cmltel neclude." adrtired rysaeend ovrJ pas . pcntagee of mid-year population. Voainl nomnlty17 of seconday) Voostiona1 institutions include ARe dependeny ratio - hatio of Ppoplation under 15 and 65 and over to technical, induetrial or other programs which operate independently or those of age 15 through 64. astdepartmens f eecndary.icetitu tlons iconomic d.12-,ey ratio - Rtio of population undmr 15 and 65 and oymr Adult literacy rte (7.)- Literate adults (able to read and write) as to the labor frce in age=grupf 15-64 years., percentage of total adult population aged 15 yeace snd over. Penio oannma ammter (cmultive, thou) - Cumultion conke of acce ptors of birth-control dsvica under auspices of national fall7 Reusing planning progrma sioc inception. Personsa pr room (urb..) - Avorage number of per.ona per roo in Penily ol_nine - users (7. of married women) - Perc...tagss of married occupied conventional dwellings in urban areas; dwellings exclud. womn of child-.baring age (15-M er)4 h s birth-control devices non-permanent structures and uncc.upied parts. to all married woe In easn age group. OccuPied d.allinsne without Ppied water (7. - Occupied conve ntional E.pl.y,-t ~~~~~~~~~~~~~~~dw-llingo In urban and rural areas without insids or outside piped T.t.laboren watetosad -eec1y.ti.pro.,icuigr facIlItie as percentage of all otcupied dwellings. Toal lao oc tosn)-tooial ciepros nldn cest lcrct 7 faldelss - COnventional dwellings with ared,forces and.unemPloyd but excluding h.... iv.e, students, etc.; electricity in liigqatr prcent of total d-e11inge in urban definitions invrous counries arent comparable. and rural ar.ea. Labor force in aericuLture (7.) - Agricultural labor force. (in farming , Rural dmIlino connected to electricity (7. - Computed -as above for foety, hunting and fishing) as percentage of total labor force, rural dwellings Only. Unelo,e (7 f labor force) - Unemployed are usually defined as persone who are able and willIng to tak e aJob, out Of e Job on a given day, remained out of a job,n and seeking week for a spmcified minimu period Raiorcevrs (pee thou pop) - All types of es...ivers for radio broad- not exceding one weak; may not b.e coparable between countries due to casts to general public per thousand of population; excludes unlicensed differet.definitions ofcop loyed and source of data, e.g., employ- ree.ielvrs in countrisa and in years when rgistiration of radio.e. a sentoff ce eatisIc - aPIs survys, compulsory unemployment insurance, in effect; data for rce.nt years may not bs comparable sinc most Incom- distribution - Psrcentags of private income (both in cash and kind) cousntriecas bper hou pop)sng - asnecr oprise motr cers .sat- received by richest 51, richest 207.. poorest 207., and poorset 407. of ing lens than. eigtht p-ene; eacludes_ enblances, hear... and military hocushods. vehicle.. El:,tic,lItyP(kwh/cr par cap) - Annual c-nsumption of Industrial, ten- Dietribution of Land ownership - Percentagme of land owned by wsa1thist mrciat, public andppriva.te electricity in kilowtt hour. per capita; 107. and poorest 10.o adonr,gene.rally basd on production data, without allowance forI lessee in grids but allowing for imports and em t o lctricity. Hsalth end Nutrition esrnt(geprca)-Pr cpit annual conaumption in kilograms Population per physician - Population divided by nuber of practicing estimated from dumestic prodction Plus net imports of newsprint. phyeici.ne qualified from a -dic.1 school at university level.  