El Salvador - Updating economic memorandum

Report No. 4054-ES El Salvador Updating Economic Memorandum January 21, 1983 Country Programs Department I Latin America and the Caribbean FOR OFFICIAL USE ONLY U Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$ 1.00 = 2.5 Colones (C) C 1.00 = US/ 0.40. WEIGHTS AND MEASURES 1 Manzana (mz) = 0.699 Hectares 1 Quintal (q) = 100 Pounds 1 Pound (lb) = 0.453 kilograms GLOSSARY OF ABBREVIATIONS ABC - Farmer Welfare Administration AID - Agency for International Development ANDA - National Administration for Water and Sewerage ANTEL - National Administration for Telecommunications BFA - Agricultural Development Bank CABEI - Central American Bank for Economic Integration CACM - Central American Common Market CEL - Lempa River Hydroelectric Commission CELADE - Latin American Demographic Center CENAP - National Productivity Center CENCAP - National System of Agricultural Training CENTA - National Center of Agricultural Technology CEPA - Port Authority COFINTA - Agricultural Land Bank CONAPLAN - National Planning Council COPAL - Cooperative of Cotton Growers DGRD - General Directorate for Irrigation and Drainage DIGESTIC - Statistical Office EDURES - Urban and Regional Development Study FEDECREDIT - Federation of Credit Cooperatives FES - Salvadorian Railways FENADESAL - National Railways of El Salvador FHTSM - San Miguel National Textile Industry FIGAPE - Finance and Guarantee Fund for Small Business FNV - National Housing Fund FSV - Social Housing Fund FSDVM - Salvadorian Foundation for Development of Low-cost Housing ICR - Rural Colonization Institute IDB - Inter-American Development Bank INCAP - Central America and Panama Nutrition Institute INPEP - Government Employees Pension Fund INSAFI - Salvadorian Institute for Industrial Promotion INSHOS - Public Hospitals System ILO - International Labor Organization IRA - Regulatory Supply Institute ISCATT - Salvadorian Institute for Training and Technology Transfer ISCE - Salvadorian Foreign Trade Institute ISIC - Salvadorian Coffee Institute ISIAP - Salvadorian Institute for Agricultural and Fishing Research  - ii - FOR OFFICIAL USE ONLY GLOSSARY OF ABBREVIATIONS (Continued) Isss - Salvadorian Social Security Institute ISREN - Salvadorian Institute for Natural Resources ISTA - Agrarian Reform Institute ISTU - Salvadorian Tourism Institute IVU - Urban Housing Institute LONAB - National Lottery MAG - Ministry of Agriculture and Livestock MOH - Ministry of Health and Social Welfare ODEPOR - Planning Office, Ministry of Education PAHO - Pan American Health Organization PREALC - Regional Employment Program for Latin America and the Carib'bean PRIDECO - Programa Integral de Desarrollo Comunal REIFALDI - Regulation of the Central American Agreement on Fiscal Incentives SSMA - San Salvalor Metropolitan Area FISCAL YEAR January 1 to December 31 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   SYNOPSIS The Economic Memorandum assesses the impact on the economy of El Salvador of the institutional and economic transformations that have taken place during the last few years. The report analyzes the recent behavior of the economy, particularly with respect to the development of the major productive sectors, agriculture and industry, as well as short term financial problems and related Government policies, and major structural reforms, with particular emphasis on the agrarian reform. The report arrives at a number of proposals for policy actions with respect to demand management, the orientation of public investment in the immediate future and in the longer term, and several important agricultural issues.   This report is based on the findings of an economic mission to El Salvador in December 1981 composed of: Juan Giral Chief Nathan Koenig Agricultural and Agrarian Reform Specialist Yalcin Baran Industrial Specialist Elio Gonella Investment Analyst Jose Soncini Industrial Financial Analyst A draft report was discussed writh the authorities in October 1982. The main text has been updated to reflect these discussions and some recent events. The Annex, however, reflects the situation as it was in early 1982.   EL SALVADOR UPDATING ECONOMIC MEMORANDUM TABLE OF CONTENTS Page No. COUNTRY DATA .... . . . . . . . .... . . . . . . . . . . . . 1-2 SUMMARY AND CONCLUSIONS ... . . i-vii. I. INTRODUCTION . . .. . . . . . ......... . 1 11. ECONOMIC DEVELOPMENTS AND THE EFFECT OF POLITICAL- MILITARY EVENTS . . . . . . . . . . . . . . . . . . . . . 2 A. Past Growth Trends . . 2 B. Recent Performance of the Economy . . . . .2 C. The 1980 Reforms.. . ....4 D. Government Development Policies and Finances . . . . . . 4 E. Balance of Payments.. . . . . . . . . 8 F. Monetary Developments . . . . . . . . . . . . . . . . . 11 III. THE MEIN PRODUCTIVE SECTORS . . . . .... . 13 A. Agricultural Production . . . . . . . . . . . . . . . . 13 B. Agrarian Reform ... ... 15 C. Coffee Production . . . . . ... ... 20 D. Cotton Production . . . . . . . . . . . . . . . . . . . 21 E. Sugar Production . . . . . . . . . . 22 F. Basic Grains and Cottonseed . . . . . . . . . . . . . . 22 G. Livestock and Poultry . . . .... . . . . 23 H. Manufacturing Sector..... . . ..... 23 IV. COUNTRY PROSPECTS. . . . . . . . . . . . . . . . . . . . . . 29 A. Immediate Priorities . .. .29 B. Policy Issues ...31 C. The Public Investment Program . . . . . . . . . . . . . 33 D. Public Finances Prospects . . . . . . . . . . . . . . . 34 E. Balance of Payments and Creditworthiness . . . . . . . . 35 ANNEX A. Agriculture and Agrarian Reform Situation and Prospects ... . . . . . . . . . . . . . . . . . . . 39 STATISTICAL APPENDIX 103 MAP   Page 1 of 2 COUNTRY DATA - EL SALVADOR AtEA POPULATION DENSITY (1981) 21,000 km 4.6mTillion (mid- 1981) 222 per kw/ Rate of Growth: 2.9% (from1970 to 1981) 357 per ka -'of arable land POPULATION CHARACTERISTICS (1980) HEALTH (1978) Crude Birth Rate (per 1,000) 40 Population per physician 3366 1/ Crude Death Rate (per 1,000) 8 Population per hospital bed 721 1/ Infant Mortality (per 1,000 live births) 60 INCOME DISTRIBUTION (1977)) DISTRIBUTION OF LAND CO RSHIP (1971) % of national income, highest quintile 7 owned by top 10% of owners 78.0 lowest quintile % owned by smallest 10% of owners 0.4 ACCESS TO PIPED WATER (1978) ACCESS TO ELECTRICITY (1975) % of population - urban 89.0 % of population - urban 44.7 - rural 28.0 - rural 14.4 NUTRITION (1977) EDUCATION (1978) Calorie intake as 7 of requirements 90 Adult literacy rate % 63.0 Per capita protein intake 54 Primary school enrollment % 79.0 GNP PER CAPITA in 1981 US $ 64o GROSS NATIONAL PRODUCT IN 1981 ANNUAL RATE OF GROWTH (M. constant prices) US $ Mln. % 1oQ5-70 1970-80 1981 GNP at Market Pr4 .es 3,491.9 100.0 4.5 3.2 -8.5 Gross Done tic Investment 433.2 12.4 1.9 2.4 - 8.8 Gross National Saving 173.2 5.0 4.7 1.6 -61.1 CuLrrent Account Balance -260.0 -7.4 Exports of Goods, NFS 933.3 26.7 2.7 4.3 -15.2 Imports of Goods, NFS 1,164.5 33.3 0.5 4.1 0.8 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1975 Value Added Labor Force 3/ V. A. Per Worker US $Min. % Mln. 7US$% Agriculture 411.3 23.0 607.5 47.2 677.0 48.7 Industry 445.9 24.9 188.9 14.7 2360.5 169.7 Services 933.9 52.1 491.4 38.1 1900.5 136.6 Uniallocated _ Total/Average 1791.1 100.0 1287.8 100.0 1390.8 100.0 GOVERNMENT FINANCE General Government Central Government ( US$ M1.)7 % of GDP ( US$ Mln.) % of GDP 1981 1981 1974-77 1981 1981 ' 1974-77 Current Receipts 528.7 15.0 16.9 451.2 12.8 14.4 Current Expenditure 626.0 17.8 11.6 491.7 14.0 10.1 Culrrent Surplus -97.3 -2.8 5.3 -40.5 -1.2 4.3 Capital Expenditures 198.2 5.6 5.5 187.2 5.3 4.5 External Assistance (net) 109.6 3.1 1.0 109.6 3.1 1.0 1/ Health services of the Ministry of Health. Excludes Social Security Institute's services. 2/ World Bank Atlas Methodology. 3/ Total labor force; unemployed are allocated to sector of their normal occupation.  Page 2 of 2 COUNTRY DATA - EL SALVADOR MONEY, CREDIT and PRICES 1970 1975 1979 1980 1981 (Million outstanding end period) Money and Quasi Money 594.3 1250.6 2270.3 2414.1 2636.1 Bank Credit to Public Sector 78.7 56.8 125.6 540.0 1388.3 Bank Credit to Private Sector 616.9 1460.6 2813.6 3244.1 3171.8 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 23.1 27.9 26.3 28.5 30.5 Wholesale Price Index (1970) = 100 100.0 174.7 278.9 327.8 362.9 Annual percentage changes in: Wholesale Price Index 2.8 19.0 17.1 10.7 10.0 Bank credit to Public Sector -18.8 619.0 470.4 329.9 157.1 Bank credit to Private Sector 6.2 6.5 16.6 15.3 - 2.2 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1979-81) 1975 1979 1980 1981 US $ Mln % (Millions US s) Exports of Goods, NFS 594.1 1313.1 1218.4 933.3 Coffee 581.0 58.2 Imports of Goods, NFS -685.3 -1267.2 -.1185.8 ,-1164.5 Cotton 73.3 7.3 Resource Gap (deficit = -) -91.2 45.9 32.6 -231.2 Sugar 18.0 1.8 Interest Payments (net) - 7.0 -20.7 - 24.1 - 29.5 All other commodities 325.9 32.7 Total 998.2 100.0 Other Factor Payments (net) -21.9 -42.0 - 59.9 - 40.5 Net Transfers 27.3 51.4 48.9 41.2 3XTERNAL DEBT. DECEMBER 31, 1981 Balance on Current Account -92.8 34.6 - 2.5 -260.0 US $ Mln Direct Foreign Investment 13.1 -10.0 5.9 - Net MLT Borrowing Public Debt, incl. guaranteed 2/ -664.0 Disbursement; 67.4 83.4 123.8 181.6 Non-Guaranteed Private Debt Amortization -47.3- -12.7 -17.1 -17.1 Total outstanding & Disbursed Subtotal I/0.1 ?7 -7 m. 7 164.5 Capital Grants - 13.6 0.8 - - DEBT SERVICE RATIO for 1981 3/ Other Capital (net) 29.3 19.1 -51.4 -29.5 % Other items n.e.i 48.0 -214.0 -317.6 Increase in Reserves (+) 31.3 - 98.8 -217.9 -100.0 Public Debt, incl. guaranteed 4.8 Arrears - - 41.0 25.0 Non-Guaranteed Private Debt Gross Reserves (end year) 142.2 206.8 181.8 168.5 Total outstanding & Disbursed Net Reserves (end year) 108.5 122.0 - 95.9 -195.9 RATE OF EXCHANGE IBRD/IDA LENDING. OCTOBER 31. 1982 (MILLION US S): Through - 1971 IBRD IDA US $ 1.00 = 2.5 Colones Cl. 1.00 = us $ Outstanding & Disbursed 103.4 26.9 Undisbursed 54.5 - 1971 - 1980 Outstanding incl. Undisbursed TST.9 2,679 US $ 1.00 2.5 Colones Cl. 1.00 = US $ 1982 Official Market US$ 1.00 = 2.5 colones Parallel Market US$ 1.00 = 4.0 colones (mid-March 1982) 1/ Loans repayable in domestic currency. 2/ Repayable in foreign currency. Excludes IMF 3/ Ratio of Debt Service to Exports of Goods and non-factor Services not available not applicable January 1983  SUMMARY AND CONCLUSIONS Background and Recent Economic Developments i. Political and social tensions began to escalate in El Salvador in 1977. Kidnappings, strikes, and political protests were followed by guerilla warfare. A coup d'etat at the end of 1979 installed a five-member J'unta, which ruled during most of 1980, although its composition changed as some members left the Government. The Duarte regime, inaugurated in 1980, sought to reach a political settlement based on elections, a strengthening of political institutions, and structural and social reforms. Guerrilla warfare increased in early 1982 but was not successful in preventing a record voter participation, in N'ational Assembly elections in March 1982. P'resident Duarte's party received 40 percent of the vote while a coalition of opposition parties obtained a 60 percent majority. An independent, interim President, Dr. Alvaro Magana, was selected and his administration took over in May 1982. ii. Partly as a result of the political instability, the Central American Common Market (CACM) trade difficulties, and lower export prices, production decreased in all major sectors of the economy during 1979-81. Large declines in real output took place in manufacturing (29 percent), construction (35 percent), and commerce (24 percent) over this period. Agricultural value added also declined (14 percent) because of both the civil strife and the production impact of the 1980 agrarian reform. Export crops were particularly affected, with cotton and sugar experiencing substantial drops; coffee exports were less severely affected. GDP declined at least one-fifth and in 1981 was at about the 1974 level. Gross domestic income (GDI) showed a sharper deterioration owing to the decline of coffee prices and large price increases for imported goods, particularly oil. Both prior engines of growth, investment and exports, showed significant declines. Real public and private fixed investment declined by 25 percent and 69 percent respectively from 1978 to 1981. Real export value decreased by 17 percent in the same period. Wholesale prices increased 17 percent a year during 1979-81 compared to 10.3 percent in 1976-79. Real minimum wages deteriorated, particularly during 1978-79, but recovered sharply with the increases in minimum and general wages that took place in 1980. iii. The current account of the balance of payments was positive in 1979 and in equilibrium in 1980; it deteriorated significantly, however, in 1981. The overall balance of payments, however, deteriorated continuously during 1979-81. Net foreign exchange reserves declined by about US$400 million from December 1978 to December 1981 and payments arrears of about US$ 65 million occurred. Several factors explain the overall balance of payments situation: capital flight, the interruption of lines of credit from foreign commercial banks and suppliers, production declines in cotton and sugar, payments difficulties in the CACM, and lower coffee prices. Foreign exchange controls were tightened and a dual exchange market system is now in place, with priority imports being transacted at the official rate (C 2.5 per dollar) and non-essential imports and invisibles being  - ii - transacted at the parallel market rate (C 4.0 per dollar in March 1982). Foreign exchange proceeds from non-traditional exports outside the CACM can be transferred and used freely in the parallel market to pay for imports. iv. The financial position of the Central Government also deteriorated sharply in 1980-81. Expenditures, many of them for military purposes, increased; revenue collections fell because of reduced economic activity and incomes, as well as lower imports and exports, particularly coffee exports. Fiscal savings declined from 4.1 percent of GDP in 1979 to -1.1 percent in 1981 and the overall deficit increased from 0.7 percent of GDP to 6.4 percent in 1981. Capital expenditures declined 18 percent in real terms. Current savings of the rest of the public sector also decreased. The public development corporation, the food marketing agency, the agrarian reform institute (ISTA), and the university had growing current account deficits, thereby reducing total public savings. As current savings deteriorated, a larger proportion of public investment was financed by domestic credit from the banking system. B. Structural Reforms V. The Salvadorian Government undertook significant reforms in 1980 that affect ownership and control of land, banks, and coffee and sugar exports. The land reform provided for expropriation of estates over 100 hectares (Phase I and Phase II), and for ownership titles to all tenant farmers for the land they rented (land-to-the-tiller, Phase III). Phase I (expropriation of all estates over 500 hectares) and Phase III were imple- mented. Phase II (expropriation of estates of 100 to 500 hectares)is still pending. The nationalization of the banking system was intended to elimi- nate the concentration of credit to a few people and enterprises. The nationalization of foreign trade placed the marketing of coffee and sugar exports under a coffee marketing board and a sugar marketing board, both autonomous agencies. Their policies are controlled by Boards composed of the Ministers of Foreign Trade, Planning, Economy, Agriculture, and Finance, the President of the Central Bank, and a representative of the President of the Republic. vi. Under Phase I, the agrarian reform institute acquired 326 properties with 224,000 hectares (17 percent of the country's agricultural land). About 35,000 families (about 8 percent of the peasant families) were beneficiaries of these expropriations; two-thirds were organized in cooperatives. Under Phase III, 31,000 families had applied for benefits by mid-1982. vii. Apart from the adverse effect of lower export prices and conti- nued violence, which caused a decline in areas planted in some reformed haciendas, Phase I had an adverse impact--hopefully temporary--on produc- tion, which is to be expected from any radical transformation of the land tenure system as the experience of other Latin American countries has shown. Production in Phase I cooperatives run by ISTA has declined. Main- taining production in the reform haciendas was not a simple task for the poorly trained campesinos or the insufficiently staffed ISTA's co-manage- ment teams. Timely provision of management, extension, technical assist- ance, credit and other support services was a problem. Furthermore, the  - iii - cooperatives have not fully repaid credit from commercial banks and the agricultural development bank. In addition, they have not generated a surplus to service their debts to the former owners. The delays in compensating many former owners have been a major issue of the reform. viii. Implementation of Phase II would affect a very important section of farms (about 24 percent of t:he farmland), which generates a significant proportion of export earnings and provides substantial employment and incomes. Because a decision to proceed with Phase II is still pending, there is insecurity and uncertainties among property owners, with a beginning of decapitalization and relaxation of management and cultivation practices. The current Government acknowledges the physical and financial constraints to move forward with Phase II at this time; any definition on the form and timing of any futuLre action regarding the lands involved is a task that apparently would be undertaken by the Government to be elected in 1984. ix. Phase III is likely to have an immediate positive impact on some beneficiaries as long as the debt service payments are lower than their prior rent. The size of the plots allocated to tillers, however, only averages about 1.7 hectares, which commits the tiller to a meager living. The average plot is mostly adequate for subsistence production, most likely from cultivation of basic grains; thus, only those with somewhat larger holdings would be able to have some excess production to sell locally. x. The nationalization of the banking system has created less problems than originally anticipated because the Government has retained most of the management teams and has maintained some autonomy in day-to-day operations. However, credit allocations to and recoveries from agrarian reform groups will need close supervision to ensure timely repayments and to avoid large arrears and a weakening of the financial system. The Government is now prepared to pay more attention to this situation. xi. The nationalization of foreign trade in coffee and sugar has adversely affected production but it is too early to evaluate the full impact. The spread between farm and export prices for coffee widened in 1980. In the 1981/82 coffee crop, however, the price spread diminished to a level similar to that of 1979, and grower prices increased by about 10 percent in spite of lower export prices. In the case of sugar, a significant number of sugar mills expropriated under Phase I are now idle as sugarcane production declined. C. Government Programs and Policies xii. For the next few years, economic conditions in El Salvador are likely to remain depressed. The main task ahead for the new administration will be recreating favorable conditions for the recovery of production to 1979 levels, and then setting the basis for further economic growth. Decreased production in agriculture and manufacturing, the weak financial position of many firms, damaged infrastructure, lack of foreign exchange, and uncertainties adversely affecting private investment and growth are all factors that make the task of the Government particularly difficult. It is expected that political-military considerations may well dominate economic events in the near future.  - iv - xiii. The Government has a short-term program aimed at economic reactivation. Although the Government is faced with overriding priorities for defense and basic needs, its program promotes improved utilization of scarce resources and some conditions needed for private investment revival, provided violence levels are reduced. Its main elements are a liberalization of exchange and trade controls and interest and pricing policies; increased credit allocations to the private sector compensated by a reduction of credit used by the public sector; and a careful demand management of the economy to strengthen the balance of payments and avoid higher inflationary pressures. This program, however, needs complementary actions to restore private sector investment and growth, and increase production levels. Among them: (i) improved support to the agrarian reform with proper consid- eration of trade-offs and costs involved, as well as of the means (manage- ment, planning, extension, supervised credit) needed to achieve the objec- tives of land distribution. Given the problems encountered with Phases I and III, Phase II might seriously disrupt the country's already reduced income and export capacity if it were implemented poorly. A major effort should be made to raise production and productivity in Phase I cooperatives to complement the recent Government effort to clarify the legal situation of rental arrangements of land subject to Phase III provisions. These actions will not only assist a recovery of early production levels, particularly of cotton and sugar, but they would also favorably affect the incomes of most reform beneficiaries. (ii) expanded support to non-reform agriculture through larger credit and foreign exchange allocations and revised marketing, and pricing arrangements for coffee and sugar by the coffee and sugar marketing boards (see paras. 57-58 and 63-64), in order to expand agricultural production and exports; (iii) effective promotion and marketing of manufactured exports outside the CACM, which most likely offers the best possibility for expanded production. Industries may well need increased assistance by means of urgent credit and foreign exchange support to finance imports, spare parts and some equipment for rehabilitation in order to expand util- ization of idle capacity; (iv) improvement of the financial position of the public sector by reducing costs, increasing tariffs and prices of public services and products, thereby reducing the need for Central Government transfers or domestic credit. Alternatively, tax reforms may be considered. The Government is faced with difficult decisions in this area because of existing wage and price controls. xiv. Furthermore, the Government needs to focus its attention on a reconstruction program for damaged infrastructure in the medium term and on designing a longer term development strategy and public investment program for the late 1980s and 1990s. Although the Government, understandably, is preoccupied with short-run problems and consequently this report focuses  v primarily on them, once production conditions are normal again the country must also look to longer term issues. Because of its demographic dynamics, El Salvador must return to a path of accelerated economic growth or face continued depressed economic conditions. Even assuming a substantial decrease in the rate of population growth, the Salvadorian population by the year 2000 would be about 1.6 times the 1980 size. In the absence of sustained growth, per capita incomes will decline. This population pressure would also create serious pressures on the restricted land and natural resources base, public services, and the capacity of the economy to create jobs. Population movements to the cities and towns would further exacerbate existing pressures for urban employment, services, and housing. Urban services levels now are low and the weak financial position of the municipalities and water agencies will require a revision of urban property taxation and water rates to finance the expansion of urban services.1/ D. Growth Prospects xv. El Salvador's growth prospects are not very encouraging, at least for the next couple of years. The economic situation in 1982-83 is likely to be heavily influenced by the immediate political/military priorities. GDP is expected to decline further with an additional pressure on jobs. Disruption of transport, power, and other services could continue as well as refugee problems. Improved security and restored private sector confidence--two important but highly unpredictable factors--might permit the beginning of an economic recovery by 1984, but any forecast at this time is highly uncertain. The short-term economic outlook will continue to be closely connected to export growth, basically coffee, cotton, sugar, and manufactured exports. Growth prospects beyond 1985 will depend,to a large extent, on significantly accelerating manufacturing growth, including labor-intensive manufactures, for export to non-CACM countries; this will provide both needed foreign exchange and employment. E. Public Investment and Finances xvi. Real public investment declined 25 percent in the biennium 1980-81. Transport and manufacturing showed large declines while social and public administration projects increased their share of total public fixed investment. In 1982, the Central Government's constrained finances likely forced a 40 percent cut in its fixed investments. Within these reduced levels, most of the investments were dictated by three considerations: (i) support to the agrarian reform; (ii) completing some large ongoing projects; and (iii) employment creation with the financing entirely or almost entirely from foreign sources. 1/ See IBRD 2945-ES El Salvador: An Inquiry into Urban Poverty, November 1980.  - vi - xvii. Beyond these immediate objectives, the Government has yet to focus on an appropriate public investment strategy for the medium term, including a review of possible projects. Drastically changed domestic conditions suggest a reformulation of project content and priorities. Large projects, such as the Acajutla container port, power and telecommuni- cations expansions, and the San Salvador freight terminal are not econom- ically and financially viable with present depressed conditions and should be postponed until these sectors recover or begin to expand beyond pre-1979 levels of activity. Rebuilding infrastructure and projects with an immediate impact on production, basically related to the recovery of production, both public and private, have a much higher priority. xviii. Public investments will continue to be constrained by weak public finances because of slow revenue growth and continued high military expen- ditures. Substantial foreign support on highly concessionary terms, with some provision of counterpart funds, will be crucially needed. The main possibility for improving public finances and financing local counterpart funds is in public enterprises and decentralized agencies, through tariffs and price increases and cost-cutting efforts. Especially important will be the financial viability of agrarian reform cooperatives and the timely repayment of credit received by them. xix. Only when short- and medium-run rehabilitation and reconstruction needs are satisfied, will El Salvador be able to return to a longer term development strategy. Past Bank reports have stressed an approach of promoting growth of manufactures and modern urban sectors to increase their labor-absorption capacity. Then, stepped-up support for manufacturing and maquila activities--through improved port facilities, industrial parks and free zones, labor training, revised export incentives, and greatly strengthened promotion activities--will be needed. Agriculture will also need further public investments and support, particularly for the expansion of cropped area, land conservation and erosion control, and increases in areas under irrigation. G. Balance of Payments and Creditworthiness xx. The overall balance of payments will continue to be weak in 1983, although this is very hard to predict given the volatility of some factors involved, such as access to commercial credit, capital flight, and the widened parallel market. For the next few years, however, the crucial factor is export production, particularly coffee. Failure to act in a timely fashion to arrest export declines could further undermine the foreign exchange situation, constrain the economy, and adversely affect future creditworthiness. xxi. The debt service ratio for public medium- and long-term debt is now low (about 3.4 percent in 1980 and 4.8 percent in 1981) and the level of the external debt outstanding at the end of 1981 was also low (US$ 664 million; US$ 1,035 million, if undisbursed loans are included). Given the lack of foreign commercial banks' credit, most of the net inflows of  - vii - external financing will be from undisbursed loans and from new operations with multilateral and bilateral sources mostly on concessionary terms. Therefore, the future debt service will likely increase slowly. Future creditworthiness, therefore, will depend significantly on three factors: export prospects, demand management, and military-political events. An acceleration in the present level of violence could well lead to a further general economic and balance of payments deterioration. For this reason the military situation will be a prime factor in determining future creditworthiness. The political situation, however, has improved after the March 28, 1982 elections. Demand management is another important factor, particularly strengthening the financial position of the public sector and reducing the size of the Central Government deficit; this would permit implementing prudent monetary and credit programs to allocate more credit to the private sector. These elements provided the basis for a stand-by arrangement with the IMF. However, prudent demand management will not ensure creditworthiness alone. GDP and export declines have to be arrested. The links between GDP and export growth, employment, and creditworthiness make the Government's efforts to arrest the export decline and bring about a recovery of export production, the deciding factor for future creditworthiness. Export growth will be the most effective policy to maintain and reinforce El Salvador's creditworthiness. A detailed analysis of creditworthiness is presented in paras. 110-114.   UPDATING ECONOMIC MEMORANDUM ON EL SALVADOR I. INTRODUCTION 1. This current Economic Memorandum updates and reviews recent develop- ments and short-term prospects and policies of the Salvadorian economy while it undergoes a military conflict and structural changes. In the last few years, El Salvador has confronted significant terrorism and guerrilla activities that have adversely affected production and the country's productive capacity. Private sector uncertainties originating from the armed struggle as well as from the reforms undertaken by provisional Governments have also contributed to lower production and a sharp decline in investment. These political-military considerations have dominated economic events, even though worldwide and regional developments have also contributed significantly to shape domestic problems. 2. Political violence began to escalate in 1977. Since then, a number of prominent local and foreign businessmen, Government officials, clergymen, students and peasants have been killed or kidnapped. Strikes and political protests in the cities became common. Increasing unrest, violence and the initiation of guerrilla activity led to a coup d'etat at the end of 1979. A five-member junta (three civilians and two army officers) ruled the country during most of 1980, although its composition changed as some of its members left Government in early 1980. The Junta, which was representative of both the military and the Christian Democratic Party, faced growing opposition from both the extreme right and the extreme left, and this resulted in a deteriorating political climate, increased guerrilla warfare, and a disruption of economic activities. Armed clashes were frequent. The Junta undertook important reforms early in 1980; an agrarian reform affected land tenure rights on large pro- perties and rented land, commercial banks were nationalized, and the State took over marketing of coffee and sugar exports. A Christian Democrat, Jose Napoleon Duarte, was installed as President in 1980. Mr. Duarte's administration aimed at a gradual strengthening of institutions, a political settlement based on elections, and the effective implementation of the 1980 reforms. Guerrillas mounted a major offensive to overthrow the Government in January 1981; this push failed. The Duarte regime held elections, as scheduled, in March 1982 for a Constituent Assembly. A second wave of increased guerrilla warfare was not successful in disrupting the elections. A record voter participation gave a 60 percent majority in the Assembly to a coalition of opposition parties over the ruling Christian Democrats. A new, independent Coalition President, Mr. Alvaro Magana was installed in May, 1982. 3. The deteriorating economic conditions, prevailing uncertainties about private sector activities, social unrest, the ongoing military conflict together with available statistics being subject to wider margins of error than usual, and Government policies being modified with greater frequency than in the past make it difficult to look too far into the future. Therefore, the focus of this memorandum is primarily short-tierm and it does not attempt to analyze longer- term economic prospects.  II. ECONOMIC DEVELOPMENTS AND THE EFFECTS OF POLITICAL-MILITARY EVENTS A. Past Growth Trends 4. To place in perspective recent developments, a quick overview of past trends follows. The Salvadorian economy grew at 5.4 percent a year during 1960-78 (2.2 percent a year in per capita terms). Exports and investment were the main engines of growth. Investment grew faster than GDP, and the invest- ment/GDP ratio increased from 14 percent in 1960-62 to 23 percent in 1976-78; investment was financed mostly out of domestic savings-which increased from 12 percent to 20 percent of GDP. While savings grew rapidly, per capita real consumption was repressed; thus, the GDP share of private consumption declined from 78 percent to 68 percent. The other growth factor, exports, also increased its GDP share from 22 percent in 1960-62 to 36 percent in 1976-78. Manufac- turing exports became significant--about one-third of total exports. Substan- tial social progress was also made. Mortality rates declined by about 40 percent (from 15 per thousand in 1960 to about 9 per thousand in 1978), although infant mortality rates continued to be high. Life expectancy increased by 10 years to 63 years. The adult literacy rate increased from 49 percent in 1960 to 63 percent in 1978, and primary education enrollment covered about 90 percent of the school-age population compared to 60 percent in 1960. However, while access to primary education was widespread in urban areas, primary coverage in rural areas was 70 percent for children age 7-12 but only 8 percent for children age 13-15. 5. In spite of this progress, the 1978 per capita GNP was low at about US$ 600. El Salvador was and is a poor, densely populated country with limited natural resources and a large number of its citizens living in poverty. Mal- nutrition was common among small children. About two-thirds of the Salvadorian households were without piped water, over half without electricity, and only one-sixth were served by waterborne sewerage systems. Furthermore, rapid population growth, at over 3 percent a year, puts additional pressures on the country's limited territory and natural resources. B. Recent Performance of the Economy 6. During 1979-81, El Salvador's economy experienced a serious setback as both private sector uncertainties and political violence increased. The 1981 real GDP was at about the 1974 level following a 18 percent decrease from its peak 1978 level. Both past engines of growth, investment and exports, experi- enced declines of about 60 percent and 17 percent respectively from their 1978 real levels. The investment/GDP ratio and the export/GDP ratio averaged 13.0 and 33 percent, respectively, during 1979-81. In addition, these declines show a deteriorating trend; in 1981 these ratios were 12.2 percent and 26.3 percent, respectively (See Table 1).  Table 1. INVESTMENT AND EXPORT INDICES 1960 1960-78 1978 1978-81 1981 (% of GDP) (Annual % (% of GDP) (Annual % (% of GDP) growth rate) growth rate) Investment 15.5 7.6 26.1 -25.7 12.2 Exports 20.4 6.5 30.7 -6.0 26.3 Source: Tables 2.1 and 2.2, Statistical Appendix. 7. Production decreased significantly in all major sectors of the economy during 1979-81. Manufacturing, construction, and commerce were the most affected, with declines of 29 percent, 35 percent and 24 percent, respectively. Agricultural value-added was also down by about 14 percent because inter alia of d.isruptions caused by the guerrilla warfare and the implementation of the agrarian reform, which have particularly affected export crops, such as cotton and sugar. Coffee production, the backbone of the economy, did not decline as much as cotton and sugar in spite of much lower export prices in 1981 and uncertainties about the application of the agrarian reform to landholdings in the 100-500 hectares. However, its outlook is less buoyant, given the reduction of the 1981-82 coffee crop and expected stagnation of the 1982-83 coffee crop. 8. Gross domestic income (GDI) showed an even larger decrease than GDP because of the terms of trade deterioration which was brought about by rising import prices for petroleum and products from industrialized countries coupled with the sharp decline of coffee and other primary export prices. Since 1974, imported inflation drastically affected the traditional price stability of the Salvadorian economy. Domestic factors also played a role in the last few years until the 1981 wage-price freeze. The consumer price index reportedly increased at 15 percent a year during 1978-80 and rose about 12 percent in 1981. Real minimum wages deteriorated sharply during 1978 and 1979 but recovered in 1980 when minimum wages were increased to about 93 percent of the December 1977 real wage. 9. Following a large deficit of US$286 million in 1978, the current aLccount balance of payments improved significantly in 1979-80. Current trans- aLctions were positive in 1979 arLd slightly negative in 1980. Exports of coffee by volume were at all time record levels during 1979-80, averaging 60 percent over the 1977-78 level. Cotton and sugar exports showed a downward trend. The balance of payments, however, deteriorated significantly in 1981, and the current account deficit reached US$260 million. Sharply lower coffee prices and lower manufactured exports to the CACM explain about two-thirds of the 1981 export decline with respect to 1.980. The rest stems mostly from lower exported volumes of coffee and cotton, w*Lich declined 16 percent and 45 percent, respectively. I.O. Traditionally, El Salvador has kept overall public sector cash deficits at low levels, but finaLnces of the public sector (excluding public banks) deteriorated significantly in 1980-81, with the overall deficit reaching  -4- about 7.4 percent of GDP. The main reasons for the changed situation are: (i) a 15 percent decline in tax revenues during 1980-81 from the high 1979 level owing to reduced economic activities and a sharp drop of coffee prices; (ii) rising current expenditures, particularly in the Central Government, which resulted in negative Central Government current savings and negligible savings for the public sector as a whole; and (iii) an expansion of agrarian reform expenditures. 11. In 1982, all major productive sectors are expected to decline as production continues to be adversely affected by the civil strife, electricity cutoffs, transport problems, sabotage, scarce credit and foreign exchange, and the impact of the agrarian reform and low international prices for agricultural production. As a result, GDP will decline further. The Government is committed to reduce the overall balance of payments deficit significantly in 1982 which, with some use of IMF and USAID resources, would permit a reduction of arrears in foreign payments and a modest improvement in gross foreign assets. The 1982 cash budget programs a reduction of the overall deficit of the Central Government, and thus the need for domestic credit from the banking system, by decreasing total expenditures 2.5 percentage points of GDP. This will be accomplished by reducing non-defense current outlays and capital expenditures. 