Tunisia - Fourth Agricultural Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6622-TUN STAFF APPRAISAL REPORT TUNISIA FOURTH AGRICULTURAL CREDIT PROJECT June 1, 1987 Europe, Middle East and North Africa Regional Office Agriculture II Division This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Tunisian Dinar (D) D 1.00 = US$ 1.15 US$ 1.00 = D 0.87 (as of December, 1986) FISCAL YEAR January 1 to December 31 WEIGH'S AND MEASURES ha = hectare (2.47 acres) mt = metric ton (2,204 pounds) GLOSSARY OF ABBREVIAI'IONS APB Professional Association of Banks of Tunisia (Association Professionnelle des Banques de Tunisie) APIA Agricultural Investment Promotion Agency (Agence de Promotion des Investissements Agricoles) ASAL Agricultural Sector Adjustment Loan (Pret Sectcriel d'Ajustement Agricole) BCT Central Bank of Tunisia (Banque Centrale de Tunisie) BDET Economic Development Bank of Tunisia (Banque de Developpement Economique de Tunisie) BNDA National Bank for Agricultural Development (Banque Nationale de D6veloppement Agricole) BNT National Bank of Tunisia (Banque Nationale de Tunisie) CLCM Local Mutual Credit Fund (Caisse Locale de Credit Mutuel) CNC National Credit Council (Conseil National du Cr6dit) CRDA Regional Agricultural Development Commission (Commissariat R6gional de Developpement Agricole) CSA Service Cooperative (Coop6rative de Service Agricole) EEC/EIB European Economic Community/European Investment Bank (Communaute Economique Europ6enne/Banque Europ6enne d'investissement) FOSDA Special Fund for Agricultural Development (Fonds Special de Developpement Agricole) FOSEP Special Fund for Fishery (Fonds Special d'Encouragement a la Peche) FNG National Guarantee Fund (Fonds National de Garantie) FPC Foreign Exchange Rate Risks Fund (Fonds de Per6quation des Changes) IFAD International Fund for Agricultural Development (Fonds Ir.ternational pour le D6veloppement Agricole) ITPAL Industrial and Trade Policy Adjustment Loan (Pret d'Ajustement des Politiques Industrielles et du Commerce) MOAP Ministry of Agricultural Production and Food Processing (Ministere de la Production Agricole et Agro-alimentaire) MOA Ministry of Agriculture (Ministere de l'Agriculture) MOPF Ministry of Planning and Finance (Ministere du Plan et des Finances) OC National Cereal Board (Office des C6reales) OCT Trade Board of Tunisia (Office du Commerce de Tunisie) OMV Irrigation Development Agency (Office de Mise en Valeur) ONH National Olive Oil Board (Office National de l'Huile) SCMA Agricultural Mutual Guarantee Society (Societe de Caution Mutuelle Agricole) UCPA Agricultural Production Cooperative (Unite Coop6rative de Production Agricole) UNA National Union of Farmers (Union Nationale des Agriculteurs) USAID United States Agency for International Development (Agence des Etats Unis pour le D6veloppement International)  FOR OMCUL USE ONLY STAFF APPRAISAL REPORT REPUBLIC OF TUNISIA FOURTH AGRICULTURAL CREDIT PROJECT Loan and Project Summary Borrower: National Bank of Tunisia (BNT) Guarantor: Republic of Tunisia Amount: US$30 million equivalent Terms: 17 years, including four years of grace, at the standard variable interest rate. Project Description: The proposed project would finance credit to agriculture in support of the Government's medium-term adjustment program (1987-91) formulated in connection with the recent Agricultural Sector Adjustment Loan (ASAL) (Loan 2754-TUN), and promote development of a financially sound rural credit system. The project would (i) through interest rate reforms, encourage BNT and the banking sector to increase their role in mobilizing resources and in financing agriculture ; (ii) restructure the complex institutional system in which agricultural credit is extended; (iii) improve the financial viability of agricultural credit operations and harmonize credit terms and conditions; (iv) assist Government in its efforts to develop private investment in the sector; and (v) promoto savings schemes tied to eligibility for credit. The project would consequently set the stage to bring