Annex I page 3 of 4 Aemw Projected ~~~~~~197l*- 1976 - L171* 1975 1980 Average lgr.) -Pojected 97- 191 NATIONAL ACCOUM1 1970 itz72_ At 1970-72 Prices & Exchangte Rates Average Anua Growth Bates As Percent of GUY Gross Domestic Product 1,692 x,4taOs ,'044 .i,406 10.1 6.5 100.0 914.8 94.4 Gains from Terms of TraLde (+) - 136 207 203 - -__ 5.2 5.6 Gross Domestic Income 1,9 ,624 2,851 3,609 11.6 6.1 100o.0 100.0, 10070 Import (incl. nyS) 384 650 653 7 75 14.1 4.3 22.7 24.8 21.5 Exports " (izwort caowity) 296 586 699 766 18.6 2.3 .17.5 22.3 21.2 Resource Gap UV W~VT2 T24 T Consumption Expemdituree 1,368 1,958 2,123 2,567 9.3 4.8 80.9 74.5 71.2 Investment " (toocl. stocks) 410 732 662 1,051 15.6 11.4 24.2 27.9 29.1 Domestic Savings 322 668 728 1,042 20.0 9.4 19.0 25.5 28.8 National Savings 265 600 692 1,109 22.7 12.5 *15.7 22.9 30.7 MERHAEIDISE TRADE Annual Data at Current Prices As Percent of Total. Imports Capital goods 108 467 425 728 44.2 14.4 34.7 40.9 39.0 Puels & intermediate goods 162 572 646 922 37.1 9.3 52.1 50.1 49.4 ipj~p~on goods 41 103 136 216 2Jj 12. 13.2 9.0 11.6 Toa0 ebijrs(ef 73T Tl T77U7 rUw 384 11.5 I.0T =00.0 100.0 Exports Primar-y produicts 249 950 1,229 1,681 39.8 8.1 94.0 93.8 92.4 Mlanufcture gOds 16 63 67 139 40.9 20.0 6 0 6.2 7.6 Totfal Merch. Imxports (f oh) 2IT r1T rTVS 173W 39.8 8.9 T=U mrn 1owr Merchandise Trade Indices' Aeage 1970-72 -100 Export Price Index 10 28 7 337 Import Price Index 100 183 195 248 Terms of Trade Index 100 130 142 136 Exports Volume Index 100 198 236 259 VALUJE ADDED) BY SECTOR Ax~umal Data at 1.970-72 Prices and Exchange Rates Average Annual Growth Rates As Percent of Total Agriculture 425 516 546 639 5.0 4.0 25.1 20.7 18.7 Industry snd Mining 441 739 733 1,032 13.8 8.9 26.1 29.7 30.4 Service 826 1.233 1.365 1.735 10.5 6.2 48.8 49.6 50.9 Total 1,69-2 2,488 2,644 3,406 101 65100.0 100.0 100.0 PUBLIC FINANCE As Percent of GDP (C-entral Go-vernment) Current Receipts 205 432 478 654 20.5 8.1 12.1 17.4 19.2 Current Expenditures 181 299 328 422 13.4 6.5 10.7 12.0 12.4 Buodgetsry Savings 24 133 150 232 53.4 11.5 1.4 5.3 6.8 Other Pablic Sector - - - Public Sector Investment 83 212 241 361 26.4 10.6 4.9 8.5 10.6 197 7-8 1 CURRENT EXCPENDITURE D)ETAILS Actual Est. DEITAIL ON PUBLIC SECTOR As % Total Current Expend.) 197_1* 1975 19Z6 INVESTMEN PROGRA[M pe cosait- US$ Mle, 1 of Total Education 23 26 28 ment e) Other Social Services 4 8 9 Social Sectots 142,0 3 Agriculture 2 10 11 Agriculture 407.3 10.7 Other Economic Services 13 14 15 Industry 354.1 9.4 Administration and Defense 24 32 29 Petroleum 531.3 14.0 Other 34 10 8 Power 645.0 17.0 Total Cuirrent Expenditures 100 100 100 Transport 6 corsunications 472.0 12.4 ___________ __________ ___________ __________ ___________ __________ __________ O ther 1 243 9 32.8 Total Expenditures fl 3s795tT TTU" SELECTED) INDICATORS 197 1- FINANCIE, Average ICON ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~26Total Public Secter Inveistment Import Elasticity 1.34 (Disbursements) 4,0-69 1000 Merginal Domestic Savings Rate 0.47 Publid Sector Savings 3,197 78.7 Marginal National Savings Rate 0.4" Net External Borrowing 872 21.3 Ai Excludes US$505.7 million financial investment. IABOR PORCE AND Total Labor Force Value Added Per Worke (175 Prices & Exc. Rates) OUTPUT PER WORKER In Millions %of Total 19b2 -75 In U.S.Dbollars Pecn fAerege a19 2 1975 1975 Annual 1975 1975 Growth Rate. Agriculture 0.9 47.4 1,025 48 Induistry 0.3 15.8 3,864 181 Service 0.7 36.8 -2 3 132 Total 1.4 19 100.0 2.4 2,140 100 not applicable -nil or negligible not available --less then half the smallest unit shown  BALANCE OF PAYMENTS, EXTEAL ASSISTANCE AND DEBT (amounts in millons of U.S. doUlars at current prices) Actual Eatimted Projected Avg. Annuat Average 1976 1980 Grovth Rate 1970-72 17975 1976-SO SUlKAl BULANCE OF PAYDTS Exports (icl. NFS) 296 1,073 1,363 1,905 8.7 Dmorts (incl. NF) 384 1.192 1.277 1.932 10.9 Resource Bal.ance ki-N) -88 -119 86 -27 Net Factor Services -44 -78 -76 -118 11.6 Workers' Remittance - - - - Current Transfers (net) 16 29 21 25 4.5 Balance on Current JAccounts -115 -168 31 -120 Private Direct Investrant 110 41 20 40 18.9 Official Capital Orants - - - - - Public M Loans Disburslents 68 140 298 299 -R apa3'nta -37 -44 -67 -124 16.6 ett D31 96 231 175 -6.7 Other IffLT Ioans DLabursenrrts 3.6 2.4 3.0 - -Repan-ta - 3.4 5.3 5.0 - Net Disburements 0.2 -2.9 -2.0 - Capital Transactions n.e.i. 0.3 -23.8 -91 -16 12 1973 V 6 Chaige in Net Reserves -27 58 -189 -79 DEBT & DEBT SERVICE CITABI AND LOAN GO 3 NI rS Public Debt Out. & Disbr. 