12. Deteriorating economic conditions have been accompanied by increasing open unemployment--in the range of 20-30 percent--a substantial refugee problem and accelerated rural-urban migration by persons displaced by open warfare in rural areas. Most affected are the border departments--Chalatenango, Cabanas, Morazan, and La Union--and the San Vicente and Usulutan departments in the coastal areas. C. The 1980 Reforms 13. The Salvadorian Government undertook significant foreign trade, land, and banking reforms in 1980. First, a land reform, which provides for expropriation of estates over 500 hectares (Phase I) and over 100 hectares (Phase II) and for ownership titles to all tenant farmers on the land they rent (land-to-the tiller, Phase III). Both Phase I and Phase III were implemented. Phase II (expropriation of estates between 100 and 500 hectares) is still pending and, given the problems experienced with Phase I, will need to be carefully reviewed before a decision is made to implement it. Second, the nationalization of the banking system, which is intended to eliminate the concentration of credit on few people and enterprises; the Government is expected to retain only 51 percent of the shares and sell the rest to the general public, including previous owners and bank employees. Third, the nationalization of foreign trade which puts the control of coffee and sugar exports in two autonomous agencies: INCAFE and INAZUCAR. Both agencies' policies are controlled by boards composed of the Ministers of Foreign Trade, Planning, Economy, Agriculture, and Finance, the President of the Central Bank, and a representative of the President of the country. These reforms are discussed later in this report. D. Government Development Policies and Finances. The Expanding Role of the Public Sector 14. The public sector's role in the economy expanded gradually during the 1970s as the Government undertook a more active development role. This was  reflected in the increasing importance of public enterprises providing power, ports and airports, telecommunications and water services; a rising level of public investment, including large infrastructure works for power, transport, and telecommunications as well as expanded social outlays for education and health; and a higher level of Central Government expenditures supported by rising tax revenues, particularly those from coffee. 15. The 1980 reforms expanded the Government role in the economy, which Inow controls about 9 percent of the gross value of agricultural production (2.3 percent of GDP) and 15 percent of the agricultural land, 10 of the 13 sugarmills, all foreign trade in coffee and sugar, and all commercial banks. This has also increased significantly public employment (8 percent of the economically active population before the reforms) but precise estimates are not available. The Financial Position of the Public Sector a. Central Government 16. Traditionally the Central Government's financial management was very prudent. Capital outlays were adjusted to the availability of current savings, overall deficits and borrowings were low, and current expenditures tightly controlled. In 1980-81, however, the situation changed dramatically as Central Government finances deteriorated significantly. Current savings were negative by 1.1 percent of GDP in 1981; the overall deficit grew to 6.4 percent in 1981 (See Table 2). This is the result of increased expenditures, mostly current, and lower revenue collections because of reduced economic activities and incomes. Most of the increase in current expenditures was for wages and salaries; the Ministries of Education, Health, Agriculture, and Defense showed the largest increases. Capital expenditures at current prices increased only 13 percent from the 1979 level but, as savings deteriorated, a larger proportion was financed by domestic credit from the banking system, mostly from the Central Bank, which reduced credit availabilities for the private sector. Transfers to the rest of the public sector showed little growth as the Government implemented a policy of self-sufficiency for the autonomous institutions and enterprises. Table 2. CENTRAL GOVERNMENT FINANCES (in percentages of GDP) 1978 1979 1980 1981 1982 a/ Central Government Current Revenues 13.5 14.1 12.6 12.7 12.3 Current Expenditures 11.0 10.0 12.1 13.8 13.8 Current Savings 2.5 4.1 0.5 -1.1 -1.5 Overall Deficit 1.9 0.7 5.3 6.4 6.4 Domestic Financing (Net) 0.1 -1.1 2.7 3.3 3.4 External Financing (Net) 1.8 1.8 2.6 3.1 3.0 a! Programmed. Source: Table 5.1, Statistical Appendix.  17. The 1982 cash budget programs a reduction of the overall deficit to 6.4 percent of GDP to reduce the Government's use of credit from the banking system. To achieve this result and also to set aside enough resources for interest payments of the agrarian reform, existing expenditures will have to be reduced about 2.4 percentage points of GDP with discretionary outlays on current account for non-defense items falling in nominal terms and Central Government investment outlays decreasing 40 percent unless additional resources are obtained. Current outlays will be lowered by reducing staff (mostly through attrition), decreasing expenditures for goods and services 5 percent with respect to the 1981 level, and slashing transfers by 10 percent. Expenditure controls have been tightened through periodic allotments and prior approval requirements. 18. The rest of the public sector (local Governments, autonomous institutions and enterprises) have also shown a deteriorating trend for current account savings, generating in 1981 current savings for only 0.4 percent of GDP, a four-fifths decline from the 1979 level. The main contribution to savings in 1981 was from the housing social fund, teachers' retirement fund, social security, power company, and telecommunications agency. The public development corporation (INSAFI), the food marketing agency (IRA), the agrarian reform institute (ISTA), and the university had current account deficits. Fixed investment expenditures declined by about 30 percent. The overall deficit of the rest of the public sector was about 1.7 percent of GDP in 1981, excluding land purchases of ISTA and other financial transactions. Austerity measures, increased university tuitions, higher Government contributions to the social security system, and possibly tariff revisions by the power generating company (CEL) may change the trend in 1982. For some enterprises (i.e., CEL) increased savings are a prerequisite to continue their repair and maintenance work as well as to proceed with their investments. However, the financial positions of the power company, the port authority, and other public enterprises are likely to continue to be adversely affected by declining economic activities, sabotage, and other difficulties. 19. As a result of these events, consolidated public sector savings declined by 6 percentage points of GDP between 1979 and 1981, and the overall deficit increased from 2.1 percent of GDP in 1979 to 7.4 percent in 1981. 1/ Public savings, which represented about one-third of domestic savings in 1978, became negative in 1981. As a result, domestic credit to the public sector increased by over 5 percentage points of GDP. In brief, the consolidated position of the public sector weakened considerably during 1980-81. 1/ Excluding certain financial transactions in support of ISTA. See Table 5.9, Statistical Appendix.  Table 3. PUBLIC SECTOR FINANCES (in percentages of GDP) 1978 1979 1980 1981 1982 a/ Consolidated Non-Financial Public Sector Current Savings 5.3 5.8 1.0 -0.4 -1.7 Overall Deficit -1.4 -2.1 -6.8 -7.4 -7.9 Domestic Financing (Net) -0.7 0.4 4.7 4.8 4.8 External Financing (Net) 2.1 1.7 2.1 3.5 3.1 a/ Programmed. Source: Table 5.9, Statistical Appendix. Public Investment 20. Public fixed investment grew rapidly during the second half of the 1970s; the peak in 1978-89 was almost double the level of 1973-74 at constant prices. This was directly relatied to the improvement in public finances and to a more dynamic development policy, which was initiated with the 1973-77 development plan. Most sectors showed substantial real increases during 1975-79, the largest being in power, transportation and telecommunications; their combined share of public fixed investment reached 58 percent in 1978-79. Productive sectors also increased their share of public fixed investment owing to the more aggressive government approach to agricultural development. Social investment grew significantly in real terms, though at a more moderate rate, from a very low base. Fixed public investment growth was complemented by an even more rapid expansion of financial investment, which reached 39 percent of total public investment in 1978-79. 21. Real public fixed investment declined 25 percent during 1980-81. Transport and manufacturing investments experienced large declines while social development projects as well as public administration projects expanded significantly. In general, the sectoral distribution was dictated by the following considerations: (i) supporting the agrarian reform through small irrigation projects, rural schools and health centers, and rural roads; (ii) completing some large projects wlhich were at an advanced stage of construction, i.e., the San Lorenzo hydroelectric plant, the Ahuachapan geothermal power plant, and water supply to San Salvador; (iii) supporting employment by going ahead with new projects which are entirely or almost entirely financed by external sources, i.e., road construction and livestock development, financed by IDB; urban and housing development, financed by USAID; and roads and other projects, financed by CABEI, and (iv) the expansion of expenditures for public administration projects. This reflects the vital role that foreign financing  -8- played in maintaining some public investment and generating some employment. Further support will be needed in the years ahead. 22. A decline in fixed public investment at current prices is expected in 1982 because of financial constraints. Central Government fixed investment will likely decrease 40 percent in 1982. Since the financial position of the autonomous public enterprises also deteriorated, the level of total fixed public investment will decline to less than C 490 million compared to C 585 million in 1980. Given that ongoing projects will need about C 428 million a year in 1982 and in 1983, and that certain reconstruction expenditures are urgently needed, there is now little scope for starting new public investment projects. E. Balance of Payments 23. The balance of payments has been adversely affected by four events: lower commodity prices, the impact of the agrarian reform on cotton and sugar exports, the guerrilla warfare, and the payment difficulties of the CACM. Exports lost much of their dynamism after reaching a peak in 1979. Coffee exports reached a peak level of 207,000 metric tons in 1979 but declined afterwards to earlier levels reaching about 150,000 metric tons in 1981 because of production problems (see the agriculture section and Annex A) as well as low farm prices paid by INCAFE. Cotton exports showed a sharp deterioration in 1979-81 as production decreased owing to the impact of the agrarian reform and guerilla warfare. Cotton lands were severely affected by Phases I and III of the agrarian reform; the Usulutan area has also been the subject of substantial guerrilla activity. Sugar exports had not overcome the negative impact of low international prices during the late 1970s when this activity experienced the impact of the agrarian reform--which included most sugar mills--the nationalization of sugar exports, and violence, which adversely affected sugar cane production. As a result, sugar production and exports decreased sharply. Manufactured exports had difficulties during 1979-81 as a result of (i) the constrained financial situation of Costa Rica and Nicaragua; even though El Salvador's overall balance is negative in the CACM, it has positive balances with these countries, and exporters of manufactures find that previously accumulated trade balances with these two countries are not easily convertible in Colones and thus there are no adequate incentives for increasing exports to these two countries; (ii) lack of financing, originating in capital flight and lack of foreign credits from foreign banks and suppliers, as well as reduced access to domestic credit. Table 4. MAIN EXPORTS PERFORMANCE (million dollars) 1978 1979 1980 1981 Coffee 386 675 615 453 Cotton 98 85 83 53 Sugar 19 27 13 14  -9- 24. The current account balance of payments, which showed some resilience to the negative Developments in the Salvadorian economy during 1979 and 1980, deteriorated significantly in 1981, but the size of the deficit is still moderate given the circumstances; 7.3 percent of GDP. Capital movements, mostly capital flight and the interruption of lines of credit from foreign private banks and commercial suppliers played a dominant role in a large decline of foreign exchange reserves in 1980. Other factors also played a significant role iTI 1981. Export values declined while import levels were similar to those of 1980 in spite of continued economic deterioration; this behavior is explained by the Government's increased use of domestic credit and the need to provide essential foodstuffs and employment to the population, financed partially by special foreign credits. Capital. flight also continued, although on a more moderate scale, and foreign commercial lending virtually ended. At the end of 1981, net foreign exchange reserves were negative by about US$200 million, not counting payments arrears of about US$65 million.2/ 25. Exchange controls have been tightened in the last couple of years as the country's balance of payments deteriorated. The dual exchange market system has an official market rate of C 2.50 = US$1.00, and a parallel market rate determined by market forces (about C 4 US$1 in mid-March 1982). Priority imports (energy supplies, basic f ood products, medicines, imports of raw materials for industry and agriculture, and spare parts) are transacted at the of ficial rate. Non-essential imports from all origins (about 25 percent of all imports) are transacted in the paLrallel market. Foreign exchange to pay for invisibles, with very few exceptions, is obtained in the parallel market. Proceeds of traditional exports (coffee, cotton, sugar, shrimp and lobster) and CACM exports must be surrendered at official market rates within 90 days while proceeds of non-traditional exports outside the CACM may be deposited in dollar accounts in the commercial banks.. These accounts may be used for authorized transactions or transferred to other dollar accounts at exchange rates determined in a negotiated sale, thereby providing a source of dollars for the parallel market. The accounts, in turn, can be used freely to pay for imports of goods and services. Proceeds from invisibles must be surrendered at the official rate with the exception of family remittances, personal services,and commissions. Exchange receipts f rom capital transactions must be surrendered at the official rate in order to quaLlify later for foreign exchange for debt servicing, dividend transfers, and capital repatriation in the official market. Alternatively, these exchange receipts can be deposited in foreign currency accounts with commercial banks and used for authorized transactions. 2/ IMF estimate; Central Reserve Bank estimates are higher because they overstate the arrears by including requests for open letters of credit for future imports.  - 10 - Table 5. BALANCE OF PAYMENTS: SELECTED INDICATORS (millions of dollars) 1978 1979 1980 1981 Exports Goods and Non-factor Services 945 1,313 1,218 933 Imports Goods and Non-factor Services -1,222 -1,267 -1,186 -1,165 Resource Gap -277 46 32 -232 Current Account Balance -286 35 -3 -260 Public Medium- and Long-Term Flows (net) 69 72 107 165 Errors and Omissions -76 -214 -318 - Other Capital Items 326 8 -45 -30 Change in Reserves (- increase) -33 99 218 100 Arrears Increase - - 41 25 Source: Table 3.1 Statistical Appendix. 26. The payments arrears have partially led to a tightening of credit conditions from foreign suppliers, who now require a confirmed letter of credit or have interrupted transactions with El Salvador. Since individual importers have little or no access to credit from foreign banks, this in effect means prepayment of imports. The Central Reserve Bank and some commercial banks have arranged for special letters of credit with foreign banks to facilitate access to payments with 60 days-after-shipment letters of credit for priority imports. However, these arrangements are for limited amounts and based on collateral deposits of the Central Reserve Bank covering a certain proportion of the line of credit. 27. External debt controls have also been strengthened. Medium- and long-term debts of the public sector traditionally have required approval and ratification by the Legislature. Long-term debts of the private sector must be registered in the Ministry of Foreign Trade to ensure access to foreign exchange for payment of interest and amortization as established when registering. These payments must be approved by the Central Reserve Bank in consultation with the Ministry of Economy. In addition, all short-term public and private debts continue to require authorization of the Central Reserve Bank. Its Exchange Control Department makes an analysis of the financial situation of the enterprise, the use and characteristics of the foreign loans, and its compatibility with the global country limits established for external indebtedness. 28. Disbursements of external official capital have stepped-up during 1980-81 and are expected to continue at high levels during 1982. Main sources of the increase in 1981 were operations with IDB, USAID and other U.S. agencies, and Venezuela.  - 11 - Table 6. DISBURSEMENTS OF OFFICIAL LOANS REPAYABLE IN FOREIGN CURRENCY a/ (million dollars) 1978 1979 1980 1981 CABEI 13 5 2 14 IBRD/IDA 13 20 13 15 IDB 30 27 20 50 IMF Trust Fund - - 25 - OPEC Special Fund 2 - - - Multillateral 58 53 60 79 France - 5 24 10 U.S.A. 1 2 18 73 Venezuela 15 15 9 19 Other 6 8 5 - Bilateral 22 30 56 102 TOTAL 80 83 116 181 a/ Excludes grants. Source: Central Reserve Bank. 29. The Government is committed to reduce the overall balance of payments deficit significantly in 1982 which, together with the possible use of some IMF resources, would permit a reduction of outstanding foreign arrears and a modest improvement in gross foreign assets of the monetary authorities, provided there is some refinancing of short-term external debts. To reduce the balance oE payments deficit, the Government has introduced some exchange rate flexi- bility by authorizing some additional transactions in the parallel market: some non-essential imports previously included in a prohibitive list or subject to prior deposit requirements (about one fourth of merchandise imports); non-Gover- nment debt service payments (about US$130 million); and import and service pay- ments of exporters of non-traditional goods (about US$60 million of exports to markets outside the CACM (see para. 71). Licenses are now issued freely for iimports that do not require foreign exchange from the Central Reserve Bank. Formalization of the parallel market is a step toward the reunification of the foreign exchange markets and during 1982 the Government may shift additional transactions to the parallel market. F. Monetary Developments 30. The Government took over all domestic commercial banks, all savings and loan associations, and an investment bank in 1980. Foreign banks were required to stop accepting deposits and were given one year (later expanded for another year) to close their local deposit departments but they are still authorized to carry out other operations under the law that regulates credit institutions. So far the reform has created less problems than anticipated  - 12 - because the Government has retained most of the management teams and has continued to give them autonomy in day-to-day operations. The banks are subject to the control of the Superintendency of the Financial System and audited by external auditors. Nevertheless, the banking system, under Government control, may encounter problems similar to those of past Salvadorian public financial institutions; i.e., poor repayment records, deficiencies in accounting systems, lack of detailed audits and other practices that will weaken financial inter- mediation. Already some instances of difficulties in recovering agrarian reform loans have been identified. If these types of problems occur more frequently, a return to some form of private sector participation in the ownership and, most important, in the operation of the commercial banks might be desirable. Proposals to return some ownership share (less than 51 percent) to the private sector were incorporated in the legislation at the time of the nationalization of the banking system. The main purpose of any adjustment would be to obtain a reasonable balance between the Government goal of avoiding the concentration of credit in a few hands and the need to maintain an efficient operating banking system, which would facilitate production and trade. 31. After reaching a high level in 1978-79, financial savings growth weakened considerably during 1979-80 as the private sector shifted its monetary assets from time and savings deposits to currency and sight deposits and, as much as possible, to deposits in banks outside the country and other foreign assets. In addition, commercial banks experienced difficulties from lack of credit from foreign banks. As a result, the supply of loanable funds from the banking system was insufficient to satisfy domestic credit demands, which increased 60 percent from 1978 to 1980. Net foreign exchange reserves declined by about US$ 316 million from December 1978 to December 1980, and payments arrears of about US$ 40 million occurred. Although in 1981 time and savings deposits grew 25 percent, this was insufficient to support the 20 percent increase in domestic credit, allocated mostly to the public sector. Foreign exchange reserves declined again (US$ 100 million), and payments arrears increased by about US$ 25 million. 32. The distribution of the increase in domestic credit between the public and private sectors has shifted in the last few years in favor of the public sector. Credit to private businesses and individuals increased by about 6 percent a year during 1979-81--a decrease in real terms. Government credit needs in 1981 were particularly high (see Table 6.1, Statistical Appendix), and thus credit to the private sector in that year declined even in nominal terms. This is mostly explained by credit demands of the Central Government, INCAFE and INAZUCAR. 33. The Central Reserve Bank credit program for 1982 considers a significant deceleration in the rate of credit expansion with a limited increase of money in circulation designed to bring down its ratio to GDP to a level more in line with the historical experience. More important, credit by the banking system would shift to provide about half to the private sector. 34. With the acceleration of inflationary trends that took place in the last few years, real interest rates in El Salvador became negative. The September 1978 revision of interest rates, which was expected to result in positive real rates of interest, was not sufficient to offset the price increase during 1979-81. To remedy this situation, some interest rates were increased in February 1982. Loans made with local resources now fluctuate in the 13 to 20 percent range depending on the operation; for those made with foreign resources  - 13 - interest rates are free depending on cost. Deposit rates were also modified with the most important change taking place for time deposits. These are gradual steps to liberalize interest rates but more is needed to reduce the incentives to hold deposits outside the country, once socio-political factors return to normal. III. THE MAIN PRODUCTIVE SECTORS A. Agricultural Production _/ 35. Agriculture is the most important productive activity with about one- fourth of GDP and over one-half of the economically active population. Exports of coffee, cotton, and sugar provided about three-fifths to three-fourths of total exports and about one-fourth to one-seventh of GDP during 1979-81. Agricultural exports are traditionally an important determinant of foreign exchange earnings and the level of economic activity. Coffee price variations and production shifts in cotton and sugar explain most of the sharp export fluctuations. In addition, agriculture provides a substantial share of the food supply. However, pressures on agricultural land to feed and employ the Salvadorian population are already significant and continue to accumulate with population growth at about 3 percent a year. With a density of 223 persons per square kilometer, El Salvador's per capita agricultural land is now about 0.3 hectares and only 2 to 3 hectares per farm worker. 36. Past agricultural production showed a dualistic pattern. Before the agrarian reform, export crops were dominant in agriculture production and produced mostly in about 2,000 large farms (each over 100 hectares and compris- ing about 40 percent of the arable land), while domestic food production, mainly basic grains (corn, beans, rice, and sorghum), were produced for the most part in about 250,000 small farms (about three-fifths exploited under sharecropping or renting arrangements, with about one-fourth of the arable land). 37. Poor subsistence farming predomi'nates in the northern areas (mostly the Departments of Chalatenango, Morazan and Cabanas), which are the descending slopes of mountain ranges that peak in Honduras. The land is not very fertile and relatively small acreages are in permanent crops. Uncontrolled land use has led to serious soil exhaustion and erosion problems. The central highlands have relatively good soils suitable for coffee, which predominates in the region. The coastal zone is characterized by large farms producing cotton and sugar. The land is fertile and large landholdings were prevalent before the agrarian reform. 38. For years, agricultural policy was mainly concerned with the promotion of exports. This emphasis changed in the early 1970s when the Government supported irrigation, improved seeds and technology, small farm credit, and basic grains marketing to increase the output of staple foods. As a result, production for domestic consumption increased rapidly after the mid-1970s while 3/ The role of agriculture and the agrarian reform is covered in much more detail in Annex A.  - 14 - export production, particularly coffee, also continued to expand. Agricultural and food production indices, both total and per capita, showed significant advances during the 1970s. Agricultural output, in both volume and value, reached peak levels during the biennium 1978-79, as did the rest of the economy. 39. Agricultural output, however, declined thereafter because of substantial rural unrest and guerilla warfare, unfavorable export prices, and the adverse effects on production of the agrarian reform. Output of cotton, sugar and coffee in the crop year 1981-82 decreased by 59 percent, 29 percent, and 15 percent from their 1977-78 levels; lower export prices aggravated the negative impact on the balance of payments and the economy. The decline in food production was less severe because of temporary advances in some basic grains (corn, rice, and sorghum) in 1980; nevertheless, domestic food crops were insufficient to satisfy the domestic demand and more imports were needed. In addition, the sharp reduction in cottonseed production, which depends on cotton production, seriously curtailed the main domestic source of vegetable oil. Furthermore, beef and dairy production were adversely affected by decapitalization of herds, indiscriminate slaughter by armed groups, and uncertainties created by the agrarian reform. As a result of the above-noted difficulties, the value of food imports rose 42 percent in 1980. Food imports of milk products, beans, fruits, legumes, potatoes, fats and oils increased sharply. This situation persisted during 1981. Table 7. AGRICULTURAL PRODUCTION Crop Year 1977/78 1978/79 1979/80 1980/81 1981/82 Coffee (in thousands of 60-kilo bags) 2,800 3,423 3,322 2,'90 2,380 Sugarcane (in metric tons) 2,892 2,745 2,019 1,824 2,096 Cotton (in thousand quintals) 1,743 1,575 1,430 997 711 (in quintals per person) Corn 1.98 2.57 2.58 2.52 2.46 Beans 0.48 0.22 0.23 0.19 0.17 Rice 0.17 0.26 0.29 0.29 0.22 Sorghum 0.79 0.82 0.79 0.67 0.64 Source: US Department of Agriculture and Central Bank. 40. Agriculture is now at a critical stage. Despite efforts to increase domestic food output, especially staple foods, reliance on food imports is increasing to make up for production deficits. Furthermore, export crops are affected adversely by unrest, uncertainties about future land reform efforts (Phase II), and low export prices that diminish the country's ability to pay for all required imports. Under these circumstances, agricultural output is likely to decline further in 1982. Food production deficits are likely to increase and  - 15 - thus further increases in required food imports can be expected in the near future. Moreover, export crops, the country's largest source of foreign exchange, may continue to decline unless steps are taken to reduce uncertainty, and recover some of the lost production. B. Agrarian Reform The Reform and the Role of the Agrarian Reform Institute 41. Although in 1975 ISTA was created and a comprehensive land reform was passed in 1976, this effort failed because of strong resistance from large landowners. A large reform proposal, covering 60,000 hectares in the San Miguel-Usulutan region, could not be implemented. Afterwards, land reform efforts were scaled down and redirected; as a partial solution, the Government established an agrarian land bank (COFINTA) to purchase land and redistribute it to small farmers. 42. Land reform efforts recovered momentum in early 1980. A new administration launched a significant land reform program, which provides for expropriation of estates over 100 hectares (Phases I and II; Decree 153 of March 1980) and for ownership titles to all tenant farmers on the land they rented (land-to-the tiller, Phase III; Decree 207, April 1980). In March, 1980, ISTA undertook to carry out its expropriating mandate for landholdings over 500 hectares, including non-contiguous haciendas with a total acreage exceeding the 500 hectare limit.  - 16 - Table 8. 1971 LANDHOLDINGS BY SIZE AND ISTA'S 1981 HOLDINGS (hectares) Number of In Basic Size Properties Area Cotton Sugar Coffee Grains Less than 5 236,751 287,815 2,267 2,515 24,019 85,771 5- 9.99 15,730 112,590 1,885 1,743 10,092 16,885 10-19.99 8,977 126,566 3,152 1,680 13,715 10,574 20-49.99 6,772 213,067 4,080 1,825 30,047 8,712 50-99.99 2,241 154,840 5,157 2,245 24,942 5,776 100-199.99 1,115 153,514 8,496 1,148 22,430a/ 4,141 200-499.99 640 192,250 17,077 3,467 5,702 Over 500 206 223,217 20,817 9,704 21,793a/ 6,812 hectares TOTAL 272,432 1,463,859 62,931 24,327 147,039 144,373 ISTA Holdings, Phase I (1981) 183b/ 188,936b/ 19,020 14,570 21,793 28,324 a/ Breakdown not available. Figure for farms over 500 hectares taken from ISTA's records. b/ Contiguous properties over 500 hectares expropriated in Phase I. Including non-contiguous properties over 500 hectares owned by individual owners, the total is 326 properties with 224 thousand hectares (Nov. 17, 1981). In addition, ISTA owns other properties acquired before the agrarian reform, which raise the totals to 374 properties and 228,000 hectares. Source: Direccion General de Estadistica y Censos, Tercer Censo Nacional Agropecuario, 1971 and ISTA. 43. The purpose of the land-to-the-tiller reform was to broaden the agrarian reform to include renters, sharecroppers, and other small farmers working land without title to it. Decree 207 provided that campesinos could acquire up to 7 hectares of land under rental or similar arrangements. Financiera Nacional de Tierras Agricolas (FINATA) is the principal institution administering the land-to-the-tiller program. Expropriation of estates in the 100-500 hectares category (Phase II) is still pending. Phase I of the Reform (Over 500 hectares) 44. ISTA utilized personnel from the Ministry of Agriculture and related agencies, such as the National Center for Agricultural Technology, to move forward with its responsibilities under Phase I of the agrarian reform. However, the size and scope of the assignment was underestimated. ISTA is short on staff in many categories, and those involved often lack needed experience or, a particular expertise. (See Annex A, para. 107). Furthermore, ISTA's mobilization of personnel from other public agencies reduced these agencies' programs as well.  - 17 - 4'5. Reformed property is administered in co-management by ISTA and the cooperatives or campesino organizations to which the holdings are allocated. The agrarian reform displaced most of the original administrative and management personnel of the expropriated estates. ISTA, therefore, had to staff each cooperative with a technician to co-manage with the coop's directors. It also provided technical assistance with 178 technicians taken from other agencies (See Annex A, paras. 179-183). Since ISTA's competent staff is insufficient to meet the needs of the reformed farms, it spreads its personnel among various cooperatives on a part-time basis. Many farms where the original management has been retained are both more efficient and productive than those under ISTA's management teams. In addition, the agrarian reform has been plagued by political unrest and violence since its very start; this has forced 26 cooperatives or campesino groups to abandon their properties. 46. The time period for co--management of the cooperatives still remains to be resolved. The apparent intention is that, after a suitable period of co-management, the cooperative should have gained enough experience to run its own affairs. At that time, ISTA would pull out and have the cooperative's board make both policy decisions and hire competent managers. However, titles issued to some cooperatives stated a five-year period of co-management renewable for another five years. Efforts should be made to reduce the co-management period and avoid a long-term involvement of ISTA's co-managers. 47. ISTA has acquired a total of 326 properties affected under Phase I with 224,000 hectares, which represent about 11 percent of the territory and 17 percent of the agricultural land., About 56 percent of the Phase I expropriations affected 183 single propertie5 in excess of 500 hectares accounting for 84 percent of the land expropriated. The remainder came mostly from single-owner non-contiguous holdings which in total exceeded the 500 hectare limit. 48. About 35,000 families (perhaps 8 percent of the peasant families) were beneficiaries of Phase I with an average of six members per family as of Oc:tober, 1981. About two-thirds of the expropriated properties were organized as cooperatives, one-fourth as campesino groups and the remainder were still being organized as of that date. 49. Apart from the depressing effect that continued violence has on crop and livestock production, Phase ]: of the agrarian reform itself had an adverse impact. As the experience in other countries has shown, this is to be expected, at least in the beginning, from a radical transformation of the land tenure system. Maintaining production in the reform haciendas was not a simple task for the poorly trained campesinos and the Government agencies were not aclequately staffed to provide management, extension, and technical assistance as well as timely credit and essentiLal inputs, such as fertilizers and pesticides. This resulted in a slow start in spite of ISTA's priority access to the nationalized banking system and foreign exchange. 5(. Overall production data for Phase I are still incomplete. Although some information is available indicating that Phase I cooperatives have been able to maintain a 90 percent level of production in the 1980-81 crop year, no comparable evidence is available for the same properties before expropriation.  - 18 - The available information, moreover, understates output declines, especially in view of the importance (78 percent in the 1980/81 crop year)4/ of export crops (cotton, sugar, coffee) on the total gross value of agricultural produc- tion in the reform sector covered by Phase I and the performance of these crops. Actual results of cotton and sugarcane production, where ISTA controls one-third and over two-fifths of the planted land, were disappointing. (See Tables 6 and 9, Annex A). The adverse production impact of Phase I on coffee was less significant since ISTA controls only 15 percent of the coffee land. 5/ 51. Credit allocations to and recoveries from agrarian reform groups will need close supervision to ensure timely repayments and maintain the long term viability of agrarian reform financing by the banking system. About C 155 million in credit was provided to ISTA coops in 1980-81 and C 231 million in 1981-82. However, production declines, lower export prices and salary payments which reduced cooperative profitability, have created financial difficulties and not all the production units have been able to fully repay their credits to Banco de Fomento Agropecuario and the state-owned commercial banks. There are arrears of 26 to 30 percent in the 1980-81 crop year. Similar situations in the 1981-82 crop and following years will result in larger arrears if appropriate steps are not taken to maintain them at a low level. This will lead to serious difficulties for the financial system. Additionally, the cooperatives owe money for farm improvement credits and for payment of the expropriated land. (See Annex A, paras 216 to 224.) 52. ISTA has taken a rather long time in determining the indemnities that should be paid on each hacienda; this appears related to the total financing required to pay the issuance of bonds. However, this process as well as titling must be expedited, first, to resolve the compensation issue and, second, to provide a basic linkage between the members and the cooperative as a viable economic unit on which the member families must rely for sustenance. 53. A significant development is that ISTA's titles will be issued to the cooperative group to which the project was originally allocated. There is no provision in the law for campesino ownership and tnus the individual member's vested interest in the property is limited to being part of the cooperative. There is no clear property right to be passed on as inheritance to other family members, a situation that resembles that of the former colono to the owner. Clearly, the rights and obligations of cooperative members require elaboration and clarification since the member's labor input will be responsible for generating additional wealth and meeting its obligations from income generated by its farming operations. Unless settled now on equitable terms, property rights could plague the efforts of the agrarian reform participants and generate dissatisfaction among them. Phase III of the Agrarian Reform (Land-to-the-Tiller) 54. As of December, 1981, the Government had received about 32,000 appli- cations for land titles from about 25,000 potential family beneficiaries with an 4/ MAG, Informacion Basica del Proceso de Reforma Agraria, 1980-81, (December 9, 1981). 5/ Ministry of Agriculture and ISTA statistics showing higher yields on agrarian reform Phase I holdings than national averages for all other farms are inconclusive because they do not make allowance for the fact that the reform properties were more advanced in infrastructure and related production inputs, including some of the best land.  - 19 - average 1.7 hectares per capita. In some departments, the per capita applica- tion is for only 1 hectare. Thus, an average family of six will be faced with wrestling from that small piece of land enough to eat or forced to look for out- side employment to cover basic needs. This phase of the land reform is likely to have an immediate positive impact on some beneficiaries; to the extent the debt service payments on their property is less than their prior rent, they are better off. Nevertheless, this approach will not resolve the national problem of very little land for farmers. Since the average plot is barely adequate for subsistence production, most of the land will probably be used for basic grains and perhaps a vegetable garden. Only those with larger holdings might have some excess production to sell locally. Unless Phase III farmers can expand their ownership to about 4 hectares or even better to the 7 hectares limit, the recipient families would be coimmitted to a meager living. Phase II of the Agrarian Reform (100 to 500 hectares) 55. The strength of El Salvador's agricultural sector is in the 100-500 hectare farm holdings, which generate most of the export earnings and provide substantial employment and incomes for a large segment of the population. Properties in the 100-500 hectare range comprise about 1,750 farming units 6/ with about 345,000 hectares of land (about 24 percent of the land in farms) distributed as follows: Western region, one-third of the land; Central region, one-fourth; Para-Central region about one-seventh; and Eastern region, one-third._/ 56. So far, uncertainties about a decision to implement Phase II have cre- ated insecurity among property owners. There is a start of decapitalization, a slowdown in new investments, relaxation of normal management practices, and postponement of decisions. Phase I dealt with properties in excess of 500 hectares to eliminate land concentration in a few hands and afford better opportunities to a larger campesino population; elements of the same problem are present in Phase II property holdings. However, all factors considered, Phase II may require a different approach than Phase I. First, the prevailing uncertainty urgently requires government decisions and assurances to create a healthy climate for confidence and renewed production efforts. Second, the experience with Phase I shows that the Government needs to have sufficient trained manpower for co-management of these holdings to produce at satisfactory levels and to maintain or increase foreign exchange earnings. Phase II involves about 2,000 properties; six to seven times the number of properties already expropriated under Phase I and, correspondingly, will require an expansion of ISTA's personnel and services in about the same proportion. Furthermore, if coffee production drops in the same proportion as cotton (60 percent) or sugar (30 percent), the result could be disastrous for the economy and employment. In addition, there would not only be substantial credit needs, the possibility of significant payment arrears equal to those occurring in Phase I would lead to further strains on the financial system. While land redistribution is still justified on equity grounds, in order to avoid the economic impact of implementing Phase II in a manner similar to Phase I requires careful analysis. 