private banks into agricultural lending over the next three to five years. Specifically, the project would provide funds for (a) medium- and long-term credit to private farmers and investors in the agricultural sector to finance a wide range of invei,tments including irrigation, forage, tree crop and livestock development, storage facilities, fishing gear and spare parts, frnit and date processing plants, and farm equipment; (b) improving BNT's management information and computer systems, and training of project-related staff. The project would also stiengthen the agricultural credit policy coordination between the various Government authorities involved. Since the project has been designed to be fully consistent with the Government's medium-term program already mutually agreed by the Bank and the Government under the ASAL, the risk of slower pace than expected in the execution of the proposed improvements is considered reduced. IBRD funds are not expected to be at risk, since BNT's commercial and overall operating resilts are positive, and BNT will become more profitable as agricultural interest rates move towards market rates and cover the transaction costs of agriculture financing. This document has a restricted distribution and may be used by recipients only in the performance of their offlcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Cost Local Foreign Total US$ million BNT credit operations 27.5 27.5 55.0 (Medium- and long-term) Institutional Development 1.5 2.5 4.0 (Software, equipment, training, consultants) Total Project Cost 29.0 /a 30.0 59.0 /a Financi Plan IBRD 30.0 30.0 BNT 12.7 - 12.7 Government 4.3 343 Sub-borrowers 12.0 - 12.0 TOTAL 29.0 30.0 59.0 Estimated Disbursements: Bank FY 1988 1989 1990 1991 1992 - - - ~(US llion) Annual 5.0 7.0 8.0 7.0 3.0 Cumulative 5.0 12.0 20.0 27.0 30.0 Staff AmraIsA! Rerpo No. 6622-TUN Date: June 1, 1987 Map No.: IBRD 14921R /a Includes US$9.4 million of taxes and duties. aSlEt  STAFF APPRAISAL REPORT TUNE;IA FOURTH AGRICULTURAL CREDIT PROJECT Table of Contents Page No. L ENlnODUCTrION ........... ,............. 1 IL THE AGRICULTURAL SECTOR .......... ...........1 A. Economic Outlook ... 1 B. Place of Agriculture in the Economy .............. 2 C. Agricultural Parformance and Government Strategy . 3 D. Bank-Financed Agricultural Projects .............. 4 mI AGRICULTURAL CREDIT SYSTEMS AND DISTITUTIONS 5 A. Financial Sector Background 5 B. Trends in Agricultural Credit ........... ........f 6 C. Agricultural Credit Institutions ................. 7 - Central Bank Refinancing Facilities ............ 7 - National Bank of Tunisia (BNT) ................ 9 - Other Commercial Banks 9 - Cooperative Credit Institutions - National Bank for Agricultural Development ..... 10 a. Problems in Agricultural Credit .................. 10 E. Credit Reforms under the Medium-Term Adjustment Program (1987-91) 0 a *e**a ......... ...........13 IY. TE NATIONAL BANK OF TUNISJA}SU *O*OOO0*....... 14 A. Organization and Staffing ........................ 14 B. Lending Policies and Procedures 16 C. Agricultural Lending Operations 16 D. Financial Situation and Performance ............. 18 E. BNT's Development Objectives and Strategy ........ 22 F. BNT's Projected Agricultural Lending Program and Financing Requirements .............. 22 V. IHE PROEC ..... ......... o4oo*#*o9 23 A. Project Objectives and Rationale for Bank Involvement ........ ooo*........................ 23 B. Summary Description of Project Components ........ 24 C. Detailed Features ... .....* ................... . 24 D. Project Cost and Financing ....................... 27 E. Procurement ............ . .**. 30 F. Disbursements 31 This report is based on the findings of an appraisal mission which visited Tunisia in November 1986 composed of Mr. B. Dussert (mission leader), Ms. L. Effron and Ms. C. Ng (Bank), and Messrs. C. Bartoli, J.J. Deschamps and M. Frioui (Consultants).  Table of Contents (Cont'd) Page No. VE PROJECTr DfPLEMdENTATION ............................................... 