Liberia - Small- and Medium-scale Enterprise Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No2869a-LBR LIBERIA STAFF APPRAISAL REPORT SMALL- AND MEDIUM-SCALE ENTERPRISE PROJECT October 20, 1980 Industrial Development and Finance Division Western Africa Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT Currency Unit: Liberian Dollar (L$) US$1 L$l FISCAL YEAR Government: July 1 - June 30 Financial Institutions: January 1 - December 31 ABBREVIATIONS ACDB Agricultural and Cooperative Development Bank AITB Agricultural and Industrial Training Board BADEA Banque Africaine pour le Developpement Economique de l'Afrique FM4O Netherlands Finance Company for Developing Countries IDA International Development Agency IMF International Monetary Fund LAMCO Liberian American Swedish Minerals Corporation LBDI Liberian Bank for Development and Investment LDC Liberian Development Corporation LFTC Liberia Finance and Trust Corporation LIFZA Liberian Industrial Free Zone Authority MIP Monrovia Industrial Park MRU Mano River Union NBL National Bank of Liberia NHSB National Housing and Savings Bank NIC National Investment Commission OAU Organization of African Unity PfP Partnership for Productivity SME Small- and Medium-Scale Enterprise UNDP United Nations Development Program UNIDO United Nations Industrial Development Organization  FOR OFFICIAL USE ONLY LIBERIA STAFF APPRAISAL REPORT SMALL- AND MEDIUM-SCALE ENTERPRISE PROJECT Table of Contents Page No. I. THE SETTING *...........***... *..****..*........* 1 A.* The Economy .................................. 1 B. The Manufacturing Sector 3 C. Industrial Policy 4 D. The SME Sector ................... 7 {I. THE FINANCIAL SECTOR ....................... 10 A. Central Bank and Credit Policy ................. 10 B * The Commercial Banks ............................ 11 C. Specialized Financial Institutions ............ 13 De Prospects 14 III. THE PROJECT 15 A. Origin and Objectives . ..... .... s15 B. Project Description ......... 15 C. Project Cost and Financing ..................... 19 IV. PROJECT IMPLEMENTATION . ........ ............. ... ..... - 23 A. Subloan Approval Procedures ..................... 23 B* Technical Assistance ... ...................... . .. 23 V. BENEFITS AND RISKS .............. .................... 24 VI. RECOMMENDATIONS . .................................... 25 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   LIST OF ANNEXES A. THE SETTING Annex I Liberia: GDP by Sectoral Origin Annex II Employment in Liberia by Major Sectors B. THE FINANCIAL SECTOR Annex III Table 1: NBL Balance Sheet, 1974-1978 Table 2: Commercial Banks Aggregate Balance Sheet Table 3: Combined Income Statements of Commercial Banks Table 4: Commercial Banks' Profitability Table 5: Commercial Banks' Resources Table 6: Commercial Banks' Deposits Annex IV Table 1: LBDI Balance Sheet Table 2: LBDI Income Statement Table 3: NHSB Balance Sheet Table 4: NHSB Income Statement Table 5: *ACDB Balance Sheet Table 6: ACDB Income Statement C. THE PROJECT Annex V Study of Industrial Incentives in Liberia and Revision of the Investment Code: Draft Terms of Reference Annex VI Outline of PfP's Technical Assistance Program to NIC Annex VII Credit Disbursement Schedule Annex VIII Selected Documents in Project File  I  LIBERIA STAFF APPRAISAL REPORT SMALL- AND MEDIUM-SCALE ENTERPRISE PROJECT I. THE SETTING A. The Economy 1.01 Liberia is a relatively small nation, well endowed with natural resources, with a population of about 1.7 million, and an average annual per capita income of about US$470 (1978). Income distribution is highly skewed however, with 5% of the population accounting for 60% of income. About 60% of the population are engaged in traditional farming and the per capita income is US$100 or less. 1.02 Economic Structure. Liberia has a highly dualistic economy. A large agricultural sector co-exists with a foreign controlled enclave sector dominated by iron ore mining. The enclave sector is export- oriented and produces, besides iron ore, rubber and forest products. It provides about 70% of export earnings, generates about 25% GDP, and 15% of all Government revenues. Iron ore is the major export earner since the major cash crops--rubber, coffee, and cocoa--contribute less than 10% to GDP and only 15% to export earnings. A breakdown of the subsectors showing the best estimates of employment and contribution to GDP is shown below: Employment in 1978 GDP in 1977 l/(current prices) '000 % (US$ million) % Agriculture 324.3 77.8 251.2 32.3 (Modern Agriculture) (61.7) (14.8) (155.0) (19.9) Mining 13.9 3.3 144.4 18.6 Construction 5.8 1.4 44.1 5.7 Manufacturing 6.5 1.6 50.2 6.5 Utilities 1.3 0.3 7.0 0.9 Government 27.3 6.5 70.6 9.1 Commerce 16.0 3.8 82.9 10.7 Transport and Communication 7.0 1.7 53.7 6.9 Business and Personal Services 14.8 3.6 76.2 9.8 1/ Last year for which data from all sectors are available.  - 2 - 1.03 Employment. The modern sector employed about 37% of the Liberian labor force of 417,000 in 1978, the remainder of which were em- ployed in traditional agriculture and trade. The largest employers in the modern sector are modern agriculture (13%), Government (6.5%), commerce (3.8%), and mining and quarrying (3.3%). The manufacturing sector accounted for only 1.6% of total employment. 1.04 The availability of trained personnel at all levels has been inadequate to meet the demand from the public and private sectors. This shortfall in appropriately trained manpower has been made up, where possible, by the use of expatriate personnel. Foreigners, of whom 80% are from other African countries, constitute about 14% of the wage labor force. There is an especially high concentration of expatriates in the professional and technical occupations (18% of the total in this occupational category), administrative and managerial positions (19%) and sales workers (37%). Open unemployment is high in Liberia, especially in Monrovia where it reaches 21% according to conservative estimates. This situation is worsening owing to a rapid flow of migrants into Monrovia while the employment opportunities in the capital have remained limited. Thus, job creation is an important consideration in formulating economic policy. 1.05 Performance. Economic growth rates in the sixties and early seventies were reasonable, ranging from 4 to 6%. However, the recent years have witnessed a weakening of Liberia's economic and financial position. Economic growth has almost stagnated with per capita incomes actually de- clining over the last five years. Real GDP grew at an annual rate of 0.7% between 1974 and 1978 compared with 4.2% between 1970 and 1974. The decline in iron ore mining and rubber exports in the wake of recession in the indus- trialized countries has had a profound effect on GDP, balance of trade, public finances and the external debt situation of Liberia. As a small country with heavy dependence on primary products sold in the international markets it is particularly vulnerable to external factors; at the same time the Liberian difficulties were further compounded by heavy public outlays on buildings and other facilities constructed in connection with the 1979 OAU conference at the expense of investment in other production activities. Despite these serious strains the Liberian economy showed some resilience in the agriculture sector. While real GDP growth was sluggish, the agri- cultural sector continued to grow at an annual rate of 4.6%. An increase in investment in the non-enclave production sector would help to broaden the economic base and moderate the effects of heavy dependence on the enclave structure. 1.06 The outlook for the Liberian economy in the coming two years appears less promising. The recent oil price increases and the continuing worldwide recession, coupled with a slowdown in economic activity in Liberia following the OAU Conference are likely to force a continuation of the recent pattern. GDP growth in 1979 is unlikely to have been more than 1 to 2 percent. The balance of trade is projected to be slightly negative. The overall budgetary deficit for FY80 is estimated at between US$60-75 million, equivalent to 30% of public revenue.  - 3 - 1.07 The consumer price index increased moderately during the last two years (5.8% in 1977 and 7% in 1978) but the evidence available for the first quarter of 1979 points to an annual rate of about 14%. This rate of increase is expected to level off after the expansionary effects of con- struction activity associated with the OAU Conference have subsided (see para. 2.04) B. The Manufacturing Sector 1.08 The manufacturing sector is small and centered around import- substitution activities. Besides sawn timber and plywood, the only signif- icant manufactured export is explosives. Manufacturing activity grew at a rapid rate in the late sixties and early seventies with real growth of about 12% but has stagnated in recent years as import-substitution possibilities have been fully exploited. Its real output was US$26 million in 1974 and US$28.7 million in 1978, representing 6% of GDP. Manufactured exports account for about 1% of the total exports. Two thirds of the value of manufacturing production originate from the refinery and cement industries and the balance is distributed among food, beverages and tobacco. Most of the large-scale firms, except for the refinery which is Government owned are foreign-owned and managed. The bulk of manufacturing activities occurs in Monrovia. There are few large firms located up-country except for those associated with the forestry and agricultural enclaves. Firms with more than 50 employees are found mostly in the food, wood and furniture, and chemical industries (beer and soft drinks, petroleum, cosmetics, industrial gases and soap). 