302 328 324 430 660 Ofi cial orants & Urant-like I972 1973 1974 1975 Interest on Public Debt 10 15 17 17 25 Repayments on Public Debt 27 31 77 32 67 Public LWT Loans Total Public Debt Service 37 46 94 49 92 IBRD - 20 23 4 Other Debt Service (net) '' 7DA 7 6 - - Total Debt Service (net) -' Other - 3 - 4 Other Multilateral 11 33 86 33 Darden on lOport bzrning (p ) Governments 36 8 3 67 Suppliers 5 19 1 10 Public Debt Service 10.1 7.3 7.6 4.6 6.8 Financial Institutions 54 21 1S 87 Total Debt Service Bonds 1 - _ - DS+Direct Ihest. Inc. *. Public Loans n.e.i. - Total Public HhT. Loans 1 4 1 0 S 1 31 Average Terms of Public Debt Actual Debt Outstanding on Dec. 31. 1975 Iot. as % Prior Year DO&D 4.4 4.9 5.2 5.3 5.8 bITRAL DM Disbursed Only Peccent Amort. as , Prior Teer DD&D 11.9 10.2 23.5 9.9 15.6 World Bank 43.U IU.0 IDA 28.4 6.6 IERD Debt Out. & Disbursed Other HSltilateral 59.8 13.9 as % Public Debt OSD 11.4 10.9 11.5 10.0 8.2 Govorments 119.8 27.9 " as % Public Debt Service 12.2 10.9 6.4 12.0 8.7 &wnmliers 59.9 13.9 Financial Inetitutiona 105.6 24.6 IDA Debt Out. & Disbursed Bonds 2.3 0.5 as % Public Debt O&D 3.9 5.4 6.6 6.6 4.9 Public Debts n.e.i 10.8 2.5 , as % Public Debt Service - Tbtal Public IedLT Debt 429.5 100.0 Other K&LT Debts Short-twe Debt (disb. only) not applicable e staff estirate not available - nil or negligible ... not available separately -- less than half the but included in total amllest unit shown 0, April 1977  ANNEX II Page 1 of 5 THE STATUS OF BANK GROUP OPERATIONS IN ECUADOR A. STATEMENT OF BANK LOANS AND IDA CREDITS (as at April 30, 1977) Loan or -------US$ million-- Credit Fiscal Amount (less cancellations) Number Year Borrower Purpose Bank IDA Undisbursed 9 loans and 2 credits fully disbursed 65.5 9.5 - 124 1968 Ecuador Education - 5.1 0.7 555 1968 Ecuador Fisheries 4.6 - 1.0 222 1970 Ecuador Agriculture - 10.0 3.4 286 1972 Ecuador Power - 6.8 1.3 930 1973 Ecuador DFC 20.0 - 3.9 425 1973 Ecuador Irrigation - 5.5 1.3 1030 1974 Empresa Water Supply 23.2 - 22.6 Municipal de Agua Potable de Guayaquil 1157 1975 Ecuador Education 4.0 - 3.8 1229 1976 Ecuador Seeds 3.0 - 3.0 1230 1976 Ecuador Technical 4.0 - 4.0 Assistance 1231 1976 Ecuador Highways 10.5 - 10.5 1255 1976 Guayaquil Ports 33.5 - 32.5 Port Authority 1359 /a 1977 Ecuador DFC 26.0 - 26.0 Total 194.3 36.9 113.7 of which has been repaid 46.2 0.3 Total now outstanding 148.1 36.6 Amount sold 1.8 of which has been repaid 1.8 Total now held by Bank and IDA /b 148.1 36.6 Total undisbursed 107.3 6.4 113.7 /a Not yet effective. /b Prior to exchange adjustments.  ANNEX II Page 2 of 5 B. STATEMENT OF IFC INVESTMENTS (as at April 30, 1977) Type of Amount in US$ Million Final Year Business Loan Equity Total 1966 & 1972 La Internacional, S.A. Textiles 3.7 0.3 4.0 1969 Ecuatoriana de Desarrollo, S.A. 1973 & 1975 Compania Financiera (COFIEC) DFC - 0.4 0.4 1976 Sociedad Agricola e Industrial Sugar Mill 5.0 - 5.0 San Carlos, S.A. Total gross commitments 8.7 0.7 9.4 Less cancellations, terminations repayments and sales 2.6 0.5 3.1 Total commitments now held by IFC 6.1 0.2 6.3 Total undisbursed 2.0 _ 2.0  ANNEX II Page 3 of 5 C. PROJECT IN EXECUTION 1/ Credit No. 124-EC - Education Project: US$5.1 million Credit of June 27, 1968; Effective Date: August 30, 1968; Closing Date: December 31, 1976. The project is behind schedule because of recurrent difficulties in the staffing and direction of the project unit, and because of shortages in counterpart funds. The bulk of the project schools are now in operation al- though substantial work still remains to be completed on foundation and roof structures, and on the installation of services. The Association