Mexico - Third Small and Medium Industry Development Project

Documet af The World Bank FOR oMCIaAL USE ONLY Rept No. PZ-02- REPORT AND CO OF THE PRESIDENT OF TEE INTERNATIONAL BANK FOR RECON!STbuCTION ANDE EL TO THE EXECUTIVE DIRECTORS - ON A PROPOSED LOAN IN AN AMOUNT EQUIVALT TO US$175 MILLION TO NACIONAL FINACIERA, S.A. WIT THE GUARANTEE OF UNITMEXICA STATES FOR A THI SMALL AID MEDIUM-SCALE INDUSTR DEVELOPM PROJECT May 31, 1983 IV-omOhuargik istoin dm __ e wedbY eemboWinte e IWmo dm fiddd t okbm eemir dbe _ r W^d w& W B_  CURRENCY UNIT - PESO EX $) Since December 20, 1982,-Mexico has the following excbange rates: {i) a sliding controlled rate for priority imports, most exports and service payments on foreigni debt; this w set at 95 pesos per dollar on Deceuber 20 and was about 115 on May 20, 1983; and (ii) a free exchange rate for all other transactions; in recent days the free peso baa been trading around 148 per dollar. FISCAL YEAR January 1 to December 31 ACRONYMS ACT Index of Averag- Cost of Funds to Multipurpose Banks (Costo Porcentual Promedlo de Captacion) CONACYT National Council for Science and Technology (Consejo Nacional de Ciencla y Tecnologia) DGCP General Directorate for Training and Productivity (Direccion General de Capaecitacion y Productividad) FIDEIN Trust Fund for Industrial Estates (Fideicomiso de ConJautos, Parques y Ciudades Industriales) FOGAIN Trust Fund for Guarantees and Development of Medium and Small Tndustry (Fondo de Garantia y Fomento a la Industria Mediana y Pequena) F0MEX Trust Fund for Promotion of Exports of Manufactured Products (Fondo de Fomento a las Exportaciones de Productos Manufacturados) FOMIN National.Trust Fund for Industrial Development (Fondo Nacional de Fomento Industrial) FONEI Trust Fund for Industrial Equipment (Fondo para Equipamiento Industrial) IDB Iater-Auerican Development Bank (Banco Interamericano de Desarrollo) INFOTEC Technological Information Service (Servicio de Informacion Tecnologica) NAFINSA National Development Bank (Nacional Fiuanciera, S.A.) PAI Integrated Program of Assistance to Smal and Medium Industry (Prograna de Apoyo Integral a la Industria Mediana y Pequena) SHE National Employment Service (Servicio Nacional de Eupleo)  FOR OFICIAL USE ONLY MJCO THIRD SMALL AND MEDIUM-SCAIE INDUSTRY DEVELOPMENT PROJECT Loan and Project Sumary Borrower: aclaonal Financiera, S.A. (NAfINSA) Guarantor: United Nexican States Beneficiaries: NAFINSA In its own right and as trustee for Fondo de Garantla y Fomento a la Industria Mediana y Pequena (FOGAIN), Fondo Nacjoaal de Fomento Industrial (FOMIN), and Fideicomiso de Conjuntos, Parques y Ciudades Industriales (FIDEIN). Amoun US$175 million equivalent, including capitalized front-end fee. Terms: Fifteen years, including 3 years of grace, at the standard variable interest rate. Relending Terms: NAFINSA would channel about 89 percent of the loan" B proceeds in pesos to FOGAIN and FIDEIN at a variable interest rate linked to the ACF and which would allow them a spread of two percentage points on their on-lending to participating financial intermediaries or borrowers. NAFINSA would channel in pesos another 10 percent of the loan to FOMIN Which would repay the net amocnt recovered from divesting equity investments, plus 50 percent of any capital gains realized, and an agreed percentage of interest received on convertible loans. NAFINSA would bear the foreign exchange risk. Project Description: The proposed project would support Mexico's integrated program of assistance to small and medium industry by providing credit and technical assistance to enterprises for maintaining or expanding production and employment levels. FOGAIN would provide credit through financial intermediaries to finance fixed assets including equipment and common service facilities, and working capital requirements; FOMIN would make minority equity investments and loans convertible into equity, to help finance fixed investments and permanent working capital; FIDEIN would provide credit for inrfrastruc- ture works in industrial estates; NAFINSA and specialized institutions would provide technical assistance, including training. About 10,000 new jobs would be created and a further 20,000 - 30,000 jobs preserved in the 3,000 firms that are expected to be helped under the project. Mhis docunent has a resricted distrbuion and may be used by recpients only inte performan of Itir ofici duties. ts contents may not otherwise be dicked without World Bank authorization-  - ii - Project Risks: The project faces two risks. The first, institutional, is the disruption arising from large-scale personnel changes and administratsive reorganizations normal in the initial months of a new Administration in Mexico. Such changes have also affected the key project implementing agencies. This risk is being minimized through measures specified in an agreed Project Execution Document. The second risk is associated with credit demand for fixed capital, which is likely to remain slack in the short-run, but should pick up as the economy recovers. Also, up to half of loan funds would be used to finance incremental working capital. Thus, tle probability of loan funds remaining unutilized is low. Estimated Cost: Component Local Foreign Total US$ Millions Credit 210.6 90.8 301.4 Risk Capital 25.3 11.0 36.3 Industrial Parks 6.5 2.8 9.3 Technical Assistance 0.8 1.4 2.2 Project Cost 243.2 106.0 349.2 Front end fee - 0.4 0.4 Total Cost 243.2 106.4 349.6 F!.ancial Plan: Local Foreign Total US$ Millions Government 64.6 - 64.6 Bauk 68.6 106.4 175.0 Beneficiaries/ Intermediaries 110.0 - 110.0 Total 243.2 106.4 349.6 = Estimated Disbursements: Bank FY 1984 1985 1986 1987 ----US$ Millions - Annual 36.0 64.0 57.0 18.0 Cummulative 36.0 100.0 157.0 175.0 Rate of Return: Not applicable. Staff Appraisal Report: Report No. 4398-ME dated May 31, 1983.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA. S.A. WITH THE GUAR-ANTEE OF UNITED MEXICAN STATES FOR A EITRD SMALL AND MEDIUM-SCALE INDUSTRY DEVELOPMENT PROJECT 1.* 1 submit the following report and recommendation on a proposed loan to Nacional FinancLera, S.A. with the Guarantee of United Mexican States for the equivalent of USS175 million to help finance the Third Small and Medium- Scale Industry Development Project. The loan, which includes a capitalized front-end fee of 0.25 percent on the Bank loan, would be repaid over 15 years, including 3 years of grace, at the standard variable interest rate. Final beneficiaries would pay, on sub-loans made in pesos, variable interest rates adjusted quarterly to the average of the ACF (average cost of funds to multipurpose banks) for the three immediately preceding months, plus at least one percentage point. The margin for beneficiary trusts and financial intermediaries would vary between two and three and one-half percentage points. NAFINSA would carry the foreign exchange risk. PART I; THE ECONOMY1/ 2. The Bank's last economic report on Mexico, -Mexico: Development Strategy - Prospects and Problems" (3605-ME), was distributed to the Execu- tive Directors on August 31, 1981. Since then the Mexican economy has faced severe economic and financial strains. An economic mission to ondertake an in-depth analysis of the macro-economic developments and prospects for the Mexican economy visited Mexico in February 1983. The mission's preliminary findings have been incorporated in the discussion below and its full report is expected later in 1983. Country data sheets are attached as Annex I. Background 3. Mexicots GDP grew at an average rate of 6 percent a year in real terms between 1950 and 1980, yielding an increase of 3 percent a year in output per capita. This rate of expansion was somewhat better than the experience of other middle income LDCs. Agriculture grew at 3.5 perceut a year and industry grew at an average rate of 7.5 percent. The sustained and rapid industrialization resulted in the rise of the share of the industrial sector. A similar change took place in the structure of foreign trade, with manufactured products accounting for an increasing share of total exports until 1975. The last thirty years also witnessed the passage of Mexico from a rural to a largely urban society: in 1980, the fraction of total population living in urban areas was estimated at two-thirds, while it had been less than 30 percent in 1950. 4. A dynamic private sector was the main engine of growth in the Mexican economy even though the public sector continued to account for well over one-third of domestic capital formation until the mid-1970s. The public  2- sector's role in Mexico was seen both to set the pace and pattern of economic grovth and to help correct the effects of an uneven distribution of resources on the relative position of the poorer segments of the population and of the less favored regions of the country- The Government's success in this regard, however, was only partial. While the living standards of many Mexicans improved considerably, the income of the poor farmers and marginal urban dwellers lagged behind. Consequently, contrasts within the Mexican economy remain conspicuous. 5. In the early seventies, the Government sought to build up infra- structure, expand basic industries, stimulate agricultural output and imple- ment massive social programs. The difficulties it encountered in mobilizing resources simultaneously to attain all these aims led to excessive public sector deficits, while domestic supply rigidities caused a large part of the aggregate demand to spill over into imports. Efforts to redress financial imbalances by strengthening public revenues feln short of their goal and, in September 1976, the Government abandoned the fixed parity of the peso and imposed a strict stabilization program on the economy in the context of the Extended Facility arrangements with the IMP. The program has yielded positive results within a relatively short time, as described below. Economic Performance, 1976-1982 6. The last Administration, which took office in December 1976, saw the control of inflation and the improvement of the current account balance as its most urgent tasks. It succeeded in reducing the rate of increase of domestic prices by half between 1977 and 1978 while, at the same time, the current account deficit decreased by over 40 percent. After two years of limited growth, in 1978, the economy resumed its rapid growth. One of the major constraints on economic growth-the availability of foreigr exchange- had been greatly relaxed by the successful exploitation of Mexico's oil reserves; at the end of 1981 proven reserves were estimated at 72 billion barrels. Oil not only contributed directly to foreign exchange earnings and government revenue, but it also enabled the country to carry a much larger external debt. The additional resources enabled the purchase of raw materials and capital goods needed to sustain a high GDP growth, and allowed the Government to embark on an ambitious expenditure program. 7. Public expenditure grew 20 percent per year in real terms between 1979 and 1981. Revenues grew more slowly, thus causing the public sector deficit to rise rapidly: as a proportion of GDP, the deficit jumped to about 15 percent in 1981, compared to a ratio of around 7 percent in the preceding several years. Despite a high rate of mobilization of private savings into the financial system, the Government had to resort increasingly to foreign borrowing. Although public sector foreign indebtedness, as a percentage of GDP, had fallen from 31 percent in 1977 to 20 percent in 1980, it rebounded again to more than 30 percent in 1981. By 1980, the rapid rise in aggregate demand was again beginning to exert pressure on prices, and domestic inflation reached 26 percent. Since the nominal exchange rate had remained practically stable since 1977, the higher Mexican inflation resulted in an appreciation of the peso in real terms. By 1980 the competitive edge gained after the 1976 devaluation had been lost. This made non-oil exports progressively less attractive, while imports rose at over 30 percent per year in real terms. 