1.09 The relative importance (in value of output) of various manufacturing industries is reflected in the following table: Value of Manufacturing Production (1975) _/ Value % (US$'000) Food Products 4,817 6.0 Beverages 8,925 10.9 Cigarettes 440 0.5 Cement, cement blocks 5,199 6.4 Petroleum products 54,752 67.1 Shoes 199 0.2 Chemical products 4,661 5.7 Metal products 634 0.8 Miscellaneous 1,992 2.4 Total 81,619 100 1/ Source: Ministry of Planning and Economic Affairs (MPEA), Quarterly Statistical Bulletin of Liberia, 1976. (Most recent data available; distribution is believed not to have changed significantly.)  -4- 1.10 Structure. The manufacturing sector is made up of three types of enterprises: (1) The few large manufacturing concerns (at most 40) are almost exclusively centered on import substitution, with an annual turnover of US$1-3 million per firm. They have 50-200 employees, with a relatively high cost per Job of about US$27,000, and are primarily owned by for- eigners and prominent Liberians. Such operations enjoy substantial incen- tives through concessionary agreements and a liberal incentive code giving tax holidays, exemption from import tariffs and protection from import competition. (2) The medium-scale enterprises have assets up to US$250,000 and an annual turnover in the order of US$500,000. They employ between 10 and 20 persons at a cost per job of US$17,000. These firms are largely engaged in the production of food and related items, household furniture and wood work, block making and auto repair. Most of these enterprises do receive or have received investment code incentives. Most of them are either wholly foreign-owned or have a very limited Liberian participation. (3) The small-scale enterprises, defined as having assets up to US$55,000, cover virtually the full range of basic economic activities for a large and very poor section of the population. They employ 1 to 10 people, many of whom are unpaid family members or apprentices at an average cost per job of less than US$5,000. These enterprises are generally Liber- ian owned and controlled, although African, Asian and Lebanese ownership is frequent. Block making, garment making, carpentry and upholstery are indicative of their range of activities. These enterprises largely escape recognition and regulation by the Government. 1.11 A recent study of the structure and performance of the manufac- turing industry carried out by UNIDO reveals that the industry was charac- terized by (a) high capital intensity (US$18,800 per job); (b) low net value added ratio (14%); (c) high dependence on imports; (d) insignificant intersectoral linkages; (e) production of primarily consumer goods for the domestic market; (f) low rates of capacity utilization (less than 50%); and (g) satisfactory profit rates. Industrialization in Liberia has thus been essentially an import substitution process producing light consumer goods with capital intensive techniques catering to the tastes and demand of high income groups. The skewed income distribution pattern favored the growth of such a production pattern and the Government industrial policies provided further impetus. C. Industrial Policy 1.12 Liberia operates an "open door" policy to attract foreign investment. The main tools of this policy have been the Development Plan and the Investment Code. In addition, some recent policy developments such as the Mano River Union, the Free Zone and the Monrovia Industrial Park have aimed at promoting industrialization, especially by broadening markets to compensate  -5- for the limited size of Liberia's domestic market. Overall, the emphasis of Liberia's industrial policy is placed on larger industrial units. Small- scale enterprises and employment generation have received little emphasis. 1.13 The First Development Plan (1976-1980). Liberia's first socio- economic development plan proposed an ambitious set of public Lnvestment projects aimed at diversifying production, dispersing economic activities throughout the country, encouraging greater participation of the population in the development process, and providing an equitable distribution of the benefit of growth. The industrial policy focus incorporated in the Plan emphasizes the development of larger-scale industry through the facilities of the Monrovia Industrial Park (see para. 1.19), the Liberian Industrial Free Zone Authority (see para. 1.18) and Government investment in large- scale export oriented activities with high local raw material content. Projects which are given high priority for government financial participation include those activities which (1) process local raw materials (logs, rubber, sugarcane); (2) have an export orientation (wood products, sugar); or (3) have an import substitution nature but with production on an efficient scale (building materials). The need to develop small-scale industries is also noted but since little is known about the sector the plan only proposes a comprehensive survey to gather data concerning location, output, sales and major problems of small-scale entrepreneurs. This survey was conducted as part of the preparation of the proposed project (see para. 1.21). 1.14 The Investment Code. Liberia's Investment Code of March 21, 1966, as amended in March 1973, provides the following benefits: (a) a 90% duty exemption on imported machinery, equipment and inputs; (b) complete tax exemption on reinvested profits and a 50% exemption on remaining profits; (c) rebates on export duties, income and excise taxes on manufactured exports; (d) "reasonable tariff protection"; (e) other miscellaneous benefits such as accelerated depreciation, lease of land at the Monrovia Industrial Park (see para. 1.19), etc. Incentives cover a five-year period with possibility of a two-year extension. 1.15 The code is written in broad language so that any manufacturing firm can qualify, regardless of activity or size. The investment must, however, fall within the priorities of the National Planning Council, and in particular, ensure permanent emloyment of Liberians at all levels, provide training to Liberians, leave options for Liberian ownership, produce local value added of at least 25% of the value of gross output and use local materials and inputs wherever feasible. The National Investment Commission (NIC) is responsible for the administration of the Code. 1.16 Nearly 50 manufacturing enterprises, including all large firms, are benefiting, or have benefited, from incentive or concession contracts. Most of the enterprises which have benefited from the Investment Incentive Code have been medium to large by Liberian standards. SMEs are often unable to meet the requirements of the code, such as detailed feasibility studies and to follow the Code's cumbersome administrative procedure. Moreover, smaller firms with incentive contracts are often unable to fully use duty exemptions because they require imports in too small a quantity and irregularly. As a  - 6 - result, large firms, by and large, have greater access to incentive contracts and utilize them more fully. The investment code is presently being reviewed and the proposed project would finance short-term consultant services to complete the revision of the code with the view toward improving access of SMEs to its benefits (see terms of reference in Annex V). The recommendations of this study would be discussed between the Government and IDA and appropriate measures to implement these recommendations would be agreed to by IDA. 1.17 Mano River Union (MRU). Liberia and Sierra Leone are the members of MRU aimed at fostering economic cooperation and trade between the two countries. The main features of the Union established in 1975 are tariff and excise tax harmonization and the assignment of industries to each member state. Because of its relative infancy, the MRU has realized few achievements in the area of industrial policy. Trade between the two countries is free of duty but subject to excise taxation to prevent revenue loss. External tariffs have been nearly fully harmonized. Given the small size of both markets, transportation difficulties, similar industrial bases and lack of marketing contacts, there is presently little trade between the two countries and it is doubtful that removal of trade barriers will stimulate significantly greater trade. As to joint industrial projects, those presently under consideration are large and therefore seem to indicate that opportuni- ties for the SMEs within the MRU in the near future will be limited. 1.18 Liberian Industrial Free Zone Authority (LIFZA). LIFZA was created in mid-1975 in order to induce foreign investment for export manu- facture. A 113-acre tract of land in the Monrovia Free Port area was allocated to LIFZA and the project is financed by a loan from BADEA. Firms qualifying for the Free Zone receive import duty and corporate income tax exemption for five years with maximum rates thereafter equal to 50% of those of other firms. Space is available for 70 firms which are expected to employ from five to ten thousand workers. To date, no manufacturing firm is operating there, although several applications have been received. In any case, the minimum investment requirement of US$200,000 restricts the use of these facilities to larger firms. 