has deferred action on a possible extension of the Closing Date pending the Government's preparation of a detailed program for satisfactory completion of all project schools. Loan No. 555-EC - Fisheries Project; US$5.3 million Loan of September 5, 1968; Effective Date: September 4, 1969; Closing Date: May 1, 1977 This project had a slow start owing mainly to institutional problems and less than anticipated demand for the fishing vessels included in the project. A feasibility study, financed under this loan, recommended the construction of fishing harbor and industrial facilities at two locations. The Bank has agreed to finance the detailed design of facilities at Manta. Additional facilities would be considered by the Bank depending on the findings of additional marketing studies, also to be financed out of this loan. An extension of the Closing Date is currently being discussed with the Ministry of Natural Resources. Credit No. 222-EC - Third Livestock Development Project; US$10 million Credit of December 10, 1970; Effective Date: September 30, 1971, Closing Date: June 30, 1977 The credit is nearly fully committed. The main objectives of the project are being met, and the demand for investments for subloans for beef and dairy development is good but additional time is required in order to have the participating banks complete the processing of sub-loan disbursements and comply with the Credit Agreement's accounting covenants. The Closing Date was extended to June 30, 1977 for this reason, and it is likely that the Credit will be fully disbursed by the end of 1977. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution and, in particular to report any prob- lems which are being encountered and the action being taken to remedy them. They should be read in this sense and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknessess in project execution.  ANNEX II Page 4 of 5 Credit No. 286-EC - Third Power Project; US$6.8 million Credit of February 15, 1972; Effective Date: December 15, 1972; Closing Date: June 30, 1977. The major part of the project has been completed satisfactorily. The remaining item--two substations--should be finished by the end of 1977. The beneficiary, Empresa Electrica de Quito, has increased tariffs twice recently; approved new organizational statutes; contracted an asset re- valuation study; and obtained a settlement of the outstanding debts of Munici- pality of Quito. On the basis of these actions, the Association agreed to extend the Closing Date in order to complete the project. Credit 425-EC - Milagro Irrigation Project; US$5.5 million Credit of August 17, 1973; Effective Date: January 17, 1974; Closing Date: August 31, 1979. Progress during the past years was good; disbursements are ahead of schedule. Almost all the irrigation and drainage canals have been completed; most of the heavy equipment has been delivered. The on-farm development work has been delayed by difficulties in preparing land titles. Loan 930-EC - Second Development Finance Companies Project; US$20.0 million Loan of August 17, 1973; Effective Dates: COFIEC February 27, 1974; CFN March 4, 1974; Closing Date: December 31, 1977. The project is proceeding according to schedule, and the loan is now entirely committed. Loan 1030-EC - Guayaquil and Guayas Province Water Supply Project; US$23.2 million Loan of July 23, 1974; Effective Date: January 29, 1975; Closing Date: June 30, 1978. Disbursements have been slow, owing to construction delays and changes in management and engineering consultants. Government intervention has partly rectified the situation with a tariff increase and other remedial measures. However, long-term financial problems have yet to be solved. The procurement practices of the Water Supply Company have caused the emergence of some difficulties which have been resolved recently. Loan 1157-EC - Vocational Training Project; US$4.0 million Loan of September 3, 1975; Effective Date: November 24, 1975; Closing Date: September 30, 1978. Project implementation has been proceeding satisfactorily with some technical and financial difficulties. Design work for the Guayaquil and Quito centers may be interrupted, however, because of the failure to complete site surveys and tests.  