8. On the positive side, the economic growth rate accelerated to over 8 percent during 1978-81, and resulted in an improvement of the labor  - 3 - market. Conditions were created aot only to absorb the new entrants into the labor force, but also to lower open unemployment, which is estimated to have fallen to 4-5 percent of the labor force in the modern sector. The Administration also strengthened its support to agriculture through subsidies, reversing the trend towards a worsening trade balance on basic foods, containing rural migration to some extent, and providing small farmers with access to more efficient production methods. Finally, a combination of fiscal incentives and administrative regulations had a positive effect on spatial decentralization, one of the major policy objectives of the Administration. 9. The Mexican economy witnessed a progressive deterioration in the course of 1981, and the Government's actions could be seen as responses to, instead of guiding, events. By 1981, the need to bring domestic inflation under control and to help restore the competitiveness of non-oil exports had become apparent. The Administration chose to follow a policy of gradual adjustment, and expected that the deceleration in the growth of demand, to be brought about through slowing the rise in public expenditures, would reduce inflation. With a continued favorable outlook for oil exports, no major problems were expected in the external sector, and a path of gradual adjustment to a rate of growth of 6-7 percent appeared sustainable in the long -un and was considered to be less costly in terms of inflation and unemrloyment than more drastic stabilization measures. Thus, the Administration decreed a 4 percent cut in its expenditures, broadened coverage of import licenses to about 80 percent of imports, tightened public procurement procedures, and allowed a more rapid depreciation of the peso. 10. Unfavorable external circumstances as well as the ineffectiveness of the policies adopted were at the root of the deteriorating economic conditions in 1981-82. Prospects for the world oil market worsened in the second half of 1981, and Mexico's actual o'l revenues, at US$14 billion, turned cut to be 25 percent below the budget estimate. Moreover, imports continued to increase. There was also a tightening of the international financial market, with a steep rise in interest rates, which greatly increased the debt servicing burden since the bulk of Mexico's external borrowing had been contracted at variable interest rates. By the end of 1981, the current account deficit reached $11.3 billion, or about 6 percent of GDP. Half of tne public sector's financing gap in 1981 was met through external funds, with net borrowing amounting to US$18 billion, half of which consisted of short term debt. The foreign exchange proceeds were required to sustain the reserve position of the Bank of Mexico as concern over economic management and the continued real appreciation of the peso in the course of the year led to substantial private capital outflows. 11. Although the budget approved for 1982 was moderate, showing virtually no real increase in expenditures, the belief that the oil market would remain 1weak and continuing doubts about financial discipline in the public sector fueled the expectation that the Government would not succeed in reducing the deficit and bringing down the rate of inflation. In fact, the general expectation was that inflation would worsen. Raising the minimum wage rate by 34 percent on January 1, 1982 and the award of a 24 percent wage increase to public employees in March (retroactive to February 18) did little to improve confidence in the management of the economy. In addition, foreign commercial lenders became progressively wary of extending new loans or rolling over the past ones as the country's financial and economic condition worsened. By early 1982 private capital outflows had reached such  -4- proportions that on February 18, 1982, the Bank of Mexico withdrew from the exchange market, allowing the peso to depreciata from Mex$27 to Mex$45 to the US dollar. 12. The Administration also announced an adjustment program following the devaluation. On April 19, 1932, a 17-point stabilization program was decreed, with further cuts in public expenditures, increases in prices of public goods and services, and a ceiling on domestic deficit financing. Nevertheless, public expenditures continued to rise faster than revenues; in fact, the public sector deficit for 1982 reached the unprecedented level of 18.5 percent of GDP. As confidence in the ability of the Administration to implement these measures continued to erode and further difficulties were experienced in obtaining external funds,there was a renewed outflow of capital. On August 5, the shortage of foreign exchange forced the Bank of Mexico to withdraw once again from the exchange market. Following this, major policy and institutional changes were introduced, the most salient being rigorous control of foreign exchange transactions, a dual exchange rate system (of Mex$50 and Mex$70 to the US dollar), nationalization of the domestic commercia.l banks, and the mandatory conversion into pesos of the US dollar accounts held in Mexico (the so-called Hex-dollar accounts) as they matured. The Government also requested the foreign commercial banks to roll over principal repayments on public debt falling due during the 90 days from August 23, 1982. 13. Thus, 1982 witnessed an abrupt halt to economic growth and a sharp rise in prices. Preliminary estimates show a slight decline, of 0.2 percent, in GDP and a 98.8 percent increase in consumer prices. Gross fixed capital formation, which had been growing in real terms at 25 to 30 percent during 1978-80 and some 15 percent in 1981, fell sharply, by almost 17 percent. At the same time, the fall in imports (by more than 40 percent), reflecting both the imposition of controls and the decline in demand, led to a substantial trade surplus of the order of US$6.5 billion, reducing the current account deficit to US$2.4 billion or about 1.3 percent of GDP. 14. On December 1, 1982, Lic. Miguel de la Madrid took office as the new President. On December 23, the IMF Board approved an Extended Fund Facility that would provide SDR 3.6 billion over three years to the Government of Mexico in support of a medium-term stabilization program. The main feature of the IMF agreement are summarized in Annex IV. In accordance with the program, the Administration of President Miguel de la Madrid has begun to carry out important ci[anges in domestic and external policies. These_ are briefly described below. Recent Stabilization Measures 15. A key objective of the IMF-supported stabilization program is to bring about a substantial improvement in fiscal performance in order to create the conditions for the resumption of sustained economic growth. The program calls for a reduction of the public sector deficit, from the equivalent of dbout 18.5 percent of GDP in 1982 to 8.5 percent in 1983, with further reductions in 1984 and 1985. Achievement of the above objective will require a major effort to reduce public sector expenditure and to increase revenues. Ihe alathorit:ies propose to hold down current expenditures by eliminating or reducing subsidies to both the private and public sectors, and by controlling the increase in the wage bill through a freeze on hiring and pursuit of a restrained wage policy.  -5- 16. Furthermore, the authorities have undertaken a review of public investment projects with a view to reducing expenditures in sectors which have in the recent past registered very large increases in capital formation, in particular the petroleum, electricity and industrial sectors. No new projects are to be started in these sectors, and priority will be given to completing existing projects that are already quite advanced and which have high rates of return. In line with this policy, the investment budget of PEMEX for 1983 has been drastically scaled down in real terms, but exploration and development expenditures are not expected to suffer. The size and distribution of PEMEX's investment program remain an important issue, due both to its claim on present scarce resources and to oil being a critical determinant of future resource availability. Investment in power is also being pared down through delaying construction of new generating plants. Overall, public investment expenditures are projected to decline in 1983, by nearly 3 percentage points, to about 8 percent of GDP. Recent organizational and proc-dural changes in programming and budgeting should help tighten control ove.- public expenditures and align them closer to the Government's objectives. A major institutional change introduced by the present Administration is the upgrading of the Office of the Comptroller General to a Federal Secretariat. 17. With regard to public sector revenues, the authorities are carrying out major adjustments in general taxation and public enterprise pricing policies. The authorities are widening the tax base through the elimination of special exemptions, and are adjusting taxation rates. The general rate of the value added tax has been raised from 10 percent to 15, and new rates of 6 and 20 percent have been introduced for certain previously exempted goods and luxury goods, respectively. There will be a 10 percent surtax during 1983 on personal income above five times the minimum wage and shareholders will now have to declare their holdings and include dividends received as part of their taxable income. 18. In regard to public enterprise pricing, the authorities have implemented major adjustments, with the objective of bringing them into line with domestic costs. Prices of petroleum products were increased by 20 to 70 percent in August 1982, followed by increases of 100 to 200 percent in December 1982, and further increases of 20 to 25 percent in March 1983. Electricity prices were increased by 50 percent in December 1982 and monthly adjustments are scheduled throughout 1983. The price of sugar more than doubled in November 1982, with further adjustments in December. Other public enterprise prices are scheduled to be adjusted in accordance with the policy objective stated above. 19. In the area of monetary and credit policy, the operations of the Bank of Mexico will be subject to limits consistent with the anti-inflation and balance of payments aims of the program. The domestic credit policy of the Bank of Mexico will reflect the aim of ensuring that the private sector receives an appropriate share of domestic financial savings. The funds available to the private sector will nonetheless be restricted by the limits on domestic credit growth and the projected 10 percent shrinkage in the real money base. Meanwhile, private sector demand for credit is expected to be strong despite a decline in output, since this will be more than offset by the need to finance debt service. Interest rates on deposits are being adjusted upward to helj. promote savings and discourage further capital outflows. The authorities have stated their intention to increase nominal deposit rates so as to make them positive in real terms. By end-March 1983,  - 6 - the interest paid on 90-day certificates of deposit and treasury bills had risen to over 80 percent (effective compounded yield) from about 40 percent in the first quarter of 1982. Controls over interest rates charged for loans are being relaxed. Credit subsidies will be reduced by relating the interest charges on preferential credits granted by the Government development banks to the average cost to the banks of loanable funds. 