6/ It comprises 15 percent of the coffee plantations. 7/ Additional non-contiguous holdings over 100 hectares owned by individual owners may increase the total number of farms to be expropriated above 2,000.  - 20 - Some compromise solution, balancing production and redistribution objectives in a way that encourages present owners to divest part of their holdings, is needed perhaps by dividing them into economically viable farm units, related to soil quality. However, the divested units would still require effective extension and technical assistance services along with adequate credit for which the Government's scarce trained manpower may prove to be inadequate. Imaginative ways of acquiring or retaining farm management may be required given the experience of Phase I. C. Coffee Production 57. Coffee usually represents about half of the value of export receipts. Given the recent decline in cotton and sugar exports, maintaining coffee produc- tion and exports in the medium term will be crucial to the future viability and the creditworthiness of the Salvadorian economy. As the area under cultivation and the number of trees per hectare expanded in the mid to late 1970s, coffee production expanded by over one-fourth to reach peak levels in the crop years 1978-79 and 1979-80. Coffee production declined by 19 percent in the 1980-81 crop year and declined 12 percent in the 1981-82 crop year. A distinct possibility exists of further production declines, mostly associated with lack of maintenance and replanting of the plantations, violence, and coffee rust. These developments, if not corrected, will adversely affect coffee production in the short run. The more important effect, however, will be in the medium run because of lack of replantings. This will significantly affect the country's foreign exchange earnings in coming years and will take longer to correct. Efforts to reverse this decline are urgently needed. Table 9: EL SALVADOR: GREEN COFFEE PRODUCTION AND EXPORTABLE SUPPLY, AVERAGE 1972-73/1976-77, ANNUALLY 1977-78 THROUGH 1981-82 (in thousands of 60-kilo bags) Item 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 a/ Total Production 2,700 3,360 3,322 2,690 2,380 2,400 Exportable Supply 2,510 3,165 3,122 2,490 2,180 2,200 a/ Provisional estimates. Source: Foreign Agricultural Service, U.S. Department of Agriculture. 58. The nationalization of foreign trade in 1980 placed coffee and sugar exports under INCAFE and INAZUCAR, which operate under the Ministry of Foreign Trade. It is too early to evaluate the impact of this reform on production. Nevertheless, coffee growers complain about low prices, which are partly  - 21 - associated with conditions in external markets. 8/ While FOB coffee prices fluctuated, farmgate prices have not reflected much change and the intermediation margin between both sets of prices widened in 1980; grower prices declined 15 percent. However, in the 1981/82 coffee crop the price differential decreased to a level similar to that of 1979 and grower prices increased by about 14 percent in spite of lower export prices. For sugarcane, the situation is the reverse since, in fact, a subsidy is being paid to growers, and the sugar agency is in poor financial situation. D. Cotton Production 59. Cotton production expanded in the mid-1970's reaching a peak of 350,000 bales of lint cotton in the 1977-78 crop. Since then, production steadily declined to an estimated 143,000 bales in the 1981-82 crop. Both acreage and yields were reduced; acreage by 54 percent and yields by 11 percent. The value of cotton exports dropped from US$98 million in 1978 to US$66 million in 1981. Increased violence and disruption in the cotton-growing areas, the impact of the agrarian reform, and sharp cost increases are behind these results. 60. The agrarian reform has affected cotton production in two ways. First, a significant proportion of cotton land (about one-third) was expropriated under Phase I and has been used for other purposes or is not producing at its full potential--agrarian reform beneficiaries do not seem yet to have the competence needed to manage a modern, technology-intensive cotton farm. Secondly, land owners are fearful of renting land because of the possibility of being expropriated, and renters that plant cotton are also afraid to rent because of the risk involved if the plantation is taken over by FINATA. A May 1982 Government Decree addressed this problem by permitting cotton and sugar land rental contracts for one crop cycle without the risk of expropriation under Phase III. The same decree also included production of basic grains and cattle. 61. The cotton outlook is not very promising. Only 62,000 manzanas9/ are being planted in the 1982-83 crop year, about 60,000 manzanas below the pre-agrarian reform 1977-78 and 1978-79 crop years (see Annex A, Table 6). Much of the reduction in acreage corresponds to the larger, more productive plantations (See Annex A). Of a'bout 29,000 manzanas in expropriated Phase I cotton properties, about 27,000 manzanas are still under production. Since about 65,000 manzanas remain in cotton in the 1981-82 crops, only 38,000 manzanas of land out of 117,000 manzanas not affected by Phase I are still growing cotton. This roughly indicates the problem with private growers. The expected output is about 115,000 bales of lint cotton. The future of cotton clearly depends on a reassessment of Government policies to provide adequate incentives to private growers, particularly renters, and on a vastly improved operation of the cotton properties expropriated under the agrarian reform. Of course, recent cost increases as well as price prospects will need to be take*n into account to determine production levels. 8/ Farmgate prices are an average obtained from sales during the crop year. They may show slightly different trends than FOB prices because of previous year inventories and export quotas. 9V 1 manzana = 0.7 hectares.  - 22 - E. Sugar Production 62. Sugarcane acreage expanded significantly during the mid-1970's and raw sugar production reached its peak level of 288,000 metric tons with the 1977-78 crop. Since then, both acreage planted in sugarcane and production declined. By 1980-81, the levels were 32 percent and 40 percent lower respectively than in 1977-78. Sugarcane yields per hectare as well as sugar yields at the mill have also decreased. Low world market prices, rising costs, guerrilla warfare, and the impact on production of the takeover of sugarcane lands and mills have all combined to adversely affect sugar production and exports. Sugar exports declined from US$ 27 million in 1979 to US$ 13 million in 1980 but recovered to US$ 19 million in 1981. 63. About 45 percent of the 42,000 hectares of land remaining in sugarcane in 1981-82 were expropriated under the agrarian reform. ISTA also took over seven sugar mills which owned some of the expropriated land. The mills are now run by INAZUCAR, the Government sugar corporation created when the Government nationalized foreign trade in sugar and coffee. In addition to INAZUCAR's seven sugar mills, three more are Government property, and three are private property. While all mills operated at an average of 82 percent capacity during 1976-79, by the crop years 1979-80 and 1980-81, many mills closed; only 6 were operating for the 1981-82 crop and 1 was maintained in reserve. 64. Sugar prospects will depend on the world price, but vigorous actions to increase sugarcane acreage and field productivity to provide enough sugarcane for the mills will also be vital. The Government expects to increase sugar cane production levels significantly in 1983. Efforts will also be needed to train more local technicians to raise production efficiency in the sugar mills. In the future, conditions may be more adequate for rationalizing sugar production by moving sugarcane and some sugar mills to better areas. INAZUCAR has developed plans to do this. F. Basic Grains and Cottonseed 65. Basic grains (corn, beans, rice, and sorghum) production expanded considerably in the late 1970s primarily because of the use of hybrid seed corn and improvements in production technology. The peak production crop year for most basic grains was 1979-80. The exception was corn, which continued its expansion into 1980-81, the first year of the agrarian reform because of the switch of cotton land to corn by ISTA cooperatives. However, in 1981-82, acreage and output of basic grains are at about 90 percent of the 1979-80 levels (see Table 15, Annex A). 66. Cottonseed is the principal domestic source of vegetable oil. As cotton production dropped, so did cottonseed. Thus, imports of vegetable oil are up substantially to make up for the production deficit. 67. El Salvador is confronted with the need to maintain its food production. Reliance on imported foods has increased recently in spite of Government efforts to increase domestic production. As a result, food imports have been given priority for foreign exchange. Large increases took place for imports of beans, fats and oils, fruits, and milk products. (see Table 20, Annex A).  - 23 - G. Livestock and Poultry 68. The country's livestock has been reduced by about 20 percent through decapitalization of herds, slaughter of animals by participants in the civil strife, and the initial disincentives created by the agrarian reform among land owners. Meat production and average yield per animal also has dropped. Furthermore, fluid milk production in 1981 was at about 16 percent below the 1979 level; previously, milk production had shown a dramatic increase of 60 percent between 1975 and 1976. As a result of production problems, there has been a steep rise in powdered milk imports from US$ 20 million in 1978 to US$ 23 million in 1980. Recovering earlier meat and milk production levels is a difficult task; the situation cannot be solved in the short run. 69. Because of lower incomes and an increased reliance on poultry, exports of red meat to the U.S. market, however, are expected to continue at levels close to those of 1979, barring further problems with pesticide residues that violate U.S.D.A. standards. This difficulty effectively stopped meat exports from March 1980 to mid-1981. H. Manufacturing Sector Production and Exports 70. Manufacturing production expanded at about 9 percent a year during the 1960's, well in excess of GDP growth at 5.1 percent, mainly owing to the opportunities provided to El Salvador by the creation of the CACM. In 1968, El Salvador's industrial sector was the most dependent on intra-CACM trade; it exported about one-third of its gross output to the region. The 1969 war with Honduras had a detrimental impact on the CACM and particularly on El Salvador. As a result manufacturing growth slowed down to about 4 percent a year in the early 1970s. After some readjustment, the sector recovered partially in the 1973-79 period for a combined growth rate of about 6 percent during 1970-79. 71. Manufacturing experienced serious difficulties in adjusting to changes in the composition of intra-CACM trade. Exports of textiles, clothing, footwear and leather products, which accounted for about 28 percent of its 1968 trade, declined in the 1970s; non-traditional subsectors, such as pharmaceutical and metal working industries, provided the major thrust for export expansion. The country's heavy dependence on textile exports to the CACM compounded the problems stemming from the conflict with Honduras. The textile subsector difficulties were eased somewhat by a relatively important expansion in textile exports to markets outside the CACM, which from an insignificant level in 1968 increased to about US$15 million in 1979. Other non-primary manufactured exports that expanded were basic metallic industries, metallic products, and pharmaceuticals. Manufactured exports to non-CACM markets increased by about 20 percent between 1977 and 1980. In 1981, these exports increased by about 40 percent. However, the development of extra-regional markets for non-primary manufactured exports has lagged behind El Salvador's potential. Table 10 shows the relative share of non-CACM trade in manufactures.  - 24 - Table 10. MANUFACTURED EXPORTS a/ (in current US$ millions) Percentage of Total Manufactured CACM % Non-CACM % _ Production _________ __ - 1968 87.2 19 81.1 94 5.4 6 1977 239.5 22 206.4 86 33.1 14 1978 259.6 22 227.9 88 31.7 12 1979 296.5 23 255.0 86 41.5 14 1980 327.5 25 288.3 88 39.2 12 1981 260.0 18 204.0 78 56.0 22 a/ CIIU Classification excluding sugar, beef, and seafood products. Source: MINPLAN, Indicadores Economicos y Sociales 72. As export growth to the CACM slowed down in the 1970s, the Government made efforts to stimulate labor-intensive exports to third countries through fiscal incentives, free trade zones, and improved services to industry. An Export Development Law, which offered significant incentives to export industries, was passed in 1974. However, existing CACM incentives continued to bias the direction of export trade in manufactures towards the CACM where, in addition, markets are well known and quality controls are relaxed. Both the common external tariff and the agreement on fiscal incentives would need major revision to provide a stimulus to growth of manufactured exports to third markets. This however, would require regional agreement. The Export Development Law, nevertheless, had some initial success, About 10 to 15 firms a year, mostly for textiles and chemicals, applied for benefits under this law during 1975-78. Afterwards, applications declined dramatically. In addition, the first free zone, located in the outskirts of San Salvador, attracted a number of plants, some of them foreign with labor-intensive assembling processes. The zone has 13 buildings, but only four are operating normally. Three buildings have machinery for maquila operations which is now under the control of workers' cooperatives because the owners left the country. The Government plans to connect the zone directly with the Ilopango airport so that planes can taxi to the buildings for loading and unloading. Recent Developments 73. Manufacturing production in real terms declined by about one-third during 1979-81 with most sectors severely affected. The factors behind this decline are: (i) Violence and political uncertainties, which are adversely affecting the investment climate. The guerrilla warfare and the lack of a clear Government posture vis-a-vis the role of the private sector has in the past reduced incentives for new investments and contributed to inadequate maintenance of the existing facilities. Favorable Government policies to promote private sector activities are expected to be followed by the present administration;  - 25 - (ii) low domestic demand caused by a deteriorating economic situation and investment climate, which has increased open unemployment dramatically, and significantly reduced the purchasing power of most of the population; (iii) foreign exchange and foreign credit shortages for imported raw materials, spare parts, and replacement equipment, mainly associated with the balance of payments disequilibrium; payments for orders have to be made in advance, further constraining the financial position of firms; (iv) difficulties within the CACM because of the constrained financial situation of some of its member countries. Frictions in the payments mechanisms mean that exporters with positive balances with Costa Rica and Nicaragua are not able to collect promptly. The situation is complicated for the exporters by El Salvador's overall deficit with the area. This puts pressure on the financial capacity of the Salvadorian exporters, who cannot continue exporting under these circumstances to Costa Rica and Nicaragua; and (v) reduced domestic credi-t availabilities, associated with lack of credit from foreign banks, lack of foreign exchange, and the increasing financial needs of the Central Government but also with precarious financial positions and capital structures of industrial firms, which make them a higher than normal credit risk. Table 11. BALANCE OF CENTRAL AMERICAN CLEARING HOUSE OPERATIONS WITH EL SALVADOR (In thousand colones) 1978 1979 1980 1981 (p) Total -76.1 -58.3 -220.8 -215.8 Guatemala -51.8 -104.1 -277.2 -255.3 Nicaragua -31.8 11.8 65.7 54.0 Costa Rica 13.7 35.9 9.7 2.4 Honduras - 6.2 -1.9 -19.0 -16.8 (p) Preliminary estimates. Source: MINPLAN, Indicadores Economicos y Sociales, 1981, and SIECA. 74. Although reportedly only 6 percent of the firms doing busines in 1978 had closed down by 1981, the employment impact was significant since the shutdowns were concentrated in labor-intensive textile, apparel and metal products industries. Employment in most large firms has decreased substantially. Social security employment statistics by sub-sectors showed a large decrease in employment from June 1978 to March 1981 in textiles,  - 26 - apparel, shoes, paper products, plastics, and basic metallic products. Employment generated by sugar mills, liquor and beer production, however, increased. Although these figures are subject to some margin of error since firms may delay paying their contributions because of tight finances, they reflect the employment problem in manufactures. Labor-management relations, which were seriously strained during 1979-80, improved considerably in 1981 as workers placed a high priority on retaining their jobs in the midst of increasing unemployment. Industrial Financing 75. Limited credit could be a major obstacle to the revitalization of industrial firms, although this is not a simple issue. On the one hand, the demand for credit is now declining as a result of closings, low capacity utilization of most plants, difficulties in obtaining foreign exchange, and postponement or abandonment of plant expansion and new investments because of deteriorating markets. This is evidenced, for example, by declines of 45 percent and 41 percent on outstanding credit balances of producers of non-metallic minerals and basic metallic products because of the decrease in construction activities. On the other hand, the tight liquidity position of the commercial banks and the credit needs of the public sector and the agrarian reform limited new production and working capital loans to the manufacturing sector in 1981. Outstanding industrial credit balances were below the 1978 level at the end of 1981. New credit went down sharply and refinancing was up, reflecting not only the deteriorating situation of manufacturing firms, but also that of the banking system. On balance, the rate of new domestic credit to manufacturing value-added has declined in 1980 and 1981 with respect to 1978-79 levels (See Table 12). This indicates that the general level of utilization of industrial credit has fallen below the declining production levels. This is partly associated with the lack of foreign exchange (see para. 77). In addition, foreign credit to manufacturers has dried up. Thus, it is very likely that credit will be a major problem for those firms still able to produce and export as well as for those firms that find their domestic demand increasing. 76. Furthermore, to revitalize the economy, an export-oriented production program for manufacturing, which will more efficiently use underutilized or idle productive capacity and create badly needed jobs is essential. The ability of the sector to significantly increase exports outside the CACM will depend on efforts to improve the competitiveness of Salvadorian exports as well as on marketing through appropriate channels, such as marketing agents, importers, retailers, etc. A more ample availability of medium term loans would help in restructuring the finances of the industrial sector in the immediate future by providing longer term refinancing for short-tem liabilities. It will also permit rehabilitation of existing equipment and replacement, if needed, under more appropriate conditions. The exact amount and methods of financing these needs (i.e. to avoid capital flight) need to be studied.  - 27 - Table 12. DOMESTIC CREDIT TO MANUFACTURING (in millions of current colones) 1978 1979 1980 1981 New credit used (during period) 324 297 197 192 Refinancing (end of period) 39 51 78 96 New Credit/Manufacturing value added (ratio) .27 .23 .14 .15 Credit Outstanding (end of period) 267 297 281 271 Source: Central Reserve Bank. 77. The foreign exchange shortage is an important limiting factor in the utilization of installed capacity, if new export markets are to be developed. Potential exports originate in sectors with a high raw materials import component--textiles and apparel 40 percent, paper products 44 percent, chemicals 53 percent, electrical supplies 45 percent. About half of the present demand for commercial bank loans from private industries reportedly will be used to finance imports of raw materials, spare parts and equipment. Raw materials imports for industry (excluding construction materials and petroleum) were in 1981 at US$277 million, or about 9C) percent of similar import values in 1979. By volume, the reduction is much greater (75 percent or less of constant 1979 import volumes) given inflation rates of about 20 percent in the suppliers' countries during 1980-81. Owing to a negative investment climate and production declines, imports of capital goods for manufacturing industries dropped from US$ 87 million in 1978 to an estimated US$ 39 million in 1981, a decline of 45 percent in nominal terms (65 percent or more in real terms). Obviously, a revival of manufacturing would mean significant needs of credit tied to foreign exchange to import raw materials, spare parts and replacement equipment. 78. Manufacturing credit has been provided in the past by the Central Bank, commercial banks, and two special-purpose public financial institutions--the Salvadorian Institute for Industrial Promotion (INSAFI) and a Small Business Fund (FIGAPE). 79. The Central Bank is operating two rediscounting credit lines and two funds that support manufacturing activities: (i) short term pre-export and export financing, using its own resources, and (ii) two special lines of credit to provide short-term and refinancing funds for the manufacturing industry. Both of these lines had been established with counterpart funds from USAID. The first line of credit is aimed at the needs of small and medium size enterprises but was barely used, reportedly because of the industrialists perception that interest rates (13 percent and 15 percent) were too high and that maturities (12 months)were too short. The second line of credit is for working capital and was established in mid-1981 and modified later to reduce elegibility requirements; it has had only limited success despite its lower interest rates (7-10 percent) and longer maturity (4 years). Potential users have complained that documentation requirements (historical and proforma cash flows for the life of  - 28 - the loan) are too stringent compared to those used for loans from banks' own resources and are not realistic given the country's prevailing conditions and the volatility of market sales and other projections with a medium term horizon. A further complication is that the Central Bank is understaffed with credit analysts to deal promptly with all the requests. The Central Bank claims that close scrutiny of applications and other procedures are needed to avoid diversions of loans to other uses, including capital flight, and that this explains the complaints. On the other hand, some commercial banks have indicated their willingness to take up their own credit analysis based on their long standing relationship with their clients. Owing to past banking practices where loans were made on a personal basis, however, financial and loan analysis skills in the commercial banks will most likely have to be further developed before the Central Reserve Bank can delegate its responsibilities to them. An externally financed training program in this respect is planned. In any case, there is a clear need to speed up processing of loan applications and to streamline requirements. At the end of November, 1981, of about C21 million in loan requests only about C7.5 million had been approved. However, the experience suggests the need for further study of the credit needs of the manufacturing sector._0/ 80. Commercial banks have been traditionally the largest source of funds for the industrial sector. They accounted in 1977 for about half of total institutional lending to the sector, mostly in the form of short- and medium-term loans, each representing about 40 percent of their industrial portfolio. Long-term loans (more than 5 years) accounted for about one-fifth, which is an unusually high proportion for commercial banks. Central Reserve Bank regulations that required banks to maintain 80 percent of their portfolio in "productive" sectors as well as its special credit lines had an impact on the increasing level of bank lending to industry. While the commercial banks' industrial portfolio amounted to only C74 million (8.2 percent of their total portfolio) in 1973, it reached C297 million (14 percent) in 1979 and C281 medium in 1980. In December 1981, commercial banks' credit for manufacturing had decreased by 4 percent as compared to December 1980, reflecting the above-noted limited credit availability. However, higher credit levels in 1979 and even 1980 may have helped capital flight. Most of the commercial banks' credit to industry was made on the basis of collaterals and commercial banks did not build up technical capabilities to appraise projects, with the possible exception of evaluations of small-scale enterprises under a much simpler methodology. 81. The Instituto Salvadoreno de Fomento Industrial (INSAFI) established in 1961, was until the mid 1970s the single most important industrial finance institution in El Salvador, accounting for over one-third of total manufacturing lending in 1974-77. However, this role has been significantly reduced as INSAFI's finances deteriorated in recent years as a result of its involvement with very poor equity investments. Since October 1980, INSAFI has not made any new loans. For all practical purposes, INSAFI was considered insolvent in 1981, with negative working capital and cash generation, and unable to repay its creditors and raise additional capital. The Central Bank had to repay INSAFI's foreign loans. 10/ A recent study of manufacturing financed by USAID does not adequately cover the credit needs of the sector.  - 29 - 82. INSAFI's situation induced the Government to embark on a financial and administrative reorganization early in 1982. The reorganization created two new and distinct organizations: an investment corporation, which is entrusted with INSAFI's equity portfolio in the public sector enterprises, and an industrial bank, which will act as a commerciaLl bank financing industrial investments with medium and long-term funds. It is too early to evaluate the impact of this restructuring but important issues will have to be dealt with if the new approach is to be sucessful. Among them: preparation of specific rehabilita- tion plans for the more promising among the ailing plants now in public hands, which could be transferred to the private sector in exchange for agrarian reform bonds and/or other obligations. 83. Fondo de Financiamiento y Garantia para la Pequena Empresa (FIGAPE) was established in 1973 to assist small-scale enterprises. Later on, FIGAPE's activities expanded to include lending operations. Improper lending policies and political factors led to a heavy concentration of FIGAPE's portfolio in a few sectors, especially urban transport. No precise information is available on the magnitude of the portfolio in arrears although it is understood to be sub- stantial, particularly in urban transport. A study of FIGAPE's operational and financial problems was carried out in 1979-80. The implementation of some of its recommendations has helped FIGAPE streamline its administrative, accounting, loan evaluation, and supervision procedures. FIGAPE is presently engaged in an increased loan supervision effort which is aimed at improving the collection process. IV. COUNTRY PROSPECTS A. Immediate Priorities 84. El Salvador's prospects will continue to be closely related to military and political developments. Production difficulties, a weak balance of payments and tight public finances will likely continue as long as the disruption created by guerrilla warfare persists. Substantial concessional foreign assistance will be needed just to fill the gaps of an economy significantly weakened by war; medium term growth prospects are not favorable. Furthermore, because of the limited agricultural land and rapid population growth, a longer run development effort will need to concentrate on industrializing the country with a view towards non-CACM foreign markets. The presently poor climate for local and foreign investors now precludes this. 85. For the next few years, economic conditions in El Salvador most likely will remain depressed. The main task ahead for the Government would be first recreating favorable conditions for the recovery of production levels before considering further economic growth. Recent production setbacks in agriculture and manufacturing, infrastructure destruction, foreign exchange constraints, weak finances of many firms, and uncertain economic and social conditions for private sector investment and growt'h are all factors that confirm this assessment and make the Government's task particularly difficult. In the short run, the Government is confronted with overriding priorities--national defense and the employment, feeding, health and reallocation of refugees. This effectively limits the scope for additional financial and infrastructure support to the private sector. Thus, the Government's economic programs for 1982 are  - 30 - geared towards improved utilization of the scarce financial resources available and the creation of some conditions needed for the revival of private investment, once guerrilla warfare subsides. The main elements of this short-run program are a phased liberalization of exchange and trade controls, and a gradual rationalization of interest rates and pricing policies; a more balanced distribution of credit between the private and public sectors; and careful demand management to avoid a further balance of payments deterioration or much higher inflation rates. This program, however, needs further complementary actions in the short-run to stimulate the economy and restore private sector growth. Some of these policy issues are discussed in Section C below. 86. To promote continued growth in the medium run, the Government will need to focus on a reconstruction program for rebuilding damaged highways, bridges, power transmission lines and other infrastructure affected by the civil strife. Afterwards, the Government would need to prepare a longer term development strategy and public investment program for the late 1980s and 1990s. Because of its demographic situation, El Salvador must accelerate economic growth or face continued economic depression. Even under the most favorable assumptions for fertility declines, the population is expected to be at least 1.6 times its 1980 size by the year 2000, which will place extremely severe pressures on natural resources and public services, notably education, but mainly on the demand for urban jobs. 87. Growth prospects for the immediate future are bleak. All major productive sectors are expected to decline in 1982 as production continues to be adversely affected by the civil strife, scarce credit and foreign exchange, and other shortcomings noted earlier. Most likely no major recovery will take place in 1983. With improved security, restored private sector confidence and a continuance of the unprecedented foreign assistance of 1980-81, the economy might begin a turnaround by 1984 with some recovery in 1985. Of course, under the present circumstances, any forecast of future developments is highly uncertain. Other scenarios may be equally plausible, such as one with continuous violence in the next two to three years, a continuation of the downward trend of the economy, and thus increased needs for special external assistance. In any case, export performance and the continuation of high levels of bilateral foreign assistance would play a large role in the final outcome. Some of these issues are examined in the creditworthiness section. 88. The economic outlook in the Salvadorian economy has always been closely connected to export growth, basically that of traditional products (coffee, cotton and sugar) and manufactured exports. In the next few years, the relationship between exports and growth will become even more dominant than in the past given the severe disruption experienced by the Salvadorian economy, the lack of foreign exchange reserves and limited prospects for private capital inflows. Most hopes for a quicker and significant economic recovery are linked to export production. Moreover, any growth prospects beyond 1985 will depend, to a large extent, on significantly accelerating manufacturing growth, including labor intensive manufactures, for export to non-CACM countries, as a source of employment and foreign exchange. This is particularly important given the present high open unemployment, the expected growth of the labor force, and the limited growth prospects of major export crops.  - 31 - 89. Unless new conditions are created, medium- and long-term employment creation prospects are bleak. Once conditions are normalized and private investor confidence is restored, stepped-up infrastructure support through new industrial parks, free zones, and improved infrastructure (particularly transport), as well as vocational training may be needed to help both industry and the related modern and high productivity sectors, like commerce, financial services, power generation, and transport grow after 1985. For the time being, however, declines in production seem to indicate that existing infrastructure, if rebuilt to pre-1980 capacity can accommodate any increase in production for the next few years. 90. Even with the recovery of manufacturing and related activities, agricultural production would have to recover and grow beyond its 1978-79 crop levels to significantly reduce open rural unemployment and also to employ new additions to the rural labor force. Improved support to peasants in Phase I and Phase III of the agrarian reform, strong support to agroindustries like coffee and food processing, tobacco, cheese and milk products, and expanded utilization of labor-intensive inputs in the agricultural sector (hybrid seeds, fertilizers) will tend to increase agricultural employment. In addition, irrigation projects represent a clearly identified possibility for more efficient land and labor utilization. Furthermore, additional rural labor could be absorbed by putting some potential additional arable land in production and by utilizing about 500,000 hectares suitable for forestry. B. Policy Issues Price and Wage Policy 91. Prices were frozen for most basic commodities and services through June 30, 1982. However, some public agencies revised prices to improve their financial position. Sugar prices were increased recently by 20 percent to cover INAZUCAR's subsidy to the growers and the marketing institute's (IRA) budgetary transfer for price support was cut in half. Further pricing action is needed in public enterprises to finance counterpart requirements for their rehabilitation, reconstruction, and investment programs. Inflationary trends and a dual exchange rate system make these price revisions all the more necessary. 92. Public wages continue to be frozen because of budgetary constraints in 1982. Minimum wages also continue to be frozen. Effective in February 1982, however, private sector wages could be increased by up to 10 percent, but only if the financial position of the affected firm is sound. Great caution will be needed in matters of wage policies, particularly in the public sector. Increases in public wages will be quickly reflected in the financial position of the public sector leading to greater use of domestic credit and further inflationary pressures, which would adversely affect real incomes of the population. Agrarian Reform 93. Given the limited arable land and the need to recover and further increase agricultural output and exports, it is essential to restore the vitality of the agricultural sector. Improving the production record of the holdings affected by the agrarian reform is one important element of this recovery, which will help employment, the balance of payments equilibrium, income generation and the financial position of the public sector.  - 32 - 94. Towards this end, the three phases of the agrarian reform raise policy issues that deserve careful attention. Phase I has suffered from declining pro- duction and productivity. In addition, Phase I cooperatives are affected by slow titling and lack of a clear definition of property rights of members as well as of their rights and duties in the cooperative. These factors which may affect members' incentives, their ability to generate surpluses, pay credit obligations and other debts--including amortization and interest on the land expropriated for the cooperative. The difficulties clearly show the need to strengthen Phase I cooperatives' production capacity by improved organization, productivity, technical support, and incentives for the cooperatives' members. To produce agricultural products, such as cotton, which require sophisticated production techniques, in cooperatives is not an easy task but efforts should not be spared. Failure to do so would continue to adversely affect production in about 17 percent (and some of the best) of the country's agricultural land, crippling the economy's exporting capacity and requiring increasing reliance on food imports to compensate for growing production deficits. 95. The production declines and the management difficulties experienced with Phase I should be carefully taken into account in implementing Phase II, which would cover about 24 percent of the country's agricultural land in farms, including about 15 percent of the most productive land in coffee. Phase II would be a very major undertaking considering the productivity, structure, and dispersion of the 100-500 hectare holdings and their importance to the economy and the balance of payments. Thus, Phase II may require a different approach than Phase I, one that would encourage property owners to divest themselves of excess land into economically viable units while eliminating existing uncer- tainties to encourage the owners to maintain productivity and production, parti- cularly coffee production. 96. The experience with Phase III shows the need to proceed rapidly with titling of applicants, but also to remove uncertainties that affect some rented land, mainly cotton land. Furthermore, since Phase III will likely end up by giving very little land to many people, some acknowledgement should be made now of the fact that a longer term land reform process will be needed to consolidate and rationalize the new minifundia, as other urban employment opportunities are created for the countryts many subsistence farmers. Technical assistance and research, as well as credit are also badly needed by these groups. Non-Reform Agricultural Sector 97. New credit of the banking system to the non-reform agricultural sector has been significantly reduced during 1980 and most of 1981, affecting particularly cotton, sugarcane, and cattle, as credit to the private sector remained sluggish owing to reduced availabilities but also to production difficulties in the farms. Refinancing, however, increased. Larger credit and foreign exchange allocation would be needed to stimulate the recovery of production, particularly of cotton and sugarcane. Recovery of sugarcane and cotton production would have a salutary effect on the balance of payments, employment, and incomes of the Salvadorian people. Toward this end, further steps are also required in clarifying the status of rented cotton land. Manufacturing 98. Manufacturing will require credit as well as foreign exchange to finance inputs, spare parts and some equipment needed for rehabilitation, if the  -- 33 - present low level of capacity utilization is to increase and manufacturing exports outside the CACM are to be developed. As noted earlier, the 1981 volume of imports of raw materials (excluding petroleum), for the manufacturing sector was 25 percent below 1979 imports and the 1981 volume of capital goods was about 65 percent below 1978 imports. The hard currency shortage has affected the manufacturing sector because it is only third on the list to receive critical foreign exchange; behind basic consumer goods--such as food and medi- cines--and inputs for labor-intensive activities--such as public works and housing that contribute significantly to employment. Clearly, not all this decline is the result of lack of credit or foreign exchange. Other factors-- decreased demand in the country and in the CACM, disruptions in distribution systems caused by the domestic violence--play a role. However, rehabilitation of the manufacturing sector will depend heavily on outside financial assistance and the development of new markets outside the CACM. Particular needs may well be financing of inputs for export production as well as equipment for plant rehabilitation and investment by medium and small industrial firms. In addition, sugar production--now mostly in Government hands--needs special support to rehabilitate the sugar mills and sugarcane production. Given earlier experiences with Government-owned sugar mills--such as the Jiboa sugar mill--and with the recent nationalized sugar mills, eventual divestiture to the private sector seem to be advisable for a successful rehabilitation of the sugar industry. 