1.19 Monrovia Industrial Park (MIP). The MIP was established in 1974 on the outskirts of Monrovia by the former Liberian Development Corporation (LDC) in order to attract import substitution activities by offering basic infrastructure. The success of this project has been limited. Firms operating in MIP have experienced difficulties with the provision of utilities, inadequate site preparation, and the provision of transportation to their employees. Recent construction work has, however, improved the situation. So far, only 13 firms have settled in the Park. These firms are involved in the manufacture of petroleum products, matches, biscuits, plastic products, rubber shoes and sugar, as well as in construction and distribution activities. Although there is no minimum investment requirement, firms locating in MIP are large and either foreign or government owned. Given the orientation of the Park toward larger firms and its location apart from the natural markets of most small Liberian enterprises, a greater access of the park would not be of direct benefit to SMEs.  -7- D. The SME Sector 1.20 The development of SMEs in Liberia seems particularly appro- priate as such enterprises tend to be more labor intensive, their scale of operation matches Liberia's limited market and they can serve as a means to increase Libe tan paticipation in the economy. However, the potential of this sector has until recently been largely neglected. 1.21 The Importance of SME. An extensive survey of the sector was financed by the Bank as part of the preparatory work of the proposed project. This survey was supplemented by a study on the Liberian construction industry conducted by UNIDO. The SME survey was carried out by a Liberian team from the University of Liberia and covered approximately 1,300 enterprises in 34 types of production and service activities, excluding trade, entertainment and professional services. According to this survey, the largest number of SMEs in Liberia are involved in tailoring, restaurants, carpentry, transportation and garages. Approximately 7,000 people are involved in these activities, where entry is relatively easy and competition in the product market is intense. Product quality is poor, partly as a result of low skill levels, and training is carried out on an apprenticeship basis. According to the University of Liberia survey, enterprises of this type have few fixed assets (over 50% of the small enterprises have fixed assets of less than US$1,000), suffer intense competition, lack utilities, especially electricity (nearly 50%) and water (about 90%), have limited space, and have a distinct distrust of bureaucracy in the form of government or banking institutions. In addition, the management of these firms is deficient; there is a high failure rate--a common feature of these subsectors--and entrepreneurs are only at best vaguely aware of means to expand their operations or improve their efficiency. Nearly half of the small-scale enterprises identified in the survey are located in Monrovia, with a significant number in Nimba and Lofa Counties. Liberian ownership is widespread and in fact certain economic activities including cement block manufacture, gas stations, cook shops, ice cream manufacture, commercial printing, butcher shops and retail trade of food, clothes and household items with an annual turnover of less than US$3,000 are by law reserved solely for Liberians. The survey recognizes, however, that Liberians often "front" for expatriate owners. 1.22 Existing Support for SME. In spite of a growing awareness of the importance of SMEs and policy statements encouraging their development, there was until recently no organization responsible for their promotion nor a clear policy framework directed towards them. As previously, the development plan which outlines industrial development strategy essentially emphasizes larger industrial units. Smaller firms are normally eligible for the benefits of the investment code but often do not apply because of cumber- some administrative procedures or if they do, are not able, because of their size, to utilize fully all of these benefits. Smaller entrepreneurs generally do not have access to loans from the commercial banks because of inadequate project preparation, weak managerial capacity and therefore high probability of default. As a result most of them have either to give up their projects or to rely on the informal sources of credit characterized by very high interest rates and very short repayment periods. Finally, there has been until recently little local institutional support for the development of SMEs.  -8- 1.23 The National Investment Commission (NIC). The National Investment Commission (NIC) was created in September 1979 with the broad mandate to coordinate the investment policies of Liberia and to encourage the development of the free enterprise system. NIC has absorbed two existing agencies--the Liberia Development Corporation (LDC) and the Concession and Investment Commission. LDC was established in 1974 as an autonomous public corporation in charge of coordinating the "execution of the total national development strategy in all areas of human and economic profitability". Its numerous responsibilities included promotion of SMEs and also various and sometimes unrelated tasks such as the management of the tourist office, the ownership and management of a number of Government enterprises, mostly unprofitable, the supervision of the OAU Conference Center and the management of the Monrovia Industrial Park. The lack of precise objectives for LDC coupled with a lack of coordination between agencies engaged in related activities, and a lack of financial support and adequate staffing explains to a large extent its poor performance in particular in the field of promotion and assistance to SMEs. This led the Government to dissolve LDC and to create within NIC a department in charge of SMEs. The chairman of NIC is appointed by the President of the Republic. NIC is organized into three main departments: the Investment Promotion Department, in charge of reviewing and recommending approval of applications for large new investments; the Finance and Administration Depart- ment, and the Small- and Medium-Scale Enterprise Department. 1.24 The Small- and Medium-Scale Enterprises Department of NIC. In contrast to the former LDC the SME Department of NIC appears better equipped to deal with the problems of SMEs. Its objectives are limited to SMEs and the Department is designed as a small staff, operations oriented, with flexible methods of intervention and autonomous within NIC. It should therefore be more responsive than LDC to the needs of SMEs. In its policy statement the SME Department of NIC has established two major objectives: (1) strengthening the capabilities of existing SMEs so as to increase their growth, enhance their linkage with Government and large industries and develop their employment capabilities; (2) increasing the rate of new enterprise formation, the rate of employment generation and the share of GNP originating in the SME sector. To accomplish these objectives, the Department undertakes (a) the promotion of new enterprises by preparing investment dossiers to be presented for credit to financial institutions and by conducting sectoral studies to identify project opportunities; (b) assistance to the promoters in implementing their projects; (c) technical and managerial assistance to new and existing enterprises. Building up the staff of this Department and providing technical assistance to the start up of its operations would be a major objective of the technical assistance component of the proposed project. The SME Department is presently headed by a Liberian professional who co-authored the Bank-financed survey of SMEs in Liberia. He is assisted by two professionals who are respectively in charge of project promotion and training and advisory services. Recruitment of technical personnel and definition of sound operational procedures are underway in consultation with IDA (see paras. 3.16 and 3.17). Training of existing personnel and recruitment of external technical assistance would be provided under the proposed project to help the SME Department meet its objectives. Initially, the Department will limit its activities to the greater Monrovia area and Lofa County but will aim at establishing a nation- wide program by 1982.  - 9 - 1.25 Technical and Vocational Training. There are a number of vocational and technical education and training programs in Liberia. Under the Bank's Third Education Project, an Agricultural and Industrial Training Board (AITB) is being established to coordinate these programs. The Bank-s recent education sector review in Liberia ranks assisting the Government to make agricultural, vocational and technical education and training --re effective as one priority for World Bank intervention. Assistance in these areas is likely to be an important part of the proposed fourth education project. The SME extension services that would be set up under the proposed project would be an attempt to redress the lack of technical and managerial assistance available to artisans and SMEs in Liberia. This would be a very modest effort of a pilot nature, but, in order to coordinate ongoing training efforts, a liaison would be established between NIC and AITB. NIC-s extension workers will be kept aware of existing vocational training programs in order to be able to identify potential training courses for small entrepreneurs. 