20. Exchange Rate Policy: On December 10, 1982 the Mexican author- ities revoked the generalized exchange control system that had prevailed since September and established a new exchanje system that included a controlled exchange rate and a generalized free market. The new system became operative on December 20, with the exchange rate in the controlled market initially set at Mex$95 - US$1, a depreciation of some 35 percent in relation to the previously prevailing ordinary rate of Mex$70 per US dollar. Authorized imports and exports of most goods and debt related transactions are ex-pected to take place through this market. The free market opened at a rate of Mex$150 - US$1 and has stayed close to that level for some time. The authorities have emphasized the temporary nature of this arrangement and expect both rates to converge, as the controlled rate is adjusted daily. So far the adjustment of the controlled rate has been at an annual rate of about 50 percent and will be modified as required in the light of changes in the differential between the rates of inflation expected in Mexico and its main trading partners. The controlled rate represents a substantial real devaluation of the peso (relative to 1978 when exports were rising), thus compensating in part for the anti-export bias implicit in the protection system. In addition to these two exchange markets, the Bank of Mexico will provide forward coverage in foreign exchange for the repayment of private sector foreign debt obligations outstanding. 21. Trade Policies: The Administration recognizes that the generation of a substantial trade surplus will be essential in managing the country's external payments position. This will require policies to stimulate non-petroleum exports combined with temporary measures to contain imports. These actians should be consistent with longer-run objectives of reducing excessive dependence on petroleum exports and raising domestic productivity and efficiency. The principal components of this comprehensive trade strategy include: pursuit of a flexible exchange rate that will help ensure the profitability of export and import-competing sectors; a reorganization of the protective system; progress in negotiations on bilateral and multilateral trade arrangements; judicious use of export incentives and promotional mechanisms; and setting up and/or strengthening of institutions that will implement and monitor particular policies. 22. External Debt Management: A central objective of the adjustment effort is to lower Mexico's reliance on external financing over the next few years, and thereby contribute to an easing of the debt servicing problems that Mexico has experienced in the recent past. Thus, the authorities are in the process of completing the formalities for restructuring Mexican debt. The restructuring exercise applies to nearly $20 billion in public debt, consolidating short-term public debt into medium and long-term facilities, and rescheduling principal payments on medium and long-term public debt due to the commercial banks during the period August 23, 1982 - December 31, 1984. The restructuring exercise includes an understanding that the international banks will maintain their exposure to the Mexican banks that are now nationalized. At the same time, it provides a mechanism that will eliminate 1982 private sector interest arrears and, in due course, facilitate  -7- payment of principal on such debt. Based on the terms negotiated with the commercial banks and on the projected net inflows, the actual ratio of debt service to exports of goods and services is expected to decrease sharply in 1983 and 1984. Thereafter, it would increase to over 60 percent, as repayments on the pre-1982 debt commence, and would stay around 60-65 percent through 1989 (as compared to the peak of 66.2 percent reached in 1979); amortization payments on new borrowing and on the rescheduled bebt are due to begin in 1986 and 1987, respectively. External debt as a proportion of GDP is expected to fall from 34 percent in 1982 to about 30 percent in 1985, and 25 percent in 1987.. 23. Balance of Payments Outlook and Financing Requirements for 1983: The economic program requires a c3ntinued surplus in the trade balance in order to provide for the US$12 billion in contractual interest payments, while maintaining a relatively small current account deficit (around US$2.0 bill:.on in 1983 as against US$11.4 billion in 1981 and US$2.4 billion in 1982). Exports are projected to be around US$23 billion in 1983, from US$21 billion in 1982. Revenues from petroleum exports are projected to stay at the previous year's level despite the expected increase in volume from an average of about 1.4 million barrels per day in 1982 to 1.5 million in 198a with the average price of the export mix between light and heavy crude oil dropping to an estimated US$26 per barrel. Other exports are expected to increase by US$1.9 billion in 1983 to a total of US$7.6 billion at a result of the more favorable exchange rate and the expected recovery in the US (Mexico's primary trade partner). Imports are expected to remain around the low levels of 1982 (US$14.9 billion) reflecting the stagnation of domestic output and investment. 24. To ensure adequate financing of the adjustment program, it was generally agreed that Mexico needed US$8.3 billion through 1983 with the IMF providing US$1.3 billion. Of the rest, US$2 billion would be forthcoming from other official sources, complementing the US$5 billion committed by the banking community early in March 1983. Prospects 25. It is particularly difficult at this stage to predict the course the Mexican economy will follow in the next few years. Even with the good start made by the Government in 1983 in taking the required stabilization measures, it is clear that the years ahead will be a period of austerity and sacrifices on the part of the Mexican population. The Government faces the challenge of maintaining the required policies over a difficult period. The factor which helped to postpone difficult policy decisions in the past - abundant foreign exchange - cannot be expected to provide a cushion in the future. Although the Mexican economy can count on substantial natural resources, an educated and skilled labor force, and well-developed institutions, the prospects of growth in the short and medium-term will depend basically on: (i) the deflationary effects of the proposed sharp reduction in the budget deficit; (ii) the constraint on resource availability imposed by the need to service the large external aebt; and (iii) the specific measures the Government adopts to stimulate producrion of agricultural and manufacturing products. Under generally favorable conditions, a reduction of the budget deficit to 8.5 percent of GDP - the target under the IMF agreement - will imply a decline of about 2-3 percent in national output in 1983. This should, however, considerably lessen the inflationary pressures in the economy. Once a reasonable budget balance has been established - and it may take some time -- the economic health of the economy should be restored, creating conditions favorable to steady growth.  26. To avoid another financial crisis in a few years, there is need to ensure that the country's debt servicing capacity improves quickly. A critical element in this is the growth of the non-oil economy, specifically agriculture and industry. Although a reduction in the budget deficit is likely to impose limits on the overall growth of the economy, appropriate incentive policies are needed to stimulate the growth of agriculture and manufacturing, which are largely private sector activities. 27. Restoration of a high and sustained rate of growth will provide the strongest weapon to tackle the long-term problems mentioned above. At present, Mexico is going through a period of adjustment, which dictates lower real growth and employment generation in the next few years. However, this will afford an opportunity to reappraise many of the past years' goals and policy instruments, and provide a sounder basis for Mexico's develop- ment. The new Administration has already shown its ability to take difficult and politically unpopular decisions. 28. The external debt prcblems have been described in para. 22. Debt service on Bank loans amounted to about 3 percent of public debt service in 1981; this ratio is projected to remain about the same during the mid-1980s. The Bank currently holds about 6 percent of Mexico's total medium and long-term public debt, and this ratio is not likely to change significantly aver the next few years. In view of the medium and long-term potential of the economy and provided that the new Administration continues to address forcefully che challenges outlined above, Mexico is considered creditworthy for IBRD borrowing. In view of the country's estimated foreign exchange needs over the next few years, financing of ongoing and new projects should include some local costs. PART II - BANK GROUP OPERATIONS IN MEXIC02/ Bank Operations 29. As of March 31, 1983, Mexico had received 78 loans from the Bank amounting to US$5,749 million, net of cancellations and terminations; of these, 50 loans totalling US$2,724.6 million were fully disbursed. The Bank held US$4,795.8 million, of which US$2,085.0 million had not yet been disbursed. Some 46 percent of Bank lending has been for agriculture and rural development, 17 percent for industry, 12 percent for power, and 14 percent for transportation; the remaining 11 percent has been for water supply, tourism, urban development, vocational training and pollution control projects. Annex II contains a summary statement of Bank loans as of March 31, 1983, and notes on the execution of ongoing projects. 30. Of the US$5.7 billion total lending, about US$2.6 billion was for establishing or strengthening institutions for channelling credit to areas where credit supply was deficient or von-existent, and setting up in the 2/ This section is substantially unchanged from the President's Report for the Third Medium-Size Cities and Sinaloa Water Project (Report No. P-3532-ME of April 21, 1983), and identical to Part II of the President's Report for the proposed Export Development Project (except para. 35), which is being distributed at the same time.  - 9 - commercial banking system the ability to carry out project-related appraisal of investments in agriculture, industry and tourism. These credit programs have facilitated lending to low-income farmers and small- and mediuar-scale industrial and tourism enterprises based on productive investment plansn rather than credit granted oa the basis of collateral. 