919. Strengthening promotion and marketing activities in support of manu- facturing exports outside the CACM is another action. Marketing is a key element to the success of this activity and requires development of contacts with marketing agents, importers and retailers with expertise in the markets of the developed countries. Further infrastructure and a revision of CACM fiscal incentives to increase production efficiency would also be required. Marketing of Coffee and Sugar Exports 100. Coffee and sugarcane growers have been facing unfavorable interna- tional prices that result in poor net returns on their operations. For coffee, tihe differential between the export and grower price widened in 1980, permitting INCAFE to cover increases in financial and consignment costs. However, coffee growers have experienced losses, or at best marginal returns on the basis of INCAFE and MAG's estimates of production costs. 101. Low returns and land reform uncertainties have resulted in poor main- tenance of coffee plantings, redluced use of fertilizers and other inputs, and a dlecreased replanting rate. An additional negative factor is guerilla interfe- rence with production and harvesting. The cumulative effect has been a drop in coffee production that needs to be reversed for balance of payments and credit- worthiness purposes. C. The Public Investment Program 102. Beyond these policy issues, the Government needs to focus on the for- mulation of an appropriate investment strategy for the medium term, including a review of past projects and foreign loans for new projects owing to recent dlevelopments. Large projects, such as the Acajutla container port, power and telecommunications expansions, and the San Salvador freight terminal, are not economically viable under present depressed conditions in agriculture and  - 34 - manufacturing and would have to be postponed until these sectors, in particular manufacturing, show symptoms of expansion beyond pre-1979 production levels. Higher priority should be placed now on rebuilding damaged infrastructure (highways and bridges, power transmission lines, telephone exchanges) than in undertaking new, large projects which will not be needed until the economic recovery is well underway. The most obvious priority, apart from reconstruction of damaged infrastructure is for projects with an immediate impact on production, basically related to the recovery of agriculture and manufacturing, both public and private. In the public sector, it is essential to make ISTA's cooperatives viable concerns by providing needed support, as noted in other sections of this report. Similarly, public manufacturing enterprises, previously under INSAFI, need restructuring, and financial rehabilitation. With regard to the private sector, public support, in the short and medium run, would have to concentrate in recreating conditions for growth, such as higher credit allocations, and in providing minor needed infrastructure, such as a special ramp in the Ilopango airport for maquila operations in the San Bartolo free zone. 103. Once the short and medium run rehabilitation and reconstruction needs are satisfied, a longer term development strategy and corresponding public investment needs and financing could be considered. This, of course, can only be put in place once violence ceases. Industrial and modern higher productivity urban activity would have to increase their labor absorption beyond the historical pattern; a continuation of historical labor absorption in urban, modern occupations would mean a very significant retention of laborers in agriculture, substantial employment pressures on the informal sector, and social- tensions. Stepped-up support for manufacturing and maquila activities through improved port facilities, new industrial parks and free zones, labor training, and expanded export incentives and promotion to support industrial growth to markets outside the CACM and help related modern sectors grow will be needed. Agricultural growth, however, will still be crucial. Six areas will be of critical importance: a continuation of activities to strengthen Phases I and III of the agrarian reform, a shift of crop patterns to higher value crops in order to maximize income and employment, planting more pasture land into crops, improvements in crop yields, greater attention to land conservation and erosion problems, and expansion of the land under irrigation. Fishing also provides an opportunity for expanding employment and incomes. D. Public Finances Prospects 104. On the basis of substantial expenditure restraint, the Central Govern- ment deficit is expected to continue in 1982 at about the 1981 level, i.e., US$235 million. Current revenues are not expected to grow much as economic activities will likely continue to be depressed; coffee tax collections, however, could show some improvement based on better average export prices. Current fiscal savings are expected to remain negative (C 145 million), continuing the trend that began in 1980. 105. To avoid increasing the overall deficit and given needed expenditure levels for defense and some employment generating programs, the Government restricted other expenditures in 1982 as follows: (i) vacant posts were cancelled, overtime pay was strictly controlled, and wages were frozen; (ii) a 5 percent reduction of outlays with respect to the 1981 level; (iii) a 10 percent reduction of current transfers; and (iv) a 40 percent reduction of capital expenditures if no additional revenues (i.e., taxes) were collected.  - 35 - Budgetary controls were strengthened. Nevertheless, foreign assistance from USAID was needed to fill the financial gap. Overall external assistance to the Central Government most likely exceeded C 300 million in 1982. 106. For 1983, Central Government finances may continue to be weak because of slow revenue growth until the private sector recovers its dynamism and high military expenditures are reduced. This will only be possible once the civil strife subsides. Although the Government may be able to take some new revenue measures, this will have to be on a limited scale given the economic situation. These assumptions are clearly subject to high margins of error given the uncer- tainties present in today's El Salvador. Weak public finances, however, will seriously limit Central Government investment programs unless substantial foreign support can be obtained with very favorable local counterpart provi- sions. This may mean the continuation in 1983 and beyond of the extraordinary assistance received from bilateral donors,particularly USAID. The need for this assistance will continue for the next few years and will be essential to avoid a deterioration of the overall financial position of El Salvador. Failure to provide it means heavy reliance on domestic financing, reduced credit to the private sector, and additional balance of payments,exchange, and inflation prob:Lems. 107. Increased tariffs and prices of public enterprises and decentralized agencies, will be needed to improve the financial position of the public sector as well as permit these agencies to finance counterpart requirements of their investment programs. Furthermore, the financial viability of ISTA's coopera- tives is essential to avoid yearly increases in Central Government transfers to service their debts as well as increasing arrears to the banking system, which would undermine overall credit operations. E. Balance of Payments and Creditworthiness 108. The current account balance of payments in 1982 likely showed a somewhat lower deficit (IJS$149 million) than in 1981 as imports decreased slightly because of the depressed economic conditions. Larger imports could only be sustained on the basis of larger foreign concessionary lending. Exports are expected to remain at about the 1981 level or even decrease mainly because the impact of somewhat better coffee prices will be offset by declines in exported volumes of coffee and cotton as well as manufactured exports to the CACM. The overall balance of payments position is very uncertain to predict owing to lack of commercial credit, capital flight, and the impact of a widening parallel market. Concessionary financing will have to close most of the current account gap. 109. Balance of payments projections become even more uncertain for the next few years as the main export products (coffee, cotton, sugar, and manufac- tures) enter a crucial stage. Policies outlined in this report could turn around production declines and result in a healthy export development and thus a stronger current account, particularly if the present level of violence is reduced. Failure to act in a timely fashion to arrest export production declines could further undermine the foreign exchange situation, constrain the economy, and adversely affect the country's creditworthiness.  - 36 - 110. The debt service ratio for external public debt is low (3.4 percent and 4.8 percent in 1980 and 1981). The total external public debt outstanding at the end of 1981 was low; US$ 661 million (US$1,035 million, if undisbursed loans are included.) Given the present difficulties in contracting new debts from foreign commercial banks and suppliers, future net inflows will depend substantially on undisbursed loans and on official sources, mostly with favor- able terms. Therefore, the debt service will likely increase slowly and future creditworthiness will depend significantly on three factors: export prospects, demand management, and the military situation. Clearly economic management requires some control over the economy; if the military situation were to deteriorate so significantly as to cause the authorities to lose control over the economy, El Salvador's creditworthiness would be jeopardized. 111. Another important factor will be a continuation and enhancement of prudent financial management in the next few years. Particularly important will be strengthening the financial position of the public sector and reducing the size of its--mostly Central Government--deficit. This would not only decrease the need for domestic credit financing of the fiscal gap but would also permit prudent monetary and credit programs to allocate increasing credit to the private sector. A further analysis of interest rate policies would also be useful. These policy elements will strengthen the balance of payments and are supported by a stand-by arrangement with the IMF, which will help to eliminate or substantially reduce payments arrears. 112. Prudent demand management alone will not ensure creditworthiness. Between 1978 and 1981, real GDP dropped 20 percent; in per capita income each Salvadorian was 25 percent worse off. Exports also dropped and the terms of trade deteriorated. Yet, in 1982, GDP and exports likely dropped even more. The economy's ability to meet its payments abroad depends on the net effect of the resource transfer on incomes and foreign exchange receipts. Unless the decline in GDP and exports can be arrested, the Government will find it increasingly difficult to service its debt; unless exports can be increased, the debt service burden will rise. Given the link between exports and GDP growth, and between export receipts and debt service payments, the Government's efforts to reverse the decline in exports, particularly coffee exports, will be the decisive factor for creditworthiness. 113. Because of the great uncertainty, surrounding any projection of the economy of El Salvador, various scenarios or alternatives are presented to show their implications. The table below illustrates rough orders of magnitude for the effects on the country's future performance and creditworthiness of a base run and three of these alternatives. A base projection assumes continued depressed economic activities in 1982 and 1983, a modest turnaround in 1984 and some recovery in 1985 and following years, particularly of export production. The alternatives are: Alternative 1: Lower coffee exports possibly owing to continued agrarian reform uncertainties, increased violence or a poor implementation of Phase II. Alternative 2: Lower bilateral concessionary assistance matched by lower imports.  - 37 - Alternative 3: Same as base run but with higher bilateral concession- ary assistance to further economic recovery. Table 13. CREDITWORTHINESS SENSITIVITY ANALYSIS (in million dollars) 1981 1982 1983 1984 1985 Base Projection 1. GDP Growth (%) -8.5 -6.3 0.0 4.8 4.6 2. Current Account Balance o:F Payments -260 -149 -204 -232 -251 3i. Exports of Goods and Services 933 889 923 1,086 1,268 4. Imports of Goods and Serv:ices 1,234 1,175 19244 1,398 1,573 5. Debt Service Ratio (%) 4.8 8.2 8.8 7.9 7.4 6. Terms of Trade Index (1980 = 100) 93 98 99 98 98 Alternative 1 1. GDP Growth (%) -8.5 -6.3 -6.2 -1.8 3.2 2. Current Account Balance of Payments -260 -149 -306 -308 -288 3. Exports of Goods and Serv:ices 933 889 812 938 1,092 4. Imports of Goods and Services 1,234 1,175 1,236 1,326 1,434 5. Debt Service Ratio (%) 4.8 8.2 10.0 9.2 8.5 6. Terms of Trade Index (1980 = 100) 93 98 100 99 100 Alternative 2 1. GDP Growth (%) -8.5 -6.3 -1.6 2.1 5.2 2. Current Account Balance of Payments -260 -149 -131 -147 -170 3. Exports of Goods and Services 933 889 923 1,086 1,268 4. Imports of Goods and Services 1,234 1,175 1,171 1,314 1,493 5. Debt Service Ratio (%) 4.8 8.2 8.8 7.9 7.4 Alternative 3 1. GDP Growth (%) -8.5 -6.3 1.6 1.5 6.6 2. Current Account Balance of- Payments -260 -149 -299 -327 -349 3. Exports of Goods and Services 933 889 923 1,086 1,268 4. Imports of Goods and Serv.Lces 1,234 1,175 1,338 1,493 1,672 5. Debt Service Ratio (%) 4.8 8.2 8.8 7.9 7.4 Source: Mission estimates.  - 38 - These alternatives show that lower exports and reduced external assistance mean lower growth and that the current account of the balance of payments is constrained by external capital inflows. Alternative 3 shows that, with increased aid and tranquility, it is possible to expect substantial growth. 114. In brief, leaving aside political/military events, El Salvador's creditworthiness depends heavily on: (i) export production policies, particularly for coffee; (ii) the continuation of prudent domestic financial policies; and (iii) the availability of special external assistance on concessionary terms. This special assistance is needed to support the Government budget as well as the balance of payments and avoid a significant additional burden on limited future public revenues and foreign exchange earnings. However, given the link between exports and GDP growth and employment, and between export receipts and debt service payments, as noted, Government efforts and policies to arrest export declines and bring about a recovery will be the decisive factor for creditworthiness.  - 39 - ANNEX A AGRICULTURE AND AGRARIAN REFORM SITUATION AND PROSPECTS I. AGRICULTURAL PRODUCTION AND EXPORTS A. The Role of Agriculture in the Economy 1. I Small in size with a great density of population, El Salvador is heavily dependent on the agricultural sector for its livelihood and earnings of essential foreign exchange. The population is about 4.7 million on a total land area of 2.1 million hectares for a density of 223 persons per square kilometer. This means nearly 0.45 hectares per capita, of which less than two-thirds, exclusive of forest land, has some agrlcultural potential. This results in a density of 330 persons per square kilometer or about 0.30 hectares of arable land per capita. The combination of so many people with so little land poses a basic problem, which is intensified by the continuing rapid population growth at over 3 percent a year. A 1979 survey estimates the economically active population at 1,575,000; 45 percent were engaged in agriculture with only 2 hectares per worker. About one-fifth were workers without remuneration. The agricultural sector has long been the largest single employer. Since agricultural work is mostly seasonal, the rural labor force is underemployed. 2. Salvadorian agriculture's most important crops are primarily for export. Coffee is the dominant crop and the principal foreign exchange earner followed by cotton and sugar. The earlier development of the large hacienda system gave primary emphasis to export production with food crops and livestock down the line in a secondary position, and strongly conditioned the agricultural pattern that evolved. Most of the basic food production for domestic consumption was in the hands of small property owners and renters or colonos tilling small plots. Agricultural policy shifted during the 1970s and fostered increased output of staple foods (corn, sorghum, rice, and beans). Price support incentives and other assistance proved effective. B. Agricultural Performance 3. Agricultural production in both volume and value, reached peak levels during 1978-79. Agricultural production indices reflect these advances (see Table 1). Food production led other agricultural production. The efforts made during the 1970s to improve domestic food output are fully reflected in the indices of per capita food production, at least through 1978, even though population grew rapidly.  - 40 - Table 1: EL SALVADOR: INDICES OF TOTAL AND PER CAPITA AGRICULTURAL PRODUCTION, AVERAGE 1971-75 AND ANNUAL 1976-80 (1969-71 = 100) Item 1971-75 1976 1977 1978 1979 1980 Indices of Production Crops 110.0 114 112 131 125 108 Total Agriculture 108.6 116 115 133 129 115 Total Food 109.6 119 123 140 142 138 Per Capita Agriculture 98.2 95 91 103 97 84 Per Capita Food 98.8 97 98 109 107 100 Index of Population 1969-71 population = 3,503,000 110.8 121.6 125.3 129.0 133.3 137.7 Source: Economic Research Service, U.S. Department of Agriculture. 4. The gross value of production was also at its highest during the two consecutive years of 1978 and 1979 (Table 2) with 70 percent of the gross value of production coming from crops output, which grew about 21 percent during 1976-79. However, the gross value of agricultural sector production in 1980 declined by 6 percent from the 1979 level. At current prices, the gross value of total agricultural sector output also dropped sharply in 1980; crop production value showed an even steeper decline. This decline continued in 1981. Table 2: EL SALVADOR: GROSS VALUE OF AGRICULTURAL SECTOR PRODUCTION, ANNUAL 1976-80 (in million colones) Constant 1962 Prices Current Prices Item 1976 1977 1978a/ 1979a/ 1980a/ 1976 1977 1978a/ 1979a/1980a/ Sectoral Total 725 751 828 840 791 2,001 2,786 2,589 3,253 2,784 Crops 489 509 578 592 552 1,600 2,380 2,131 2,712 2,199 Livestock 103 102 104 102 99 218 217 246 328 321 Poultry 93 100 104 106 99 109 117 135 134 171 Forestry 26 27 29 25 27 31 33 33 32 33 Fisheries 12 12 12 13 13 38 36 38 42 54 Agriculture 2 2 2 3 2 4 4 5 5 6 a/ Preliminary. Source: Banco Central de Reserva.  - 41 - 5. Agricultural production. was adversely affected in 1980-81 by rural unrest, low export prices, uncertainties, and the agrarian reform. The decline had its earlier ferment seeded by, economic, social and political factors. In an effort to ease tensions and stabilize the country, the military-civilian Government which assumed power in October 1979, put into effect a series of significant reforms and policy changes, including a far-reaching agrarian reform program. Some of these, by their nature, had a direct impact on agricultural production in 1980-81. The agricultural sector, which already showed marked signs of slippage in 1980, deteriorated further in 1981. Furthermore, the prospect of production continuing at relatively low levels in 1982 is high. Without the restoration of a greater degree of stability and confidence, the outlook for improvement in the agricultural sector in the next few years is likely to remain gloomy. 6. The agricultural outlook is plagued by: terrorist disruptions of the rural economy; uncertainties about the implementation of the agrarian reform; high unemployment and reduced consumer purchasing power; relatively low returns from export crops in the face of continuing high production costs; depletion of operating capital; and inadequacy of credit. This situation is having an ad,verse impact on both production for domestic consumption and for export. The next section presents an analysis of the problems plaguing agricultural export production and the rising dependence on food imports. Coffee Production: The Economy's Backbone 7. Coffee is by far the most important export crop in terms of natural resources utilization, employment and incomes. Coffee is grown in five zones, but the greatest concentration of production is in the western Departments of SaLn Salvador, La Libertad, Santa Ana, Sonsonate, and Ahuachapan. Of the 1981-82 clherry coffee harvested, an estimated 55 percent was from the zone in which the Detpartments of San Salvador and La Libertad are located. 8. Including small growers, there are about 40,000 coffee producers cultivating 180,000 hectares of land. Coffee does best in the western and central parts at altitudes ranging between 500 and 1,500 meters. The most desirable quality coffee is grown in high altitude areas. Prior to 1980, an estimated 120 beneficios or mills processed the harvested coffee and turned out green coffee which was bagged primarily for export. 9. As vital as the coffee industry is to the economy, there is no central internal source with a continuity of information on the planted and harvested areas and the numbers of coffee trees in bearing and nonbearing stages. There also is a paucity of information on the number of coffee growers or producing urLits. The last agricultural census dates back to 1971. It showed that there were some 40,000 production units with the area devoted to coffee totalling 147,000 hectares. Of all these units, 72 percent were less than 1 hectare in size and they represented only about 5 percent of the total amount of land in coffee. On the other hand, production units above 5 hectares in size totalled 3.9 thousand and had 123,000 hectares in coffee. These represented 9.7 percent of all the units producing coffee and had over 80 percent of all the land devoted to this crop. Plantations over 50 hectares represented 1.5 percent of all the coffee production units but 47 percent (69,000 hectares) of the total plantings.  - 42 - 10. Of an estimated 188,000 hectares devoted to coffee, about 186,000 hectares were harvested in 1981-82. The areas of coffee planted and harvested over the past five-year period increased significantly with respect to the five-year period beginning with the 1972-73 crop year reflecting much improved coffee prices; they have held rather steady despite the unrest and turmoil that has prevailed in the country. Table 3: EL SALVADOR: COFFEE AREA AND TREE POPULATION, FIVE-YEAR AVERAGE 1972-73/1976-77, ANNUAL THROUGH 1981-82 Crop Year Average (Oct.-Sept.) 1972-73/1976-77 1977-78a/ 1978-79a/ 1979-80a/ 1980-81a/ 1981-82a/ Area (hectares) Planted 172,000 183,500 185,000 187,000 188,000 188,000 Harvested 158,000 165,000 170,000 185,000 185,000 186,000 Tree Numbers (thousands) Bearing 417,417 484,808 505,000 505,000 516,000 526,000 Nonbearing 62,695 66,869 70,000 70,000 60,000 50,000 Totals 480,112 551,677 575,000 575,000 576,000 576,000 a/ Preliminary estimates. Source: Foreign Agricultural Service, U.S. Department of Agriculture. 11. During the five crop years beginning with 1972-73, the coffee tree population averaged 480,112 thousand with 62,695 thousand in the nonbearing stage. Coffee tree population increased in the next five-year period and totalled over 551,000 thousand in the 1977-78 crop year and 576,000 thousand in 1981-82, of which 67,000 thousand and 50,000 respectively were nonbearing. Coffee Production and Prospects 12. The Ministry of Agriculture places the 1980-81 coffee output at 161,000 metric tons (2,690 thousand bags of 60 kilograms) and the 1981-82 production at 142,000 metric tons (2,380 thousand bags). Both coffee production and exportable surplus have declined since the 1978-79 crop year.Thel981-82 level compares unfavourably even with the five-year period beginning with the  - 43 - 1L972-73 crop year; it would be 12 percent or more below the 1980-81 output. One reason for the decline is lower yields per hectare. 1/ Table 4: EL SALVADOR: GREEN COFFEE PRODUCTION AND EXPORTABLE SUPPLY, AVERAGE 1972-73/1976-77, ANNUALLY 1977-78 THROUGH 1981-82 a/ (in thousands of 60-kilo bags) Average Item 1972-73/1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83b/ TotaL Production 2,610 2,800 3,423 3,322 2,690 2,380 2,400 Exportable Supply 2,434 2,610 3,228 3,122 2,490 2,180 2,200 a/ Crop year October-September. b/ Preliminary estimates. Source: Foreign Agricultural Service, U.S. Department of Agriculture. 13. The outlook for coffee production is not encouraging. Yields have declined steadily over recent years due to poor maintenance of plantings, reduced availability of fertilizer, guerrilla interference with farming activ- ities, and reluctance to make further operational investments because of prevailing uncertainties. The cumulative effect of all these negative forces is expected to be reflected in a stagnation at the 1981-82 level in the 1982-83 coffee production. The 1981-82 and 1982-83 coffee crops are among the smallest in a decade. Moreover, the annual rate of coffee tree replacement has slowed down recently and is below the usual replanting rate. Poor maintenance and below normal replanting rates are bound to have a deleterious effect on coffee trees in coming years. The most common number of coffee trees per hectare is somewhat over 2,000 with a range of between 1,300 and 7,200, depending on the sophistication of the farming operation. In general, the tree density per hectare tends to be higher in El Salvador than in most other producing countries. 1/ On the basis of an estimated 2,360 thousand bags being produced in 1981-82, the average per hectare yield would be 12.6 bags of 60 kilos against 14.5 bags in 1980-81, and 18.0 bags in 1979-80. The 1981-82 average yield is low compared with the most recent high of 19.8 bags per hectare in 1978-79 and the average yield of 18.7 bags during the five-year period since 1972-73.  - 44 - Costs and Returns 14. In recent years, as a result of low coffee prices coupled with internal problems, growers have generally experienced losses or at best marginal returns. Coffee production costs with optimum maintenance and high average yields have been estimated by the Ministry of Agriculture (MAG) at C 3,631.45 per manzana 2/for 1980-81. With an average yield of 20 quintals of green coffee per manzana, the unit cost amounts to C 181.57 per quintal (US$0.73 per pound). Similarly, INCAFE calculated the 1981-82 production costs at C 3,211.28 per manzana for a farm of 50 manzanas and a tree population of 1,600 per manzana yielding 20 quintals of green coffee. In this case, the cost per quintal of green coffee amounts to C 160.56 (US$0.64 per pound). 15. Production costs include those of growing the crop as well as those of harvesting, including delivery to the processing mills. Maintenance of the coffee plantings is an integral part of the whole operation. An estimated 40 percent of production costs, relates to the growing phase; the remaining 60 percent to the harvesting phase. About 70 percent are labor costs. An estim- ated 160,000 persons are engaged in production, maintenance and harvesting work. Harvest employment at the peak is placed at 80,000; the harvest season covers a span of four months, from November through February with a peak occur- ring from mid-December through mid-January. An additional 10,000 farm workers are engaged in other related work such as in beneficios, transportation, etc. 16. The financial situation of the growers is affected by the fluctuation in coffee prices as shown in Table 5. In the first year of operation of INCAFE, the new coffee marketing agency, the price paid to growers averaged an estimated US$ 0.63 per pound on a green bean equivalent basis, excluding the cost of processing for export. In 1981, the price paid to growers averaged US$0.72 per pound (a 14 percent increase). These prices are not fully comparable with prior prices because INCAFE pays for the cost of processing coffee. Adjusting for the US$0.20 per pound INCAFE paid to beneficios for processing operations would result in a gross of US$0.83 and US$0.92 per pound to growers in 1980 and 1981. Coffee producers have expressed dissatisfaction over what they allege to be low prices. 2/ A manzana is equal to 0.7 hectare.  - 45 - Table 5: EL SALVADOR: COFFEE EXPORTS, UNIT FOB VALUE OF EXPORTS, PRICES TO GROWERS, AND DIFFERENCE BETWEEN EXPORT VALUE AND GROWER PRICE Year Exports Unit Value Price to Grower Difference (60 kilo bags) Exports (green bean equivalent) Thousands ------ U.S. cents per pound ------------- 1975 3,062 56.66 35.50 21.16 1976 2,666 114.45 85.12 29.33 1977 3,015 198.15 183.49 14.66 1978 2,347 151.14 96.64 54.50 1979 3,390 141.58 96.40 45.18 1980 2,644 159.20 82.52 a/ 76.68 b/ 1981 2,212 140.00 92.40 a/ 47.60 a! Estimated as paid by INCAFE and adjusted by 20 U.S. cents to cover payment to beneficios. b/ Calculated on the basis of US$0.83 per pound grower price equivalent, which includes US$0.20 cents paid to beneficios by INCAFE. Source: International Coffee Organization (ICO) documents, INCAFE and Mission estimates. Coffee Rust 17. A major threat to coffee is the prevalence of rust (Roya del Cafeto), which already has raised fears in the western three major coffee producing zones and scattered into other parts of the country. Reportedly, coffee rust was first discovered in El Salvador in December, 1979. Responding to the need, MAG developed a project to combat coffee rust through the Salvadorian Coffee Research Institute (ISIC), and the Department of Agricultural Protection (DDA), with INCAFE collaboration. Since coffee growers did not have the capacity to pay for needed control measures, the Government undertook most of the work. The Government supplied materials and spraying equipment while the grower provided' the labor. 18. In mid-1981, about 29 thousand hectares were under quarantine against coffee rust, of which about 7 thousand hectares were reported as infected. Where coffee rust was found, the project called for spraying with a copper base fungicide up to five times per season depending on altitude, levels oE coffee production and density of foliage. The cost per chemical treatment was C 80 colones per manzana; about US$45 per hectare. More recently, efforts to control coffee rust have been concentrated on both spraying and fumigation. At the end of 1981, about 24,500 hectares have been sprayed and another 6,900 hectares were expected to be fumigated in the mnths ahead. 19. Research on various aspects of coffee rust control, including formulation of fungicide materials, systems and rates of application, timing, etc., is a major responsibility of ISIC. This agency has also been working on tlae development of rust resistant varieties of coffee trees but none have yet  - 46 - been released to growers. There also is the concept that poorly nourished coffee trees are more readily susceptible to coffee rust while those well fertilized to encourage vigorous growth tend to have greater resistance. 20. The coffee rust infestation in El Salvador has been identified by ISIC as the classic Hemileia vastatrix which is perhaps the most destructive; in fact, coffee rust is the most serious coffee disease.3/ All varieties of coffee grown in the Americas are said to be highly susceptible to Hemileia. Coffee rust infections originate with a parasite. 21. Coffee rust activities are directed out of 26 operation centers. These offices help producers deal with the rust by supplying technical advice, spray equipment, chemicals and other materials for chemically controlling the disease. In addition, six units are located in different sections to provide repair and maintenance services required for spraying equipment. Financial requirements covering the cost of the coffee rust project have been placed at a total of C 35 million. 22. Despite the efforts to control and confine the rust infections, the disease has continued to spread and widen the areas affected. This is cause for growing concern among growers over the future of their industry. There is in fact considerable potential danger to coffee production and the key role of this crop in the national economy, especially under conditions favorable to still further and more rapid spread of the rust infected areas. INCAFE Marketing 23. Virtually all aspects of coffee marketing, including exports and much of the production financing, have been vested in the Instituto Nacional del Cafe (INCAFE), established under Decree No. 75 issued December 20, 1979. The underlying purpose of this legislative action was to nationalize coffee market- ing. INCAFE has a seven-member governing board, which includes five Ministers--foreign trade, planning, economy, agriculture and treasury--the President of the Central Bank, and a representative named by the President of the Republic. Administrative responsibility is vested in a board of directors and a general manager. Decree 75 made provision for periodic internal audits, an annual report on operations, and financial statements. Subsequent legislative actions, (Decree No. 83 of January 9, 1980, Decree No. 404 issued September 29, 1980, and Decree No. 554 of January 5, 1981) strengthened and clarified earlier authorizations. Decree 75 also terminated operations of the National Coffee Department, which played a limited part in export coffee marketing mainly by maintaining a registry of contracts. The Salvadorian Coffee Company, created in 1942, was abolished with its assets and liabilities 3/ It is described by the U.S. Department of Agriculture in "Plant Diseases" as follows: "the first symptoms are small, yellowish, translucent, oil spots on the leaves. They expand into rather large, round spots and early show a powdery coating of spores on the under surface. As the spores mature, the spots gradually turn bright orange to red. With age the lesions become brown and surrounded with a yellow rusted band. Defoliation occurs to such an extent that many trees retain only two or three leaves on their branches where they might ordinarily have 15 to 20. Such affected trees are stunted, cannot produce, and usually die in a few years."  - 47 - transferred to INCAFE. Decree 75 created a commission primarily to audit the affairs of this company including, its operating losses and coffee market speculation during the 1972-79 period. 24. The main objective of INCAFE is to buy coffee from the producers, facilitate its milling, and market the final product abroad. On the farm production side, INCAFE's main activity is to provide financing for maintenance of the plantings and harvesting of coffee. This particular financing aspect of the coffee industry amounted to about US$100 million in 1980. Coffee producers are financed on an installment basis; funds are supplied in accordance with the spread of work done or production supplies purchased over the course of a year. Wlile no credit advances are mades, producers are required to pay interest on the installments paid to them. Coffee production is also financed through the Central Bank and various financial intermediaries. 25. For processing coffee, beneficios or millers, received from INCAFE C 50 (US$20) in the 1981-82 crop year for each 46 kilos processed.4/ The agency also processes part of the national harvest in its own mills, roughly 15 percent ofi the 1980-81 crop. Coffee is sold by producers mainly in two forms, cherry coffee (uva fresca) and parchment: coffee (pergamino); the percentage of each dturing the 1980-81 crop was 72 pesrcent and 11 percent respectively, the rest being in other forms. Since INCAFE handles the export marketing of coffee, it receives the proceeds from sales and in turn pays the producers, the millers and the taxes levied on shipments of this commodity to external markets. 26. Operating on a flat fee basis, millers are only required to meet INCAFE requirements. There is no particular incentive to maximize quality. This situation may result in lower quality coffee being exported. During the prevailing internal conflict and unrest, some beneficios have been shut down due to power outages and thus have been unable to process growers' cherry coffee beyond fermentation. Where this has been experienced, the outturn of export coffee reflected a lower quality., 27. Although INCAFE does not provide technical assistance to coffee growers, it does supervise credit: extended to them for production of their crops. Services such as combating coffee diseases, guidance on planting systems, dealing with production problems, etc., are provided by various govern- mental agencies and also by some private importers. However, INCAFE has imported equipment and materials to help combat the coffee rust, in collabora- tion with MAG and the Instituto ';alvadoreno de Investigaciones del Cafe (ISIC). 28. Although INCAFE was established during the 1979-80 coffee harvest, it did not get into its first full year of operation until the 1980-81 crop. This institution is now embarked on the 1981-82 crop, its second full year of opera- tion, but it has not yet issued an annual report or a balance sheet statement to its board as required. However, toward the end of 1981, the Board of Governors did enter into a contract with a U.S. firm to make an audit of INCAFE. This would be the first audit of INCAFE and an important step. In the absence of 4/ In the mill processing operation, it takes five kilos of cherry coffee or 1.2 kilos of parchment coffee to produce one kilogram of green coffee for export.  - 48 - annual reports and balance sheets, INCAFE lacks accountability. Moreover, since the agency has not been adequately responsive in providing for primary source information on its operations, this has given rise to dissatisfaction among coffee growers and the industry in general. 29. Unfortunately, INCAFE is not a primary source of information on much that is of vital interest to the country's coffee industry. Specific information on INCAFE's calculations of net margins between its total cost per unit of coffee on a green bean equivalent basis and its returns from export sales could not be obtained by the mission. Statistics on exports and prices over a period of years were supplied but this information was derived primarily from secondary sources, such as the International Coffee Organization (ICO). Nevertheless, INCAFE periodically issues a memorandum relating to current purchases of coffee by volume and value with such information also presented on a cumulative basis during the course of the crop year. Information relating to current local and international coffee prices is also regularly supplied by INCAFE. The Cotton Sector's Dilemma 30. Cotton is predominant in the central and eastern parts along the coastal region, particularly in the Departments of Usulutan, San Miguel and La Paz, where soil and climatic conditions are suitable for growing cotton. Since in the 1930s crop production and management techniques as well as ginning were deficient and effective pest control was almost unknown, cotton producers decided to join efforts and organize a cooperative (COPAL) that would be unique in the services available in dealing with virtually all aspects of cotton production and marketing. With Government support, COPAL became the only seller in domestic and foreign markets of all the cotton produced. Although no cotton could be grown by any individual without being a member of COPAL, the only requisite for membership was to subscribe to a share of stock. The overall objective was to develop cotton growing in an orderly and well-planned manner. COPAL had approximately 4,000 members at its peak but with the recent decline in cotton production, its membership dropped to about 2,900 in 1980-81. 31. The Ministry of Agriculture (MAG) licenses all cotton growers. Through this process, both MAG and COPAL along with the individual grower are advised of supplies needed and also the kind of cotton to expect in order to keep the harvested varieties separate for purposes of ginning, grading and marketing. 