ANNEX II Page 5 of 5 Loan 1229-EC - Seeds Project; US$3 million Loan of May 24, 1976; Effective Date: October 20, 1976; Closing Date: June 30, 1980. The national seeds council and project unit are established, and the project director has been appointed. Candidates have been identified for the two consultants postions. Procurement is now underway on the equipping of the seed processing plant to be built on the coast, and similar activity is scheduled to begin soon for the related civil works. Loan 1230-EC - Technical Assistance Project; US$4.0 million Loan of May 24, 1976; Effective Date: October 20, 1976; Closing Date: December 31, 1980. The project has been proceeding slowly with the establishment of the national rural development planning unit and appointment of its local staff, in addition to the hiring of the first expert. Candidates for other positions have recently been identified and agreed upon. The preparation of the project in Tungurahua province is underway, and a team of consultants will shortly initiate work on the Guayas Basin project. Loan 1231-EC - Fourth Highway Project; US$10.5 million Loan of May 24, 1976; Effective Date: October 13, 1976; Closing Date: December 31, 1979. Bids for the civil works component of the project have been opened on April 18 and are being evaluated. Consultants were invited in March 1977 to submit proposals for the various technical assistance programs included in the project. MOP is interviewing candidates for the position of overall coordinator. Consultants to carry out an agricultural development study, to be financed under this loan, have been selected. Loan 1255-EC - Second Guayaquil Port Project; US$33.5 million Loan of May 24, 1976; Effective Date: March 11, 1977; Closing Date: December 31, 1981. After complex and protracted negotiations, the main civil works con- tract was signed on February 11, 1977. Some critical engineering aspects will require additional design work but, in the meantime, dredging has already started. Cofinancing arrangements for US$10 million with a private inter- national bank were concluded on March 11, 1977.  ANNEX III ECUADOR AGRICULTURAL CREDIT PROJECT SUPPLEMENTARY PROJECT DATA SHEET I. Timetable of Key Events (a) Identification Mission: September 1975. (b) Preparation by: The Ministry of Agriculture and Livestock in cooperation with the Bank. (c) Appraisal Mission: October 1976. (d) Negotiations: April 26 - May 6, 1977. (e) Planned date of effectiveness: September 1, 1977. II. Special Bank Implementation Actions None. III. Special Conditions The Bank has obtained assurances that: 1. Relending terms would be as specified in para. 35. Credit and rediscounting terms and conditions would be reviewed periodically and would not be altered without the Bank's concurrence prior to the closing date of the loan (para. 37). 2. Participating banks would provide adequate short-term loans and working capital to project beneficiaries and the Central Bank would provide rediscount facilities for both long- and short-term loans (para. 37). 3. The Project Executive Unit would have adequate operational autonomy and any change in its location within the public service would be made after consultation with the Bank and on terms and conditions acceptable to the Bank; and the Unit's relationship with participating banks would be reviewed midway through the commitment period (para. 31). 4. Supporting technical assistance to farmers through the pro- vision of MAG extension services would be as specified in para. 25.  ao 79500 77!00 75 00 73 O' DECEMBER 1976 -~~ ECUADOR