31. TE- Government arranged adequate budget financing in the years 1978 to 1981, which significantly improved project implementation. Government and Bank officials met periods-ally to review project implementation, and greater atteution was focused in Mexico on project monitoring. As a result of these measures, most of the Bank-assisted projects were being implemented satisfactorily until mid-1982 and disbursements rose from US$91 million in FY78 to US$448 million in FY82. However, the present financial crisis is again causing delays in the provision of counterpart funds, and proposals for special actions are under preparation to help the Government ease the counterpart fundilng constraints on the implementation of projects. IFC Operations 32. As of March 31, 1983, IFC had made investment commitments in 23 companies in Mexico, for a total of US$551.2 million, of which US$411.6 million had been sold, repaid or cancelled. A summary statement of IFC investments is presented in Annex II. IFC has been working together with the Bank in preparing proposals to establish a facility which would complement the proposed Bank loan for the Export Development Project. The IFC loan facility would provide foreign exchange financing to private sector companies for the importation of machinery, equipment and spare parts required for production of exportable products, for efficient import substitution anI for improvements in the utilization of their existing productive capacity. IFC is aiming at a US$75-100 million facility (including funds mobilized from foreign commercial banks) which would provide financing for fixed investments of a larger size than those assisted under the proposed Bank loan for an Export Development Project. Bank Stratey 33. The main objectives of Bank lending in Mexico in the past six years have been to: (a) support poLicies and programs leading to a wider distribution of the benefits of economic growth; (b) help finance projects that, directly or indirectly, contribute significantly to output and employment; (c) help reduce Mexico's urban-regicnal imbalances; and (d) help free bottlenecks which prevent rapid growth. Under the present circumstances, the Bank also intends to support the Government's stabilization program, in close cooperation with the IMF, through quick- disbursing operations and assistance to increase non-oil export earnings, and to participate in an intensive macroeconomic and sector policy dialogue to support design and implementation of appropriate development policies. 34. Because of the difficult structural problems of agriculture and the sector's crucial importance for the one-third of the nation's population living in the rural areas, the Bank has made agriculture the leading sector for its lending. The Bank's agricultural lending program in Mexico has four goals: first, to increase productivity of presently cultivated lands; second, to improve the productivity of small farmers; third, to complement infrastructure investments with support services, such as extension, market- ing programs and credit; and fourth, to promote employment-genersting invest-  - 10 - ments in rural areas. The Bank has made 13 loans in FYs77-82 totalling US$1,834.4 million for irrigation, rural development and agricultural, agro- industrial and livestock credit programs. A US$175 million loan for a rural development project and a US$180 million loan for an irrigation rehabili- tation project were approved by the Executive Directors in FY82, and a US$138.4 million loan for San Fernando rainfed agricultural development was approved in early FY83. A US$115 million loan for marketizz perishables was approved by the Executive Directors in April 1983. Projects for rainfed agriculture, regional development and rural credit are in preparation. 35. Bank lending for industry has aimed at: (a) reduction of the balance of payments deficit; (b) decentralizing industrial activities away from the major, increasingly congested, urban areas; and (c) promot4ng greater employment. A steel project which the Bank helped structure and finance is now operating in a previously underdeveloped area on the west coast of Mexico, and the city in which it is located, Lazaro Cardenas, is developing into a new growth pole. Four loans for industrial projects to promote the development of small- and medium-scale industrial enterprises, to finance expansion of small- and medium-scale mining, and to support an industrial equipment fund (FONEI) were approved by the Executive Directors in FYs78-80. A loan for a vocational training project was approved by the Executive Directors in July 1981; it is assisting a program to increase the supply of skilled workers and technicians. A US$152.3 million loan for development of a capital goods industries project and a US$60 million loan for pollution control were approved by the Executive Directors in FY82. A modification in the capital goods project has now been approved by the Executive Directors to set up a pilot export development fund to help alleviate the current foreign exchange shortage confronting Mexican exporters. A US$350 million loan for a proposed export development project is being presented to the Executive Directors at the same time as the proposed loan. 36. Bank lending for physical infrastructure has been focused on regional development and strengthening of institutions and sector policies. A highway sector project (FY79) and the fourth railway project (FY81) support these goals. The first and second medium-size cities water supply and sewerage projects (FY76 and 81) reinforce the planning, management and finance of specialized water supply and sewerage institutions at the federal and mnicipal levels, and contribute to the establishment of tariffs more closely relared to costs; a third project was approved by the Executive Directors on May 17, 1983. 37. The Government has adopted a National Urban Development Plan that spells out its regional development priorities in operational terms. A project to assist in the development of the Lazaro Cardenas conurbation area was approved by the Executive Directors in FY78. and a second urban project for oil-producing southeastern Mexico was approved by che Executive Directors in FY81. A loan for the preparation of a deconcentration program for the Mexico City Region was approved by the Executive Directors in August 1982. 38. The Economic Development Institute (EDI) is assisting CECADE (a similar institute under the Ministry of Programming and Budget) in training Government staff in project preparation, monitoring and evaluation. EDI assistance is directed at courses on urban and regional development, agricul- ture, rural development and agro-industries. The Bank has also assisted the  Mexican authorities in training personnel for managing water supply and industrial credit projects. 39. The Inter-American Development Bank (IDB) is the second largest source of inultilateral aid to Mexico. The IDB has made loans to Mexico totalling US$2,974.3 million as of March 31, 1983. Over 50 percent of the total has gone to agricultural and rural development projects, and the balance to transportation, industry, water supply and sewerage, tourism infrastructure, education, municipal development, and pre-investment. The IDB and the Bank have coordinated their assistance on several projects. Each has made loans for the national integrated rural development program (PIDER), agricultural and livestock credit, small- and medium-scale industries development, and botel development projects. The International Fund for Agricultural Development (IFAD) has approved a loan of US$22 million for a rural development project in the state of Oaxaca which was appraised by the Bank's staff and for which the Bank is acting as cooperating institution for administering the loan. 40. Bank-supported power, steel, fertilizer and tourism projects in Mexico have beea co-financed by several bilateral export credit agencies and commercial banks. In January 1982, Mexico borrowed US$500 million from commercial banks to provide complementary financing for Bank-assisted projects where project specific co-financing would have been difficult. PART III - THE INDUSTRIAL AND FINANCIAL SECTORS General 4i. Mexico's dynamic manufacturing industry plays an important role in the economy and the current economic stabilization program. Over the last twenty years this sector has grown faster than GDP, except during the years 1975-77. During the subsequent period of recovery in 1978-81, manufacturing value-added growth averaged 8.7 percent per annum in real terms, slightly higher than average GDP growth. Because of the exceptional growth of the petroleum sector, manufacturing industry's share of GDP remained unchanged at roughly 23 percent in the decade 1970-80. Employment generated by the manufacturing sector grew at an estimated 3.8 percent per annum in 1970-77, rising to an impressive average of 6.8 percent per annum in 1977-81. By 1980, 19 percent of Mexico's labor force was employed in this sector. However, as the country plunged into recession in 1982, manufacturing value-added declined an estimated 2.4 perceut, and prospects for 1983 are not brighter. As a result, unemployment has also risen. 42. In 1971, Mexico created a range of incentives and an institutional framework favorable to exports. Later, during the recovery after 1977, important import liberalization measures were introduced. By 1979, nominal protection in 24 out of 27 key subsectors was lower than in 1970. Combined with the increasing overvaluation of the peso, however, this led to a staggering rise in imports, growing at 32 percent annually in real terms between 1977 and 1980. Most of the incremental imports were of intermediate goods (such as chemicals, petrochemicals and basic metals) and capital goods required by a rapidly expanding economy. Imports accounted for 12.8 percent of all manufactures consumed in Mexico in 1980, as compared to 9.7 percent a decade earlier.  - 12 - 43. Manufactured exports rose between 1976 and 1979, and their level peaked in 1978 reaching 5.5 percent of domestic manufacturing output, up from 3.8 percent in 1970. A subsequent decline of exports' share to 3.7 percent of domestic output was caused by a loss in competitiveness of Mexican exporters, as market conditions deteriorated abroad and the peso continued to appreciate i-n real terms. Engineering industries, including metal products, machinery and equipment, showed the greatest dynamism during the 1970's, and their share in manufactured exports rose to 28 percent in 1980. Growing exports of these products reflect both a significant level of technology absorption and the relatively inexpensive skilled labor available in the country. Industrial Policy 44. The Government's 1979 Industrial Development Plan set out as basic objectives the creation of jobs to absorb a rapidly growing labor force, promotion of industrial investment in accordance with regional priorities, increasing real income, and the development of domestic technology. The public sector's role under this plan was to invest in strategic productive sectors and economic and social infrastructure. The private sector also had a major role to play. To encourage private investment, and to generate employment, fiscal incentives were introduced in priority regions and sectors. As an additional incentive to investors in the new growth poles, discounts were offered for certain energy-based inputs supplied by public sector enterprises. Small-scale industry received higher incentives on capital than any other sector. 