32. COPAL has developed for El Salvador's cotton a broad market and a reputation for both consistency in its grading and quality of product. COPAL conducts its own breeding and fiber selection program. The newest and best variety of cotton developed through this work is Cedix which with a staple length of 1-3/32", has a greater tensile strength and yields more lint and less seed than other traditional varieties. COPAL has special arrangements with growers for producing seed which it sells to its members. Cotton Production 33. In 1961, there were 1,600 production units with 44,000 hectares in cotton and an output of 40,703 metric tons of raw cotton. By 1963-64, plantings expanded to reach 114,000 hectares but cotton production ran into problems.  - 49 - There was an overextension into unsuitable land and improper use of fertilizers along with insecticides that upset the ecological balance and resulted in serious insect and disease problems. Cotton production suffered a temporary setback. A recovery began in 1969 under a rehabilitation program undertaken by COPAL with technical assistance from Israel. The 1971 census showed nearly 3,000 production units with over 64,000 hectares of cotton and an output of over 69,000 metric tons of raw cottoni. Annual production of lint cotton from 1971-72 through 1979-80 averaged over 30)7 thousand bales of 500 pounds. However, production has slowed down significantly in the early 1980s (more below). The table below shows cotton production and yields. Table 6: EL SALVADOR: COTTON AREA HARVESTED, PRODUCTION AND YIELD, a/ 1971-72 THROUGH 1981-82 Area Estimated Production Average Yield Crop Year Harvested Raw Cotton Lint Cotton Raw Cotton Lint Cotton (manzanas) (thousand quintals) (quintals per manzana) 1971-72 103,750 4,087.9 1,495.3 39.7 14.4 1972-73 121,800 4,195.2 1,493.4 34.2 12.3 1.973-74 135,800 4,553.9 1,632.7 35.8 12.9 1974-75 125,900 4,562.6 1,617.5 37.3 12.9 1975-76 105,700 3,609.5i 1,313.3 34.5 12.4 1976-77 113,300 4,315.6 1,427.6 35.0 12.6 1977-78 142,100 4,946.5 1,745.3 33.1 12.3 1978-79 146,100 4,408.3; 1,579.6 30.2 10.8 1979-80 120,800 4,004.8 1,429.3 33.5 11.8 1980-81 a/ 83,200 2,602.9 997.3 30.6 12.0 1981-82 a/ 65,000 - 711.4 - 10.9 a!L Provisional Estimates. Source: Direccion General de Economia Agropecuaria (MAG), Cooperativa Algodonera Salvadorena (COPAL) and Mission estimates. 34. During 1979-80, the area harvested was reduced by 17 percent. During the crop year 1980-81, while agrarian reform was being implemented and rural tnrest increased, cotton growing operations were seriously hampered. This is reflected in deep declines in cotton areas harvested and bales produced during the 1980-81 andl981-82 crop years. 35. As production expanded in the mid-1970s, COPAL undertook an investment program to modernize its gins, improve operating capacity and efficiency as well as upgrade cotton storage facilities to maintain quality. There are four ginning plants. During 1979-80, these gins turned out 286 thousand bales of lint cotton at a cost of about C 13.4 million, or C 9.37 per quintal (US$3.75 per 100 lbs). However, with the decline in cotton in production since 1980, the cotton gins are now operating at less than 50 percent of their capacity.  - 50 - 36. In the 1970s, cotton provided employment for an annual equivalent of up to 50,000 workers, mostly nonskilled labor engaged in planting, cultivating and harvesting activities. The ginning phase required about 2,500 skilled workers from November to April. Administrative activites engaged some 500 office workers. In the production of cotton, the cost of labor represents about 45 percent. Cotton Exports 37. The export market usually absorbs 70 to 85 percent of the cotton produced in the country while the remaining quantities are utilized by the domestic textile manufacturing industry. The largest volume of exports was 309,000 bales in 1977-78 for C 228.4 million. The largest number of bales sold for domestic use was 65,957 in 1975-76. Table 7: EL SALVADOR: VOLUME AND VALUE OF EXPORT AND DOMESTIC LINT COTTON SALES, 1971-72 THROUGH 1980-81 Crop Year Export Marketing Domestic Consumption Crop Year Bales Value Bales Value (500 lbs) (Million Colones) (500 lbs) (Million Colones) 1971-72 245,408 87,910.2 55,810 20,303.0 1972-73 258,856 99,176.8 49,583 19,444.5 1973-74 276,385 139,222.5 61,073 38,471.6 1974-75 302,927 176,583.5 23,585 13,890.0 1975-76 196,319 140,088.9 65,957 47,072.2 1976-77 245,186 206,987.1 65,326 56,818.6 1977-78 308,896 228,419.9 40,850 31,381.9 1978-79 251,264 222,429.6 63,537 56,420.9 1979-80 235,928 214,619.3 49,350 45,375.9 1980-81 143,908 147,931.8 55,318 52,294.9 Source: Cooperativa Algodonera Salvadorena (COPAL). 38. Although El Salvador usually exports cotton to more than a dozen countries in different parts of the world, the two largest buyers in recent years have been Japan and China. Out of the 1980-81 crop, 89 percent represented cotton of superior grades on the basis of international standards.  - 51 - P'rices and Costs :39. International cotton prices tend to vary widely as the table below shows. Table 8: EL SALVADOR: -AVERAGE FOB EXPORT COTTON SALES PRICES, 1971--72 THROUGH 1980-81 (US Dollars per Quintal) Average Middling Crop Year General Plus Grade Average (C-1 ANA) 1971-72 28.59 28.90 1972-73 31.20 31.82 1973-74 47.78 48.01 1974-75 45.03 45.27 1975-76 56.19 56.76 1976-77 68.12 68.41 1977-78 57.91 58.76 1978-79 69.45 69.95 1979-80 71.54 72.14 1980-81 81.15 81.42 Source: Cooperativa Algodonera Salvadorena (COPAL). 40. Prices paid by domestic textile manufacturers for lint cotton in the domestic market are closely related to FOB export prices. Domestic users have first call on El Salvador's cotton production; local textile manufacturers indicate to COPAL the number of bales required by each. Such quantities are held in reserve by the cooperative to be drawn upon as needed by the individual processor. The price paid is determined on the basis of the FOB average of the international market for the marketing year. This apparently has resulted in an equitable price arrangement with an assured supply. 41. The cost of cotton production has more than doubled since the mid-1970s because of inflation, security expenses, and higher prices for oil based inputs. Sophistication of cotton production and its costs are brought into sharp focus in Table 7.4, Statistical Appendix by the very nature and range of items listed. The components shown imply growing much of the cotton in large areas as is the case with the use of tractors, heavy machinery, and related equipment for soil preparation, planting and tilling. The size and scope of cotton producing operations is characterized by the vast use of insecticides, which together with airplane spraying represents about one-third of the total production cost. The problem haLs become so serious that the usual application of control chemicals is twice a week at the start of the season and then weekly during the remaining months of the growing period. In addition to privately operated airplane spraying enterprises, COPAL itself has a fleet of its own (10-14 airplanes). The cooperative supplies the spraying service along with the required chemical material on retquest of its members at a lower charge.  - 52 - 42. The especially heavy and extensive use of cotton insect and disease control chemicals in El Salvador provides a strong basis for an ecological nightmare. The chemical spray material, although diluted with water, kills off the beneficial insects along with the bad, taints underground water resources, pollutes rivers and streams, contaminates soils and tends to be harmful to life in general. There is need for an alternative approach through biological control to plant protection in the Salvadorian cotton sector. Fortunately, COPAL is interested in such a course with work already underway. Heavy Reliance on Rented Land 43. Cotton in El Salvador has developed a heavy dependence on rented land. Before agrarian reform became effective after 1979, reportedly at least half of the cotton production took place on rented land. Most of those engaged in growing cotton on rented land had their own tractors and necessary mechanical equipment. 44. The distribution of cotton growing by size of planting gives an important insight to cotton production before and after agrarian reform. In 1979, about 420 farms with over 50 hectares each (16.8 percent of the total area planted), had about three-fourths of the total harvested area and the total raw cotton tonnage. Since Phases I and III of the agrarian reform became effective, both the number of cotton producers and the land area ranging up to 50-100 hectares have remained relatively steady but significant decreases have taken place among the larger growers. In the 1979-80 crop year, 14 percent of cotton growers showed intentions to plant upward of 70 hectares each for about 70 percent of the 84,000 hectares intended to be planted; the next crop year--the first of agrarian reform--only 10 percent intended to plant over 70 hectares each for about 57 percent of the 67,000 hectares intended for 1980-81 cotton growing. In 1981-82, the second year of agrarian reform, 14 percent of COPAL members showed intentions to plant over 70 hectares of cotton each for about 71 percent of a total of 64,000 hectares; actual results were lower (42,000 hectares), due to lack of bank credit, higher costs of production, and violence in the countryside. 45. The agrarian reform has affected cotton land in two ways. First, agrarian reform Phase I expropriated properties exceeding 500 hectares. Second, Phase III (land-to-the-tiller) created a potential problem for both land owners and renters. Owners are fearful of renting land for cotton production because under Decree No. 207 there is a possibility of the parcel being expropriated; renters that plant cotton face a risk since it could be claimed and taken over also under Decree No. 207. Reportedly, about 45 percent of the country's cotton land has already experienced a change of ownership under the agrarian reform. Currently, the prime factors in El Salvador's ability to continue cotton production at reasonable levels are security, availability of rental land, and financing. This suggests that improved conditions would be needed to retain the experience and know-how vested in the cotton producers on rented land to avoid further production problems. 46. The outlook for 1982-83 is not very encouraging. Prospects are for a harvested area of around 43,500 hectares, down 1,500 hectares from the previous year and nearly 40,000 hectares below the 1979-80 pre-agrarian reform year. Early indications are for a 1982-83 output of only 115,000 bales of lint cotton as compared with 143 thousand bales in 1981-82 and 286 thousand bales in 1979-80.  - 53 - C)PAL Financial Status 47. COPAL is now in operational and financial difficulties. This basic- ally results from the steep drop in both cotton output and exports while there are financial obligations that both COPAL and its members need to meet. COPAL built much of its capital structure through the support of its members. This wats made possible through a 10-year, 8 percent forced loan, which each member is obligated to make to COPAL at the end of the marketing year and which ranges from C 1.25 to C 2.0 per quintal of lint cotton. A 1981 evaluation placed the cooperative's fixed assets at C 34 million with equipment and machinery amount- ing to some C 25 million. COPAL's indebtedness to the Central Bank is about C 46 million plus accumulated interest for a total of about C 55 million to C 60 million. 48. The situation of COPAL is complicated by two financial decisions made in 1979. Based on good market prospects for the 1979-80 crop, COPAL paid its members C 10 per quintal of cotton above the selling price for an overall expenditure of C 17 million. 5/ This probably was prompted by the anticipa- tion of a fate similar to that of coffee and sugar exports, which were national- ized. The second decision was to repay foreign loans reportedly to retain its good credit standing among external lending institutions that had made loans to C()PAL to buy new equipment (C 17.5 million), spare parts (C 4 million) for its gins and other installations, and pesticides, fertilizer and other supplies (C 9 million) for sale to members. 49. The financial situation of COPAL is important to cotton growers. In the past, cotton growers financecd 70 percent of their production costs through credit with the balance coming from their own resources. To facilitate bank fiinancing, COPAL supplies the grower with an irrevocable letter of credit that assures the grower's bank that it: will be repaid out of cotton deliveries to the cooperative. As the marketing season advances, COPAL makes advances to permit early repayment of bank credit. Furthermore, in earlier years, COPAL obtained from external banks short-term loan commitments (for up to six months) to finance grower advances as cotton ginning and marketing got underway. Now foreign banks are reluctant to operate in El Salvador and, in addition, interest rates are higher than those charged by local banks. Cotton Prospects and Government Policy 5(). As analyzed, this sector is presently confronted with a grave crisis. A continuing emergency situation has placed the growers in an economic squeeze, and threatens the existence of the producer-owned and controlled cooperative. Cotton growers need solid assurances that continued high level production is essential as a significant provider of employment, income, and 5/ In this connection, there is a formal agreement to pay back the C 17 million that had been handed to growers as an addition to the price they received from 1979-80 cotton crop sales. Under this arrangement, each of the members assumed the amount paid above that year's cotton liquidation price as a personal debt to be repaid to the cooperative over a period of three years. Of the C 17 million, one-third has already been repaid with the full amount to be turned over by COPAL to the Central Bank for credit to the cooperative's debt.  - 54 - vital foreign exchange. This will require the Government to focus attention on actions required to restore cotton area and production to previous levels, and to foster greater productivity per unit of land to increase output. Agrarian reform campesinos, who took over cotton holdings were poorly trained and did not have the competence needed to manage a modern, technology intensive cotton farm, even though they had worked previously in cotton crops. Increasing production would need the Government to improve production and yields in agrarian reform cooperatives and to recognize that cotton is also grown on rented land and that, in the prevailing circumstances, a decision not to rent land is also a decision not to grow cotton. Renters are usually responsible for all phases of production with the equipment they already have. Once steps are taken to make available rental land, some assurances will also be required so that it remains in cotton production for a reasonable period to ensure some stability in overall output. Different approaches may be followed. Based on Government guarantees and a grower commitment to produce cotton for a five-year period on a specific land area, individual growers should be able to rent land. The owners in turn could release the cotton land on a negotiated annual rental basis, while the grower agrees to follow soil conservation practices to minimize erosion. The Government also needs to be concerned with uplifting cotton production and effectively marketing the crop. There is a need to improve the financial strength of COPAL to increase productive capacity as output expands, and improve production efficiency to lower costs. The cotton sector urgently needs also effective extension and technical assistance along with research services and backstopping support of adequate credit. Sugarcane Production 51. During recent years, marked changes in management and farming practices have sharply reduced both the land area in sugarcane and production of this important crop. The fall-off in sugarcane planted and harvested areas with consequent lowered production started with the 1977-78 crop. Since then, the decline has greatly accelerated. The resulting deterioration is dramatically highlighted by comparing present production with mid-1970s levels (see table below). Table 9: EL SALVADOR: ESTIMATED SUGARCANE LAND PLANTED, AREA HARVESTED, PRODUCTION AND YIELDS CROP YEARS 1971-72 THROUGH 1980-81 Planted Harvested Year Area Area Production Yield per Hectare (hectares) (hectares) (metric tons) (metric tons) 1971-72 34,982 22,685 1,849,227 81.5 1972-73 34,129 23,553 1,888,392 80.2 1973-74 39,516 30,251 2,397,980 79.3 1974-75 43,520 33,175 2,615,982 79.9 1975-76 41,104 33,540 2,589,456 77.2 1976-77 41,585 34,650 2,933,512 85.4 1977-78 40,839 34,350 2,892,904 84.2 1978-79 38,977 33,336 2,745,246 82.4 1979-80 33,534 27,273 2,019,218 74.0 1980-81 27,972 26,573 1,824,100 68.6 Source: Instituto Nacional del Azucar (INAZUCAR), Gerencia de Planificacion.  - 55 - 52. From the start of the 1970 decade, sugarcane production in El Salvador expanded progressively, reaching a peak in 1976-77. However, by 1980-81, production had dropped to 62 percent of its mid-1970 level while average yields per hectare reached a new low for the decade. This has idled some mills and resulted in sizeable underutilization of others. Sugarcane production for 1982-83 is expected to recover somewhat as a result of crop loans made by INAZUCAR with the 1980-81 crop year. 53. Overall sugarcane production costs have risen by more than 60 percent since the mid-1970s. The major cost items as inputs, growing and harvesting'along with transportation have spiralled during the period because of inflation. But there are additional factors attributable to internal strife and uncertainties. 54. With greatly increased production costs, sugarcane growers have been hard put to make ends meet in the face of inadequate returns due to prevailing low international sugar prices. Thus, for the 1980-81 and 1981-82 harvests, INAZUCAR provided advance guarantees of minimum grower prices for cut sugarcane sold, which were substantially above those of the 1979-80 harvest, as a grower incentive to maintain production. This policy of fixing minimum prices in effect subsidizes the grower to cover rising production costs. This subsidy amounted to C 10-12 per ton of cut cane in 1980-81 and 1981-82. For 1982-83, the guaranteed price of C 50 per ton will continue but without it entailing any cost to INAZUCAR because the domestic sugar price was raised to cover the subsidy. 55. An additional element that merits closer attention is sugarcane rust or carbon. This malady has had a. minimal effect so far since it has attacked only one variety representing a minor part of the local sugarcane crop. About 20 resistant sugarcane varieties are being tested on the experimental grounds of a remaining private sugar company to determine adaptability to growing conditions in El Salvador. Hopefully, this testing should result in suitable resistant varieties being available in the event that sugarcane rust becomes more of a problem in this country. In the meantime, where sugarcane rust becomes evident there are measures taken to control it so as to prevent its spreading. Sugar and Molasses Production and Exports 56. Changes in management and operating practices since 1978-79 adversely affected the output of sugar more than the production of sugarcane, although both were down substantially. In terms of volume and value of sugar, the peak was reached for both in 1977-78, based on the high tonnage of sugar produced. Especially noteworthy, along with the sharp drop in sugar output during 1979-81, is the low percentage yield of this sweetener per ton of sugarcane in that two-year period. This, to a considerable extent, reflects the reduced use of fertilizer and other lowered production practices.  - 56 - Table 10: EL SALVADOR: SUGARCANE PRODUCTION, VOLUME OF SUGAR OUTPUT, PERCENTAGE SUGAR YIELD PER TON OF CANE AND VALUE OF SUGAR PRODUCED, CROP YEARS 1971-72 THROUGH 1980-81 (value in thousand colones at 1970 constant prices) Production Year Sugarcane Sugar Percentage Value (metric tons) Yield of Sugar 1971-72 1,849,227 187,473 10.13 86,649 1972-73 1,888,392 190,164 10.07 92,092 1973-74 2,397,980 231,722 9.66 110,316 1974-75 2,615,982 256,757 9.81 124,585 1975-76 2,589,456 261,797 10.11 127,796 1976-77 2,933,512 286,021 9.75 136,639 1977-78 2,892,904 288,007 9.95 141,663 1978-79 2,745,246 277,261 10.09 132,378 1979-80 2,019,218 178,809 8.85 93,192 1980-81 1,824,100 174,058 9.54 90,632 Source: Instituto Nacional del Azucar (INAZUCAR), Gerencia de Planificacion and Mission estimates. 57. Sharply reduced production of sugar is reflected in a steep decline in exports. Supplying the domestic demand has priority over exports and thus the internal consumption of sugar dropped less. Table 11: EL SALVADOR: DOMESTIC CONSUMPTION AND EXPORT MARKETING OF SUGAR IN RELATION TO PRODUCTION, 1975-76 THROUGH 1980-81 (metric tons) Item 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 Production 261,797 286,021 288,007 277,261 178,809 174,058 Domestic Use 134,721 120,795 157,712 116,431 144,285 129,715 Exports 127,076 165,226 130,295 160,830 34,524 34,343 Source: Instituto Nacional del Azucar (INAZUCAR), Gerencia de Planificacion. 58. The production of molasses is important both for domestic use and exports. It has been curtailed by the recent reduction in the output of sugarcane and this has seriously affected its availability for livestock feeding. The volume of molasses required for industrial use is more or less steady, and is utilized in the production of alcohol. After domestic needs for molasses are satisfied, the residue is then available for export.  - 57 - Table 12: EL SALVADOR: PRODUCTION AND UTILIZATION OF MOLASSES, 1977-78 THROUGH 1981-82 (in barrels of 110 gallons) Crop Year Production Destined UtilizationExports 'Livestock Feed Industrial 1977-78 247,581 93,467 56,573 97,541 1978-79 233,283 125,076 57,352 50,855 1979-80 191,935 133,502 58,433 - 1980-81 158,000 91,660 43,000 23,340 19831-82 a/ 193,000 95,000 50,000 48,000 a/ Estimated. Source: Instituto Nacional del Azucar (INAZUCAR), Gerencia de Planificacion. 59. Prices for molasses marketed domestically tend to remain stable over cer-tain periods but they do vary as between livestock and industrial uses. For industrial purposes, primarily alcohol, molasses does in fact have a higher use value than for livestock feeding. The price spread between the two increased from C 7 per barrel during 1977-78 to C 15 during 1979-81. The Nationalization of the Sugar Sector 60. In March 1980, ISTA took over most of the sugar mills as well as their substantial landholdings under Phase I of the land reform program. The land was organized into 56 cooperatives. About 45 percent of the total sugarcane land is in the reform sector. Table 13: EL SALVADOR: LAND DEVOTED TO SUGARCANE AND NUMBER OF GROWERS IN PRIVATE AND AGRARIAN REFORM SECTOR, CROP YEARS 1980-81 AND 1981-82 (land area in manzanas) Private Sector (a) Reform Sector (b) Growers Land Area Growers a/ Land Area 1980-81 1,440 21,733 56 18,267 1981-82 1,079 23,120 56 19,210 a/ Includes ISTA agrarian refoirm cooperatives whose members total about 4,000 sugarcane growers. Source: (a) Instituto Nacional del Azucar (INAZUCAR), Gerencia de Planifi- cacion. (b) MAG Oficina Sectorial de Planificacion Agropecuaria (OSPA) and INAZUCAR.  - 58 - 61. While ISTA took over about 45 percent of the sugar land, the National Sugar Institute (INAZUCAR) was established to deal with the production of sugar in the ten Government owned or expropriated sugar mills and all marketing of sugar and molasses. INAZUCAR is organized to function under a governing assembly, consisting of six members which included five Ministers --foreign trade, planning, economy, agriculture, and treasury--and the President of the Central Bank. The foreign trade Minister is the President of the governing assembly. Executive and administrative responsibility is vested in a President. During its first year, INAZUCAR had a total of some 3,000 permanent and temporary employees engaged in office and sugar mill operations. 62. INAZUCAR lacks capital. Its financing has been primarily from short-term credit from the Central Bank, profits from sales, and other funds from the banking system. This agency is presently up against the need to obtain longer term lines of financing for investment purposes. The amount needed has been estimated by INAZUCAR at C 25 million, which would include a foreign exchange component of US$2.5 million. 63. Government intervention through INAZUCAR coupled with ISTA's takeover of large landholdings and the uncertain status of medium size properties have combined with the prolonged internal strife and insecurity to significantly reduce sugarcane and sugar output. Extensive fires in some sugarcane fields also resulted in significant losses to growers. Curtailed output of sugarcane and other factors, such as personnel problems, combined to increase sugar mill operating costs. Table 14: EL SALVADOR: INSALLD CAPACITY AND UITLIZATION (CF SUGAR MELLS 1976-77 TlR(UXH 1980-81 (in thousands of quintals) Installed 1976-77 1977-78 1978-79 1979-80 1980 Mill Capacity Used % Used % Used % Used % Used % El Angel 1,000 974.8 97.4 843.1 84.7 869.4 86.9 449.4 44.9 518.0 51.7 San Esteban 850 414.8 48.7 208.3 24.5 390.6 45.9 235.5 27.7 183.6 21.6 La Cabana 1,000 1,006.0 100.5 979.6 97.9 887.6 88.7 421.8 42.1 467.5 46.7 San Francisco 850 761.7 89.6 793.6 93.3 730.4 85.9 320.5 37.7 411.5 48.4 Chaunico 250 257.7 103.0 252.5 101.0 222.6 89.0 140.9 56.3 203.2 81.2 La Magdalena 275 147.4 53.5 234.6 85.3 227.8 82.8 212.0 77.0 136.8 49.7 San Isidro 200 179.6 89.8 180.7 90.3 138.4 69.2 130.6 65.3 - - El Carnen 250 314.4 125.7 322.5 129.0 251.9 100.7 153.3 61.3 203.0 81.2 Talacalhya 100 55.5 55.5 62.6 62.5 67.2 67.1 47.8 47.7 - - Izalco 1,300 1,183.7 91.0 1,167.2 89.7 1,280.9 98.5 1,062.0 81.6 1,066.0 82.0 El Castano 250 210.0 83.9 181.3 72.5 164.5 65.7 94.6 37.8 - - Akichapan 150 135.3 90.2 142.9 95.2 94.2 62.7 59.9 39.9 - - Jiboa 850 400.7 47.1 806.5 94.8 702.0 82.5 558.9 65.7 595.1 70.0 Total 7,325 6,041.6 82.4 6,180.2 84.3 6,027.4 82.2 3,887.2 53.0 3,783.9 51.6 Source: Instituto Nacional del Azucar (INAZJCAR), Gerencia de Planificacion.  - 59 - 64. El Salvador has 13 sugar mills, of which seven were transferred by ISTA to INAZUCAR; three are government property 6/and three mills are privately held. Sugar mill capacity is significantly underutilized. During 1979-80, all 13 mills functioned but at 53 percent of capacity. In the 1980-81 grinding season, nine mills operated at an average of 52 percent of capacity. For 1981]-82, only six mills were in operation instead of nine in the previous year with an expectation for 90 percent utilization of installed capacity. This compares with 1978-79 when all 13 sugar mills operated at about 82 percent capa- city. In addition, one of the mills was maintained in reserve for an emer- gency. Of all these mills, INAZUCAR owns five, including the one in reserve; ISTA one and a private owner one. 65. When the private mills were expropriated, it was expected that compen- sation would take place on the basis of values in the 1979 tax declarations with allowances for improvements. Part of the compensation was in cash and depended on INAZUCAR's ability to pay; the remaining part in bonds. So far, no decisions have been made on the compensation of former sugar mill owners. However, since October 1980, INAZUCAR has contemplated transforming the expropriated sugar mills into mixed enterprises over a three-year period by selling shares to the general public but INAZUCAR would retain at least 51 percent of the capital. Sugatr Prospects 66. Having the sugar mills set up as mixed entities, ties in with the INAZUCAR aim of restructuring and reactivating the sugar sector and its indus- trial components. INAZUCAR underst:ands that there is an urgent need to adopt vigorous measures to increase sugarcane acreage and productivity, and raise sugar mills' efficiency. The principal elements are: to recover sugar cane production and develop new areas to produce enough cane to operate existing sugar mills at least at the pre-1979 levels by improving sugarcane prices to the grower, and providing financing for medium and small growers as well as tech- nical assistance; improve sugar mill efficiency to lower costs; relocate, if necessary, mills to new areas growing sugarcane. However, present sugar prices are not encouraging. 67. In technical matters, El Salvador used foreign sugar technicians in the past; however, they left the country when the internal strife increased. Now, the alternative would be to train more local technicians perhaps with outside assistance. 68. A recent MAG study indicated that land in the eastern areas has potential for growing sugarcane. This is a low-yield, cotton-producing area, privately owned. INAZUCAR has plans to develop sugarcane production in this area with an initial start already made in growing required seed material. Within two years, INAZUCAR expects to develop 7,000 hectares with sugarcane from 300-400 growers. INAZUCAR expects to relocate two sugar mills with a daily grinding capacity of 3,500 tons with an investment per mill estimated at about US$4-5 million. Of this, 25 percent will be in foreign exchange, primarily for 6/ One of these is owned by Instituto Salvadoreno de Fomento Industrial (INSAFI), and another by ISTA while the third was acquired under earlier land reform activities as an investment by the State.  - 60 - mill and transportation equipment. 7/ The funds needed would cover the cost of moving the two sugar mills, mill operational improvements, storage facilities for sugar and molasses, and sugarcane loaders and vehicles. INAZUCAR's plans, however, need to carefully assess present and future sugar prices before embark- ing on significant new investments for sugar production. 69. INAZUCAR also plans to upgrade all the country's sugar mills to improve their operation and increase their production capacity. The agency estimates that such replacement of machinery and equipment would cost at least C 4 million. Expenditures would also have to be made for sugar storage facil- ities and additional tanks for storing molasses. However, these investments would depend on more normal conditions in the country. Basic Grains 70. Basic grains (corn, beans, rice, and sorghum), represent the basic nutritional component in the popular diet and an important generator of employ- ment and income, especially in the low-income population. Government food policy has been directed at increasing production. The aim was to assure more adequate and stable supplies, especially for people heavily dependent on these foods for their subsistence. While notable progress was made until recently, internal unsettled conditions and other developments have strongly influenced recent annual crop results. Both crop area and output of basic grains have tended to fluctuate from one year to another. In terms of the total land area and output of all basic food grains, the peak year was in 1979-80. Most notable development in 1980-81, the first year of agrarian reform was the record produc- tion of corn and rice, which was partly due to late receipt of credit by ISTA coops, which interfered with planting other crops. Corn output, however, dropped in 1981-82 while production of other basic grains continued its decline from the 1979-80 level. Table 15: EL SALVADOR: AREA AND OUTPUT OF BASIC GRAINS, CROP YEARS 1977-78 THROUGH 1981-82 (in thousands of hectares and metric tons) 1977-78 1978-79 1979-80 1980-81 1981-82 a/ Products Area Output Area Output Area Output Area Output Area Output Corn 244.6 379.7 264.1 506.9 275.7 522.8 291.1 526.6 276.2 499.9 Beans 52.5 33.7 51.7 42.9 55.0 46.5 52.4 39.9 49.7 38.3 Rice 12.4 32.8 13.9 50.8 14.8 58.2 16.8 60.7 13.8 50.1 Sorghum 132.0 151.1 136.6 161.8 143.4 160.3 119.4 139.9 115.4 135.7 Totals 441.5 597.3 466.3 742.4 488.9 787.8 479.7 767.1 455.1 724.0 a/ Estimated. Source: MAG Oficina Sectorial de Planificacion Agropecuaria (OSPA). 7/ INAZUCAR estimates that a new mill would require an investment of US$ 11,000 per ton of installed capacity.  - 61 - 71. Average yields of basic grains have varied rather widely from year to year. In spite of upgraded cropping practices, vagaries of weather still play an important role in determining yields with its influence on plant diseases and use of nutrients. This highlights the urgency for assuring some reserve stocks as a margin of food security from one crop harvest to another. Table 16: EL SALVADOR: BASIC GRAINS AVERAGE YIELDS PER HECTARE, CROP YEARS 1977-78 THROUGH 1981-82 (in kilograms per hectare) 1977-78 1978-79 1979-80 1980-81 1981-82 a/ Product Yield Yield Yield Yield Yield Corn 1,552 1,920 1,896 1,809 1,810 Beans 642 829 845 760 771 Rice 2,633 3,660 3,947 3,618 3,620 Sorghum 1,144 1,184 1,118 1,172 1,176 a/ Estimated. Source: MAG Sectorial Planificacion Agropecuaria (OSPA). 72. During the 1976-77 to 1980-81 crop years, except for sorghum, total costs of producing basic grains increased rather sharply. Corn production costs rose by 60 percent, beans costs more than doubled, and rice costs increased 40 percent. About 25 percent of the 1980-81 production costs of growing basic grains was spent for seeds, fertilizers, insecticides, and other essential materials. Nearly 30 percent of the costs represented expenditures for pLanting, cultivating and harvesl:ing. 73. Agrarian reform cooperatives, with their ready access to credit and inlputs, are expected to increase their participation in the production of basic grains. Before the reform, there reportedly were about 250,000 farming units that produced such crops mostly on farms of less than 10 hectares and occupied around one-fourth of the total farm area. 74. Government guaranteed producer prices are an incentive to increase production of basic food grains, especially corn, beans and rice. For 1980-81, these prices were set at C 24 (US$9.60) per quintal for corn, C 100 (US$40.00) for beans and C 33 (US$13.20) per quintal for rice. The initial guaranteed price for beans in 1980-81 was C 70 (US$28.00) but it was soon increased to C 100 (US$40.00) due to tight supplies. e) Cottonseed 7'i. The principal domestic source of vegetable oil is cottonseed from the country's production of cotton. The supply of cottonseed varies with the size of each year's cotton crop. In 1980-81, it was nearly 63 percent below the previous year and about one-half the peak 1977-78 volume. The yield of cottonseed after the cotton ginning process averaged 59 percent of the product  - 62 - produced by growers. In past years, cottonseed held for planting was in the range of 88-110 thousand quintals with the remaining supply used for processing into edible oil. Domestic consumption of cottonseed oil is at an annual level of 20,000 metric tons but local production is now only about 50 percent of the volume required. Table 17. EL SALVADOR: COTTONSEED PRODUCTION AND PERCENTAGE YIELD FROM RAW COTTON, CROP YEARS 1976-77 THROUGH 1980-81 (in thousand quintals) Year Raw Cotton Cottonseed Yield (percent) 1976-77 4,315.6 2,586.1 59.9 1977-78 4,946.6 2,914.0 58.9 1978-79 4,408.3 2,592.0 58.8 1979-80 4,004.0 2,372.0 59.2 1980-81 2,602.9 1,487.0 57.1 Source: Cooperativa Algodonera Salvadorena (COPAL). 76. COPAL sells all domestically produced cottonseed to local processing mills at prices set by the Ministerio de Economia. The price has increased 40 percent since 1977-78. The 1980-81 price was C 17.50 (US$7.00) per quintal compared to C 12.50 (US$5.00) per quintal in 1976-77. f) Other Agricultural Products 77. Other food crops for local consumption are relatively insignificant in land area requirements and volume of output, although important to consumers. The table below shows area and yields for some of these crops.  - 63 - Table 18. EL SALVADOR: AREA AND PRODUCT YIELD OF SELECTED FOODS, CROP YEAR 1980-81 Product Crop Area Yield (manzanas) (metric tons) Sugarcane for panela 3,000 1,500 Peanuts 435 310 Tomatoes 2,290 20,800 Oranges 7,000 97,700 Pineapples 1,850 17,600 Watermelons 2,750 4,000 Mangoes 1,000 13,600 Cashew 4,000 2,200 Coconuts 5,700 53,000 Source: MAG Direccion General de Economia Agropecuaria. g) Livestock and Poultry 78. El Salvador's livestock sector has been seriously undercut as the result of a combination of factors, which have adversely affected meat, milk, and poultry production. These included decapitalization of herds; indiscrim- inate slaughter, stealing, and slaughter of animals by participants in the civil strife; and the discouragement of raising cattle and hogs owing to the uncer- tainties created by the agrarian reform. The country's national cattle herd has been diminished by about 200,000 head since 1979, the 1982 population is estimated at 1.1 million heads. Both the tonnage of meat produced and the average yield per animal slaughtered have dropped sharply since 1979. It may be several years before the national livestock population recovers its 1979 size. Table 19. EL SALVADOR: CATTLE POPULATION, NUMBER SLAUGHTERED, MEAT PRODUCED AND CARCASS WEIGHT YIELD, 1978 THROUGH 1982 Year Population Slaughter Volumeat Yield (thousand) (thousand) (thousand MT) (kilos) 1978 1,236 221 36 163 1979 1,294 240 40 167 1980 1,289 204 33 162 1981 1,172 188 30 160 1982 a/ 1,100 200 32 160 a/ Estimated. Source: MAG and U.S. Department of Agriculture, Foreign Agriculture Circular of December 1981.  - 64 - 79. El Salvador has two meat packing plants that are shipping meat to the United States. In March 1980, these plants lost their eligibility because U.S. Department of Agriculture inspectors found excessive levels of pesticide residues. Following corrective measures, both establishments were permitted to resume exports by mid-1981. In 1979, meat shipments to the United States totalled over 4,500 metric tons a year; little more than 900 metric tons were exported in the 1981 months after eligibility was restored. An early 1982 forecast of meat exports places possible shipments to the United States at nearly 4,000 metric tons. Dairy Production 80. Dairy cattle have suffered the same adverse conditions as beef cattle. As a result, milk production declined to 342 million liters in 1981 or about 84 percent of the 1979 peak level of 409 million liters.These figures compare with 253 million liters in 1975. A major result is the sharp rise in imports of powdered milk. Poultry 81. Poultry production increased dramatically since the mid-1970s, and became an important source of protein. Poultry has been encouraged by the Government as a cheaper substitute for red meat. In mid-1980, there were about 9 million head of poultry, of which 4.2 million were in family units and 5 million in commercial establishments. Large flocks had 3.3 million in 1976. Commercial poultrymen alone had over 3 million egg laying birds, nearly 1.8 million broilers and well over 700 thousand breeders. There were nearly 200 commercial poultry farms of which about 100 were producing eggs and 60 raising broilers with the remainder engaged in breeding operations. Egg production was estimated in 1980 at more than 580 million eggs compared with 490 million in 1976. The total output of poultry meat during the June-May period of 1979-80 was placed at nearly 34.2 million pounds of which approximately 29 million pounds were marketed. Swine Production 82. There are less than 400,000 head of swine in family units. MAG has set a tentative short-term goal of encouraging swine production. For the time being, however, much of the required effort will have to await more favorable conditions in the countryside. Livestock and Poultry Production Problems 83. El Salvador does not have the area for extensive livestock raising but it can increase productivity from natural and other pastures by improved management through brush and weed control, reseeding, use of legumes, fertiliza- tion, prevention of overgrazing and rotational grazing. Plant materials along with farm and processing factory wastes should be conserved for animal feeding because the possibilities for growing feed grains for cattle, swine and poultry are highly restricted in view of the importance of grains as a food for human consumption. There are also substantial supplies of by-products available from sugar, flour and rice milling, oil extraction, slaughtering, and other related processing operations that could be more fully utilized as feed. Nevertheless, the main feeding source would continue to be pastures, especially improved  - 65 - pastures with the introduction of legumes. But a gap in feed supplies, especially grain concentrates and protein meals, would have to be made up, as in the past, through imports of corn, grain sorghums, soybean meal and other protein meals. 