1.26 International Programs. Various multilateral and bilateral aid agencies have recently shown interest in the Liberian SME sector. UNDP and the FMO, the Dutch Development Financing Agency are proceeding to finalize a limited program of technical and financial assistance to the woodworking industry. These programs will be coordinated with the proposed project through NIC. The only ongoing project for SME in Liberia is located in Yekepa in Nimba County. Begun in 1974, it was conceived and heavily supported by the LAMCO iron mining company and is administered by the Partnership for Productivity (PfP), a private development agency. The goal of this project, now supported by USAID is to develop a local economic base sufficient to support the region once LAMCO leaves the area. To do this, PfP undertook to (1) assist LAMCO in "spinning off" activities to local entrepreneurs (e.g. transport services, furniture repair, construction); (2) generate new activi- ties to service LAMCO's demands; (3) develop new experimental enterprises; (4) train managerial personnel; and (5) create and assist enterprises un- related to iron mining. After four years of operation, the project has successfully assisted about 20 enterprises and has provided support to agri- cultural development in the area. Its experience provides valuable informa- tion to other potential programs in Liberia in terms of activities assisted, problems faced and methods used to overcome these problems. Under the pro- posed project, the new staff of NIC's SME Department would be trained in PfP activities and methods. PfP would also assist the SME Department to develop and implement the extension services component of the proposed project. 1.27 Prospects. The previous Government had latterly demonstrated a genuine interest in supporting SMEs, which has in particular been reflected in the establishment of the SME department of NIC and the decision to revise the investment code in favor of small Liberian enterprises. This interest has been emphasized by the new Government and it forms the basis for tackling the major constraints to development of SMEs, in particular access to credit and technical assistance. The proposed project would help overcome some of these constraints by making term resources and credit guarantees available to SMEs and by building up NIC's SME Department's capability to provide adequate technical and managerial assistance to small entrepreneurs.  - 10 - II. THE FINANCIAL SECTOR 2.01 The financial sector in Liberia consists of a Central Bank, (National Bank of Liberia), seven commercial banks, two wholly Government owned, specialized financial institutions (The National Housing and Savings Bank (NHSB) and the Agricultural Cooperative Development Bank (ACDB) wand a development bank, the Liberian Bank for Development and Investment (LBDI). These financial institutions are concentrated in Monrovia but some of them operate branches in the rest of the country. A. Central Bank and Credit Policy 2.02 The National Bank of Liberia (NBL) was established with DMF assis- tance, in 1973 to supervise overall banking activities, perform clearing house operations, extend credit to the Government and banks and regulate the supply of currency. However, the scope of the National Bank's monetary policy has been so far restricted by the use of the US dollar as the national currency and by the fact that international capital flows freely in and out of the country. In 1978, the National Bank introduced a number of measures designed to absorb excess liquidity of commercial banks, encourage savings and reduce the demand for credit. Legal minimum reserve requirements on deposits of commercial banks were raised from 6 to 9% on demand deposits and from 3 to 6% on time and savings deposits. In addition, commercial banks are now required to maintain with the National Bank the entire amount of the required reserves, instead of 80% previously. To increase the mobilization of savings by the banking system, minimum interest rates payable on savings and time deposits were raised from 5 to 8% and from 5.75 to 8.75% respectively. The National Bank has also decided that the initial deposits required by the commercial banks,' other than those engaged exclusively in corporate or wholesale banking, to open a savings account, should not exceed $200 and that the minimum balance required at all times should not exceed US$25. Finally, in an effort to encourage commercial banks to lend to Liberian entrepreneurs, the Central Bank created in 1978 a Credit Guarantee Scheme, the provisions of which would be a key feature of the proposed project (see para. 3.05). 2.03 Interest Rates. Until recently, interest rates were freely deter- mined but subject to a ceiling of 12%, set by the Central Bank. This ceiling was removed in early 1979. The usury rate however remains at 25%. Rates currently charged by commercial banks are 13 to 15% for revolving short-term credit (commercial banks extend almost no medium-term credit) and 18% to 23% for consumer durables. LBDI's current interest rates range between 12 and 14%, the 'foreign exchange risk being borne by the final borrower. 2.04 The average annual increase in consumer prices during the past four years has been below 10%. The rapid rise in current public and capital expenditures and the slow growth of the directly productive sector have led to a substantial price increase in 1979, with an annualized rate of 14% for the first quarter of 1979. This rate of increase is, however, expected to  - 11 - level off after the expansionary effects of construction activity associated with the OAU Conference have subsided. Inflation is projected to remain around 10% per year over the next three years. The final lending rate of 13.5% proposed under the project will therefore be positive and in line with rates currently charged in Liberia. The adequacy of interest rates would be reviewed by Lhe Government and IDA from time to time. B. The Commercial Banks 2.05 The seven commercial banks currently operating in Liberia are in order of size: c 1) Bank of Liberia jointly owned by Liberian interests (51%) and the Chemical Bank of New York. The Bank of Liberia engages mainly in retail lending. It operates a branch in Grand Bassa County. 2) Chase Manhattan Bank is a branch of Chase Manhattan New York and is predominantly engaged in retail financing. It has a branch in Marshall Territory. 3) Bank of Monrovia, a branch of Citibank New York, specializes in corporate lending. It has a branch in Yekepa (Nimba County). 4) International Trust Company is a full service bank owned by the International Bank of Washington, D.C. with a Liberian minority participation. It operates a branch in Yekepa (Nimba County). 5) The Liberian Trading and Development Bank is a subsidiary of lMediobanca, Italy, mainly involved in trade financing. 6) The Bank of Credit and Commerce International (BCCI), an affiliate of BCCI Holdings, Luxembourg, engages in trade financing. 7) The Liberian Finance and Trust Company (LFTC) is 100% Liberian owned and deals mainly in personal loans and loans to small businesses. Except for the Bank of Liberia and LFTC, the top and middle management of these banks is expatriate. 2.06 The commercial banks are the most important source of funds in Liberia. Total commercial bank loans and overdrafts to the private and public sector have grown from US$75 million in December 1974 to US$185 million in September 1979, of which US$144 million went to the private sector. The bulk of commercial bank lending has been directed to trade financing (43%), credit to public corporations (22.4%) and agriculture (rubber and forest plantations). The share of manufacturing in total credit is only 5.7%. As of September 1979, the distribution of bank credit by economic sector was as follows:  - 12 - Distribution of Bank Credit by Economic Sector (September 1979) (in %) Agriculture 12.6 Rubber (4.7) Forestry (5.2) Other (2.7) Mining and Quarrying 0.3 Manufacturing 5.7 Construction 7.2 Transportation Storage & Communication 1.2 Commerce 43.0 Services 0.3 Personal 7.3 Other (essentially Credit to Public Corp.) 22.4 TOTAL 100.0 Commercial banks extend essentially short-term credits, up to 90 days, which are rolled over for preferred customers. Commercial banks have been reluc- tant to lend to small entrepreneurs because their management capacity is generally weak, their projects are poorly prepared and because they lack adequate collateral. Moreover, the existence of adequate business opportuni- ties of a larger scale has discouraged the banks from taking measures of their own to overcome the problems of lending to small businesses. 2.07 The resources of the commercial banks consist essentially of capital funds, deposits and foreign borrowings. Deposits of residents and financial institutions are the most important component of these resources. As of September 1979, commercial bank resources amounted to $243.8 million of which 58.0% were accounted for by residents' deposits. Demand deposits represent 45.5% of the total deposits, time deposits 24.0% and savings deposits 30.5%. Overall, the share of local resources was 66% as of September 1979. 