Nicaragua - Agricultural Development Project

R E S T R I C T E D FILE COPY Report No. P-97 This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on a PROPOSED LOAN to INSTITUTO DE FOMENTO NACIONAL for an AGRICULTURAL DEVELOPMENT PROJECT in NICA RAGUA August 17, 1955  INTERN2 TI AGIP .;L BANITK FOR R.AbCU' S'1!,1.UCTI01)T AND DgEVKLOPIMNT REPORT AN,1D R:ECOrl iNIDATIOII'S CF TrE; 2iE;SIIENT TO TE EXECUTIVE DiLICTORS CJ A PROPOSED L.O'N To iNbTITUTO DE FOUENTO NAGCIONiL OF AICA.itGUIA 1. I submiit the following report and recormendations on a proposed loan of ,1,500,000 to Instituto de Fomento Nacional, of Nicaragua (sometimes hereafter referred to as "Fomento'u), to finance import requirements connected with programs for land clearing, erosion control, milk processing and the improvement of pasture and cattle breeding stock. PAURT I - .HISTORICAL 2. One of the recommendations of the report entitled "iThe Economic Development of Nicaragua" prepared by the Bank's special mission in 1951-52 was that an Instituto de Fomento should be established to: (a) make long-range technical plans for the country's develooment. (b) provide adequate engineering and teclnical advice to new and existing agricultural and industrial enterprises. (c) make loans involving greater rislk and at longer terms than those made by existing banking institutions. (d) help establish a capital market, and promote and channel savings into newi enterprises. 3. The Instituto de Fomento was established in Mlarch 1953 as an autono- rious government agency. In October 1954 Fomento asked tne Bank to consider making a loaln to finance some elements in its program. A Bank mission visited Nicaragua in February 1955 to study this request, and as a result of discussions with the mission Fomento submitted the proposal now under consideration. 4. Formal negotiations for a loan opened in ;ashington on ilugust 3, 1955. Mr. ilfredo Sacasa, General Manager, represented both Fomento as Borrower and tihe Government of Nicaragua as Guarantor.  5. If the sroposed loan is rmade, it would increase the total amount of Bank loans to Nicaragua to .4,18,200,000. Tne loans already macde are as follows: Year Serial No. Purpose 'mount l95l 44 NI Farrn Machinery 4,200,000 1951 45 NI First Highway Project ;J3,500,000 1951 52 NI Grain Storage ,I 550,000 1953 81 NI Seco.-:d Highway Project W3,500,000 1953 d2 HiI Diesel Power v 450,00 1955 121 NI Thermal Power Project .Q7,100,000 1955 122 NJI Pow-Ter Distribution Project "? 400,000 Total - $16,700,000 The loan would be the second to Fomento, which was the borrower under Loan 122 NI P:' T II - DESCRIPTT10i OF UTD PR0P0S3D LOhN Borrowjer 6. The Borrower would be the Instituto de Foniento Nacional, an autonomous Goverrnment agency. The Guarantor would be, the Republic of Nicaragua. iAnmount 7. The lonr. would be in tlle amount of 4l,500,000 or its equivalent in other currencies. Purpose b. Thne purpose of the loan would be to finance the importation into Nicaragua of machinery, equipment and materials to be used for land clear- ing, erosion control, pasture improvement, cand inilk Drocessing. Provision is also made for tile importation of cattle for breedirng purposes. Thlrough the miiediurm of appropriate loans, Foraento would make tihese imported goods available to various forms of agricultural private enterprise - farmers, machinery operators, and producer-owned milk processing plants. Interest, Commission and Comnitment Charges 9. The loan would bear interest at the rate of 441- per annum, including the statutory commission of 1%. The commitment charge would be 3/4 of 1% per annum and would accrue from the effective date of the Loan 0.greement or a date 60 days after signature, whichever is the earlier.  - 3 - Amortization 10. The loan would be for a period of 12 years, with a period of grace of about two years corresponding to the expected period of disburse- ment. It would be amortized by semi-annual payments beginning October 1 1957 and ending October 1, 1967, as set out in the amortization table of the oroposed Loan Agreement. 11. These payments are calculated to correspond roughly to the payments wjhich Fomento will receive on the various credits wihich it will extend wiith the proceeds of the loan. A of the credits extended by Foraento would mature before tne final maturity date of the Bank loan. Although mrtost of these credits will not exceed five to seven years, tlhe credits for mailk processing machinery ijill require some-what longer terms, so that the final maturity has been fixed at twelve years. Owing to the special amortization schedule, w'hich calls for heavy payments in the earlier years, the 4h-2g interest rate, normally applicable to loans of six to nine years, is considered appropriate. Provision of Local Currency 12. Fomento wqould make suDplementary loans as necessary to assist producers to mnlke effective use of the imo?orted machinery, equipment, rmaterials and livestock. Legal Instruments and Legal Authority 13. There are attached drafts of: Loan :.greement between Fomento and the Bank (NFo. 1) Guarantee i.greement between the Republic of Nicaragua and the Bank (No. 2) 14. These agreerients are substantially in the forms currently used byr the Bank. The Loan `-greement contains thie following provisions of special interest: Section 2.02 would make the withdrawal of funds to finance milk Drocessin- raachiner-1 subject to the BankOs aporoval of the Qarticular enterprise in which the machainery is to be used. Section 5.03 would require Fomento to obtain the Bank's ap?roval before incurring debt, exception being made for debts with a maturity of not more than one -ear up to the limit of 2.5 million cordobas. Section 5.08 would require Fomento to insure that there are adequate facilities for reoairing and servicing machinery and equipment financed by the loan.  - 4 - Section 5.11 would limit Fomento's investments in the operations of the Managua grain storage plant to 3 million cordobas unless the Bank otherwise agreed. With respect to the last point, Fomento's program for the coming year contemplates that its advances to the Managua grain storage plant, the construction of which was financed by the Bank through Loan 52 NI, may increase up to this maximum limit. These advances are being made to provide working capital and to finance the losses incurred during the plant's first two years of operation. Different arrangements could and preferably should be made for this financing, and a Bank end-use mission will review this question with the Government in the near future. 15. The Loan Agreement will require ratification by the Board of Directors of Fomento. The Guarantee Agreement will reoquire ratifi- cation by the Nicaraguan Congress. 16. The report of the Committee provided for in Article III, Section 4(iii) of the Articles of A^greement of the Bank is attached (No. 3). PZART III - APPR'ISAL OF TItE PROPOSED LOAN 17. A detailed appraisal of the projects (T.O. 91-b) is attached (No. 4). A report entitled "Current Economic Position and Prospects of INicaregua" (14.H. 35-a) was distributed to the Executive Directors on February 15, 1955 (Secretary's memorandum 1-201). Justification of the Project 18. The project forms part of Fomento's 1955-56 program for the development of Nicaragua's agriculture and associated processing industries. Tnis program as a whole seems well conceived. 19. In recent years there has been a very rapid expansion of cotton cultivation in iNicaragua which has absorbed substantial acreage that had been devoted to food crops. It is therefore urgently necessary to expand the area under cultivation. At the same time the present methods of cotton growing are creating serious problems of soil erosion. Fomento's program includes an attack upon both of these problems. Machinery would be supplied on rental or hire purchlase teris to privAte operators who clear new land and carry out erosion control operations for farmers.  20. Through technical and financial assistance, Fomento is also actively encouraging the efforts of farmers to expand milk production and to establish producer-owned milk processing plants. Progress in th,ese directions would improve dietary and health standards and would tend to reduce the importation of dairy products. The project would, by financing the importation of milk processing and pasture improvement equipment, and also of high-grade breeding stock, help to raise both the quantity and ouality of the output of Nicaragua's beef and dairy cattle farms. 21. Tne Bank's staff is impressed by the care taken by Fomento to provide producers with the technical assistance necessary for them to make effective use of additional credit, and I believe that its program in general and the project in particular should make a significant contribution to Nicaragua's economic development. Metlhods of Procurement 22. Fomlento would procure the land clearing and erosion control machinery by means of competitive bidding. 11 distributors of pasture improvement equipment in Nicaragua would be eligible to participate in the ,pasture improvement program. The Bank would review the proposed method of procurement for each milk processing project submitted for its approval with the object of securing the highest degree of competitive bidding consistent with the hi;ghly specialized nature of the equipment. Cattle breeding stock would be directly selected in the exporting countries by a representative of Fomento. Economic Situation 23. There has been no significant change in Nicaragua's economic situation since I submitted to the Executive Directors my report, dated June 30, 1955 (P-89) on the thermal power and power distribution projects. Prospects of Fulfilment of Obligation 24. Fomento is under competent management and its program is on sound lines. The operations which are contemplated under this loan should be self- linuidating in the sense that they are expected to provide the local currency needed at present exchange rates to purchase the foreign exchange to service the loan. Fomento would give the Bank an assurance in writing that it would arrange its re-lending so as to maintain a rate of repayment which would provide it with funds adequate to meet its anortization payments to the Bank as they fall due. Any eventual losses in these operations could be covered out of Fomento's authorized caoital of 50 million cordobas (about ,)7 rmillion) which the Government is subscribing by instalments over the period 1952-62. The first three instalments, amounting to 16 million cordobas, had been paid by June 30, 1955, and the 5 million cordobas due for the fiscal year 1955-56 is being paid in monthly instalments.  25. FoDiento's lending operations have not yet attained a volume adequate to sup:Jort the overhead costs of its orgalization and oersonnel. Part of these overhead costs arise in connection with activities) such as development planning and certain forms of technical assistance, which are not directly related to credit operations. Fomento would give the Bank a written assurance, however, that it will earmark from its resources sufficient funds to maintain its investment prograa before allocating any funds to these non-banking activities. 26. Nicaragua should be able to make availabl'e uithout undue strain the foreign exchange required to meet the service of the loan in addition to its other obligations. P.AiT IV - CO3TPLI.IJGNCE ITTH ARTICLES OF G IaIENT 27. I an satisfied that the proposed loan would comply with the irticles of Pgreemeent of the Bank. PART V - F..: h:vTIoS 28.