84. A major problem in the livestock sector is low productivity, espe- cially in cattle. There is much room for upgrading of livestock through improved care and management and attention to selection and breeding. Nutrition is vital in the slaugher weight of animals and the volume of milk produced per cow and poor nutrition is a major factor contributing to low productivity. It also provides a good base for disease and parasite infection. Under such circumstances, calving rates are a deficient 60 percent or less; with improved conditions, they could be up to 70-75 percent. Moreover, calf mortality at a 10 percent rate in poorly attended herds could be reduced to around 5 percent. Improved pastures are essential for good livestock management. They permit a carrying capacity of four animals per hectare instead of only one or two under poor or deficient pasture conditions. This is in strong contrast with the poultry segment where more satisfactory conditions prevail due to improved breeds and breeding of egg laying and broiler flocks. Fishing 85. The commercial fishing fleet in 1981 consisted of 84 boats, of which 73 are operated by 11 companies engaged in catching shrimp mostly for export frozen to the United States. Three other companies with eight boats specialized in catching langostinos, identified either as large shrimp or small lobsters. In addition, the Ministry of Education has one commercial boat for general fishing activity and the Government recently acquired two tuna fishing vessels. El Salvador has five processing companies with freezing and storage facilities. Three of the plants are located at Puerto El Triunfo and freeze shrimp while the other two at La Union handle langostinos. The five plants have adequate capacity to freeze and store catches at their present levels, but they would have to be expanded if the shrimp and langostino production potential is further exploited. 86. - Production of all fish in 1980 totalled 7.2 thousand metric tons valued at nearly C 49 million. Commercial production represented 69 percent of the total volume and 88 percent of the value owing to the higher value of shrimp and langostinos. Shrimp alone accounted for nearly 3.2 thousand metric tons with a value of some C 32 million. The artisan fishing volume approximated 2.3 thousand metric tons with a value of nearly C 6 million. Aquaculture accounted for only 6.6 metric tons valued at C 0.1 million. 87. Recognizing the fisheries potential, the Government has invested in deep water and traditional fishing operations. The Government's two tuna boats were to be a start in fostering private enterprise commercial tuna operations in nearby and international waters. It is estimated that this activity could produce an annual minimum catch of 6,000 metric tons of tuna for export to the United States in frozen form. Programmed for 1982 was the construction of infrastructure for the fish port industrial zone at La Union. For servicing the artisan fishing fleet, which has an estimated 900 boats, three wharves are under construction in Acajutla, El Triunfo, and El Tamarindo.  - 66 - C. Rising Dependence on Food Imports 88. El Salvador is up against the problem of financing both food and other import requirements of its expanding population and troubled economy. Despite recent efforts to lift domestic food output, reliance on agricultural imports has increased to make up for production deficits. Essential food imports have been given priority in expenditures of foreign exchange, even though the country's ability to earn foreign exchange has been impaired. The value of total food imports rose 120 percent from 1976 to 1980; most of the increase took place in 1980. Imports of fats and oils more than doubled between 1978 and 1980. Large increases also took place for imports of milk products, beans, fruits, etc. (See table below.) Furthermore, El Salvador became a heavier consumer of wheat. As the internal unrest continues, overall agricultural output deficits are likely to increase during 1981-83 and thus imports of food commodities. While import prospects for potatoes and vegetables are relatively stable, bean imports during 1982 and 1983 are expected to be considerably higher. Substantial imports of fats and oils and protein meals are also expected. A major factor is the progressive reduction of cotton production and cottonseed. Table 20: EL SALVADOR: VALUE OF TOTAL FOOD PRODUCTS AND RELATED SELECTED AGRICULTURAL COMMODITY IMPORTS AS COMPARED WITH ALL IMPORTS, ANNUAL 1976, 1978, AND 1980 (thousand dollars) Item 1976 1978 1980 Value % Value % Value % Food Products 67,471 9.2 105,645 10.3 149,099 15.0 Of which: Milk Products 12,018 1.6 19,891 1.9 23,428 2.4 Wheat 18,158 2.5 17,626 1.7 26,215 2.6 Corn 211 - 13,822 1.3 131 - Fruits and preparations 5,824 0.8 11,077 1.1 20,460 2.1 Other Cereals &- preparations 3,736 0.5 5,357 0.5 9,604 1.0 Beans, Other legumes and Potatoes 8,678 1.2 9,956 1.0 33,666 3.4 Fats and Oils 9,803 1.3 8,160 0.8 19,415 2.0 Animal Derivates 5,147 0.7 6,514 0.6 14,262 1.4 Vegetable Origin 4,656 0.6 1,646 0.2 5,152 0.5 Total All Imports a/ 734,684 100.0 1,027,378 100.0 992,978 100.0 a/ Totals have small diferences with balance of payments figures on other tables. Source: Direccion General de Estadistica y Censos.  - 67 - 89. El Salvador is being assisted by the United States under PL 480 in financing essential food imports and other agricultural commodities. Wheat purchases in fiscal year 1980-81 were funded under PL 480 provisions to the extent of US$11.8 million; the IJ.S. made also available US$30 million in credit guarantees in 1981 to finance imports of specified agricultural commodities, .such as dry beans, corn and taLlow. For 1982, the U.S. Government authorized export credit guarantees for up to US$19.5 million for sales tallow, protein mneal, vegetable oils, and meat and/or bone meal. 1). Agricultural Exports 90. Even with assistance f-rom outside sources, El Salvador has to earn foreign exchange in order to pay for needed imports. Now, the country is operating on a slim margin in ils ability to meet essential needs. Reduced earnings from exports have forced belt tightening measures and imposition of priorities on import commodity procurement. Maintenance of agricultural exports iis essential in this context. iAgricultural exports reached a peak in 1979 with coffee exports contributing 64 percent of this total, cotton 7 percent and sugar 2 percent. In 1980, however, the value of coffee exports declined by one-third and as a result the coffee share decreased to 54 percent. Out of total exports of C 2.4 billion coffee contributed C 1.3 billion. In 1981, the value of exports dropped even lower as a result of relatively unfavorable international prices combined with lower agricultural production because of unrest, instability, and the agrarian reform. Table 21: EL SALVADOR: VALUE OF TOTAL FOOD PRODUCTS AND RELATED SELECTED AGRICULTURAL COMMODITY EXPORTS 1976-1980 (thousand dollars) Item 1976 1978 1979 1980 Value % Value % Value % Value % Food Products 461,535 62.1 474,157 55.9 823,815 67.4 658,337 61.5 Coffee, All Forms 406,404 54.7 440,253 51.9 779,620 63.7 624,141 58.3 Shrimp, Fresh 11,839 1.6 10,675 1.3 12,571 1.0 17,065 1.6 Sugar, Unrefined 40,512 5.5 18,914 2.2 26,828 2.2 13,224 1.2 Candy 2,280 0.3 2,966 0.4 2,481 0.2 1,791 0.2 Fruits, Fresh 500 0.1 1,349 0.2 2,315 0.2 2,116 0.2 Other Products 65,846 8.9 104,002 12.3 90,986 7.4 91,848 8.6 Cotton 64,142 8.6 100,469 11.8 87,003 7.1 87,096 8.1 Sesame Seed 1,120 0.2 3,123 0.4 3,196 0.3 3,972 0.4 Fats and Oils 584 0.1 410 - 787 0.1 780 0.1 Total All Exports a/ 743,268 100.0 848,196 100.0 1,223,181 100.0 1,070,320 100.0 a! Totals have small differences wLth balance of payments figures in other tables. Source: Direccion General de Estadistica y Censos.  - 68 - II. AGRARIAN REFORM AND ITS IMPACT A. Early Trends 91. The skewed pattern of land tenure and the evergrowing need to provide more opportunity for more people has long been recognized as one of the most important social and political issues in El Salvador. In fact, the basic problem of land tenure itself goes back to 1881 when communal forms of landhold- ing were eliminated. This gave rise to the development of large estates or haciendas. A range of small and medium farms also came into being along with mini-plots in individual holdings. 92. The land tenure situation that developed is fully reflected in the results of the 1971 agricultural census. Of about 270,868 farms with a total land area of 1,451,894 hectares, 71 percent were under 2 hectares with only 10.4 percent of the total land area. The census showed 92.4 percent of the farms as being under 10 hectares in size with only 21.1 percent of all the farmland, while 0.8 percent of all the farms covered 39 percent of the total farmland. Those in the 100 to 1,000 hectare range constituted 0.7 percent of all the farms but had 30 percent of the country's total farm area; farms of 1,000 hectares and more represented only 0.1 percent of all farms but 8.5 percent of the national farmland. 93. On the large estates that developed, the farm labor force consisted of colonos, who usually worked without any monetary compensation but with provision of a plot of land on the hacienda and housing, along with some limited family support services. A 1965 legislation sought to eliminate the colono system by setting fixed minimum wages. Colono labor, which previously had been cheap, became more costly, surplus labor was evicted from the big estates and these families had to scrounge around, relocating as best they could. This greatly added to the already high number of landless laborers and their families, estimated at 150,000. The unemployment rate increased substantially,except during peak season farm work periods. 94. Since substantial numbers of farmers (perhaps 60 percent of the total) had gone into farming as renters, legislation was enacted in 1974 establishing guidelines for rental agreements. The objective was to achieve fair treatment for those farming under rental agreements. 95. The Salvadorian Institute for Agrarian Transformation (ISTA) was created in 1975. It was responsible for executing agrarian reform projects in ways that would profoundly modify the land tenure system. The general objec- tives were to improve social, economic and living conditions of campesinos as well as raise their incomes through provision of land, supporting services and other aids to increase agricultural output and productivity. 96. After securing passage for a comprehensive land reform law in 1975, ISTA's plans to redistribute a large amount of land in what presently is the country's largest cotton area met vigorous opposition by large landholders, and the agrarian reform program could not be implemented. This came about with changes in the agrarian reform law which undercut ISTA's authority to redistribute land. Political unrest subsequently became greatly intensified with growing social and economic dissatisfaction.  - 69 - B. The Basic Agrarian Reform Law 97. Although there was some improvement in the 1970s, the basic agrarian reform law (Decree No. 153) was issued in March 5, 1980; this has been charac- terized as a historic date. The decree set limits on large holdings of agricul- tural land in private hands. It also prescribed certain requirements governing the ownership and use of land to serve a social function. This revolutionary start aimed at balancing the land tenure system by redistributing the land to the workers of the large haciendas and to the minifundistas on rented land. The main goal was to give some land to the peasants. The reform was launched under difficult political conditions and in the middle of a guerrilla warfare. Tlhis explains some of its shortcomings; however, it must be said that apparently some likely consequences were not fully recognized, particularly the negative impact on agricultural production of the reform in a country with limited arable land and highly dependent on a few export crops for rural employment, income, and foreign exchange. This is to be expected from any radical transformation of the land tenure system, as the experience of other countries has shown. To ensure the success of the reform and compensate for the expected drop in produc- tion, a massive inflow of additional foreign and technical assistance was required, at least during a transitional period. This has not been the case in El Salvador. Nevertheless, the agrarian reform has accomplished significant land redistribution; it has beneiLitted about 60,000 families (35,000 plantation workers' families and 25,000 miniLfundista families), or about one-fourth of the estimated number of peasant fami:Lies, who were renting a small parcel of land or were landless. In addition, over 100,000 minifundista families may benefit through new allocations under the land-to-the-tiller program. The next few paragraphs will analyze some of the positive results, as well as shortcomings of the agrarian reform. 8/ C. Phase I 98. Government Decrees Nos. 153 and 154 provided for the immediate implementation of the agrarian reform. ISTA was designated as executing agency, and authorized to take possession of properties and chattels in holdings exceed- ing 500 hectares. This was Phase I. Although Decree No. 153 is also applicable to holdings between 100 and 500 hectares, action on these properties (Phase II) was not included in Decree No. 154 and still remains in abeyance. The resulting uncertainty among these intermediLate size landholders has generated a wait and see attitude with an adverse impact on their production and productivity. 99. Decree No. 153 also provides the basis for yet a third step (Phase I[I) of agrarian reform, which wats implemented through Decree No. 207 issued April 28, 1980, which has become known as the land-to-the-tiller law. It enables those farming land under rental, share-cropping or other such arrangements to become owners of the ground so tilled. 8/ Some shortcomings of the agrarian reform has been recognized by Salvadorian authorities. See, for example, ISTA, El Proceso de Reforma Agraria en El Salvador, July 1981 (page 221 and Comision de Reforma Agraria Nacional, Fundamentos y Perspectivas del Proceso de Reforma Agraria en El Salvador, September 1981 (pages 28-32)  - 70 - 100. ISTA made a strong start to carry out its mandate of expropriating landholdings that exceeded 500 hectares. The initial action, with military support, was directed at large haciendas targeted for this particular intervention. With what it figured was an ample force of technicians and other personnel, the agency vigorously undertook its assignment. In its preparations for moving forward with its agrarian reform assignment, ISTA made arrangements for a wide range of needed personnel from all major Ministry of Agriculture units and related agencies. Their specific work included taking possession of haciendas, development of farm operation and management plans, providing technical assistance, programming of credit, budget administration and performing various other operating functions. However, this resulted in a drain of technical and other essential workers from various entities. For example, Centro Nacional de Tecnologia Agropecuaria (CENTA) assigned to ISTA 185 technicians from its extension division. 101. The record shows that between March 6 and June 30, 1980, ISTA intervened 229 properties. As expropriation progressed, the agency organized, where feasible, hacienda colonos into cooperatives or related organizations to get agricultural production going again on these farms. On smaller properties, Decree 842 permitted ISTA to parcel them out among individual farmers rather than develop cooperatives to farm them. 102. ISTA soon discovered that, in anticipation of a possible expropria- tion, many haciendas had been decapitalized by their owners. This was done in large part through sale or other disposition of livestock, tractors and machinery. Restoration of tractors and other essential items had to be a first order of business to get a hacienda back into production. But such and other related expenditures required investment capital which neither the organized cooperatives nor ISTA had to spare. 103. From the start it was recognized that with the rounding up of person- nel from other agencies and its own recruitment, ISTA staff responsibilities would grow as expropriation and related activities expanded and these workers would play an increasingly important role in the development, promotion, and operation of cooperatives. In effect, it was their job to make agrarian reform work in achieving the goals set by the basic mandate. Unfortunately, it turned out that ISTA was short on staff and other assistance in almost every category and many of those engaged were also lacking in needed experience as well as competency. In fact, shortly after the intervention process got underway, it became apparent that ISTA, and for that matter the Government itself, had underestimated the size and scope of the tremendous assignment undertaken in implementing the Basic Agrarian Reform Law and that advance planning had been insufficient. For example, apparently no solid determination had been made on overall ISTA operating and investment capital requirements for the first year. Thus, ISTA had to obtain emergency credit from the Central Bank to permit onward lending so that agrarian reform cooperatives could finance their initial cycle of crop production. 104. The agrarian reform cooperatives and related organizations need a great deal of bolstering through competent management, training, member educa- tion, and provision of extension and technical assistance or advisory services. The requirement for such varied support rests against the realization that it takes more than the unprepared colonos to formulate policy, plan, direct the cooperative and to run the farm as a business operation. In all of this, the  - 71 - greatest weakness is in the transfer of technology and provision of technical assistance; the number of qualified personnel engaged in this work so far has been inadequate. 105. Agrarian reform had displaced most of the original administrative and management personnel on haciendas taken over. The evidence shows, however, that on the limited number of haciendaLs where original management had been retained, the farms were both more efficient and productive than others that had been expropriated. A large percentage of the intervened agricultural properties had utilized a high degree of technology, operated efficiently, made good use of laLnd resources and had a big capital investment. These constituted the most productive category of farms in each segment of agricultural production. It is against this background that agrarian reform Phase I cooperatives are now functioning. 106. The Agrarian Reform Law prescribes that administration of acquired property should be subject to a system of co-management between ISTA and the cooperatives or other related organizations to which the particular holdings were assigned. This is expected to last for some time before the cooperatives are ready for self-management. ISTA assigns to each cooperative a technician, preferably one with some manageme!nt training or experience, to serve in a co-management role with the organization's board of directors. The aim, of course, is to achieve agrarian re!form objectives, continuance of production and productivity along with care and maintenance of the acquired property. In ISTA's view, the technician's relationship with the board is to provide advice and guidance concerning hacienda business and operating matters. At the time of takeover, colono beneficiaries were encouraged to continue the same production pattern and techniques utilized by the former property owner with backstopping support in the form of credit and technical assistance. In addition to the assistance that its own staff may be able to supply, ISTA relies on governmental agencies, such as CENTA, to provide extension and technical assistance services in. agricultural production, with the nationalized banks advising in areas of credit and finance. 107. ISTA does not have enough competent staff to meet the full time co-management needs of many cooperatives. Therefore, the agency spread its personnel among various cooperatives to serve as co-managers on an intermittent or part time basis. In agrarian reform haciendas with cooperatives, around 80 percent had a technician, but some two-thirds of these worked only part time. 108. The time period for co-management of any given cooperative is a question that still remains to be resolved. A co-management provision written into the first land title ISTA provided to a cooperative stated that ISTA co- management would continue for a 5-year period and could be renewed for an additional five years if necessary. It also provided that ISTA could "retake management" at any time deemed necessary in the future. The apparent underlying intent, however, was that, after a suitable period of co-management, the cooper- ative should have gained enough experience to run its own affairs and ISTA would pull out of its management role. The cooperative would manage itself with the organization's board of directors responsible for policy decisions and possibly hi.re a manager. This, however, will require that ISTA co-managers provide significant training to the peasants in order to achieve self-management.  - 72 - 109. Within a period of less than 19 months after its initial Phase I agrarian reform intervention on March 6, 1980, ISTA acquired a total of 326 properties with 223.7 thousand hectares, (nearly 11 percent of the total national area) which incorporated some of the best agricultural lands in the country. Table 22: EL SALVADOR: NUMBER OF AGRARIAN REFORM PHASE I PROPERTIES, TOTAL AREA, AND NUMBERS OF ORGANIZATION MEMBERS AT OCTOBER 31, 1981 Properties Department Number Hectares Members Ahuachapan 27 16,317.00 2,610 Santa Ana 27 19,349.70 2,141 Sonsonate 37 25,652.34 4,095 Chalatenango 9 7,488.33 1,032 San Salvador 13 10,776.20 1,433 La Liberyad 53 38,718.94 6,122 Cuscatlan 3 3,443.00 421 Cabanas 2 729.19 35 La Paz 2 1,298.00 4,186 San Vicente 44 26,687.17 1,748 Usulutan 27 10,060.33 5,869 San Miguel 46 27,461.21 2,141 Morazan 19 19,734.80 700 La Union 17 16,024.80 2,125 TOTAL 326 223,741.01a/ 34,658 a/ Calculating 6 family members, the beneficiaries were about 208,000. Source: ISTA-Gerencia Operaciones Agrarias y Desarrollo Comunal Campesino. 110. Although all holdings in excess of 500 hectares were subject to takeover under Phase I, the properties actually acquired may be divided into two main groups. One consists of those properties with more than 500 hectares (about 56 percent) and the other covering holdings of less than 500 hectares. Expropriated properties with less than 500 hectares had formerly consisted of various noncontiguous holdings owned by one owner who in total possessed more than 500 hectares.  - 73 - Table 23: EL SALVADOR: NUMBER AND AREA OF AGRARIAN REFORM PHASE I BY DEPARTMENTS AND SIZE GROUPS AT OCTOBER 31, 1981 Over 500 Hectares Under 500 Hectares a/ Combined Totals I)epartment Number Area Number Area Number Area Ahuiachapan 14 12,627.80 13 3,689.20 27 16,317.00 Santa Ana 16 17,706.30 11 1,643.40 27 19,349.70 Sonsonate 25 23,170.40 12 2,481.94 37 25,652.34 Chalatenango 4 6,315.00 5 1,173.33 9 7,488.33 San Salvador 9 10,092.40 4 683.80 13 10,776.20 La Libertad 36 33,828.60 17 4,890.34 53 38,718.94 Cuscatlan 1 2,719.00 2 724.00 3 3,443.00 Cabanas 1 646.80 1 82.39 2 729.19 Morazan 1 833.00 1 465.00 2 1,298.00 La Paz 16 19,600.30 28 7,086.87 44 26,687.17 San Vicente 8 5,732.80 19 4,327.53 27 10,060.33 Usulutan 24 22,315.00 22 5,146.21 46 27,461.21 San Miguel 15 18,814.00 4 920.80 19 19,743.80 La Union 13 14,534.90 4 1,489.90 17 16,024.80 Totals 183 188,936.30 143 34,804.71 326 223,741.01 a/ Represents the various noncontiguous properties owned by individual owners whose total holdings exceeded 500 hectares. Source: ISTA - Gerencia Operaciones Agrarias y Desarrollo Comunal Campesino. 111. The general level of Phase I property expropriations apparently has stabiLized with very few additional interventions anticipated. Although there is some discrepancy in ISTA statistical information, as of November 21, 1981 there was a total of 374 agrarian reform properties with 228.7 thousand hectares of land including earlier acquisitions. The size distribution of these holdings is shown in Table 24. Another ISTA agrarian reform accounting shows that at the end of December 1981, the agency had a total of 496 properties with 313,459 hectares. This total included 326 agrarian reform holdings with 223,741 hectares that had been taken over by the end of November 1981. There also were 63 properties, 8,266 hectares, that had been obtained through voluntary sales to ISTA. The remaining 107 properties, having 81,452 hectares, had been acquired by ISTA up to March 6, 1980 through adjudications.  - 74 - Table 24: EL SALVADOR: SIZE RANGE DISTRIBUTION OF AGRARIAN REFORM PROPERTIES AS OF NOVEMBER 17, 1981 (hectares in thousands) ISTA Purchases and Size Range Phase I Properties Earlier Acquisitions Combined Totals Number Hectares Number Hectares Number Hectares Up to 500 Ha. a/ 108 27.3 84 14.3 192 41.5 From 501 to 1,000 Ha. 112 72.4 6 3.8 118 76.2 From 1,001 to 1,500 Ha. 35 38.5 1 1.1 36 39.6 From 1,501 to 2,000 Ha. 6 10.0 1 1.9 7 11.9 From 2,001 Ha and Over 18 51.7 3 7.8 21 59.5 Totals 279 199.8 95 21.3 374 228.7 a/ Includes noncontiguous properties of any owner whose total holdings exceed 500 hectares. Source: ISTA 112. About 34,658 organization members were involved in the expropriated properties but the beneficiaries totalled over 200,000 persons--an average of six beneficiaries per member. The greatest number of the Phase I holdings are in the Department of La Libertad with 16 percent of the properties and 17.3 percent of all the expropriated land. This department also led in both the number of organization members and beneficiaries. Ranking next in order in terms of both the number of properties and the amount of land included in them were the Departments of San Miguel and San Vicente; the Department of Cabanas was at the bottom of the list. 113. Under Decree 153, Phase I, properties were to be assigned to agricul- tural cooperatives, associations of campesinos or other organizations of agri- cultural workers. Thus on each hacienda taken over, ISTA had to set up a coop- erative or other organization vested with production responsibilities and suitable to the particular circumstances of the property. On the 326 properties that had been acquired, ISTA established cooperatives on more than half of them (187 cooperatives with 20,159 members). The campesino groups totalled 78 with 12,027 members. In the process of being organized were 61 groups with 2,472 members. 114. Most of the production cooperatives organized were in the Department of Sonsonate where the number totalled 27 with 2,990 members. The Departments of La Paz and Usulutan each had 25 cooperatives with 2,333 and 3,150 members respectively. The greatest concentration of campesino associations was in the Department of La Libertad where there were 26 haciendas with such groups and a total of 3,915 members.  - 75 - 115. From its very start in March 1980, the agrarian reform process has been plagued by social and political unrest and violence. During the first year in which intervened properties were being organized into production cooperatives and campesino groups, 55 such organizations were confronted with problems and obstacles arising out of the prevailing situation. Despite such roadblocks, these particular organizations, according to ISTA, managed to continue function- ing. There were, however, another 26 such agrarian reform organized groups that were forced to abandon their efforts as the result of high levels of violence, insecurity and even loss of life. 116. As of November 1981, ISTA reported that owners of about one-fifth of the Phase I haciendas had been indemnified. Indemnification payments had been made on about 70 haciendas for C 110.7 million. Of this amount, C 10.5 million was paid in cash and close to C 100.2 million in 6 percent interest bearing long-term bonds. In this regard, ISTA has taken some time in determining, from information previously supplied, the indemnification that should be paid on each expropriated hacienda. Furthermore, ISTA does not have the total financing required to pay the remaining indemnities that still should be made on haciendas. lL7. A close issue is that of determining the financial liability that a cooperative group assumes when it receives from ISTA title to an assigned hacienda. Each group is expectedl to cover amortization and interest paid to the former owner. There also is an assessment of rent until the title is actually transferred to the group. The cooperative group assumes the debt on its assigned hacienda, in keeping with the terms (20, 25, or 30 years) of the particular bond issues to the former owner of the property. In any event, ISTA has not yet gone through the necessary calculations to determine the payments that might be required to amortize the obligation. Reportedly, only two cooper- atives have so far been able to begin making payments on their debts. The title issuance process can and must be expedited to provide the basic linkage between the cooperative as a viable entity and its assigned property on which the members along with their families must rely for sustenance. 118. ISTA issues titles to the cooperative groups. The law makes no provi- siLon for ownership of the land by the campesino. Thus the individual member has no vested interest in the property other than being part of the organized group in which membership is held. In such circumstances, there is no clear property right that can be passed on as an inheritance which is the same situation that prevailed in the member's former status as a colono under a hacienda patron or owner. 119. The rights and obligations of cooperative members as well as the rights and obligations of a cooperative to its members under the agrarian reform legislation require elaboration zmd clarification so that they may be readily understood by the beneficiaries. Especially important is the question of property rights since it is the cooperative membership labor force that produces the wealth from its farming operations. Thus, from these earnings the coopera- tive has the financial ability to meet current obligations, build assets, promote savings and provide beneficial services. Unless settled, the question of property rights alone incorporates elements which in the long run could undermine the agrarian reform participants and generate dissatisfaction among them.  - 76 - D. Phase II 120. The real heart of El Salvador's agricultural sector and its strength consists of the farm holdings in the 100 to 500 hectares range. From this group, the economy derives most of its output and export earnings while provid- ing substantial employment and incomes for a large segment of the population. This is the category of properties which would be affected by whatever decision the Government makes in settling the Phase II Agrarian Reform. So far, planning for Phase II appears both inadequate and indecisive. From the very start, the scene has been dominated by increasing uncertainty and insecurity coupled with fear among the property owners. Even before Phase I, there was a start of decapitalization, a slowdown in making investments, relaxation of normal manage- ment practices and a general holdback in positive decision making. The Govern- ment sought to provide certain assurances and even added incentives so owners of properties in the 100 to 500 hectares range would be encouraged to maintain production levels. But uncertainties and hesitancies still persist along with the unrest and other difficulties. 121. Properties in the 100 to 500 hectares range total about 1,750 farming units with nearly 345,000 hectares of land (over 24 percent of the country's farm land). The holdings are widely distributed over the country. They include about 15 percent of the most productive land in coffee. 122. Based on the experience with Phase I, it should be clear that follow- ing through on Phase II in any manner similar to that of Phase I would require many times the present staff numbers with comparable increases in funding. The administrative and technical manpower needed, both in numbers and degree of competence, simply is not available now or in the near future. Allowing for non-contiguous holdings, Phase II involves over 2,000 properties--six to seven times the number of properties expropriated under Phase I--and correspondingly will require an expansion of ISTA's personnel and services in about the same proportion. At this time, such an undertaking may well be extremely difficult if not impractical from the standpoint of both the agricultural sector and the national economy, considering the productivity, structure and dispersion of holdings in the 100 to 500 hectares range group. 123. In any case, as matters stand, there remains the need for firm plans to eliminate the prevailing uncertainty with respect to Phase II. Phase I dealt with very large properties to eliminate great concentrations of land and afford more opportunities for more people. Elements of the same problem exist in the range of property holdings affected by Phase II. However, all factors considered, Phase II requires an entirely different approach. While land redistribution is still justified on equity grounds, implementing Phase II in a manner similar to Phase I has little economic justification. In order to reduce the production decline, some compromise solution, balancing production and redistribution objectives in a way that encourages present owners to divest part of their holdings, is needed, perhaps by dividing the holdings into economically viable farms, related to soil quality. Each unit would require backstopping support of effective extension and technical assistance services along with adequate credit for which the Government scarce trained manpower should be substantially expanded.  - 77 - E. Agrarian Reform Phase III, Land-to-the-Tiller 124. The basis for Phase III of agrarian reform was included in Decree 153, the Basic Agrarian Reform Law, but Decree No. 207 of April 28,1980 implemented this reform. The purpose of this decree was to broaden agrarian reform to include renters, sharecroppers and other small farmers who had been working land without having title to it. Under Decree 207, these campesinos could acquire up to seven hectares of land previously rented by them. This aspect of the reform was directed at the minifundistas. 125. The administration of Decree No. 207 originally vested in ISTA did not continue for long. Decree No. 525 of December 12, 1980 created the National Financiera for Agricultural Land (FINATA) which under Decree No. 71 of December 22, 1980 was designated to administer Decree No. 207. FINATA has developed a staff of about 200 to deal with the acquisition and distribution of land to qualified campesinos through 20 regional and field offices. The agency has provided its employees with extensive cadaster training to expedite property identification and titling procedures. 126. Land for purposes of Decree No. 207 may be acquired by purchase or by expropriation for holdings of plots below 100 hectares. Owners of expropriated land have the right to be paid 50 percent in cash and the remainder in bonds. Landowners in excess of 100 hectares receive payment in accordance with the Basic Agrarian Reform Law. Compensation is established in both cases on the basis of value stated in tax reports for the years 1976 and 1977. 127. Campesinos pay for the plot received an amount equal to the compensation allowed to the previous owner. Campesinos must pay in regular installments for amortization and interest during a period of no more than 30 years. Advance payments or full cash payments are also permitted with some discount. Beneficiaries under Decree No. 207 are limited to the respective family units. The land acquired may not be transferred or mortgaged in general but at a beneficiary's death, a transfer may take place and also the property may be mortgaged as collateral for agricultural loans from a credit institution, which may repossess and redistri'bute the parcel to other beneficiaries. In any event, when a plot is acquired by a participant, the beneficiary is tied down to that piece of land for a 30-year period, unless the property is otherwise pre- paid or repossessed. 128. Within its first year of operations, FINATA took aggressive action to develop an understanding among campesinos and even landowners as to how they could participate and benefit under Decree No. 207. The agency sought to provide answers to common questions raised in connection with the availability of land for allocation to campesinos and the acquisition of land from owners and their compensation. The land-to-the-tiller aspect, or Phase III of agrarian reform, has had the support of farm workers organizations. Until December 1981, FINATA had received a total of 31,619 applications for land titles. Since an applicant can file for more than one plot, up to the limit of seven hectares, as there were 24,735 potential beneficiaries for a total of about 40,000 hectares valued at over C 62.2 million (roughly one-fifth of the estimated number of minifundistas). The average price was about C 1,100 per manzana and fluctuating from a low of C 343 per manzana for the Department of Morazan to a high of C 1,588 per manzana of the Deparitment of La Libertad.  - 78 - Table 25: EL SALVADOR: BENEFICIARIES OF DECREE No. 207 AT DECEMBER 4, 1981 Actual Land/Per Department Number of Beneficiary Land Area Family Estimated Average Applications Families Ratio Value per Manzana (manzanas) (colones) Ahuachapan 5,135 3,276 7,954.50 2.4 7,782,634 978 Santa Ana 5,627 4,263 6,413.46 1.5 7,557,500 1,178 Sonsonate 4,870 3,793 6,541.81 1.7 7,801,884 1,192 Chalatenango 371 292 742.38 2.5 848,354 1,142 La Libertad 4,159 3,089 7,576.81 2.4 12,038,727 1,588 San Salvador 526 409 909.40 2.2 776,687 854 Cuscatlan 1,121 895 1,395.98 1.5 1,769,556 1,267 La Paz 1,534 1,408 2,770.22 1.9 3,400,034 1,227 Caba as 768 518 894.20 1.7 778,468 870 San Vicente 872 694 1,893.57 2.7 2,795,748 1,476 Usulutan 1,662 1,765 7,833.65 4.4 10,924,379 1,394 San Miguel 2,203 1,690 4,135.52 2.4 2,536,153 613 Morazan 1,274 1,087 2,149.27 1.9 738,099 343 La Union 1,497 1,096 5,827.79 5.3 2,495,072 428 Totals 31,619 24,725 57,038.56 2.3 62,243,295 1,091 Source: FINATA, Division de Adjudicaciones. 129. The amount of land allocated in each department varied with both the number of applications submitted and the total beneficiary families. Most significant, however, is the resulting average amount of land per beneficiary family, which nationally averages about 2.3 hectares. In some departments the average is higher; in others, lower. Nevertheless, whatever amount of land up to 7 hectares a recipient may get, the fact remains that the 30-year ownership commitment virtually locks the individual to the allocated plot of land. Thus, the average beneficiary family of six is figuratively faced with wrestling from that bit of land little more than enough to eat unless able to take advantage of outside employment or other earning opportunity. 130. Of the more than 32,000 applications submitted for land, provisional titles have been delivered to nearly 50 percent, although actual recipients totalled only 14,874 because some recipients received more than one document. Benefitting family members raise the number of beneficiaries to 89,244. There is need for expediting the issuance of provisional titles. It has been estimated that Phase III might enable 125,000 campesinos to establish ownership rights on plots of land totalling perhaps 180,000 hectares which they worked under rental or other arrangements. Thus the present level of accomplishment indicates that much more remains to be done.  - 79 - 131. Phase III is likely to have an immediate positive impact on some beneficiary families; to the extent that the debt service payments on their property is less than their prior rent, they are better off. Nevertheless, considering the small size of the units that have so far been allocated, such an amount of land is barely adequate to provide subsistence for average families. Most of the land will probably be devoted to growing basic grains and perhaps a vegetable garden for family consumption. Only the few with more than average size holdings might have some excess production to sell locally. Since Phase III farmers will need inputs, such as fertilizer and seeds, Decree No. 207 beneficiaries may obtain some credit for production inputs but they need the provisional title to qualify. Furthermore, required extension and technical assistance services probably would be in short supply or not available. Finally, some acknowledgement must be made now that a longer term land reform process will be needed to consolidate and rationalize the new minifundista as other, urban employment opportunities are created for, the country's many subsistence farmers. Impact on Agricultural Production 132. Aside from the destabilizing and depressing effect that continued unrest and violence had on crop and livestock production, the advent of agra- rian reform had its own adverse impact on the agricultural output. This was particularly true among the medium and large landowners whose holdings ranged upward from 100 hectares. Although actual implementation of agrarian reform provisions of Decree No. 153 was made applicable under Phase I to properties exceeding 500 hectares, there still remained Phase II which, if implemented, would apply to holdings of 100 tD 500 hectares. From the outset, the mere possibility of expropriation raised chilling fears among their owners. Some undertook decapitalization by selling off livestock and farm implements. In the case of several large coffee plantations, beneficios or mills on these proper- ties were stripped of machinery for storage elsewhere or other disposal to avoid possible takeover. In other instances, large landholdings were divided into smaller units which were then transferred under titles for individual ownership. 