2.08 The financial position of the commercial banks appears to be sound since most of their loans are to preferred clients and are well secured. Commercial banks often require collateral above 100% of their loans and most personal loans are installment loans which are repaid by salary deduction. Their experience has so far been very favorable, their losses very limited and their profitability attractive. Financial statements of the commercial banks are presented in Annex III.  - 13 - C. Specialized Financial Institutions 2.08 National Housing and Savings Bank (NHSB) started its operations in 1976 with a subscribed capital of $5.0 million held by the Government of Liberia. Although it deals mainly in residential mortgages and personal loans, NHSB's charter authorizes it to offer all normal commercial banking services. At the end of 1978, NHSB's assets amounted to $31.5 million and total loans outstanding stood at $26.4 million. A total of 359 mortgage loans had been approved, the number of deposit accounts was over 15,000 and deposits amounted to $16.5 million. NHSB charges an interest rate of 12% per annum on its mortgage loans up to 20 years. A minimum balance of $25 is required to open an account and interest of 8% is paid on all accounts with balances of $100 or more. NHSB lends exclusively to Liberian nationals. Besides its mortgage activities, NHSB has arranged credit facilities for the Liberia Petroleum Refining Company and has participated in a loan syndication for the Republic of Liberia. It has also extended time and term loans to public corporations. NHSB has expressed interest in participating in the proposed project and it appears well equipped to deal with small Liberian promoters even though it has been operating for only three years. NHSB's financial statements appear in Annex IV Tables 3 and 4. 2.09 Agricultural and Cooperative Development Bank (ACDB) was estab- lished in November 1976: (a) to provide short-, medium- and long-term credit to individual farmers, either directly or through cooperatives, (b) to promote the development of agricultural enterprises, and rural industries and (c) to provide technical advice and assistance to individual farmers and coopera- tives. Its initial subscribed capital of $2.25 million, held by the Govern- ment (95%) and the Liberian Produce Marketing Corporation (5%), is expected to increase to $5.0 million by 1982. ACDB has its head office in Monrovia and a branch in Gbarnga (Bong County). At the end of 1979, ACDB took over LBDI-s subsidiary in Lofa County which had been established in 1977 to extend credit under the Lofa Rural Development Project financed by the World Bank. A new branch is to be opened in Nimba county during 1980. As of December 1978, ACDB's outstanding loan portfolio amounted to $514,000, and demand and savings deposits stood at $401,000. Because of its presence in rural areas, ACDB's participation in the proposed project would be important for the development of rural industries. 2.10 Liberian Bank for Development and Investment (LBDI) was established in 1965 with the assistance of IFC which subscribed 25% of the initial US$1.0 million share capital. LBDI's capital was increased from $1.0 million to $5.0 million in 1976, of which $3.6 million was paid in as of December 1978. The Liberian Government, IFC and a number of private Liberians together own 50.4% of LBDI's shares, the remaining being held by a number of private foreign companies and financial institutions. Under its charter, LBDI finances productive enterprises in manufacturing, agriculture, transporta- tion, tourism and services. It can make loans, take equity participations, issue guarantees and underwrite stock issues. Since 1972 the World Bank has extended three lines of credit to LBDI totaling US$12 million. The assist- ance of the Bank Group has contributed to the development of LBDI into a strong and sound financial institution which now plays a major role in  - 14 - financing enterprises of all sizes. The board of LBDI is chaired by the Minister of Finance and consists of eight members, three representing Liber- ian interests, one representing IFC and four representing foreign share- holders. LBDI is organized into three main departments: Projects, Finance, Internal Audit and Control. As of May 1979, LBDI's staff totaled 49 of which 27 were professionals. The staff is competent and experienced and the general quality of LBDI-s project appraisal is satisfactory. 2.11 LBDI's operations have increased rapidly in recent years. Net approvals reached $7.5 million in 1978 against $2.7 million in 1975. Al- though 85% by amount of LBDIs lending has gone to projects above $200,000, the bulk of LBDI's loans by number has gone to small and medium enterprises, majority Liberian owned. From a sectoral point of view about 26% of LBDI's lending by amount is to timber and wood processing and agri-business. The share of manufacturing is relatively small (10.5% of the amount of loans in 1978). LBDI has been very active in "other services", i.e., trade, restau- rant, transportation, bakeries, garages, etc., which represent about 60% of its lending by amount. 2.12 LBDI's investment and financial position are sound. At the end of 1978, total assets reached $27.2 million. The loan portfolio outstanding was $12.8 million. Equity participation, comprising investments in nine compan- ies, was $0.7 million. The percentage of portfolio affected by arrears was 9.8% and the arrears represented only 4.1% of the outstanding portfolio. Provisions stood at about 3.3% of outstanding portfolio, covering about 80% of the arrears. As of December 1978, LBDI-s net resources available for commitment amounted to $11.0 million including $7.7 million in foreign exchange from IBRD, ADB and EIB. LBDI-s net profit after provisions exceeded $780,000 in 1978, an increase of 27% over 1977, and represented an attractive 18.9% return on share capital. A cash dividend of 7.5% was declared for 1978. As of December 1978, LBDI's debt equity ratio stood at 3.3:1. Finan- cial statements are presented in Annex IV, Tables 1 and 2. 2.13 As of March 1, 1980 less than half of IBRD's third line of credit to LBDI, extended in September 1976, has been committed. This slow rate of commitments is due to the slackening economic activity in Liberia and to the Bank's previous policy of disbursing hard currencies for a project in which the foreign exchange risk is borne entirely by the final borrowers. With the new disbursement procedure for DFCs, half in dollars, half in other currencies, commitments are expected to increase more rapidly. D. Prospects 2.14 So far, SMEs have had limited access to credit in Liberia. Com- mercial banks have been reluctant to lend to SMEs because they consider them as poor credit risks. Although LBDI has made genuine efforts to help small- and medium-scale entrepreneurs, these efforts have been hampered by the nature of its resources, specifically the cost and foreign exchange risk of its borrowings. The proposed project should enable LBDI, while using up its third line of credit, to pursue a more aggressive promotion of SMEs by taking advantage of foreign exchange risk-free resources. As for the commercial banks, they should be more amenable than in the past to provide term financing  - 15 - to SMEs since the preparation of credit dossiers by NIC will limit their administrative burden and since the Guarantee Scheme will significantly limit the credit risks. Indeed, they have already expressed, in writing, interest in participating in the new SME financing scheme. III. THE PROJECT A. Origin and Objectives 3.01 In 1978, at the request of the Government of Liberia, the Bank agreed to explore the possibilities of establishing a technical and financial assistance program for small- and medium-scale enterprises. A Bank industrial sector mission was followed by consultants' studies, including a comprehensive survey of SMEs in Liberia conducted by a Liberian team from the University of Monrovia and financed by the Bank. The proposed project is the result of this preparatory work, and its credit and technical assistance components address several major constraints on small business development: foreign exchange risk, inadequate collateral, and limited technical and management capacity. The project would complement LBDI's Bank-supported assistance to medium- and large-industrial projects by making available to LBDI and other financial intermediaries financial and technical resources which are suited to a clientele of smaller businesses. 3.02 Objectives. The project has two primary objectives: first, to develop an appropriate institution that would provide the necessary assistance to entrepreneurs in planning and managing their investments; second, to encourage local financial institutions to increase their support of local businesses. The project would thus support the Government's efforts to broaden the industrial base and increase local participation and employment in industrial activities in Liberia. B. Project Description 3.03 To achieve the above objectives, the project would consist in the provision of term resources for the financing of small- and medium-scale enterprises and in the delivery of technical assistance to NIC to build up its capability in providing assistance to small- and medium-scale businesses. The proposed project would be supported by a US$4.0 million IDA credit to provide for: (a) Credit for small-scale enterprises (US$1.0 million) and medium-scale enterprises (US$2.4 million); and (b) Technical assistance to the Small- and Medium-Scale Enterprise Department of NIC (US$0.6 million). Enterprises benefitting from the project will be wholly Liberian owned. The project would be implemented over a three-year period.  - 16 - The Credit Component 3.04 The project's credit component amounting to US$3.4 million would be onlent by the Government to the banking system through the Central Bank (NBL). Eligible banks would be LBDI, NHSB, ACDB and the commercial banks. The variety of financial institutions involved, some having branches outside of Monrovia, would ensure a broad sectoral and geographic distribution of the loans. All projects in the secondary and tertiary sector except trade would be eligible for financing. Typical sectors would include wood and metal working, food processing, building materials, tailoring, road transportation, repair and maintenance activities. Project promotion and follow up would normally be provided by NIC which would also assist them in bookkeeping, 4 general management and appropriate solutions to specific technical problems. However, NIC sponsorship would not be mandatory and participating banks would be able to promote their own projects provided these projects are financially and economically sound, and meet the proposed eligibility criteria. (a) Small-Scale Enterprises Component. Out of the proceeds of the IDA line of credit, $1.0 million would provide medium- and long-term financing for fixed investment and permanent working capital for small-scale enterprises. For the purpose of this project, small- scale enterprises would be defined as wholly Liberian-owned enter- prises with maximum fixed assets of $50,000 at the time of loan application and project investment costs of up to $50,000. There would be no lower limit to the size of the projects. Participating banks would finance up to 90% of the cost of these projects. Although the foreign exchange cost of these projects is estimated at 70%, IDA would refinance 100% of loans in this category. (b) Medium-Scale Enterprises Component. From the line of credit, $2.4 million would finance capital investments and permanent working capital of medium-scale enterprises, defined as wholly Liberian- owned enterprises with maximum fixed assets of $100,000 at the time of loan application and project investment costs of up to $100,000. Participating banks would finance up to 80% of the cost of these projects, slightly more than the foreign exchange cost estimated at 70%. IDA would refinance 100% of loans in this category. 3.05 Credit Guarantee. Small- and medium-scale enterprises which qualify under the National Bank of Liberia Credit Guarantee Scheme, i.e., individual Liberians or wholly Liberian-owned enterprises requiring loans below $100,000 would be eligible for the guarantee. This guarantee presently covers 66.23% of the amount of the loan in default, but the Government has agreed to increase this percentage to a maximum of 80% to adequately compensate the lenders for the lack of collateral which is a major obstacle to access to credit for small enterprises. This increase would be a condition of effectiveness of the proposed project. The guarantee would be granted by the Central Bank for a fee of 1% per annum.  - 17 - 3.06 On-lending terms and conditions. (a) Interest Rate. The credit component would be on-lent by the Govern- ment to the Central Bank at 8% per annum. The Central Bank would on- lend these funds to the participating financial institutions (commercial banks, LBDI, NHSB and ACDB) at a rate of 9% plus 1% for the loans eligible to the Guarantee Scheme. The 1% margin would help compensate the Central Bank for its additional administrative expenses. The participating financial institutions would on-lend these funds to the final borrowers at an interest rate of 13.5% per annum including the fee for guarantee. The participating banks would therefore receive a margin of 3.5% on guaranteed loans and of 4.5% on non guaranteed loans which is adequate. Since the Central Bank would not make any allocation of funds to the individual participating banks prior to subloan disbursement, and in order to encourage the participation of the commercial banks to the new scheme, there would be no commitment fee charged by the Central Bank. Participating banks, however, would charge their commitment fee to the final borrowers, which is generally 1.5%. In addition NIC or the banks promoting the projects would charge a one time 1.5% service charge. The adequacy of the proposed interest rate would be reviewed by the Government and IDA from time to time. (b) Terms. The terms of the subloans to the final borrowers would be flexible with a maximum of 10 years and a minimum of 30 months, including a grace period of up to 24 months. Terms are expected to average 7 years with 18 months of grace. The amortization schedules from the commercial banks to the Central Bank would be determined on the aggregate repayment schedule of subloans approved by each commercial bank. The funds repaid to the Central Bank on the initial loans made under the IDA line of credit would be repaid to the Government over 14 years including a four-year grace period. (c) Foreign Exchange Risk. The foreign exchange risk would be borne by the Government without a fee. (d) Free Limit. The first five projects in each category, small and medium, would be submitted to IDA for approval. Subsequently, there would be an individual free limit of $40,000 and an aggregate free limit of $500,000 for small projects and an individual free limit of $70,000 and an aggregate free limit of $1.2 million for medium-scale projects. These amounts will be reviewed from time to time by IDA. (e) The analysis of all subprojects would include the investment cost per job, the internal financial rate of return, and for the medium-scale projects, the economic rate of return. During negotiations, it was agreed that all subprojects financed under the line of credit would: (i) encourage employment creation; and (b) give due consideration to the use of appropriate technology.  - 18 - 3.07 Conditions. The above conditions would be specified in a Project Agreement to be signed between IDA and the Central Bank. The signing of a subsidiary loan agreement between the Central Bank and the Government specify- ing the on-lending conditions would be a condition of effectiveness of the line of credit. In addition the Government would issue through the media a policy statement describing the new program of technical and financial assist- ance to SMEs. A draft of this statement has been reviewed and agreed to by IDA. The Central Bank would issue a circular satisfactory to IDA to the participating financial institutions detailing the on-lending conditions of the IDA line of credit. Finally the Central Bank would appoint a qualified professional to manage the line of credit. This professional participated in the negotiations of the proposed project. 3.08 Subproject Financing Plan. The financing plan expected for the subprojects financed under the line of credit is presented below: Subproject Financing Plan Small-Scale Medium-Scale Enterprises Enterprises US$ 000 % US$ 000 % Average total investment 27.8 100 87.5 100 Average bank financing 25.0 90 70.0 80 Owners' contribution 2.8 10 17.5 20 Number of projects 40 34 Total cost of projects 1,100.0 100 2,975.0 100 of which IDA 1,000.0 90 2,380.0 80 Technical Assistance Component 3.09 This component would focus primarily on strengthening the capacity of the SME Department of NIC to offer effective promotion and advisory services to small- and medium-scale enterprises. Government's selection of an independent agency to perform these functions is predicated on its desire to foster widespread participation of financial institutions in SME development, and on the fact that the necessary level of assistance would constitute an inordinate drain on banks' resources were they individually to assume this responsibility. The technical assistance would be delivered through a project promotion and evaluation unit located in Monrovia within NIC's SME Department and through extension services which would have a wider geographic coverage. Because of PfP's experience with SMEs in Liberia, NIC has selected, with IDA's agreement, PfP to implement these extension services. An outline of PfP's proposal appears in Annex VI. PfP's contract would include the recruitment training and field organization of six to eight extension officers, the training of NIC's SME Department's new staff, the organization of workshops for small entrepreneurs and the development of a monitoring system for the NIC  - 19 - field program. The project cost would include the capital and operating budget of the Department for a period of three years, estimated at US$1.3 million net of taxes. Out of the proceeds of the IDA line of credit, US$0.6 million would be passed to NIC by the Government as a grant to finance: (i) Technical assistance for the NIC's SME Department Project Promotion and Preparation Unit (4 man years) $310,000 (ii) Recruitment and training costs for extension workers and for extension services (see Annex VI) $180,000 (iii) Vehicles and equipment $90,000 (iv) Short-term consultants. (a) Two man-months to $40,000 complete the revision of the Investment Code in view of allowing SMEs to benefit from investment incentives, (b) three man-months to follow up on the survey of SMEs, and (c) one man-month contingency. Total: US$620,000 Remaining costs would be met by Government through annual budgeting appropria- tions to NIC. C. Project Costs and Financing 3.10 Total project cost is estimated at $5.0 million net-of-taxes of which $3.5 million would be foreign cost. In addition, taxes would be US$0.5 million. The proposed IDA credit of $4.0 million would thus represent 73% of total project cost and would meet 100% of total foreign cost plus $0.5 million of local expenditure (10% of project cost net of taxes) in line with IDA-s policy of promoting SME entrepreneurship. Project costs and the proposed financing plan are summarized in the following tables:  - 20 - LIBERIA SME Project Project Cost Estimates ($'000) Local Foreign Total (70%) Investments Small-scale enterprises 330 770 1,100 Medium-scale enterprises 900 2,100 3,000 Sub-total 1,230 2,870 4,100 Technical Assistance Advisory Services (Extension Services) 47 144 191 Advisors (Project Promotion and 78 248 326 Preparation) Short-term consultants 9 32 41 Vehicles and Equipment 44 72 116 Operating Costs 581 107 688 Sub-total 759 603 1,362 Total Cost including Taxes 1,989 3,473 5,462 Taxes 474 - 474 TOTAL COST NET OF TAXES 1,515 3,473 4,988  - 21 - LIBERIA SME Project Proposed Project Financing Plan (US$'000) IDA Entrepreneurs Government/NIC Total Investments Small-scale Enterprises 1,000 100 - 1,100 Medium-scale Enterprises 2,380 620 - 3,000 Sub-total 3,380 720 - 4,100 Technical Assistance Advisory Services 180 - 11 191 (Extension Services) Advisors (Project 310 - 16 326 Promotion and Preparation) Short-term consultants 40 - 1 41 Vehicles and Equipment 90 - 26 116 Operating Costs - - 688 688 Sub-total 620 - 742 1,362 TOTAL 4.000 720 742 5,462  - 22 - 3.11 Procurement. The purchase of equipment and goods under the project is not suitable for international competitive bidding given the nature and small size of subprojects to be financed and goods and services to be pro- cured. Participating institutions would follow usual DFC procurement proce- dures, which are adequate, to ensure that goods and services are suitable and reasonably priced. The amount of equipment and vehicles to be purchased by NIC would be too small to attract international bidders and would be conducted through normal Government procedures i.e. quotations which are satisfactory. 3.12 Consultants. IDA would approve the qualifications, terms and conditions of advisors and short-term consultants financed under the project. Provision has been made to finance four man years of advisors to NIC's SME Department and six man-months of short-term consultants to complete studies on the investment code and the SME sector. The average expatriate man-month cost for the advisors (including salary, costs, fees, international travel and subsistence) is expected to be about $6,700. As for the studies, the average expatriate man-month cost (including salary, costs, fees, interna- tional travel and subsistence) is expected to be about $10,000 and the average local man-month cost is about $3,300. 3.13 Disbursement. Disbursements would be made on the following basis: (a) Subloans to: (i) small-scale enterprises: 100% of participating banks' subloans up to a maximum of 90% of the investment amount; (ii) medium-scale enterprises 100% of participating banks' subloans up to a maximum of 80% of total investment amounts; (b) Technical assistance: 100% of advisory services costs and 80% (representing foreign exchange component) of total costs of vehicles and equipment. 3.14 All funds under the credit component of the project would be disbursed through the Central Bank which would follow regular DFC procedures. Disbursements would be fully documented. However, after a certain number of claims have been submitted, the Association will review its disbursement procedures and could allow the Central Bank to claim reimbursement against a certified statement of expenditure, the supporting documentation being retained by the Central Bank for inspection by Project supervision missions. 3.15 Accounting, Audit and Subproject Data. The Central Bank and NIC would prepare a quarterly report on their activities which would be sent to IDA. There would be no need to require auditing from participating banks since this is a normal requirement of the Central Bank. The Central Bank would prepare and send regularly to IDA detailed subproject data reporting questionnaires in the form recently introduced for all Bank-Group financed DFCs. Assurances were obtained at negotiations that the conditions described in this paragraph would be observed.  - 23 - IV. PROJECT IMPLEMENTATION A. Subloan Approval Procedures 4.01 The credit requests prepared with or without NIC's help will be presented by the promoter to the bank of his choice. But, as necessary, NIC would help promoters locate the most appropriate source of financing for their projects. Credit approval would be the responsibility of the accepting bank following their own internal procedures, although this approval will be conditional on Central Bank granting its guarantee and on refinancing approval by IDA. In practice, the accepting banks would forward the credit dossiers to the Central Bank for guarantee. In order to speed up the implementation of the projects, this procedure would be on a no objection basis within 15 days. The Central Bank would ensure that the eligibility criteria established under the project (citizenship, size of assets and loans, ...) are fulfilled in the proposals. The Central Bank will then forward the dossiers to IDA for approval and would be responsible for informing the banks of this approval. In case of queries on the dossiers, IDA will seek clarification directly with NIC, or the Central Bank as appropriate. Disbursement requests will be screened by the Central Bank, to ensure that the documentation is complete and acceptable to IDA. Actual IDA disbursements will be made through the Central Bank. The Central Bank would designate a qualified professional to manage the line of credit. This professional took part in the negotiations of the proposed project. B. Technical Assistance 4.02 The head of the Project Promotion and Preparation Unit will be assisted by two professionals. These three professionals will together cover the following disciplines: engineering, financial analysis, economics and marketing. The financial analyst and the engineer will appraise the projects and prepare the credit applications. They will also be expected to provide technical and financial advice to the entrepreneurs. The economist/marketing specialist will study the marketing aspects of the projects, identify sub- sectors offering a good potential for SMEs and provide the economic analysis of medium-scale projects. Our assessment confirms the view of NIC and the Government, that local expertise is not adequate for the engineer and the economist/marketing positions, and that these positions should therefore be filled by internationally recruited experts who will have Liberian counter- parts. The professional staff of the division will undergo short-term train- ing with PfP in Yekepa where, as mentioned earlier, PfP operates a comprehen- sive technical assistance program for SMEs. The purpose of this training will be to familiarize NIC's new staff with the SME environment in Liberia and with methods to be used in assisting entrepreneurs. 4.03 Extension Services. In addition, an extension service unit would be established under the authority of the manager of the SME Department. The main functions of this unit will be to bring technical and managerial assis- tance to small-scale enterprises in the Monrovia area (Montserrado County) and Lofa County. Extension workers would be trained in identifying projects  - 24 - and preparing credit requests. These requests would be presented to the local branches of financial institutions where they exist or they would be sent to NIC in Monrovia for submission to banks. The extension services would also help organize artisans and small enterprises into groups or cooperatives in order to improve their technical and business skills and to strengthen their input purchasing and contract tendering positions. The unit's staff is expected to spend most of their time in the field. Because of its experience in Yekepa, PfP has been chosen by NIC, with the agreement of the Bank, to finalize and implement this program and will submit to IDA a detailed plan of action before negotiations. This plan will include recruit- ment training, field organization and supervision of six extension workers who will be based in Monrovia and in Montserrado and Lofa counties (see Annex VI). 