45. The new Administration has retained the basic objectives of previous industrial policies, although the means for achieving them are expected to be somewhat different. A sectoral development plan, expected to be published in September 1983, will spell out the whole policy package in detail. The new foreign exchange policy (para. 20) has already had a strong impact: relative prices have shifted towards tradeables, thus favoring both exports and efficient import substitution. A major area of concern in industrial policy is employment. In addition to the devaluation of the peso, other important measures have already been taken which encourage the use of labor such as upward adjustments in interest rates and increases in energy prices. The proposed project has provided an opportunity for dialogue with the Government on remaining employment issues, including a possible revision of the investment incentive system. The new Administration was also concerned that the system of labor- and employment-related data collection and analysis was not adequate given the importance of these matters for policy formulation. A number of measures have therefore been taken, and others are planned, to strengthen the agencies responsible for the system, to ensure the provision of adequate, timely and reliable data, and thus to improve the system for monitoring employment and labor market developments during the period of economic adjustment. A policy statement addressing these issues was received from the Mexicans during negotiations. Discussions between the Bank and the Mexican authorities on the recommendations of a recent Bank industrial sector mission,3/ and on policies concerning exports and capital goods development, have provided further opportunities for a fruitful policy dialogue. 3/ The report resulting from this mission, Mexico - Future Directions of Industrial Strategy' (Report No. 4313-ME, of May 31, 1983) is being distributed to the Executive Directors at the same time as this report.  - 13 - Small and Medium-Scale Enterprises 46. Mexico's last comprehensive industrial census in 1975 reported that 95 percent of the country's industrial and mining enterprises employed fewer than 250 workers each and, within the Mexican context, are considered small or medium-sized. They employed 49 percent of industry's labor force and pro- duced 39 percent of its total value-added. Small and medium-scale industry participated effectively in recent industrial growth, and contributed to development outside the urban concentrations of Mexico City, Guadalajara and Monterrey. 47. Important changes took place in small and medium-scale industry's output structure between 1970 and 1975. The share of traditional consumer goods (food, beverages, tobacco, textiles, clothing and shoes) in its total value-added shrank from 41 to about 36 percent, while that of modern indus- trial goods grew from 16 to 24 percent. After the recent devaluations, imports have declined drastically and the demand for domestically produced industrial goods is expected to increase. With the adoption of an effective export development strategy, these goods would also have additional outlets abroad, provided that the world economy recovers and that protectionist tendencies are curbed. 48. Small and medium-scale industrv has a critical role to play in the economy's recovery, because it can help alleviate the difficulties of the external sector through stepped-up exports and curb domestic unemployment through increased labor absorption. Also, it has a potential for supplying specialized products bought by larger firms, and it can contribute to a broadening of industry's ownership base. The basic strategies to encourage small and medium-scale industry are already in place; what is needed is an increased availability of finance and a series of measures that would enable the institutions dealing with such industry to be more effective. The proposed project has been designed to support both. Integrated Program and Technical Assistance 49. To strengthen the institutional framework and to pull together the critical functions of technical assistance and financial support, Nacional Financiera, S.A. (NAFINSA) established an integrated program of assistance to small and medium-scale industry (PAI) in 1978. Its major objectives are (a) to encourage more rapid growth in sectoral output and employment, (b) to promote decentralization and regional development, (c) to provide close link- age between extension services and credit, and (d) to adapt sectoral programs to the needs of national development goals. The Bank has worked closely with the Mexican authorities in launching the program and supported its objectives through two previous projects (para. 57). 50. The PAI program is governed by a Program Coordinating Committee headed by the Director General of NAFINSA and including the heads of the trust funds and representatives of several Government agencies concerned with industrial development. This Committee determines policies and monitors and evaluates operations, but it delegates to its Secretariat the function of administering technical assistance services, promoting investments and coor- dinating among the various institutions concerued. After the nationalization of the Mexican banks in September 1982, the Administration has decided to consolidate and redefine the roles of some financial institutions. NArINSA  - 14 - would also, under plans already announced, take stock of the PAI program and, where appropriate, redefine responsibilities and rearrange the division of labor among its institutions. As a first step, a new Directorate was created in NAFINSA to oversee the PAI program. 51. One of the central features of the PAI program has be-u its exten- sion service, currently operating with a staff of 117 professionals, through 26 branch offices grouped into eight regions across the country. The extension officers' primary tasks are to promote the PAI program and to provide technical assistance to small and medium-sized firms. Due to the high cost of providing iadividual technical assistance, the extension service has sought ways of providing effective technical assistance to groups of firms. Thus, an experimental program of forming clusters of firms operating in similar lines and located in the same geographical area was introduced with Bank support under the previous Bank-financed small and medium-scale industry project (Loan 1881-ME). Training programs and extension services for these collective action groups have met with success. Both commercial bank officials and industrialists have also received training from the local PAI branch offices, with additional help provided by other specialized institutions. Similar collective action would be encouraged under the proposed project. However, since considerable investment of staff time is required, the costs and benefits of the present extension system should be carefully studied before the program is expanded with an eye towards naking the system more cost-effective. During negotiations, agreement was reached with NAFINSA to undertake such a study, on terms of reference satisfactory to the Bank, and review the study's findings and recommendations with the Bank by December 31, 1983 (Section 3.11 of the Loan Agreement). 52. Several specialized institutions are providing technical assis- tance to industrial firms in Mexico. The Servicio de Informacion y Tecnologia (INFOTEC), a Government dependency, provides technical information and in some cases assistance in technology. It channels its services for small and medium-sized industry through the PAI extension service. The Direccion General de Capacitacion y Productividad (DGCP), of the Ministry of Labor, provides training courses, including accelerated vocational training, to improve productivity. The Servicio Nacional de Empleo (SNE) - overseen by the Labor Ministry - monitors and provides information on the labor markets. As in the past, enterprises would be encouraged under the proposed project to seek the services provided by these specialized institutions to complement the assistance they receive directly through the PAI program. PAI would enter into agreements establishing joint work programs with the more important of these institutions by September 30, 1983. This is reflected in the Project Execution Document referred to in para. 80. Industrial Financing 53. Because of encouragement from the Government for the formation of large multipurpose banks offering a full range of financial services, the number of financial intermediaries in the Mexican banking system declined steadily from over 200 in 1978, to about 76 in 1982. This included privately-owned commercial banks, which were nationalized on September 1, 1982. The new Administration has declared its intention to sell up to one- third of the shares of the nationalized banks to the public, and to allow the whole system to operate autonomously.  - 15 - 54. Credit to small and mediumrscale enterprises is estimated to account for some 15 percent of the total absorbed by the manufacturing sector. This volume of financing is not proportional to the estimated 39 percent share of small and medium industry in the sector's total value added. An estimated two out of three small and medium-sized firms have never received credit from the banking system. This was one of the limiting factors to their growth in the past, but under present circumstaaces many of these firms need access to credit even t.- maintain production and employment levels. Currently, sbortages in foreign exchange, strict import controls, inflation, higher inventory costs and growing accounts receivable aU tend to increase firms' cash-flow requirements. Institutional measures contemplated. under the PAI program (para. 50), a review of its collective action potential (para. 51), and the provision of finance under the proposed project, particu- larly for increases in permanent working capital requirements, have been designed to alleviate these problems. 55. Resources for industrial finance have traditionally come from current and savings accounts, deposits, certificates and bonds, along with significant contributions from the public sector. The securities market as a source of funds for industrial finance is still insignificant in Mexico, representing only 4.2 perceat of the country's total term financing. Exrernal sources of financing, on the other hand, have been substantial. Foreign currency credit increased by 48 percent in real terms in 1981, while total financing in the same year increased only by 22 percent. Interest rates on deposits were positive in real terms in 1981, but as inflation rose they became negative in 1982, and deposits were eroded in real terms. The ensuing liquidity crisis created a particularly difficult situation for industry. The new Government declared in December 1982 its intention to allow deposit rates to rise, in order to stimulate deposits and a positive capital flow to the country. iased on the stabilization program being implemented with IMF suppor':, deposit rates should be reasonably in line with expectations with respect to inflation by the end of 1983. 