133. Entering its initial cropping cycle for Phase I acquired properties, ISTA was faced with the immediate problem of getting production underway. The cooperative groups that had been organized required capable management, exten- sion and technical assistance, financing and other essentials for 1980-81 crop- year farming operations. At the same time, there was a shortage of all these basic elements along with a serious lack of experience. The very few cooper- atives that had been able to retain original management of their allocated properties were indeed fortunate from the standpoint of operating experience and know-how that readily could be applied. A delay in rounding up operating and production credit as well as procuring such essential farm inputs as fertilizer, s,eeds and others, got the 1980-81 cropping year off to a slow start even though wLth the banking system nationalized, ISTA cooperatives had adequate access to credit for agrarian reform cooperatives and also priority in the utilization of foreign exchange for purchases ofE inputs, such as fertilizer, as well as in the availability of extension and technical assistance. According to ISTA, intermediate institutions alone made available some C 155.1 million in production credit for 1980-81. 134. The harvested area under ISTA was about 123,900 hectares of which 24 percent represented pastures. The principal crops were basic grains (23.4 percent), coffee (17.6 percent), cotton (15.8 percent), sugarcane (9.7 percent),  - 80 - various vegetables (1.1 percent) and other crops (8.4 percent). In some quarters it is estimated that Phase I cooperatives maintained a 90 percent level of production in the 1980-81 crop year. But no comparable information is supplied to show the level of production on the same properties before expro- priation. Thus there may be an understatement of the decline in output actually experienced in 1980-81, especially in view of the inadequacies of management and know-how that were so prevalent at that time. Furthermore, there are signifi- cant declines in cotton and sugarcane output, activities on which ISTA controls one-third and 45 percent of the land devoted to these crops. 135. The relatively low level of production coupled with reduced inter- national prices for coffee, cotton and sugar placed the cooperatives in a posi- tion where they could not repay the full amounts of credit extended to them in 1980-81. Also, part of the emergency credit obtained by ISTA for further relending was not recovered with some portion of this being charged off as a social cost. 136. Calculations using MAG and ISTA statistics purport to show that average per hectare crop yields on agrarian reform Phase I holdings have been generally higher than on all other farms or the national average. The vali- dity of such a comparison is obviously superficial since it does not allow for the fact that the reform properties are among the more advanced in infra- structure and related production aspects, including some of the best land in the country. A more forthright presentation would be a comparison of Phase I yields with those on the same farms before expropriation but such earlier information is not available. 137. The 1981-82 crop planting area planned by ISTA totalled nearly 154,700 hectares, a 25 percent increase over the year before. It was contem- plated that this land area would be devoted to basic grains (30.1 percent), pastures (19.2 percent), coffee (14.1 percent), sugarcane (11.6 percent), various vegetables (1.3 percent), and other crops (7.7 percent). On a percentage basis, the agrarian reform area land planned for different crops in 1981-82 would be equivalent to 44.8 percent of all the land devoted nationally to sugarcane in 1980-81, with 29.7 percent in cotton, 8.2 percent in coffee and 6.8 percent in basic grains. 138. In its planning for 1981-82 production, ISTA placed agrarian reform Phase I credit requirements from the same 1980-81 intermediate institutions at some C 213.9 million. This represented an increase of nearly 37.4 percent from the previous year. As before, the interest rate for this funding was 13-15 percent, depending on factors of crop and land. In fact, however, the total 1981-82 ISTA credit needs for production and other purposes exceed C 300.7 million. The Agricultural Challenge Ahead 139. Despite the past emphasis on producing for export, rapidly growing population needs and related circumstances now require that top priority be given to further increasing output and exports to new high levels of foreign exchange earnings. Moreover, within the limited land capabilities there is much room for greater determination and more positive efforts to expand food production for domestic consumption. Moving in this direction is essential for cutting down on the prevailing heavy reliance on food imports. The mainstay  - 81 - of the national diet is represented by the so-called basic grains--corn, sorghum, rice and beans. However, all of these food items are usually not yet being produced in quantities sufficient to meet consumption needs. 140. Broadening the production base by far greater crop diversification and revitalizing the livestock industry is of utmost importance to the well- being of the national population.. Making more effective use of climatic condi- tions which range from semitropical to temperate would also greatly add to the aLbundance and diversity of food production. This would include such commodities aLs bananas, citrus fruits, a wide array of vegetables, roots, tubers, and such d[ifferent fruits as apples, pears, peaches, and others. The potential benefits of exploiting such lines of production are virtually untouched. But to fully realize such gains would require improvements in production techniques as well aLs in handling and distribution from producing areas to the ultimate consumer. III. DOMESTIC MARKETING OF AGRICULTURAL PRODUCTS 141. The domestic market operates primarily on the basis of private enter- prise. The Government intervenes in the market by fixing prices for some consu- maer products and by buying and selling basic food grains. However, since 1980, the Government has extended its market intervention to the handling and market- ing of export crops -- coffee and sugar--activities that were analyzed earlier. 142. Marketing of domestic crops is beset by numerous deficiencies. A, multiplicity of intermediaries generally operate on wide margins between buying and selling prices affecting most producers, especially the small farmers. Small farmers are in a poor bargaining position because they lack the resources and the information needed for advantageous selling of their products. In addition, transportation is deficient and costs are high; marketing facilities and services are inadequate. 143. From the standpoint of both farmers and intermediaries, a more favor- able marketing situation prevails in the San Salvador area. In recent years, market facilities have been built to improve operating efficiency and lower costs. Consumers have shared in these gains because of improved quality. 144. The situation of locally-produced commodities varies considerably between products. Fresh fruit and vegetable producers are subject to much waste and loss in hauling over rough roads. Commercial egg and broiler producers are more fortunate because they sell directly to retail outlets and are thus able to enjoy a larger share of the fixed consumer price. Fresh milk producers confront a larger number of processors who buy the fluid product from producers and sell at fixed retail prices to consumers; this limits distribution margins. Basic Food Grains and the Regulatory Supply Institute (IRA) 145. The price and supply aspects of corn, beans, rice, and sorghum are controlled by the Regulatory Supply Institute (IRA), which is responsible for price support to the farmers. Retail prices are established by the Ministry of Economy. IRA has buying centers and storage facilities as well as a network of distribution outlets. IRA imports basic food grains when local supplies are short of consumer requirements.  - 82 - 146. IRA's working capital consists of a rotating credit of C150 million from the Central Reserve Bank of El Salvador (BCR). IRA's operating 1980 budget totaled C18.1 million; about 64 percent is used to cover personnel and related services. The staff totals 1,464, of which 27 are professionals, 171 techni- cians, 673 administrative personnel and 554 laborers. These include grain storage receivers, fumigators and others engaged in related handling procedures. 147. Agricultural commodity storage facilities in the country have a capa- city of 364,000 metric tons. IRA owns about 37 percent. In addition to its own silos and warehouses IRA rents 27,000 metric tons of storage capacity and has 19,000 metric tons capacity under tarpaulin. Each of the storage plants and buying centers has machinery for drying, cleaning and grading the product received. There is provision to insure proper fumigation, sanitation and aeration to safeguard against insect damage or other loss. Additionally, storage plants are equipped to pack products. Domestic procurement in 1980-81 was most significant to consumers in terms of white corn and sugar; substantial imports of rice and beans were needed to offset deficits. Table 26: EL SALVADOR: TOTAL IRA COMMODITY PURCHASES BY SOURCE OF SUPPLY, JULY 1980 - JUNE 1981 (in quintals) Product Domestic Imports Total Corn 1,192,801 300,828 a/ 1,493,629 Beans 210,976 70,209 281,185 Rice *487,277 111,237 b/ 589,514 Sugar 516,643 516,643 Milk (powdered) 242,136 242,136 TOTAL 2,398,697 724,410 3,123,107 a/ Yellow corn bought for re-sale to feed mixing plants. b/ Equivalent to rough rice (66,742 quintals milled rice). Source: Instituto Regulador de Abastecimientos (IRA), Departamento de Compras. 148. Commercial production of corn, beans and rice involved in IRA buying in the 1980-81 crop year represented about 20 percent of the output of these products. IRA producer prices for basic grains are announced in advance of the planting season. The agency buys these products at their guaranteed prices from farmers and cooperatives affiliated with the credit system and who hopefully utilize the limited technical assistance services available. There has been a general upward trend in the volume of commodities purchased locally by IRA  - 83 - particularly corn, beans, 9/ and rice. IRA buys basic grains at its guaranteed price and sells to its distributors at a price somewhat below the producer price. The distributor is allowed a fixed margin over IRA, prices and, thus, the consumer benefits from the subsidy. 149. Farmers with products to sell in the regular distribution system, however, are largely on their owm (about 80 percent of the commercial production of basic grains). They must bargain with the initial buyer (usually a trucker).; The prices paid by the trucker for corn, beans and rice are substan- tially below IRA's guaranteed prices; the buildup of margins from the producer to the consumer is also sizeable. IRA's prices for corn, beans and rice are relatively more favorable than the average trucker price for basic grains in the San Salvador market. Sugar 150. Refined sugar is a major item among the domestic commodities bought by IRA. Since 1979, the volume of sugar purchased declined, reflecting a slacken- iing in internal demand. Nevertheless, sugar ranked second to corn in domestic IRA purchases in 1980. ][RA's Imports 151. The volume of all commodities imported by IRA totaled 631,035 quintals iin 1980. About 69 percent was basic grains, mostly corn followed by beans and milled rice. Powdered milk imports represented the remainder (31 percent). The agency has been a consistent importer of increasing quantities of powdered milk, especially whole milk. The table below shows the relative importance of milk and basic grains imports. Table 27: EL SALVADOR: VTALUE 1/ OF IRA COMMODITY IMPORTS, 1972-1980 (in thousand colones) Powdered Milk Year Corn Beans Rice Whole Nonfat Semi-fat 1.972 - - - 285.0 475.4 119.0 1973 17,120.0 2,554.0 56.6 545.0 713.0 - 1974 2,407.4 9,207.0 6,661.4 6,705.0 1,724.0 - 1975 10,651.5 13,339.0 9,444.2 6,864.1 2,499.4 - 1976 - - - 12,960.0 - 1L977 16,246.0 - - 12,403.5 - 1978 7,708.2 - - 11,836.0 - - 1L979 - - 2,075.2 23,482.0 581.0 697.0 1L980 5,171.0 7,775.0 3,795.0 38,789.0 1,397.0 1,236.1 IL/ Rounded figures. Source: Instituto Regulador de Abastecimientos (IRA), Departamento de Compras y Balance General. 9/ Consumer preference favors black beans. Their availability from commercial production has apparently lagged considerably in relation to red beans.  - 84 - 152. A fresh look at IRA commodity imports and expenditures for such products is presently warranted, especially with respect to powdered milk. The sharply increased volume of whole milk powder imports deserve special attention since this is among the most expensive of the dairy products. With local fresh milk production not likely to be restored soon, the prospect is for continued, growing reliance on powdered milk imports. IRA might consider cutting costs and expenditures by switching to importing non-fat powdered milk and butter oil or other fat that could be used in local production of reconstituted whole fluid milk in order to replace the more expensive whole milk powder imports. This will result in substantial savings without any inconvenience to consumers. IRA: Policy Implications 153. In the marketing and distribution of basic food grains there are two realms. One is the IRA system and the other is the traditional course involving the trucker or other intermediary. Between the two structures there is rela- tively little interplay of competitive forces. Since IRA purchases are from producers affiliated with credit institutions, other farmers are left to fend for themselves in selling to truckers or other handlers in the marketplace. Because of this, the open market is deprived of the impact of IRA as a competi- tive factor, which enables buyers to strike their own deal with individual farmers without regard to IRA guaranteed producer prices. 154. Under the circumstances, except in a period of shortages, there is no compelling reason for a traditional buyer to come close to the IRA price when dealing with a producer. Thus, in fact, the farmer has little option but to sell at the price offered. Intermediaries are virtually free to buy and sell without much competition from IRA. As a result, the price paid the grower of basic grains is held as low as possible under the IRA price level while the ultimate consumer pays as much as the traditional seller can command. Moreover, the proportion of the marketable supply of a commodity handled by IRA and the nature of its distribution system do not permit its distribution operations to reach a larger percentage of low income families. IRA distribution to official institutions, for example, gets to those primarily in the middle income segment of the population with those in the low income needy group being deprived of basic grains they otherwise would receive. Furthermore, IRA distribution is virtually restricted to urban areas, so that the rural poor are left without any such food assistance. 155. Existing silo and warehouse facilities are inadequate to provide necessary storage for any material expansion in basic food grains volume or additional commodity procurement. For the present, however, there is no imme- diate pressing need for any significant expansion in storage capacity because of prevailing crop production and marketing difficulties. Production prospects for the 1981-82 crop year commercial supply of basic grains are not too bright in the light of continued rural violence and disruptions. Restoration of normal operating conditions in farming areas, however, should be conducive to resuming upward production trends and thus necessitate some expansion in storage facil- ities in the future.  - 85 - IV. AVAILABILITY AND SUPPLY OF FARM INPUTS 156. The decline in El Salvador's agricultural production since 1978-79 partially reflects lower use of farm inputs, especially fertilizers and plant protection materials owing, among other reasons, to shortages, depleted stocks, uncertainties, lack of financing and in some cases, foreign exchange on a timely basis. This lowered maintenance and decreased yields. Lack of foreign exchange results in delayed placement of farm input orders, curtailments in quantities or late arrivals of shipments. The situation requires review for priority alloca- tion of foreign exchange to finance procurement of some essential farm inputs and spare parts. 157. The country's largest single supplier of farm inputs is the Banco de Fomento Agropecuario (BFA); its role has been greatly expanded since the agra- rian reform in 1980. BFA is a major supplier of farm inputs to ISTA cooper- atives or other groups through a network of warehouses and storage facilities. Supplies vary widely from different formulations of fertilizers, insecticides, and herbicides to different kinds of improved seeds along with animal protein mieals and small equipment. Fertilizer 158. Fertilizer stocks increased toward the end of 1981 with the decline in the volume of fertilizers used. About 185,000 metric tons of fertilizer were reportedly available in the country. This amount represents about half of the yearly national fertilizer needs; ordinarily December stocks are only 20,000 metric tons or less. Obviously., farmers utilized much less fertilizer for the :1981-82 crops than they usually do. The inevitable result is reduced agricultural productivity. 159. Before the advent of the agrarian reform, BFA distributed about 20-30 percent of the fertilizer used in the country, INCAFE handled about 10 percent, and the Federacion de Cajas de Credito (FEDECREDITO) about 5 percent. All these fertilizers were imported by the respective entities. After the agrarian reform, BFA has become an even grreater participant in the handling and distribu- tion of fertilizer supplies. In 1980, BFA sales represented 64 percent of total sales of simple and mixed fertilizer materials. The largest private importer and supplier of fertilizer (to its cotton grower members) is COPAL. For the 1]980-81 cotton crop, this cooperative spent nearly C 7.5 million for fertilizer iLmports to supply cotton producers with 18,000 metric tons of sulfate of ammonia (70 percent) and urea. Seed and Planting Stock 160. Progress has been made in developing, multiplying and supplying seed and planting stock adapted to EL Salvador's varied growing conditions. CENTA efforts have resulted in readily available supplies of improved seeds which iinclude hybrid corn, beans, rice and sorghum along with different vegetable seeds, such as tomatoes and peppers. Yet despite these efforts in seed development and improvement, many producers still use local varieties with low yields. Such growers, mostly small farmers, save their own seed for replanting year after year. CENTA is also engaged in developing improved varieties of fruits and nuts for replanting. These include citrus, avocado, mango and  - 86 - cashews. MAG is encouraging greatly expanded internal production of tree crops in order to improve the use of marginal lands and also add to the country's food supply. 161. CENTA maintains its own laboratories for seed and fertilizer testing, seed certification and related activities. This agency has seed storage and processing facilities for use in connection with its production and handling operations. CENTA also cooperates with growers in producing certified seed as well as in the multiplication of improved varieties for wider distribution. 162. The principal supplier of seed for cotton production is COPAL, which is also engaged in varietal development and improvement work through breeding and selection 286 manzanas dedicated to investigation activities. This cooperative's major achievement in its seed work included development of its own CEDIX variety and also other superior varieties being tested for multiplication. 163. Development of improved planting material for use in the production of coffee is handled by the Instituto Salvadoreno de Investigaciones del Cafe (ISIC). This agency is presently engaged in a cooperative effort in combatting coffee rust. For some time, however, it has sought to develop coffee rust resistant varieties that might be adapted to local conditions. ISIC is also working in coffee production management and varietal improvement fields in order to attain higher yields. Livestock and Poultry Inputs 164. The marked depletion in cattle numbers, especially dairy animals, has greatly intensified the need for replacement stock and animals for breeding purposes. This will take several years to overcome. To speed up the rate of increase in the availability of livestock for replacement or breeding, artificial insemination using imported semen could be employed on a wider scale. 165. Through establishment of some specialized breeder flocks, El Salvador has developed a significant egg laying and broiler raising reproduction capa- city. With good management, these flocks are capable of producing adequate supplies of hatching eggs and baby chicks to maintain a reasonable balance between product output and consumer needs. While much of the egg and poultry meat production is in commercial enterprises, MAG is anxious to encourage more small and medium farmers to raise poultry and also promote producers' cooper- atives. This would require increased production of hatching eggs and baby chicks, for this purpose MAG has sought to work out three-year financial arrangements with the United States for imports of turkey poults as well as chicks for broiler production and egg laying flocks. 166. Adequate feed supplies in the form of grains and protein meals are vital to raising poultry. Cattle in El Salvador are mostly pasture or range fed, although some limited feed supplements may be used in milk production or breeding operations. With local feed and food crop production already down and likely to go lower, shortfalls in feeding requirements necessitate increasing imports. This has meant shipping into the country large quantities of yellow corn along with protein meals, most of which goes for poultry feeding.  - 87 - 167. About 90 percent of the sorghum produced in El Salvador is used as feed with the remaining 10 percent going for human consumption as a substitute for corn and wheat when these grains are in short supply. Of the sorghum used as feed, about 90 percent goes to poultry enterprises with pigs taking up the balance. 168. Oil mills now have considerable excess production capacity owing to the lower availability of cottonseed. These mills could utilize this extra capacity by extracting oil from imported cottonseed, soybeans or other such raw materials. This kind of operation would yield much needed supplies of vegetable oil for food uses. It would also result in a substantial output of by-product protein supplements which could substitute for imports and stretch local feed supplies. V. EXTENSION AND RESEARCH SUPPORTING SERVICES 169. Progressive agriculture requires strong linkages with effective exten- sion and technical assistance services backstopped by research and adequate credit. Moreover, land and water resources and forests have to be protected and conserved through wise use to insure their permanent availability to meet future needs. A. Technology Transfer and Research 170. The Ministry of Agricu:Lture (MAG) had general responsibility for agri- cultural research including agronomy, plant sanitation, horticulture and agricultural engineering, until the 1972 creation of the National Center of Agricultural Technology (CENTA), which has responsibility for research, exten- s:Lon, seed certification, and agricultural education at the middle level. At the same time, responsibilities of the General Directorate for Cattle (DGG) were broadened in the livestock research field through the creation of the Cattle Development Center (CEGA). This center has introduced numerous innovations in l:Lnes of investigation and methodology and helped widen the scope of livestock improvement and pasture development technology. 171. The General Directorate for Irrigation and Drainage (DGRD) of MAG demarcates useful agricultural land in the country and the potential for irriga- tion while the General Directorate of Natural Resources (DGRN) has primary responsibility for forest and soil resources as well as their development and conservation. MAG's General Directorate for Fishing Resources (DGRP), created in 1980, has responsibility for all aspects of commercial and artisan fishing and fisheries industry development. This includes improving technology, fleet maintenance and improvement, domestic and export marketing of fishery products, promotion of aquaculture, and conservation of fishery resources. Although each of these several MAG agencies has its own specific assignment and responsibil- iities, all of them relate to a common denominator of extension or technical assistance and research. Moreover, in one way or another, each has linkages with various elements of the agr:Lcultural resource base. 172. In 1980, ISTA confronted an acute scarcity of technical and other skills required to make agrarian reform work. Even after draining professional and technical personnel from the limited staff of MAG and CENTA, ISTA remained  - 88 - acutely understaffed. Since the agrarian reform process was given first prior- ity in the use of supporting services, the result was an unbalanced condition detrimental to the needs and interests of the traditional sector. Because of a shortage of technical staffing in both the reform and agricultural private sectors, overall production and productivity were adversely affected. B. MAG Specialized Institutes 173. Profiting from this experience, MAG, in early 1982, launched a sweeping reorganization of its extension, research, technical assistance, and training services, along with those responsible for resource development and conservation. This significant innovation is now being implemented. It is based on regionalization of field operations and services which MAG now has incorporated in three specialized institutes. The country has been divided into four regions, each with its own director and budget. The specialized work of each institute will be carried on in every region consistent with local needs. The approach promises nationally unified but locally oriented science, research and technological transfer services functioning on a coordinated basis in each of the four regions. Moreover, it represents an effort to have closer contact with rural people and provide more direct services to a wider range of indivi- dual farmers and agrarian reform cooperatives or other groups. The three specialized institutes are: Instituto Salvadoreno de Capacitacion y Transferen- cia de Tecnologia (ISCATT), Instituto Salvadoreno de Investigacion Agraria y Pesquera (ISIAP), and Instituto Salvadoreno de Recursos Naturales (ISREN). They are an integral part of MAG directly linked to the ministerial office and responsible to the Minister for its operations and achieving MAG's policy and program objectives. The institutes are under a mandate to insure effective coordination; freely offer suggestions for improvement; promptly transmit the results of research or other findings; and provide all required support to facilitate and advance progress in respective areas of assigned responsibili- ties. 174. The general basic structure and assigned work responsibilities of each of the three specialized institutes may be briefly outlined as follows: ISCATT has responsibility for technical assistance, promotion and social organization, training and communications with farmers through publications and other means. The technical assistance division is the most important owing to its capabil- ities in the transfer of technology and raising individual farming and manage- ment skills. It is concerned mainly with the whole spectrum of technical assis- tance in crops, livestock and fisheries production and processing but also with proper land as well as soil and other resources building and conservation measures. A major function is to develop and upgrade agricultural and fishery or other resources utilization skills. ISIAP is primarily a research entity consolidating much of the crop and livestock investigational and testing work of both CENTA and DGG as well as the more recent DGRP fisheries research. Its most important functions are agricultural crops, livestock and fisheries research; plant and animal sanitation or protection from disease; insect or parasite control and eradication; and seed production, processing and storage, marketing and certification. ISREN is basically concerned with renewable natural resources. It has a major interest in the availability and use of water and the development and protection of natural areas. It is concerned with dams, flood protection, weather conditions, distribution of surface and underground water resources, irrigation technology, drainage, and forest conservation.  - 89 - 175. The reorganized MAG includes four existing entities, which are now linked directly to the ministerial office: the Regulatory Supply Institute (IRA), the National Agricultural School (ENA), the Agrarian Reform Institute (ISTA), the National Financiera for Agricultural Land (FINATA), and the Agricultural Development Bank (BFA). 176. The real test of this innovative approach will undoubtedly come in the actual implementation and execution of assigned responsibilities. That is when job performance, progress made and results achieved become most revealing. At the outset, however, the ability of these three specialized institutes to function effectively will depend in large measure on the advance preparations made to facilitate their field work. This requires identification of the problems and needs of the agricultural sector as well as its pertinent segments to provide the essential basis for planning, effective leadership, close coor- dination, and adequate training. Most of these have been previously identified as MAG institutional deficiencies, which also include shortages of funding and inadequate staffing. C. Technical Assistance and Extension and the Role of ISCATT 177. The realities of the present situation are being brought into focus by the performance capabilities of the three specialized institutes. Starting from the current position, it is readily apparent that progress will not be made by any great leap forward. Since the start of agrarian reform, the Government assumed responsibility for introducion of virtually all crop and livestock science and technology among most farmers. The wide-ranging obligations inherent in that action, however, could not be fulfilled by any governmental agency even though ISTA tried hard to plug the gaps. Prior to the agrarian reform, the large haciendas had no great reliance on governmental advisory services; most of them had competent management and hired advisory assistance when needed. ISTA sought to overcome this problem by drafting required skills from other agencies and even doing its own recruiting but, as a result, much of the agricultural sector was stripped of the support services on which small- and medium-size farmers had long relied for assistance. Now, innovative ways need to be developed to reach the farmers without service regardless of their size and this is likely to take longer than presently anticipated. To meet these needs, the three specialized institutes will require a time-phased step-by-step alpproach within the clear limits of both qualified personnel and financial resources. Yet, even with the scarce manpower and other related supports avail- able, a reasonably good but limited start can be made toward revitalizing the country's agricultural sector. 178. ISCATT can be a vital part and play a major role in agricultural and rural development, as well as in human resource improvement. Before ISCATT was established, extension and related technical services were scattered through several MAG agencies and related entities. ISTA had a total of 178 technicians in 1980 engaged in technical ass'istance to its intervened large farms which have been taken from other agencies: 82 professionals from CENTA, 27 from DGG, 34 from DGRNR, and 35 from ISIC. 179. Next to ISTA, in its technical assistance requirements for administer- ing large cooperative farming operations, has been CENTA staffing of agricul- tural extension work. CENTA had 72 extension agencies with an extension staff  - 90 - totalling 354 in 1981, of which 93 were administrative personnel and 261 techni- cians, of which 89 were professionally trained extension workers, 71 trained home economists, and 20 extension assistants employed in 4-H Club work or rural youth development. Within the limits of its staffing resources, CENTA assistance focuses on small and medium farmers, but with top priority given to agrarian reform needs. 180. ISTA, CENTA, and DGG account for about 575 extension and technical assistance personnel actually providing advisory and guidance services in the field. However, the total of extension or technical assistance technicians working for all MAG and related agencies apparently has not been compiled. Nevertheless, the number may be far below individual agency requirements and producers' needs. So far, the overall number of producers able to benefit from these services were indeed limited at best. For example, it has been indicated that CENTA extension services were available to 10-20 percent of the farmers while DGG reached possibly 5-10 percent of the livestock producers. 181. Extension and technical assistance services which could be provided by ISCATT have not been quantified by either ISIAP or ISREN. These institutes obviously first will need to review previous operational plans and establish their own new priorities for their responsibilities. 182. Extension and technical assistance have been basically oriented to a specific crop, livestock operation or other specific problem. ISCATT presents the opportunity for effective consolidation of all existing extension and technical assistance strengths and for building up both capabilities to assist the vast majority of farmers with improved technology. ISCATT's technical assistance division--a unified extension service--could deal more realistically with the needs and problems of crop and livestock production within the context of the individual cooperative or farm operating as a business enterprise. 183. Aside from extension services that might be made available to cooper- atives or farms operating as business units, valuable aid could also be provided through services tailored to meet their specific needs. This could be arranged through a working agreement developed between ISCATT and the cooperative or large farm operation to supply the required services on a cost-sharing basis. Under such an arrangement, ISCATT would make available the number and calibre of qualified technicians needed with the cooperative or other participant sharing in the salary and maintenance costs of any personnel assigned to it. The orga- nization or farm beneficiary would be obligated to provide office space and cover overhead costs, such as administration and transportation. ISCATT would provide, under this arrangement, supervision and professional backstopping as needed, maintain a flow of pertinent research information, and assure appro- priate training. All this does not mean that ISCATT, however, should have a monopoly in supplying technical assistance or advisory services. Any ISTA coop- erative or organization, such as COPAL or any large individual farm operation, willing to pay should be free to hire such services from competent private sources. In fact, private technical assistance and advisory service firms should be encouraged. Competition from them would contribute to improve ISCATT operating efficiency. There is also a need for providing technical assistance through development of a group approach under the leadership of extension personnel in each locality. The extension personnel can encourage the small farmers to organize in groups under an elected leadership responsible for receiving from local extension workers and transferring to the group information and technical knowledge.  - 91 - 1134. An important considerat:ion in dealing with extension or technical assistance requirements, is the ]Location of the agencies out of which cooper- alives, individual farmers and fi'shermen are served. Considering the spread of territory and the nature of the technical assistance to be provided, the four regions of the country need a total of about 250 agencies. This is almost triple the number maintained now by both CENTA and DGG. These agencies should be equitably distributed among the regions and within the respective zones and within direct and easy reach of most individual farmers, agrarian reform cooper- atives or other groups. On the basis of the estimated number of farm units of all types and sizes in El Salvador, approximately 1,000 professional extension or technical assistance personnel would be required--one technician to about 400 farmers. These staff members stationed in the field agencies would need to be backstopped by an additional 1,000 assistant agrarian technicians. Also, there would be a need for about 250 home economists and an estimated 100 extension assistants for 4-C Club work in rural development. This.staffing totals 2,350, mostly professionals. It does not include four regional office chiefs, 250 agency chiefs, and 11 assistant chiefs in zones, as well as assistants and administrative or other personnel.. 185. The extension or technical assistance field workers would also, from time to time, require backstopping by specialists in coffee, cotton, sugar, basic grains, fruits and vegetables along with some other crops, as well as in fisheries, livestock, and poultry. 186. ISTA agrarian reform cooperatives and related groups still need to find their way to increase production and productivity in their operations. These farming groups would have to place more emphasis on producing for the greatest total return and net profit from the enterprise which also affords the opportunity for increasing gainful employment and improving family living. This isisue undoubtedly should be reviewed by ISTA since it could bring a shift in technical assistance priorities a.nd result in reinforcement of the work with the cooperatives. This would require involving the technical staff and rendering mcre pertinent assistance to the reform groups. This would mean increasing the technicians providing advisory and related services to about 300, the number of agrarian reform cooperatives and related groups that might be reached. 187. A high priority is the most urgent need to breathe new life into export crop production and revive its foreign exchange earning capabilities. This relates primarily to three crops--coffee, cotton and sugar. It presents a situation in which one of the major elements required is a massive infusion of appropriately directed extension or technical assistance services, particularly in the agrarian reform cooperatives of Phase I. The competent technicians thus engaged would have to be fully backstopped by necessary coffee, cotton or sugar specialists. D. Training Resources and Needs 188. Many of the inherent characteristics of the ISCATT training division and its functional resources have their origin in the Centro Nacional de Capacitacion (CENCAP) which was created about mid-1970 as a MAG entity. Its basic purpose was to identify and meet training needs of the agricultural sector in alL its aspects. A major objective has been to raise the level of technical knowledge and skills of agricultural producers, farm managers, technical workers, campesinos and related personnel through appropriated systematic  - 92 - orientation and training. CENCAP has maintained eight training centers located in different parts of the country and operated eight mobile training units. During 1981, this agency provided a wide range of training to more than 9,500 individuals as compared with some 6,700 in 1980 and only little over 1,500 in each of the two previous years. With a permanent staff of 53 and supplemented as necessary, CENCAP through its own developed methodology provides training through especially tailored and regular courses, short courses, seminars and other various means. 189. Since 1980, much of CENCAP training activity has been oriented to advancing the agrarian reform while also meeting other diverse training needs. In giving priority to agrarian reform requirements, CENCAP has trained managers, accountants, administrative personnel, supervisors, organizers, and campesinos. Other course work and training in the institutional and private sector has been related to crop and livestock production, irrigation and drainage, resources development and management, transfer of technology, fishery operations and business organization 190. Against this background of actual operating experience, ISCATT's training division has embarked on building an effectively functioning structure to serve the agricultural sector's needs for extension or technical assistance services. This will require not only additional manpower but also much training and retraining of personnel. Understandably, this will take time with progress being made by steps. At the outset, however, it is necessary to inventory the extension and technical assistance staff capabilities already available. This should provide a base from which to move forward by identifying personnel training and retraining needs in relation to the field work load to be undertaken. This should also point up requirements for additional personnel and the means of recruitment. However, budgetary constraints may limit what can be acomplished in the short-run. 191. El Salvador needs to broaden the experience and knowledge of many technicians so as to overcome deficiencies and develop in them multiple technical assistance capabilities. This would facilitate moving away from the system of fragmented attention to a single crop or livestock problem and would permit providing'services to a farm or cooperative on the basis of its total operational needs as a business enterprise. This would improve the use of scarce technical manpower as well as increase operating efficiency. 