4.04 Assistance to Liberian Contractors. As mentioned earlier, during the preparation of the proposed project, a study was made by UNIDO on the Liberian local construction industry. The preliminary conclusions of this study indicate that the main problem of the local construction industry is a lack of construction management expertise in addition to financial con- straints. To assist this sector, two sets of measures have been envisaged in the proposed project. First, local contractors will be eligible for bank financing on the same footing as SMEs under the credit scheme. Second, an expert to be financed under the recently approved Bank Feeder Road Project, to develop appraisal criteria for local contractors and to provide them with managerial assistance will be appointed; located in LBDI, he will nevertheless work in close cooperation with NIC. 4.05 Project Preparation Facility. In order to speed up the implementa- tion of the technical assistance component of this project, the Government has requested and IDA has agreed to the use of the Project Preparation Facility (PPF) to cover between July 1980 and project effectiveness projected in January 1981: (1) the recruitment costs and the salaries of the two interna- tionally recruited experts for the SME Department; (2) the initial implementa- tion costs of the extension service by PfP; and (3) vehicles and equipment. Total costs to be financed under the PPF would be approximately $200,000. V. BENEFITS AND RISKS 5.01 By providing through NIC and the banks the necessary technical and financial assistance to SMEs, the project would help increase participa- tion of local entrepreneurs in the industrial sector, reduce Liberia's depen- dence on the enclave sector and promote employment generation. It is expected that, over three years, the proposed project would assist about 40 small-scale enterprises with individual loans averaging $25,000, the bulk of these loans being in the $5,000 to $10,000 range, and, about 34 medium-scale enterprises with individual loans averaging $70,000. The project would help generate over $4.2 million of investments which in turn would create around 500 jobs at an average cost of about $8,000, and below $5,000 for the small-scale enterprises.  - 25 - These figures are much lower than the present average cost per job in Liberia. Probably the most important long-term project benefits, but also those with which the greatest risks are the building up of NIC-s SME department into an effective promotion agency, and the expansion of commercial bank participation in the financing of SMEs. The development of NIC would be a complex task and for that reason there is the possibility that NIC may not develop as quickly as anticipated; nevertheless the strong commitment evident on the part of the Government to the project would be invaluable in overcoming possible difficul- ties. Assurances have been given by the Government and the Chairman of NIC that the SME Department would enjoy the necessary autonomy to fulfill its operational responsibilities. The Government has invited the commercial banks to indicate in writing their interest in the scheme and they have declared that they were willing to participate. Nevertheless, their actual participa- tion in implementation will depend to a great extent upon the performance of NIC and the quality of the dossiers produced and the actual demand for loans which may vary depending on macro-economic conditions. VI. RECOMMENDATIONS 6.01 An IDA credit of US$4.0 million to the Republic of Liberia is recommended for this project. The Government would pass on to NIC as a grant US$0.6 million to finance technical assistance. The remaining US$3.4 million would be onlent by the Government to the National Bank of Liberia at an interest of 8%. The National Bank of Liberia would relend these funds to participating financial institutions at an interest rate of 9% plus 1% for the loans eligible to the Guarantee Scheme. (1) During negotiations, assurances have been received on the following points: (a) onlending terms and conditions (para. 3.06); (b) recruitment by NIC of professionals acceptable to IDA, for the new SME Department (paras. 3.09, 3.12); (c) Government to provide its share of the technical assistance costs (para. 3.09); (d) Government to keep IDA informed of the revision of the Investment Code (para. 3.09); (e) subloan approval procedures (para. 4.01). In addition the operational procedures and the organization chart of NIC-s SME Department have been agreed to by IDA (paras. 3.17, 3.18). (2) The following would be conditions of effectiveness:  - 26 - (a) Issuance by the Government of a policy statement detailing the technical and financial assistance program for SMEs (para. 3.07); (b) signing of a subsidiary loan agreement between the Central Bank and the Government (para. 3.07); (3) The following would be conditions of disbursement: (a) Issuance by the National Bank of Liberia of a Circular to the participating financial institutions, specifying eligibility criteria and onlending conditions for the line of credit (para. 3.07); (b) Amendment to the Guarantee Scheme (para. 3.05). With the above conditions fulfilled the proposed project would be suitable for a credit of US$4.0 million.  LIBERIA GROSS DOMESTIC PRODUCT BY SECTORAL ORIGIN (In $ million curretnt prices) 1970 1971 1972 1973 1974 1975 1976 1977 1978& .. Agr-culture 40.4 40.2 38.2 57.4 73.5 62.6 78.2 96.2 113.7 ribber 23.0 24.0 24.1 37.1 (47.9) (29.6) (39.5) (40.2) (42.0) Forestry 4.1 6.4 6.4 6.0 ( 6.4) (13.8) (18.2) (25.0) (35.0) Othcr 13.3 9.8 7.7 14.3 (19.2) (19.2) (20.5) (31.0) (36.7) 2. Mining 120.3 124.8 142.1 129.8 159.0 231.8 182.6 144.4 117.6 Iron Ore 109.3 113.7 117.6 110.9 (147.5) (224.7) (176.3) (136.1) (105.0) Other 11.0 11.1 12.4 18.9 ( 11.5) ( 7.1) ( 6.3) (8.3) ( 12.6) 3. Manufacturing 15.2 17.1 18.0 22.6 34.6 36.3 45.2 50.2 51.2 4. Construction 16.2 14.4 17.6 15.0 21.4 28.8 37.9 44.1 * 5. ^'olesale 6 Retail Trade, H{otels and Restaurants 42.5 45.6 49.4 35.0 43.4 49.2 54.5 8 .9 * 6. Electricity and Water 5.5 5.8 7.1 6.1 7.2 8.5 10.4 7.0 7.8 7. Treisport, Storage and CommunicatiOn 31.8 34.7 36,3 32.5 32.5 40.7 45.1 53.7 * 8. Fi-a.cial institutions, Realestate ,& Business Services 23.7 24.7 27.3 33.1 35.4 40.2 45.5 49.3 * 9. Cornunity, Soctal & Personal Services 12.4 11.6 13.0 16.7 21.8 21.9 24.4 26.9 * 10. Pra,ducers of C.ovnrnwent Services 23.0 27.0 26.7 31.2 36.0 43.8 51.5 70.6 82.0 L;. Imputed Batik Charges - 3.4 - 3.4 - 3.5 - 4.2 - 5.1 - 4.7 - 6.7 - 3.8 * 12. Monetary GDP(at factor cost) 323.1 342.5 372.2 375.2 459.7 559.1 568.f 621.5 640.G 13. Traditional Economy 55.3 57.5 58.9 78.2 110.6 117.3 130.2 155.0 170.0 14. Total GDP (F.C.) 378.4 400.0 431.1 453.2 570.3 676.4 698.8 776.5 81n.0 '5. indirect taxes (net) 30.0 29.9 35.4 39.4 47.5 50.5 63.0 84.7 103.0 16. Total GDP (m.p.) 408.4 429.9 466.5 492.6 617.8 726.9 -(1.8 861.2 913.0 ?re !Minarv estimates MIT0E: The above estimates are based on a nev series of national accounts originated by a..iilable the Ministry of Planning and Economic Affairs recently end are therefore different * s No, a:ailable from those'reported in Report No. 1642a-LBR kFeb. 28, 1978) Source: Ministry of Planning & Economic Affairs  EMPLOYMENT IN LIBERIA BY MAJOR SECTORS 1977 AND 1978 1977 PercentagRL 1978 Percentage TOTAL EMPLOYMENT 408,250 100.0 417,046 - Agriculture 310,150 76.0 315,379 75.6 Montary Agriculture2/ 46,000 11.3 46,966 11.3 Non-Monetary Agriculture (Subsistence Farming)3/ 256,800 62.9 260,909 62.6 Forestry 5,000 1.2 5,105 1.2 Fishing 2,350 0.6 2,399 0.6 Industry 35,650 8.7 36,457 8.7 Mining 14,200 - 3.5 13,916 3.3 Construction 5,500 1.4 5,830 1.4 Manufacturing 6,200 1.5 6,510 1.6 Arts and Crafts 8,500 2.1 8,925 2.1 Electricity, Gas and Water 1,250 0.3 1,276 0.3 Services 62,450 15.3 65,210 15.6 Government, Public Services 25,500 6.3 27,285 6.5 Commerce 15,600 3.8 15,928 3.8 Transports 6,850 1.7 6,994 1.7 Business 1,400 0.3 1,429 0.3 Hotels and Restaurants 700 0.2 715 0.2 Community and Personal Services 8,400 2.1 8,576 2.1 Household Services 4,000 1.0 4,084 1.0 Note: The average annual growth rates of employment in the monetary, economy were 2.1%; in subsistence economy 1.62. H 1/ Percentages may not add to 100 because of rounding. 2/ Concessions and Liberian Commercial farming including small-scale commercial farming and public corporations. 3/ Subsistence Agriculture employment, with productivity at 45% of potential productivity. Source: Ministry of Planning and Economic Affairs.  LIBERIA - NATIONAL BANK OF LIBERIA Balance Sheets 1974-1978 ------------------------- (US$ Million) ------------------------------------ 1974 1975 1976 1977 1978 ASSETS 35.39 39.86 46.09 57.71 45.09 External Assets (net) 11.84 13.90. 13,56 26.40 13.00 External Assets (11.87) (13.93) 17.17 27.34 1Q.03 US currency (2.49) (0.95) (5.43) (4.97) (4.10) Balances with banks abroad (5.49) (7.50) (7.65) (18.33) (9.56) Holdings of SDR's (3.89) (3.39) (4.09) (4.04) (4.37) IMF Gold Tranche : (-) (2.09) - - _ External Liabilities 0.03 0.03 3.61 0.94 .5.03 Balances with Banks 2.69 3.90 4.65 3.72 3.01 GOL Securities 20.26 19.99 25.48 24.51 26.63 Advances _ 0.88 0.48 0.46 0.27 GOL () (-) - - Banks (H) (-) _ - Others (-) (0.88) (0.48) (0.46) (0.27) Other Assets 0.60 1.19 1.92 2.62 2.18 LIABILITIES 35.39 39.86 46.09 57.71 45.09 Paid-up Capital 5.00 5.00 5.08 5.34 5.34 General Reserve 0.01 0.32 _ - Liberian coins in circulation 8.80 8.41 8.90 9.87 10.68 Deposits 9.44 11,53 19.50 28.51 14.47 GOL (5.84) (6.81) (12.93) (19.85) (-7.64) Banks (3.17) (4.40) (6.09) (7.92) (18.84) Other (0.43) (0.32) (0.48) (0.74) (3.27) Allocation of SDRs 11.68 11.17 11.08 11.58 12.42 Other Liabilities 0.46 3.43 1.54 2.41 2.18 X Source: National Bank of Liberia  LIBERIA SME Project Commercial Banks' Aggregate Balance Sheet ($000's) 1974 1975 1976 1977 1978 1979 ASSETS (as of Sep. 30) Cash and balances with Central Banks and Local Banks 8,372 11,170 16,500 27,490 31,666 30,974 Balances with Banks Abroad 19,702 12,885 32,359 18,886 19,122 22,826 Credit 75,061 78,874 82,698 112,794 150,686 185,199 (G.O.L.) (3,789) (2,114) (884) (4,671) (9,413) (3,310) (Public Corp.) (339) (1,793) (684) (1,138) (11,334) (37,727) (Companies & Individuals) (69,988) (73,968) (75,676) (106,985) (129,932) (143,876)