56. The Government has created, over the years, a number of public sector banks and trust funds to channel term financing, directly or through intermediaries, to small and medium-scale enterprises - short-ternm credit, traditionally, has been provided by commercial banks. By far the most important agency supporting the industrial sector is Nacional Financiera, S.A. (NAFINSA), one of the Bank's long-standing borrowers in Mexico. A well developed and mature institution, NAFINSA, together with the Banco de Mexico, oversees the country's most 'mportant trust funds dealing with the industrial sector. The Trust Fund for Guarantees and Development of Medium and Small Industry (FOGAIN), the National Trust Fund for Industrial Development (FOMIN) and the Trust Fund for Industrial Estates (FIDEIN), are all administered by NAFINSA and participate in the PAI program; the Trust Fund for Industrial Equipment (FONEI) and the Trust Fund for Promotion of Exports of Manufactured Products (FOMEX), are both administered by the Banco de Mexico. While the above institutional arrangements may be affected by the proposed ins titu- tional transfer and consolidation within the financial sector (para. 50), the PAI program trust funds are expected to remain the main channels for interme- diation of finance to small and medium-scale industry. Past Experience in the Sector 57. With the Bank's support, Mexico'c PAI program has become one of the largest and most dynamic programs of its typa anyw;.ere. A first Bank loan of US$47 million (Loan 1552-ME of May 4, 19?8) to help build the program was fully disbursed by late 1902. A second, US$100 nillion, operation (Loan  - 16 - 1881-ME of September 29, 1980) supported the program's expansion. About 80 percent of its funds have been committed to date, and 72 percent have been disbursed. An ex-post evaluation by FOGAIN in 1981 uf a representative sample of its portfolio showed that operations financed under the two Bank loans had a positive economic impact: three-quarters of the credits benefitted enterprises with fewer than 50 employees each, and nearly nine-tenths were channelled to priority regions outside Mexico City. The employment impact of small and medium-scale industry has also been significant, with an estimated 600,000 jobs creaLed in this sector between 1975 and 1981. Under the proposed project, NAFINSA would consolidate its considerable accomplishments under the two previous projects and help alleviate the liquidity problems currently facing smaller-scale enterprises in Mexico. 58. The Bank has previously granted four loans (Loans 824-HE of June 2, 1972, 1205-ME of April 30, 1976, 1560-ME of September 27, 1978 and 1712-ME of July 30, 1979) totalling some US$360 million to support, through FONEI, larger enterprises with important import substitution or export potential. The first three loans are fully disbursed, and close to 60 percent of the fourt.. Qperation has been disbursed to date. Two more loans became effective in early 1983 to support fixed investments in capital goods industries and pollution control. Although the profile of Bank assistance to Mexico in industrial development has become broader, the small and medium-scale industry operations remain a central focus of the assistance strategy. PART IV - THE PROJECT 59. NAFINSA and the Mexican Government first discussed the proposed project with a Bank mission reviewing progress under the previous operation (Loan 1881-ME) in June 1982. Appraisal took place in two phases: the first phase in September/October 1982, and the second phase -;n January 1983 after the change in Administration. Negotiations were held in the Bank, in April 1983. The Mexican negotiating team was headed by Mr. Mario Lopez of NAFINSA, and included Messrs. Sergio Mota Marin, Director General of PAI-FOGAIN, Julio Martinez, Deputy Director General of PAI, Sergio Luis Cano, Director of FOMIN, Gustavo Varela Ruiz, Director of FIDEIN, Luis Nava of NAFINSA and Hector Flores of the Ministry of Finance. A Staff Appraisal Report (No. 4398-ME) is being distributed separately to the Executive Directors. Annex III provides supplementary data on the project. Project Description 60. The integrated program of assistance to small and medium-scale enterprises (PAI) 4/ has maintained its objectives of encouraging growth and employment, promoting regional develoment, fostering integrated support and enhancing the program's relevance to national development goals. The proposed project would continue support for the PAI program and help refocus 4/ For FOGAIN and FIDEIN, small enterprises have an equity capital of between Mex$50,000 and Mex$15 million (US$435 to US$130,000) and medium enterprises have an equity capital of up to Mex$90 million (US$782,600). For FOMIN, the maximum equity capital would be Mex$225 million (US$2.0 million).  - 17 - its activities to respond to the present economic situation. In addition to financing fixed investments, the project would assist small and medium-scale enterprises to maintain production and employment levels by ensuring access to credit and equity resources to finance their substantially increased permanent working capital requirements. The Loan and Project Summary at the front of this report provides a brief description of the project. The proposed loan aould include the following specific components: (a) US$150 million for credit through FOGAIN and intermediaries for (i) fixed investments in machinery, equipment, civil works and industrial buildings, as well as in common service facilities, such as maintenance and repair shops, warehouses, training facilities, and quality and materials testing centers; and (ii) increased permanent working capital requirements for materials, components, spare parts or other production inputs not including labor; (b) US$18 million for minority equity investments and loans convertible into equity to be made by FOMIN to finance establishment or expansion of productive capacity, and increased permanent working capital requirements; @c) US$4.6 million for credit through FIDEIN for infrastructure and urbanization investments of industrial estates; and @d) about US$2 million for technical assistance through NAFINSA and specialized institutions for extension services and the training of extension agents of the PAI program and other institutions, as well as the provision of equipment and materials required. The FOGAIN Credit Component 61. This component is by far the largest in the proposed project, accounting for about 86 percent of project costs. FOGAIN, the most important financial institution for small and medium-scale industry in Mexico, was established in 1954 as a second-tier institution. Administered by NAFINSA, it rediscounts loans for equipment, machinery, civil works and working capital made by banks and other financial intermediaries, which take the credit risk and appraise the investments. It also has a guarantee scheme which, however, has not been used extensively. As new features under the proposed project, FOGAIN would finance common service facilities managed by collective groups of eligible enterprises, and -- in response to industry's urgent needs - provide more substantial amounts for increases in permanent working capital. Up to 50 percent of the FOGAIN component would be used to finance sub-loans purely for incremental permanent working capital. The Bank would monitor the evolving needs of small and medium-scale industry during the project's implementation, but would not finance subloans purely for incremental working capital in respect of which expenditures have been incurred after December 31, 1985 (Section 2.02(d)(iv) of the Loan Agreement). 62. The trust fund's highest decision-making body is a Technical Committee, headed by a representative of the Ministry of Finance, and composed of other Government officials and representatives of the private sector. It decides matters of policy, procedure, financial plans and  - 18 - budgets, and approves credit operations in excess of Mex$11 million (US$95,650). FOGAIN's staff includes some 150 professionals, as well as semi-professionals and some additional personnel attached to its regional offices. Its staff, in general, is competent. It evaluates investments up to Mex$11 million by their financial rate of return, as well as in light of the location (geographic area), size and priority of the industrial enter- prise. Evaluation criteria are sound, and analyses of investments over Mex$11 million include economic rate of return tests. 63. Since 1954, FOGAIN has made some 61,000 loans to 39,500 firms, totalling Mex$41.3 billion. In 1981, this trust fund provided an estimated 10.7 percent of Mexico's total industr'al credit, representing about one third of the credit made available to the small and medium-scale sector. Its operations have grown 14 percent in real terms annually between 1979 and 1982. The investments it has supported are relatively labor-intensive, with an estimated cost of US$12,000 per job created (1981 prices). 64. FOGAIN's loan portfolio stood at Mex$43.6 billion on December 31, 1982. While its income statement showed a mDderate profit in 1980, it incurred losses of some Mex$68 million in 1981, and its position declined further in 1982, losing some Mex$1.7 billion. These losses were caused by rising negative spreads in FOGAIN's financial operations, mainly because - as a policy - interest rates on its outstanding loans were not adjusted, even though most of FOGAIN's loan contracts include a clause permitting such adjustments. FOGAIN would take steps to implement a program of adjustments in the interest rates of sub-loans made before June 30, 1983, in accordance with a timetable agreed with the Bank (Section 3.05(b) and Schedule 3 of the Loan Agreement). FOGAIN would also take measures to protect its capital base in the future (Section 3.01(c) of the Loan Agreement). The Risk Capital Component 65. This component, the second largest in the proposed project, would constitute 10 percent of costs. FOMIN was established in 1972 as a first-tier Government trust fund administered by NAFINSA. Its role is to stimulate the creation of new smalI and medium-scale enterprises, or the expansion or strengthening of existing ones, by subscribing up to 49 percent of their equity capital requirement. Through this, FOMIN also helps promote development of Mexico's capital market. FOMIN's financing can also include loans convertible into equity. Its investments are intended to be temporary and to be sold once the investee company achieves a satisfactory financial position. FOMIN thus serves to bring together groups of investors, assuring them of access to capital and permitting the enterprises to operate on a larger and more economical scale. Its participation frequently helps firms start the transition from a closed family business to a corporation with wider ownership and professional management. In order to continue expanding throughout Mexico, FOMIN has been encouraged by the Bank to examine the possibility of promoting the formation of regional venture capital corpora- tions in which it would be a minority participant, together with state governments, and pob.ibly IFC, and with private interests as the majority share holders. 66. FOMIN is governed by a Technical and Funds Disbursement Committee which includes representatives from other Government agencies and the private sector. FOMIN has some 45 staff in total, including 10 portfolio analysts and supervisors who are well-qualified to appraise and monitor its  - 19 - operations. The expected addition of three specialists in 1983 would enable this trust fund to deal more effectively with sophisticaLed technology transfer and marketing strategies. Its appraisal techniques are sound, but the supervision of its portfolio has not been fully adequate due to shortages of staff and rapid portfolio growth. To be able to expand its operations, while correcting these minor shortcomings, FOKIN is establishing separate units for supervision and portfolio control and is introducing greater delegation of authority. The measures FOMIN is taking in these areas were agreed during negotiations and are reflected in the Project Execution Document referred to in para. 80. 