192. Advantage should be taken of every opportunity to improve the work skills and pertinent knowledge of extension and technical assistance personnel. In addition to providing scholarships, ISCATT might well arrange with the National Agricultural School (ENA) to include in its curriculum appropriate courses on extension and technical assistance along with home economics and leadership development. There is also need to encourage professionalism in agriculture, providing opportunities and inducements to study its various subjects in schools and universities, giving greater prominence to agriculture as a profession. Training should also be provided for the formulation and implementation of personnel policies in the three specialized institutes to stimulate professionalism and promote or foster job satisfaction. In addition  - 93 - to training, it is vital that the extension technician have the mobility or transportation required to get out into the field to reach and work with farmers or cooperatives. Otherwise, being desk bound is both wasteful and useless. E. Agricultural Technology and the Role of ISIAP 193. ISIAP is in effect the fountainhead of generated information and technology for the agricultural sector and fisheries. With its already large store of accumulated knowledge arLd results from internal studies, the country has so far developed a body of research findings and technological information far greater than can be transferred usefully to farmers by its present extension capabilities. This constraint, however, is expected to be overcome gradually by ISCATT improvements in technical assistance services. 194. ISIAP needs to reexamine the status of agricultural and fisheries research, define more precise objectives and set its priorities. The need is illustrated by examining the most recent fiscal year's operative plans of individual MAG agencies, especially CENTA in crop-related activities and DGG in the livestock field. The plan documents show that a substantial part of the research workload has been thinly spread over a wide number of program and subprogram activities, some of them repetitious and some of little consequence. While much valuable research and related work is being done, the outstanding fact is that there is a tendency to dilute limited available technical manpower and financial resources by spreading the work over a large number of activities with little or no regard for priorities. 195. Facilities and personnel incorporated in ISIAP by the recent restructuring of MAG thus provide a good base for the research and related work of those institute divisions respectively concerned with crops, livestock, plants and animal health, and seed technology. The largest of the agencies affected by this transformation is CENTA with its seed technology complex and modern facilities for handling, storage, testing and certification of improved, newly developed and hybrid planting material, as well as its three experimental stations, eight experimental farms and four demonstration farms, and laboratories for soil testing and analysis. In 1981, CENTA had a research staff that totalled 179 of which 71 were professionals (including 10 agronomists and 10 soil specialists). The remaining 108 members of the total research staff included 55 assistant agronomic technicians and 17 laboratory assistants. Much of the CENTA work was, of course, done away from headquarters. 196. The other agency affected by the transformation is DGG, which was involved in practically every aspect of livestock research, development and testing. This agency's physical facilities include three animal pathology laboratories engaged in extensive testing and diagnostic work and the regional livesitock development centers. 197. The extraordinarily heavy use of chemicals in local cotton insect and disease control is now a major costly problem that urgently merits research and technical attention. Insects attacking cotton in El Salvador can be divided into two major categories: inherent insect pests, and induced pests. The inherent pests are those that cause damage primarily in the absence of insecticide use; induced pests are those that increase to numbers that cause economic damage because of destruction of natural enemies, the development of insecticide resistence, or other factors. Experiences in different parts of the  - 94 - world indicate that many of the cotton insect problems are induced. A number of practical survey and prediction technologies are available which can be used to substantially reduce induced insect problems. Also, some practical and numerous emerging biological suppression technologies are known for possible use in control of inherent and induced pests. To get at the heart of the cotton insect problem in El Salvador, a special research and investigatory approach would be required. Two or three carefully selected experts (with knowledge of tropical cotton agroecosystems, and with a broad practical knowledge of the latest survey, prediction and suppression technologies for cotton insects) should carefully review the cotton situation on-site. This team should be able to analyze the problem, to identify and transfer significant new technology, and to make specific recommendations on the best approach to providing technical inputs in the long term. 198. There are numerous agricultural production problems that are crop or area specific. This also calls for on-the-spot investigatory work. Such an approach would utilize research results already available and adapt findings to local conditions that may differ from one area to another. 199. Inclusion of fishing in the divisional structure of ISIAP follows earlier recognition of the importance of fishery resources when in 1980 MAG created the Direccion General de Recursos Pesqueros (DGRP) to be responsible for development of this segment of the economy. Although fishing has long been followed in El Salvador, growth of the sector has been relatively slow and for the most part has developed spontaneously. More recent interest, however, has sparked some increases in investment and expansion of operations. 200. Realization of the fisheries potential could be aided materially by much needed research. A major requirement is to develop through research a national fishery exploitation system for building the resource to increase productivity and promote its conservation. This research would have to be concerned with fisheries management in harmony with the life cycles of the species. There already is some fear that shrimp and langostinos in nearby areas may be in danger of extinction. Through research, ways could also be developed to make fuller use of the fish and other sea life caught with shrimp or other netted species. Needed research on improvements in artisan fishing methods and gear employed could result in substantial increases in individual catches and total fish production. VI. RENEWABLE NATURAL RESOURCES A. ISREN and Renewable Natural Resources 201. The most valuable natural resources that El Salvador has are land and water. These resources must be managed wisely to insure their availability for permanent use along with the nation's forests. With the sparseness of land in relation to population, the country is fortunate that climatic conditions permit multiple cropping. This along with the development of the irrigation potential may greatly enhance crop and livestock growing opportunities. This general area of renewable natural resources is served by ISREN.  - 95 - 202. Despite the intense and still growing pressure of population against extremely limited land resources, still potentially productive soils remain virtually unutilized. With an overall land area totalling some 2.1 million hectares, there is an apparent potential for bringing appreciably more land into crop production in annual and semiannual as well as permanent plantings. On the basis of 1980 actual land use compared to the utilization potential, there is much scope for natural pasture improvement or reseeding in expanding livestock production as well as for reforestation. Table 28. EL SALVADOR: ACTUAL 1980 AND POTENTIAL USE OF SOIL RESOURCES (in thousands of hectares) Land Activity Actual Use Actual as Potential Use Potential as % of Total % of Total A. Crop Production 678.1 32.2 867.7 41.2 1. Annual and Semipermanent 458.7 531.1 a. Unrestricted 110.6 b. Restricted 420.5 2. Permanent Crops 219.4 336.6 B. Livestock 522.4 24.8 522.4 24.8 1. Pastures a. Improved 134.0 b. Natural 388.4 C. Forests 260.2 12.4 634.0 30.2 D. Scrub or Brush 568.4 27.0 E. No Agricultural Possibilities 75.0 3.6 80.0 3.8 National Total 2,104.1 100.0 2,104.1 100.0 Source: MAG Direccion General de Recursos Naturales Renovables, (DGRNR). 203. In the case of forests, only 41 percent of the forest land potential is being utilized while vast areas are in scrub or brush growth, which utilizes land without any economic return. This represents a large part of the national territory which the country cannot afford to neglect, especially since each year substantial lumber imports are needed to supplement local needs. The Government has been developing a growing awareness of the need to make more effective use of the forest land potential through reforestation; as a result, tree plantings are contemplated for both protective and commercial forestry purposes. 204. A large part of the agricultural resource base has become impoverished and its soil left vulnerable to further deterioration through negligence and mismanagement. A major factor has been the irrational cutting of trees and denuding of extensive forest areas which eliminated the protective cover and left the land subject to erosion. Further contributing factors have been crop practices that disregard slopes as well as tilling steep or shallow soils  - 96 - unsuited for cropping. Erosion and soil fertility problems have been further aggravated by burning of crop stubble after harvest. In the case of livestock, relatively little attention has been paid to management of natural pastures let alone improving them. This has resulted in overstocking and overgrazing with damaging impacts on the productivity of grasslands and diminution of protective cover that inhibits washing and erosion. 205. The loss of forest, grass or other ground cover promotes surface water runoff by inhibiting its permeation into the soil. Underground water resources are thus restricted along with the recharge of aquifers. This breaks the ecological equilibrium with damaging effects on plant and animal life. The disappearance of surface soil and its fertility through erosion has become a major problem, a leading carrier being the Rio Lempa with much waterborne sediment accumulating at its dams. 206. The nature and extent of the erosion problem affecting El Salvador may be expressed in simple statistical terms. Of the total land area, only 10 percent is not yet affected by erosion; 16 percent has little erosion, but the remaining 74 percent has significant erosion. B. Role of Irrigation and Drainage 207. Irrigation offers an opportunity to stretch limited land resources to increase agricultural productivity by extending crop growing seasons into water deficit periods of the year and by supplementing natural rainfall in the event of temporary shortages. Moreover, there is the additional possibility of increasing agricultural production in extensive low-lying areas that are plagued by drainage problems. As has been demonstrated in different parts of the country, increasing productivity of such areas requires installation of drainage and flood control works. 208. Both irrigation and drainage problems relate to the wet and dry seasons. During the wet season, rainfall for crop production is abundant, averaging around 1,800 mm for its May-October period of six months. The dry season extends over the other six months from November through April when it is practically rainless. This dry season makes irrigation important for multiple cropping; it has an effect similar to that of adding more land to an already severely restricted natural resource base. 209. On the basis of available soil resources suitable for agriculture, MAG estimates indicate a potential 323,000 hectares of land could be advantageously irrigated for crop production. An additional 32,000 hectares could be recovered from low-lying areas for agricultural use through installation of drainage works. Thus through irrigation and drainage, agricultural production could be increased from better utilization of 355,000 hectares; about 41 percent of the potential crop land. This would represent a substantial addition to present levels of utilization. 210. The development of irrigation has taken place rather gradually. The country has 10 irrigation dams. Now, however, there are some indications that the pace may be quickened as responsible agency restructuring within ISREN takes hold. The land area irrigated by these dams totalled some 37,200 hectares in 1980-81, an increase of 85 percent with respect-to 1970-71. The largest single irrigated area (Sonsonate Banderas dam), was up only 47 percent during that same  - 97 - period but the most spectacular gain took place in the Lempa dam--155 percent from its 1970-71 total. Of the 37,243 hectares of land under irrigation, the Western region had 43 percent, the Central region 18 percent, the Paracentral region 20 percent, and the Eastern region 19 percent. Much irrigated land is in small parcels with only a little more than one-third of the users receiving any technical services in 1980-81. 211. Now, there are some indications that irrigation works may accelerate with the creation of ISREN. First, there are considerable possibilities for the development of small irrigation projects based on catchments and simple diversions from local watercourses without storage reservoirs but utilizing gravity flow for distribution. While individual projects have been constructed iin the past, financing was a ma jor problem; beneficiaries first had to be organized into cooperatives so that BFA could provide needed funding. However, the 1980 agrarian reform and ISTA's cooperatives provide a new basis for the development of small irrigation projects where sources of needed water supplies are available. Financing is no longer a major constraint since cooperatives are given a priority in obtaining credit from financial institutions. The likelihood of agrarian reform cooperatives adding 20,000 hectares of new irrigated land through small irrigation projects is considered by MAG's 1981-83 agricultural plan. This would raise the land area under irrigation by 54 percent to a total of 57,243 hectares. However, this would still represent only about 18 percent of the 323,000 hectares of land that potentially could be irrigated in the country, of which 60 percent has good possibilities for i rrigation, 30 percent has moderate limitations and the remaining 10 percent has significant limitations. Second, the agrarian reform may facilitate undertaking some of the large irrigation projects that previously had difficulty in obtaining external financing because of the land tenure problem. Projects previously at some stage of development may be speeded-up, such as the San Miguel-Usulutan project. C. Resources Conservation and Development 212. The deterioration already experienced in El Salvador's land, forest, and water resources need not continue in the future. Within the scope of ISREN responsibility in the field of renewable natural resources, there exists the basis for priority attention to their conservation and development. The expertise for effectively dealing with the country's critical land, forest and water problems is already concentrated in ISREN. These elements provide for a good start in formulating an urgently needed national agricultural resources conservation and development program. The kind of policies and programs needed will have to be developed on the basis of the needs already detected in each of El Salvador's four regions. ISREN may require research support from ISIAP in special fields and the cooperation of ISCATT's extension or technical assistance staff to reach the producers and cooperatives in the field, because the program will require active cooperation and support from them. VII. AVAILABILITY OF AGRICULTURAL CREDIT 213. The nationalization of the private banking system placed the Government in position to channel banking credit to potential borrowers. When the agrarian reform was initiated, ISTA organized cooperatives were given  - 98 - priority over all other borrowers in obtaining credit from financial institutions. This applied to commercial banks that had been nationalized as well as to specialized official credit institutions. The latter controlled 40 percent of the total loans of the financial system with BFA alone providing 36 percent of the 1979 agricultural credit. Altogether, 14 credit sources became involved with about 280 ISTA cooperatives. In August 1980, the 14 credit institutions were each assigned by the Central Reserve Bank (BCR) a certain number of the cooperatives and were directed to meet their credit needs. For the most part, however, this was done indiscriminately and without considering that some banks had previously dealt with owners of haciendas that had since been organized as cooperatives. The distribution was as follows: 80 cooperatives were assigned to the 10 nationalized commercial banks, 91 to BFA and the others spread to the remaining financial institutions. The commercial banks were not ready to take on their new assignment because they did not have farm oriented units to take care of cooperative credit needs or provide suitable loan supervisions. They quickly moved to overcome these and other deficiencies but conflicts arose with ISTA representatives and MAG due to institutional differences in motivations and lack of coordination in the agrarian reform area. Meanwhile, BFA had a striking advantage over the commercial banks since it was experienced in dealing with cooperatives and had a full field staff of 148 credit agents and loan supervisors. Table 29: EL SALVADOR: AGRICULTURAL CREDIT (million colones) Agricultural Credit 1978 1979 1980 1981 Banking System New Credit 585.9 563.5 505.4 554.7 Refinancing 79.3 90.8 145.9 196.5 New Credit/Gross Value of Production (%) 27.5 20.8 23.0 28.1 Credit Outstanding 442.1 511.8 467.7 521.3 Banco de Fomento Agropecuario Credit Outstanding 151.1 208.0 224.7 263.4 Source: Central Reserve Bank and Agricultural Development Bank. 214. While awaiting institutional lending to begin with priority to agrarian reform credit, ISTA had no financing to get operations going. In this situation, an emergency fund of about C 120 million was reportedly supplied by Banco de Fomento Agropecuario for ISTA lending to cooperatives since it already was getting late to start the 1980-81 crop production cycle. Of this C 75 million were subsequently not recovered. ISTA paid by issuing bonds that will be repaid with the payments of cooperatives. 215. From the start of the agrarian reform, BFA provided emergency financing to take care of the needs of the cooperatives. Credit to the reform sector rose to a total of some C 126.2 million broken down as follows:  - 99 - (1) Loans to ISTA - - Employee salary payments on cooperatives . . . C 51,887,753.39 - Production inputs . . . . . . . . . . . . . . . 29,522,791.40 - Payment of allowances to ISTA and MAG technicians . . . . . . . . . . . 1,101,104.25 - Interest charges . . . . . . . " 3,455,503.64 Subtotal . . . . . . . . . .. . " 85,967,152.68 (2) Anticipated Credits - - Agricultural production preparations on-cooperatives . . . . . . . . . . . . . . . . 40,242,163.14 Total . . . . . . . . . . . . . . . . . . . C126,209,315.68 About C 89.1 million were provided as loan credits of which C13 million were recovered by the end of December 1980)with C 54.5 million anticipated from the Banco Hipotecario. It was expected that the remaining balance of the total eventually would be cancelled. 216. While confronted with the immediate problem of getting credit for the 1980-81 crop year, ISTA also haLd to plan ahead for the following 1981-82 production cycle. Table 30. EL SALVADOR: CREDIT GRANTED TO ISTA COOPERATIVES BY INSTITUI'IONAL SOURCES, 1980-81 AND 1981-82 (in colones) Source 1980-81 1981-82b/ Banco Agricola Comercial 11,881,806.86 11,811,210.00 Banco Cuscatlan 9,386,923.15 11,701,840.00 Banco Capitalizador 3,528,085.16 4,763,015.48 Banco Mercantil 542,998.94 1,672,511.00 Banco de Credito Popular 9,559,400.00 11,970,400.00 Banco Salvadoreno 7,677,110.36 16,895,492.00 Banco de Comercio 7,274,785.09 9,848,905.00 Banco Internacional 898,538.94 1,720,050.00 Banco de Desarrollo e Inversion 2,800,929.00 3,354,660.00 Banco Financiero 427,100.00 713,450.00 Banco Hipotecario 38,326,839.78 34,862,198.30 Fedecreditos 2,268,634.00 4,062,195.59 Incafe 34,491,185.93 41,625,278.00 Banco Fomento Agropecuario 26,066,452.66a/ 58,108,566.48 155,130,789.87 213,109,771.85 a/ Includes credit provided by BFA through ISTA to reform sector cooperatives. b/ Estimated on the basis of data on crop production credit provided for may plantings plus financing for sugarcane in the 1981-82 crop year. Source: Instituto Salvadoreno de Transformacion Agraria (ISTA).  - 100 - Applications submitted by ISTA cooperatives to their assigned financial institu- tions resulted in granting some C 155.1 million in credit for the 1980-81 crop year and C 213.1 million colones for the 1981-82 crop year. However, credit granted to ISTA cooperatives and community associations by the nationalized banking system, other public financing institutions and BFA for the 1980-81 crop year was actually greater (C 188 million) and included some additional expendi- tures. The increased funds covered different items as the concluding phase of planning agricultural production and agro-industry activities along with various other ISTA expenditures such as for management and co-management by technicians. 217. Experience with the 1980-81 credits granted to the ISTA cooperatives shows a rather unsatisfactory repayment record. These were primarily one-year crop production loans at 13-15 percent interest that varied with the crop and the land used. Of the C 155.1 million in credit to cooperatives, assured recovery after liquidation of that year's crops amounted to only C 115.6 million. There thus was a shortfall of 26 percent left for refinancing. The inability of the cooperatives to repay in full was attributed primarily to low export product prices and the prevailing violence in the countryside which did not permit normal crop production and harvesting. Additional factors were lack of adequate technical assistance, low productivity and efficiency in farm work along with salary payments possibly in excess of the established minimum that cut into the profitability of cooperative production operations. 218. The eighty ISTA cooperatives that were allocated to the 10 nationalized banks for financing, had loan repayment difficulties similar to those of virtually all other associations but they additionally had overextended their borrowing. The nationalized banks had granted this group a total of approximately C 60 million in credit for producing specific crops. The security for such crop production loans consisted of the crops and the endorsement by ISTA for 50 percent of the amount of credit provided by the nationalized banks. After the 80 cooperatives liquidated the 1980-81 crop output, there was an estimated shortfall of C 18 million, or 30 percent, in repayment of production credit alone. This consisted of C 3 million in loans made by the nationalized banks and C 15 million in directly related production credit extended by BFA. On top of the crop loan deficit, an additional C 20 million were loaned to the 80 cooperatives by BFA for farm improvements, investments, administrative costs and other expenditures. Additionally, the cooperatives owed ISTA a total of C 7 million for use of the land they occupied. Thus, with the shortfall of production credit repayments, unreimbursed other expenditures made out of BFA financing and the unpaid rental to ISTA, the 80 cooperatives thus had a global deficit of C 45 million colones. 219. For the 1981-82 crop year, the C 213.1 million credit granted to ISTA cooperatives represented an increase of 37 percent from the 1980-81 amount. This represented about 71 percent of the total ISTA had earlier estimated as needed for financing 1981-82 production and other activities on agrarian reform sector haciendas. With a planned area of some 135.8 thousand hectares in crops, which was an increase of 5.3 percent from the previous year, ISTA contemplated expenditures of nearly C 58.6 million for agricultural production inputs. Of this, 69 percent was for fertilizer, 28 percent for insecticides, and the remainder for herbicides and other materials.  - 101 - 220. As a major source of institutional financing in El Salvador, BFA in 1980 supplied nearly C 311.4 million in credit, of which 91.8 percent was for agricultural operations in both the traditional and reformed sectors. E'ractically 100 percent of the BFA total volume of credit extended to the reform sector alone was for financing agricultural activities. Of the amount that went to the traditional sector, 86 percent went into agricultural uses. Table 31. BFA AGRICULTURAL CREDIT EXTENDED TO TRADITIONAL AND REFORMED SECTORS BY LENDING ACTIVITY, 1980 (area in manzanas and credit in thousand colones) Traditional Sector Reformed Sector Total Activity Area Credit Area Credit Area Credit Food Crops 231,375 84,981 37,160 30,829 268,535 115,810 Export Crops 261,923 40,728 48,539 68,488 75,462 109,216 Livestock Development 2,526 26,791 2,619 9,947 5,145 36,738 Agro-Industry Development 3,964 4,515 12,082 6,398 16,064 10,913 Rural Social Development 18 2,272 - 730 18 3,002 Resources Conservation 24 420 83 322 107 742 Total Agricultural Operations 264,830 159,707 100,483 126,167 365,313 285,874 Nonagricultural Total - 25,480 - 42 - 25,522 Total All BFA Action 264,830 185,187 100,483 126,209 365,313 311,396 Source: Banco de Fomento Agropecuario (BFA) 221. BFA's 1980 credit for total agricultural operations in both the traditional and reformed sectors amounted to C 285.9 million and applied to 365,000 hectares. About 56 percent went to the traditional sector, covering 73 percent of the land serviced by BFA and the rest to the reformed sector. But in terms of credit by land area, the traditional sector got an average of C 860 per hectare with the reformed sector at nearly C 1,800. The national average was somewhat under C 1,100 per hectare. Over half of the credit supplied to the reformed sector was used for export crop production and about one-fourth for food crops. On the other hand, over half of the traditional sector financing went for food crops with export crops utilizing about 25 percent. 222. The export crops produced, as reported by BFA credit approvals for 1980, were topped by coffee in the reformed sector and by cotton in the tradi- tional sector. In both the reformed and traditional sectors, sugarcane produc- tion ranked second. Export crop expenditures were greatest for cotton in the reformed sector but with an area that ranked a low third. The amount spent for cotton was also highest in the traditional sector as was the area devoted to this crop. Of the C 68.5 million in export crop loans for the reformed sector, cotton absorbed 49 percent, coffee 35 percent, and sugarcane 16 percent. With 48.5 thousand hectares in this sector producing for export, coffee utilized 52 percent, sugarcane 36 percent and cotton 12 percent. In the traditional sector, of the C 40.7 million for export crop production credit, cotton used 62 percent,  - 102 - coffee 20 percent and sugarcane 18 percent; out of the 26.9 thousand hectares producing for export in the traditional sector, cotton plantings represented 44 percent, sugarcane 36 percent and coffee 20 percent. 223. Of the total amount of credit mader available by BFA in 1980, just over 50 percent went to cooperatives. These borrowers represented only 4.2 percent of the total number of loans made but 41 percent of the area covered by BFA financing. Table 32. BFA CREDIT ACTIVITY BY TYPE OF BORROWER, 1980 (area in manzanas and credit in thousand colones) Loans Made Coverage Financing Borrower Number % Area % Amount % Cooperatives a/ 2,010 4.2 149,967 41.1 156,676 50.3 Solidary Groups 6,112 12.7 59,713 16.3 21,757 7.0 Subsistence Individuals 12,576 26.1 32,898 9.0 8,384 2.7 Integrated Individuals b/ 27,466 57.0 122,735 33.6 124,579 40.0 TOTAL 48,164 100.0 365,313 100.0 311,396 100.0 a/ Each cooperative varies in size of membership responsible for credits received. b/ Includes different production cost items. Source: Banco de Fomento Agropecuario (BFA), Planificacion. 224. In its 1980 report, BFA refers to the special attention it gave to the credit requirements of cooperatives in both reform and traditional sectors as well as to the needs of subsistence individuals and solidary groups that consist mainly of little farmers. These categories totaled 20,698 borrowers who received C 186.8 million that financed production on 242,578 mz of crop land. The traditional farmer category, consists primarily of small to medium farmers who represented 57 percent of all the BFA loans made and received 40 percent of all the credit extended with the amount supplied being used on 33.6 percent of the total land area covered by BFA financing.  - 103 - STATISTICAL APPENDIX Table Number I. POPULATION 1.1 Demographic Indicators, 1950-2000 II. NATIONAL ACCOUNTS 2.1 Gross Domestic Product by Expenditure, 1960-81 2.2 Gross Domestic Product by Expenditure, 1978 prices, 1960-81 2.3 Gross Domestic Product by Expenditure, 1975 prices, 1960-81 2.4 Gross Domestic Product by Sector, 1960-81 2.5 Gross Domestic Product by Sector, 1962 prices, 1960-81 2.6 Gross Fixed Capital Formation by Major Sector, 1971-81 2.7 Gross Domestic Product Projections by Expenditure, Base Projection 1982-85 2.8 Gross Domestic Project Projections by Expenditure, Alternative 1, 1982-85. III. BALANCE OF PAYMENTS AND EXTERNAL TRADE 3.1 Balance of Payments, 1971-81 3.2 Exports, 1960-81 3.3 Imports, 1960-81 3.4 Balance of Payments Projections, Base Projection, 1982-85 3.5 Exports Projections, Base Projection, 1982-85 3.6 Imports Projections, Base Projection, 1982-85 3.7 Exports Projections, Alternative 1, 1982-85 IV. EXTERNAL DEBT 4.1 External Public Debt Outstanding including Undisbursed, Dec. 31, 1981. Debt Repayable in Foreign Currency 4.2 Service Payments, Commitments, Disbursements and Outstanding Amounts of External Public Debt (Foreign Currency), Dec. 31, 1981. 4.3 External Public Debt Outstanding including Undisbursed, Dec. 31, 1981. Debt Repayable in Local Currency 4.4 Service Payments, Commitments, Disbursements and Outstanding Amounts of External Debt. (Local Currency), Dec. 31, 1981. V. PUBLIC FINANCES 5.1 Summary of Central Government Cash Operations, 1971-81 5.2 Central Government Cash Revenues, 1971-81 5.3 Central Government Cash Expenditures, 1971-81 5.4 Central Government Cash Expenditures by Ministries, 1971-81 5.5 Central Government Current Transfers, 1977-81 5.6 Central Government Capital Transfers. 1977-81 5.7 Operations of the Rest of General Government, 1977-81 5.8 Operations of Public Enterprises, 1977-81 5.9 Consolidated Operations of the Non-Financial Public Sector, 1977-81 5.10 Summary Accounts of Decentralized Public Sector Agencies, 1977-81 5.11 Total Public Investment by Sectors, 1972-81  - 104 - 5.12 Investment of Autonomous Agencies and Public Enterprises, 1970-81 5.13 Public Financial Investment, 1972-81 5.14 Public Sector Fixed Investment, 1965-81 5.15 Public Fixed Investment by Sectors, 1976-81 VI. MONEY AND CREDIT 6.1 Summary Accounts of the Consolidated Banking System, 1971-81 VII. AGRICULTURE 7.1 Status of Phase I of Agrarian Reform, October 31, 1981 7.2 Phase III Provisional Titles Delivered, Recipients and Family Beneficiaries, December, 1981 7.3 Distribution of Cotton Production by Farm Size, 1979-80 Crop 7.4 Costs of Cotton Production, 1973-82 7.5 Centrifugal Sugar Production, 1971-72 through 1980-81 7.6 Costs of Sugarcane Production, 1976-81 7.7 INAZUCAR Employment, May 1980-June 1981 7.8 Growers Sugarcane Prices 7.9 Domestic Prices for Molasses by Utilization 7.10 Costs of Producing Basic Grains 7.11 Cottonseed and Oil Prodution 7.12 IRA Storage Capacity, 1981 7.13 Producer-Consumer Pricing in IRA Distribution Network, 1981 7.14 IRA Domestic Purchases of Basic Food Grains and other Products, 1976-81 7.15 Consumer Level IRA and Market Prices, by Month 1980-81 7.16 IRA Expenditures for Local Commodities, 1976-80 7.17 IRA Food Imports, 1972-81 7.18 Traditional Trade Producer to Consumer Price Build-up, Jan. 1981 7.19 IRA - Guaranteed Producer and Average Trucker Prices in San Salvador 7.20 Agricultural Food Imports, 1976-80 7.21 Imports of Fertilizers and Plant Protection Materials, 1976-80 VIII. MANUFACTURING 8.1 Gross Value-Added in Manufacturing, 1971-81 IX. PRICES 9.1 Wholesale Price Index by Main Commodity Group 1971-81 9.2 Year-End Minimum Wages, 1976-81 9.3 Minimum Wages, 1975 prices X. STANDARD TABLES 10.1 National Accounts Summary, 1971-81 10.2 Balance of Payments, 1971-81  Page 1 of 2 Table 1.1: EL SALVADOR: DEMOGRAPHIC INDICATORS, 1950-2000 (Population in Units) Medium Variant 1/ All Ages 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 1930.641 2202.402 2542.1i48 2942.382 3397.642 3924.095 4539.517 5235.673 5997.034' 6327.106 7730.402 o-4 327.668 393.570 474.683 549.659 620.935 708.532 816.167 915.936 1005.912 1099.581 1203.733 5 56.687 66.70' 81.043 97.429 111.623 126.328 145.552 167.806 186.719 204.492 223.946 6 54.228 63.669 77.223 93.492 107.937 122.226 140.554 162.672 182.093 199.900 218.923 7 51.977 60.960 73.703 89.663 104.404 118.449 135.879 157.577 177.516 195.469 214.092 8 49.934 58.540 70.457 85.943 100.993 114.940 131.495 152.542 172.971 191.159 209.429 9 48.098 56. i67 67.461 82.339 97.673 111.643 127.370 147.588 168.1441 186.932 204.907 5-9 260.925 306.244 369.886 4148.866 522.630 593.587 680.851 788.185 887.740 977.952- 1071.297 10 46.421 54.464 614.699 78.852 94.476 108.552 123.475 142.708 163.969 182.792 200.523 11 44.856 52.855 62.158 75.487 91.433 105.665 119.776 137.896 159.599 178.741. 196.199 12 43.635 51.175 59.764 72.249 88.200 102.659 116.244 133.312 155.010 174.537 191.936 13 42.851 49.254 57.475 69.1143 84.619 99.371 112.81T7 129-032 150.066 170i 062 187.678 14 42.363 147.2244 55.294 66.173 80.848 95.904 109.555 124.995 144.930 165.400 183.415 0l-l1 220.125 254.991 299.391 361.904 439.575 512.152 581.898 667.944 773.574 871.532 959.731 15 41.918 45.422 53.293 63.322 77.206 92.556 106.365 121.032 139.900 160.798 179.181 16 41.540 43.680 51.487 60.579 73.638 89.308 103.277 117.144 134.910 156.262 174.976 17 41.095 42.314 49.655 58.027 70.242 85.915 100.111 113.457 130.182 151.538 170.644 18 40.48o 41.483 47.702 55.703 67.103 82.296 96.774 110.009 125.854 146.544 166.112 19 39.728 41.007 45.733 53.561 64.174 78.561 93.328 306.728 121.825 141.411 161.439 15 -19 204.761 213.906 247.869 291.191 352.363 428.636 490.854 568.371 652.671 756.554 852.351 20 39.017 40.527 43.898 51.544 61.311 74.905 89.952 103.506 117.831 136.348 156.796 21 38.361 40.090 42.116 49.692 58.527 71.295 86.652 100.361 113.889 131.307 152.202 22 37.405 39.595 40.715 47.828 55.947 67.872 83.224 97.154 110.163 126.542 1147.1439 23 36.005 38.948 39.857 45.868 53.614 64.729 79.600 93.804 106.698 122.201 142.433 24 34.325 38.177 39.360 43.907 51.478 61.814 75.880 90.361 103.416 118.176 137.307 20 -24 185.113 197.338 205.947 238.839 280.877 340.614 415.308 485.186 551.997 634.573 736.178 25-29 1148.1i31 177.242 188.881 196.906 228.591 269.342 327.534 400.697 468.775 533.943 614.319 3') -34 120.422 141.144 168.865 179.883 187.237 217.755 257.159 313.899 385.129 451.500 514.612 35-39 1u9.650 113.627 133.410 160.009 170.328 177.054 206.348 244.485 299.393 366.760 433.02d 1-344 91.1o46 102.657 106.282 125.079 150.458 160.129 166.192 194.323 230.831 283.9114 351.037 hs _L9 72.224 84.264 95.o08 98.374 116.117 140.299 149.328 154.856 181.526 216.473 267.433 50-54 58.367 65.585 76.781 86.878 89.823 106.514 129.408 137.875 142.649 167.880 200.913 55-59 42.589 51.679 58.312 68.672 78.028 80.718 96.282 117.841 125.549 129.723 153.'07 t -64 32.510 36.510 434.617 50.610 59.984 68.552 71.024 85.390 105.237 112.264 115.747 65 -69 22.545 26.552 30.017 37.060 42.343 50.664 58.351 60.677 73.510 91.396 97.600 70 -74 16.3514 17.144 20.416 23.332 29.186 33.716 40.831 47.517 49.612 60.680 76.oBo 75-79 10.070 11.225 11.894 14.390 16.670 21.215 24.845 30.527 35.892 37.700 46.537 Bo+ 7.736 8.723 9.820 10.732 12.495 14.615 18.138 21j965 27.036 32.650 36.598 1/ One third reduction in fertility. Source: CELADE and MINPLAN.  Page 2 of 2 Table 1.1: EL SALVADOR: DEMOGRAPHIC INDICATORS, 1950-2000 Medium Variant POPULATION (IN THOUSANDS) DEPENDENCY CHILD-WOMEN SEX MEDIAN RATIO RATIO RATIO AGE YEAP TOTAL AGED 15-64 WOMEN 15-49 (PER 1 000) (PER WOMAN) (PER 100 FEMALES) (YEARS) 1950 1930.641 1065.218 465.073 812.4 0.705 100.6 18. 1v > 2202.402 1183.953 514.549 860.2 0.765 100.6 18.42 1960 2542.148 1326.042 572.830 917.1 0.829 100.5 17.56 1965 2942.382 1496.41s0 644.551 966.3 0.853 100.3 16.90 1970 3397.642 1713.807 742.479 982.5 0.836 100.2 16.64 1975 3924.095 1.989.614 866.563 972.3 0.818 100.1 16.72 1980 4539.517 2318.4437 1010.768 958.0 0.807 100.1 16.91 1905 5235.673 2702.922 1181.025 937.0 0.776 100.0 17.16 1990 5997.034 3143.757 1385.495 907.6 0.726 100.0 17.54 1995 6827.106 3655.615 1623. 360 867.6 0.677 99.9 18.07 2000 7730.402 4238.824 1885.659 823.7 o.638 99.8 18.70 AVERAGE ANNUAL RATES IMPLIED VITAL RATES ESTIMATED NUMBERS OF NET MIGRATION NATE OF GROWTH (PERCENT) (PER 1,000) (IN THOUSANDS) (PER 1.000) NATURAL CRUDE CRUDE BIRTHS DEATHS EXPONENTIAL COMPOUND INCREASE BIRTH DEATH 1950-55 2.634 2.669 29.40 49.12 19.72 507.560 203.799 3.10 195a-60 2.869 2.911 32.02 49.71 17.70 589.676 209.929 3.37 1960-65 2.924 2.967 32.84 48.01 15.17 658.293 208.059 3.65 1965-70 2.877 2.919 32.63 45.49 12.86 7I21.048 203.789 3.91 1970-75 2.881 2.923 32.86 43.73 10.88 800.522 199.069 4.10 o 1975-80 2.914 2.957 33.34 42.58 9.24 900.990 195.568 14.25 1980-85 2.853 2.895 32.78 40.62 7.83 992.556 191.400 4.30 1985-90 2.715 2.753 31.56 38.29 6.73 1075.239 188.878 4.45 1990-95 2.593 2.627 30.41 36.26 5.85 1162.625 187.552 4.52 1995-2000 2.485 2.516 29.49 34.70 5.21 1262.763 189.467 4.67 REPRODUCTION RATES TOTAL GENERAL EXPECTATION OF LIFE AT BIRTH FERTILITY FERTILITY (YEARS) RATE RATE GROSS NET (PER 1,000 WOMEN) MALES FEMALES TOTAL 1950-55 3.150 2.160 6457.5 207.2 45.60 47.80 46.67 1955-60 3.320 2.397 6806.0 216.9 48.40 50.90 49.62 1960-65 3.-140 2.539 6847.0 216.3 51.50 54.30 52.87 1965-70 3.230 2.569 6621.5 207.9 54.50 57.50 55.96 1970-75 3.090 2.562 6334.5 199.0 57.50 60.65 59.04 1975-60 2.930 2.520 6oo6.5 192.0 60.35 63.65 61.96 1980-85 2.710' 2.403 5555.5 181.1 62.90 66.35 64.58 1955-90 2.490 2.262 5104.5 167.6 65.00 68.65. 66.7t8 1990-95 2. 310 2.141 4735.5 154.6 66.80 70.70 68.70 1995-2000 2.1 70 2.o44 * 44118.5 143.9 68.20 72.40 70.25 Source: CELADE and M1NPLAN.  Page 1 of 2 Table 2.1 EL SALVADOR: GROSS DOMESTIC PRODUCT BY EXPENDITURE (MILLIONS OF CURRENT COLONES) - - - _ _ _ _ _ _ _ _ _ _ _ _ _ - -_ - - - _ -_ - -_ --_ _ _ _ _ _ _ _ _ - -_ _ _ _ _ _ _ _- - _ _ _ _ _ _ -_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - - - - - - - - - - - - - ITEM 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 CONSUMPTION 1.264.9 1,250.8 1,400.2 1,509.0 1,615.6 1,738.7 1,875.9 1,963-7 2,074.6 2,140.8 2,232.6 PRIVATE 1,121.8 1,101.8 1.238.9 1,349.7 1,453.1 1,566.1 1.692.1 1.761.0 1,858.8 1,892.0 1,956.9 GENERAL GOV'r 143.1 149.0 161.3 159.3 162.5 172.6 183.8 202.7 215.8 248.8 275.7 GROSS DOMESTIC INVESTMENT 219.4 191.8 194.4 214.6 317 3 294.7 341.8 318.8 255.5 303.2 330.8 FIXED 204.4 167.8 173.1 202.6 262.8 283.3 306.1 315.7 248.1 273.6 298.3 PRIVATE 163.8 122 3 134.8 158.6 214.3 215.6 226.7 254.9 189.3 208.6 235.7 PUBLIC 40.6 45.5 38.3 44.0 48.5 67.7 79.4 60.8 58.8 65.0 62.6 CHANGE IN STOCKS 15.0 24.0 21.3 12.0 54.5 11.4 35.7 3.1 7.3 29.6 32.5 GROSS DOMESTIC EXPENDITURE 1,484.3 1,442.6 1,594.6 1,723.6 1.932.9 2,033.4 2,217.7 2,282.5 2,330.1 2,444.0 2,563.4 _ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - RESOURCE BALANCE -64.3 1.5 8.0 -30.0 -66.2 -41.2 -108.0 -66.8 -38.2 -62.2 8.0 EXPORT OF GOODS & NFS 289.5 324.0 374.5 410.0 476.5 535.8 523.5 571.5 586.8 559.3 642.5 IMPORT OF GOODS & NFS 353.8 322.5 366.5 440.0 542.8 577.0 631.5 638.3 625.0 621.5 634.5 GDP AT MARKET PRICES 1,420.0 1,444.1 1,602.6 1,693.6 1,866.7 1,992.2 2,109.7 2,215.7 2,291.9 2,381.8 2,571.4 ===