67. FOMIN's present portfolio of Mex$2 billion, involving investments in 110 firms, has grown by 14 percent annually in real terms since 1979. Because of the costs and risks involved in its operations, FOMIN's beneficiaries are mainly medium-sized firms. Its investments have had a positive _.mployment impact, as the average cost per job created has been estimated at US$14,000 equivalent t1981 prices). After it inculrred losses in 1979, FOMIN's financial performance improved, with revenues rising significantly after 1980. Improved performance was achieved by rapid growth, adoption of convertible debt instruments and a more profit-oriented equity sales policy. FOMIN's return on equity sales increased from 36 percent in 1979 to 52 percent in 1982, in nominal terms, and broke even in real terms in the last two years. To tighten its portfolio control further, FOMIN would also enforce more frequent and prompt financial reporting by its investee firms. These measures would be particularly beneficial as several of FOIIN's clients began to experience serious problems during the financial crisis of 1982. By year's end, 43 companies, representing 36 percent of FOMIN's portfolio, faced financial difficulties, mainly as a result of exchange losses and working capital shortages following the 1982 devaluations. FOMIN has prepared a plan of action to address the problems of tl-.. poorer performers in its portfolio, which is reflected in the agreed Project Execution Document referred to in para. 80. The Industrial Estates Component 68. FIDEIN was established in 1970 and is administered by NAFINSA. It plans, promotes and implements a national system of industrial estates, as part of a comprehensive program of industrial decentralization and regional development. Its overall policy-making body is the Technical Committee, headed by the Minister of Urban Development and Ecology. This trust fund is currently staffed by 38 professionals, up from 27 in 1980. Performance in project appraisal has been uneven, mainly because its staff lacked adequate experience. FIDEIN intends to focus more attention on the technical, administrative, marketing, financial, economic and credit aspects of urbanization subprojects in tie future, and the Project Execution Document referred to in para. 80 outlines the specific measures to be taken to strengthen FIDEIN in these areas. 69. As part of an expansion of its program, FIDEIN was expected to finance, construct and lease standard factory buildings and common service facilities, as well as to lease equipment and machinery to small and medium-scale industry. FIDEIN's experience with this program has not been fully satisfactory. Its technical and operational management has not been built up to the level required by the growing demand for factory buildings. In addition, the need for FIDEIN to build model factory buildings as a promotional tool is declining; most firms would prefer to construct their  - 20 - own factories. To date, a total of 48 factory buildings have been erected and the infrastructure of some 20 industrial estates has been completed. Private concerns, on the other hand, have been quite successful in meeting the demand for industrial estates, of which they financed an estimated 110 in the country. FIDEIN's financial losses in 1982 amounted to Mex$21.8 million, compared to Mex$100,000 in 1981. Prospects for 1983 look better, since more than half of LEs factory buildings have been sold recently, and the remainder are on lease with options for sale. 70. FIDEIN's management has decided to phnoe out the direct construction of standard factory buildtiags and to transfer to FOGAIN responsibility for providing credit to firms wishing to construct their own buildings and facilities. Also, it does not plan further leasing of equipment and machinery. After this major overhaul of its operations, FIDEIN's role would be strengthened in providing information on Mexico's industrial estates and promotional and advisory support to industrial estate developers, including the evaluation of new industrial estate projects and provision of specialized technical assistance services. FIDEIN would expand its role in financing infrastructure and urbanization for industrial estates by covering private as well as publicly-owned estates. In the proposed project a small component has been reserved to assist FIDEIN in this new role. Technical Assistance Component 71. The technical assistance component, of about US$2 million, would provide training, specialized consultant services, and equipment and materials through the PAI program and other specialized institutions (paras. 51 and 52). Training would concentrate on employees of the participating industrial enterprises, and the extension agents and staff of the PAI program, the four specialized institutions discussed in para. 52, as well as other agencies whose ad-hoc support has proved effective under the previous Bank projects. Legal arrangements between NAFINSA and the specialized agencies in respect of the technical assistance, equipment and services provided would be approved by the Bank (Section 2.04(b) of the Loan Agreement). Consultants to be financed under the loan would have qualifications, and would be employed on terms and conditions, satisfactory to the Bank (Section 3.02 of the Loan Agreement). Relending Terms 72. The Borrower - NAFINSA -- would channel the resources in pesos to the individual trust funds and other participating institutions. The receipt of contractual arrangements, satisfactory to the Bank, for passing on the proceeds of the Loan to FOGAIN, FOMIN and FIDEIN, would be a condition of disbursement of the fundsi allocated in the loan to each trust-fund, respec- tively (Sections 2.02(d)(iii) and 3.03(a) of the Loan Agreement). NAFINSA would carry the foreign exchange risk and repay the loan. As under the pre- vious Bank projects, in these contractual arrangements NAFINSA would pass on the proceeds of the loan to the PAI program at cost, and FOGAIN and FIDEIN would, before repaying PAI, retain a spread of 2 percentage points to cover their operating costs. FOMIN would repay PAI the net amount recovered by divesting its equity investments, 50 percent o' any capital gain realized, and an agreed percentage of interest received on convertible loans. Recycled loan funds accruing to NAFINSA as trustee of FOGAIN, FOMIN and FIDEIN would be used for purposes similar to those of the project (Section 3.03(b) of the  - 21 - Loan Agreement). FOGAIN's financial intermediaries would charge a spread between two and three and one-half percentage points. 73. In order to -educe the interval during which the trust funds must finance the Bank's share of subloans with their own resources, a Special Account would be opened in the Banco de Mexico for the PAI program. The Bank would make an initial deposit of US$17.5 million into this account, to be replenished as required through disbursements on the basis of statements of expenditure. This Special Account would be wound down at the end of the proposed project. On-lending terms 74. Since 1974, financial 4ntermediaries in Mexico have used the weighted average of their cost of mobilizing resources -- the ACF -- to determine the interest to be charged on medium and long-term loans. This index is published by the Banco de Mexico every month. In the past, it has generally been an adequate index, reflecting the real cost of attracting funds to the domestic financial system. Based on the policies currently being followed by the Government (para. 55) it would remain a satisfactory parameter for determining on-lending rates under the proposed project. The Bank would review with the Government by February 1, 1984 the continuing adequacy of the ACF as an index. In the event of its no longer being adequate, Mexico and the Bank would agree on an alternative benchmark for setting interest rates, consistent with the prevailing economic coaditions in Mexico (Section 3.02 of the Guarantee Agreement). 75. In 1979, FOGAIN introduced a structure of twelve interest rates to give preference to small enterprises, especially those located outside the metropolitan centers and engaged in priority activities (e.g. food process- ing). Under the previous Bank project (Loan 1881-ME), the arithmetic average of aU on-lending rates, in the twelve categories referred to above, had to be at least one percentage point above the average of the ACF for the previous 12 months. Rates had to be adjusted at least once a year to reflect changes in the average ACF. With the Bank's agreement, NAFINSA, jointly with the Government, has introduced improvements in the system, such as reducing the number of interest rate categories from 12 to 6, and reviewing interest rates every three months. 76. Under the proposed project, FOGAIN would charge final borrowers variable interest rates adjusted quarterly to reflect movements in the ACF. Six interest rate categories would be used depending on the size and location of the enterprise, and on average the rates would be equal to Lhe average of the ACF for the last three months, plus at least one percentage point (Section 3.04(a) and (b)(i) of the Loan Agreement). FOGAIN has not yet defined the precise structure of 6 interest rates that it would apply. Receipt by the Bank of FOGAIN's interest rate structure, satisfactory to the Bank, would be a special condition of the loan's effectiveness, and changes in the structure without the Bank's agreement would be an event of default (Sections 6.01(b) and 5.01(b), respectively, of the Loan Agreement). 77. The variable interest charges would be adjusted quarterly on all FIDEIN and FOMIN investments. The rates would be set equal to the average of the ACF for the three immediately preceding months, plus at least one percentage point for FIDEIN loans, and 3 percentage points below the average  - 22 - ACF for the preceding quarter on FOMIN's convertible loans (Section 3.04(b)(ii) of the Loan Agreement). However, as set out in FOMIN's operating regulations, if FOMIN does not exercise its option for conversion luto equity, its interest rates would be raised to the same levels as charged by FIDEIN. 78. The trust funds would have to introduce substantial increases In interest rates to final borrowers, since their current rates are substan- tially lower than those required by the covenants under the proposed loan. This would require some time, so that interest rates may be increased in stages. Onlending interest rates would be increased by about 10 percentage points in July, 1983 as a first step, and additional adjustments would be made subsequently, as necessary, in order to reach full compliance with covenanted interest rates. In view of the urgent need for finance of small and medium-scale industry, up to US$50 million would be disbursed through December 31, 1983, at interest rates below those covenanted, for onlending for FOGAIN or FIDEIN loans, provided that all such loans carry variable interest rates, and that interest rates are adjusted, according to an agreed program, to reach the covenanted levels. Costs and Financing 79. On the basis of the outlook for investment demand, project pipe- lines of the participating institutions, and their institutional capacity, a slice of the PAI program in an amount equivalent to about US$350 million would be supported under the proposed project. The proposed Bank loan of US$175 million equivalent (including US$436,409 for the capitalized front-end fee) would represent 50 percent of total costs. The Government would provide US$64.6 million, and the intermediaries and project beneficiaries would contribute US$110.0 million. The Bank loan would cover the project's estimated foreign exchange component of US$106.0 million, the front-end fee of about US$0.4 million, and finance about US$68.6 million in local costs. The rationale for local cost financing discussed in paras. 25-28 above. Initially, US$150 million of the proposed loan would be allocated for the credit component (FOMAIN), US$18 million for the risk capital component (FOMIN), US$4.6 million for the industrial park component (FIDEIN) and about US$2 million for technical assistance. Project Implementation and Procurement 80. The proposed project would take about three and one half years to complete. Its implementation would hinge on NAFINSA's recent measures and plans for the future development of the PAI program (para. 50). Therefore, NAFINSA has prepared a Project Execution Document to reflect the specific measures and timetables required to complete the PAI program's reorganiza- tion. The Document - agreed during negotiations - also covers a range of implementation measures for the FOGAIN, FONIN and FIDEIN project components (paras. 66, 67 and 68), as well as for technical assistance (para. 52). As under the previous two projects, FOGAIN, FOMIN and FIDEIN would carry out their project component in accordance with their respective Operating Regulations, which were discussed during appraisal and found satisfactory. Formal approval by the Technical Committees of FOGAIN and FIDEIN of the agreed changes in their Operating Regulations would be a condition of the proposed loan's effectiveness (Section 6.01(a) of the Loan Agreement). Changes in the Project Execution Document and the Operating Regulations  - 23 - materially and adversely affecting the project would be an event of suspenrsion and default of the Bank loan (Section 5.01(b) of the Loan Agreea-at). 81. In view of the Bank's satisfactory experience with FOGAIN's operations, the Bank's prior review would be required for only the first three permanent working capital sub-loans, as well as all common service facilities sub-loans. A1l FOMIN equity livestments requiring more than US$400,000 equivalent, and the first three of its permanent working capital sub-loans, would also be subject to prior Bank approval (Section 2.02(c) of the Loan Agreement). Since FIDEIN is expected to make relatively few, technically complex, investments for infrastructure and urbanization of industrial estates, such subprojects would be approved by the Bank and all related contracts would be awarded in accordance with the Project Execution Document. Section 3.07(a)(ii) of the Loan Agreement). 82. NAFINSA has had considerable experience with Bank-financed procure- ment and its standard procedures - also used under the two previous Bank loans - are satisfactory. Together with FOGAIN and FOMIN, it would ensure, directly or through the intermediaries, that the goods and services financed from the loan are competitive in quality and price and are appropriate for its clients' needs. The project's account kept by NAFINSA, and the accounts of FOGAIN, FONIN and FIDEIN, would be audited annually by independent auditors according to standards acceptable to the Bank. The auditors' reports - also in respect of the amounts advanced from the loan account would be submitted to the Bank witbin six months after the end of each fiscal year (Section 4.02 of the Loan Agreement and 3.03 of the Guarantee Agreement). Disbursements 83. The Bank would reimburse 73 percent of the disbursements made by FOGAIN, FOMIN and FIDEIN against statements of expenditures for machinery, equipment, civil works andlor permanent working capital requirements under qualified sub-projects. The Bank would finance 100 percent of foreign, and 75 percent of local, expenditures for consultants and related equipment, materials and services. Taking into account the strong demand for permanent working capital in Mexico, disbursements from the loan for this component are expected to be quicker than the average for Bank-financed industrial development finance projects. The loan is expected to be fully disbursed by mid-1987. * Project Benefits and Risks 84. The proposed project's direct benefits would reach a wide range of small and medium-sized firms, including many located in areas outside the country's large urban concentrations. Permanent working capital finance provided under the loan would help maintain production levels and employment in these enterprises. Fixed investments financed through the loan would support initially modernization and replacement and later, as the economy recovers, expansion of productive capacity. Altogether, about 3,000 small and medium-sized firms are expected to receive finance and benefit from technical assistance programs under the FOGAIN, FOMIN and technical assistance project components, and about 12 industrial estates would be assisted through FIDEIN. An estimated 10,000 jobs at various levels, including unskilled labor, would be generated in 1983-86 through investments financed from the proposed loan. A further 20,000 to 30,000 jobs would be  - 24 - preserved through helping to provide firms with adequate working capital. The institutions of Mexico's integrated program of assistance to small and medium scale industry would also be strengthened in both organizational and financial management. 85. The project faces two risks. First, the institutions which would carry out the project are undertgoing reorganization, and have experienced considerable changes in management after the new Administration took over in December 1982. Implementation measures contained in the Project Execution Document have been designed, however, to ensure that the adverse effects of these reorganizations on the project's execution are minimized. Therefore, the risk is low, and acceptable. Second, if Mexico's economic recovery is delayed, effective demand for fixed Investments to be financed under the loan could drop. The commitment and determination shown by the new Government in adhering to the timetable of the recovery program suggest, however, that - barring unforeseen external developments - the probability for substantial delays is low. Moreover, a certain flexibility has been built into the proiect by providing finance for incremental permanent working capital requirements. Continued demnand for this component could neutralize any slow-down in disbursements occasioned by lower-than-expected demAnd for fixed investments in the first two years of the proposed project. Therefore, this risk is also acceptable. PART V - LEGAL INSTRUMENTS AND AUTHORITY 86. The draft Loan Agreement between the Bank and NAFINSA, the draft Guarantee Agreement between the United Mexican States and the Bank, and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement, are being distributed to the Executive Directors separately. Special conditions of the project are listed in Section III of Annex III. Special conditions of the loan's disbursement are described in para. 72. Two special conditions of the loan's effectiveness would be (i) the receipt in the Bank of a new interest rate structure for FOGAIN, which should be satisfactory to the Bank (para. 76), and (it) forml apprcval of the changes in the FOGAIN and FIDEIN Operating Regulations (para. 80). 87. I am satisfied that the proposed loan wonld comply with the Articles of A_reement of the Bank. PART VI - RECOM-MNDATIONS 88. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President By E. Stern Attachments May 31, 1983  _ 2.A=NE_ 1 Page 1 of 5 xCo - SOCIAL IDICAOs DATA SH1ET NEKICO RNUE t5 (HEICD VT AME (THOUSAN SQ. sm.) __ __ __ __ __ __ __ TOL 5 REEl )DLE in[ ACcULtURAL 977.2 1960 lb 1970 /b ESrDA lb LATI NMRICA & CARIBA EMtOM GRIPsF CAPIrA (U3S$) 470.0 860.0 2090.0 1902.0 23z3.9 ENERMY CONSUNPrTON PER CAPITA .9204 (uLOC2ISi G: CaL EquLV ) 12.7 1066.5 1534.6 t 259.9 2107.4 OPuLATIO ID vrrAL srATLsTCS poPULATIUn. mL-EAR cTrOUSA ) 36881.0 51187.0 69752.0 UlRAN POPMLATION (PERCEC OF TOTAL) 50.8 59.0 66.7 65 J7.9 POPMUATION PROJECrION5 115.0 POPULATIO IN IMAX 2000 (MILLIONS)20. STATIONARY POPULATION (MLIONS) .6 YEAR SnOlNARY POPULATWIO IS REACHED 2O75 POPULATION DENSITY3.2 3. _MR SQ. ER. 18.7 25.9 4 6.3 392 83.3 JPER SQ. ER. MZRICUI.TUAL LAND 3b.9 52.4 69.3 92.5 155.4 POPMlATION AGE SRUMCTUE (PERCENT) 0-14 YES. 45.6 46.5 45.1 39.7 31.1 15-6 'RS. 51.0 50.0 51.4 56.1 61.2 65 RS. AND AOE 3.4 3.5 3.4 4_2 7.7 POPULATI'NI GRUJIN RATE (PERCENTr) TOTAL 3.2 3.3 3.1 2.4 L.6 URBAN 4.9 4.8 4.3 3.8 3.5 CA HE BIRTA TAE (PER INOSIND) 45.2 42.9 37.0 31.4 Z3.6 CRIDE EAS RAIE (PER TODUSAND) 11.7 9.4 7.4 8.4 9.2 GROSS aoDUCTN RATE 3.3 3.1 2.5 2.1 1.6 FMILY PLANSING ACCEP`RS. ANNAL (TCrOUSAiMS) _ 25_1 842.OIe USERS (PECETC OF ARRIED OllEN) ,_ _, 60.0 F:OD AsD NURIrlTO- IDEMX OF FOOD PRODUCTON PEI CAPITA (1969-71-100) 97.0 100.0 103.0 .10.0 116.0 PER CAPITA SUPPLY OF CALORIES (PERCENT OF RS)OTRNNES) 117.7 110.5 l12.9/c 108.4 125.1. PROTEINS (GRAM PEt DIAY) 69.1 64.7 65.27; 66.0 92.7 OF MICH ANIMAL AND PULSE 28.8 26.7 27z17; 34.0 35.9 Cmn (IeS 1-4) M TRTALM UIE tO.3 6.5 3.7 5.6 9.2 NEALTE 7. IFE EBECTA AT NIMH (yEAS) 57.7 61.7 65.4 64.2 67.6 INFANr NUBTALIT RAIE (PER 'ImIAD) 91.1 73.6 56.0 64.2 65.1 ACcESS TO SAFE WAIER (PERCENT OF POPULATION) TOTAL 23.5 54.0 62.Ofd 65.6 mEAN 71.0 70.07d 78.9 RURAL ._ 29.0 49.o7;i 43.9 ACCESS 70 ECRETA rISPOSAL (PERCN OF POPOULTION] TOTAL ' ' - 59.3 UII .. _. __ 75.3 RURAL -' 13.0 14.0/d 30.0 N POPULATION PER FrHTICIAS 1823.4 1506.3 1255.7/e 1617.3 1105.4 POPATION PER HINRSUIC PERSON 3634.1 1640.2 1623.67; 1063.5 634.4 POPULATION PER HOSPITAL RED TOTll 585.7 844.8 B66.3/e 477.4 286.8 I;BAS . 1012.1 1o0o.07; 679.8 192.0 RURAL .. 1294.3 112L.Ile 1903.4 AVPISSIOh3S PR HOSPrTAL RED .. .. .. 27.3 20.0 HOUSING AVERAGE SIZE OF HOUSOLD TOTAL 5.4 5.7 URBAN 5.7 5.7 mRLA 5.2 5.8 AvERAG E alBER OF PERSONS PERb RO TOTAL 2.9 2-5 tURJAS 2.6 2.2 RURAL 3.4 3.2 ACCESS TO ELECTRICITY (PERCENr OF DULLCGS) TOAL *- 58.9 UR.- 80.7 RURAL '- 27.8  - 26 - ANNEX 1 TAMP 3k Pave 2 of 5 mmm SOCIAL 0ICAltOS ATA SIIEZT umco REIEE OUs Cuero= - lUST rnzczuI -STIAE) MOST im MIDDE INCOME IIL 7 1960 lb 1970 /b ISTZMAZE /b UTIn AKERIC& 6 CAuBRW EUROP EmucAnoN ADJUSTED REIOLZJII RATIOS PRMt: TTAL s0.0 1.0 12.0 108.3 102.4 MAUE 82.0 107.0 127.0 106.4 107.1 PEmIUl 77.0 102.0 122.0 103.3 99.0 SECONDART: TOTAL 11.0 22.0 5.0 41.3 60.2 IWLE 14.0 27.0 49.0 40.4 66.4 FEMALE 8.0 17.0 41.0 41.8 58.0 VOCATINAL ZEAL. (Z OF SECONDARY) 23.6 26.7 Z.9 33.7 31.6 PUPIL-TEA RA lUNAR! 44.D 45.9 40.7 29.9 25.3 SECOfDIAT 13.1 14.5 17.0 16.7 22.2 ADULT LITERAC! RATE CPERCENT) 65.8 74.2 81.0 79.1 75.9 coNsuoor FASSENU CARS PER TWUlSDl POPULATION 12.9 24.1 42.0c 42.8 51.0 RADIO RECEIVS PER TROUSAZD PFOPUIaN 89.5 273.6 295.2 270.5 157.2 nV RECEVERS PER TOMARD POPULATIG 17.h 58.5 110.7 107.7 123.7 NPAPME ('tA= GRERAL INr.EST) CIRUlATION PER EDIMS POPULAFION 73.7 .. 64.5ff 63.7 123 CIRERA WAL ATEEDAC PER CAPIA 10.0 5.0 4.IT 2.7 4.0 LABOR FOR TABL IO FORME (TWUSAIUMS) 11132.7 14724.8 20187.7 FUEE (PERCE) ) 15.Z 17.4 19.5 24.4 36.6 ACUIUME (PERCENT) 55.1 45.2 35.6 31.3 38.7 ININTR (PERCEr 19.5 22.9 25.8 23.9 25.9 PARIICIPATION RAZE (PERCENT) TOA 30.2 28.8 28.9 33.6 44.5 IALE 51.1 47.4 46.8 50.4 56.3 FEMALE 9.2 10.1 11.4 - 16.8 32.8 ECONOMIC DEPENDENCY RATIO 1.6 1.7 1.7 1.3 0.9 INCOME DISTREUWTi PERCEIT Or PRVATE INCOIE RECEIVED R IUC8EST S PERCE O R fO. is.. IIGHEST 20 PERCEN OF SLS 6.1 60.7 57.7Ic ULOEST 20 PET ONF HOUSEBOI1S 3.4$j 3.3 2.7- 9.. LIOEST 40 mRT OF ROSENOLRS 9.8 9.9 9.97c POVERTY TAREr OUPS ESrDIAITE ARSOLEE POVOERTY MCUIE LEVEL U5 PER CAITA) u3M .. .. . .. RURAL .. .. .. 184.1 ESrLATED RUATIVE POVERTY DCE l