33 A. Agricultural Credit Policy Reforms .c ............. 33 B. Credit Operations ....... ..... .......... .. . 36 C. Institutional Development ........................ 39 D. Monitoriuag and Evaluation ........... ............. 39 E. Accounts and Audit ............................... 40 VIl. BEMEFTS, JUSTIFICATION AND RISKS ...................... 41 A. Bent-fits and Justification ....................... 41 B. Risks ................................... 45 Vm. AGREEMENTS REACHED AND RECOM MNDATIONSD................ 46 Supporting Tables 1. Resource Structure and Gruwth of Banking System (1980-85) 2. Assets and Liabilities of Commercial Banks (1980-85) 3. Outstanding Credit to Agriculture 1980-85 4. Banking System Lending Commitments in Agriculture (1983-85) 5. Structure of Interest Rates 6. BNT Recovery Rates by Source of Funds and Risk Assumed 7. BNT Cost of Resources, and Return on Resources Used 8. BNT Agricultural Credit Operations - Financial Conditior 1980-85 9. Investments in Agriculture (1977-86) 10. BNT Schematic Agricultural Lending by Subsector (1981-90) 11. Project Cost Estimates 12. Schedule of Disbursements of Bank Loan 13. Farmers in Tunisia 14. Agricultural Credit Monitoring Indicators 15. Production Levels and Growth Rates of Key Agricultural Products (1972-86) Annexes 1. Performance under Previous Agricultural Credit Projects 2. Local Mutual Credit Funds (CLCMs) and Mutual Guarantee Agricultural Societies (SCMAs) 3. Policy and Institutional Reforms Matrix 4. Indicative Project Lending Program 5. BNT Financial Position (1981-90) 6. Sub-sectoral Investment Strategies in Agriculture (1987-91) 7. Production and Service Cooperatives (UCPAs and CSAs) 8. Guidelines for Impltmentation of Policy Reforms 9. Lending Terms and Conditions 10. Selected Documents and Data Available in the Project File Charts 1. Implementation Schedule 2. Flow of Project Funds 3. Organization Chart Up Branch Network of National Bank of Tunisia (November 1986) (IBRD 14921R)  STAFF APPRAISAL REPORT TUNISIA FOURTH AGRICULTURAL CREDIT PROJECT L INTRODUCTION 1.01 Following the formulation of a medium-term adjustment program (1987-91) for the agricultural sector, which was supported by an Agricultural Sector Adjustment Loan financed by the Bank (Loat' 2754-TUN), the Government of Tunisia and the National Bank of Tunisia (BNT) have requested Bank assistance to finance a Fourth Agricultural Credit Project to promote private investment in agriculture. The project, besides investment financing as in previous agricultural credit operations, would have the additional objective of improving the agricultural credit system of Tunisia. The project would provide for the coordination of agricultural credit policy between the Government, the Central Bank, and the banking sector; the modernization on a decentralized basis of BNT's organizational structure, planning process, management control, accounting and loan monitoring systems; better farmer coverage; and increased financial viability of agricultural credit operations. 1.02 The Project was identified jointly by BNT and the Bank in 1985. It was prepared in 1986 by BNT and Government with the assistance of consultants and the support of Bank missions supervising the Third Agricultural Credit Project (Loan 1885-TUN) and appraising the First Agricultural Sector Adjustment Loan (Loan 2754-TUN). It was appraised in November 1986 by a mission composed of Mr. B. Dussert, Ms. L. Effron and Ms. C. Ng (Bank) and Messrs. C. Bartoli, J.J. Deschamps and M. Frioui (Consultants). iH. THE AGRICULTURAL SECTOR A. Economic Outlook 2.01 Past Performance. During the 1970's, the Tunisian economy did well. Overall, the value of production grew at 4.4S p.a. in real terms compared to 3S p.a. for middle income countries as a group. Economic performance benefitted from a substantial improvement in the terms of trade due to a rapid increase in the price of oil, which allowed both consumption and domestic savings to increase and investment to remain high (over 30% of GDP). The inflation rate remained modest, averaging 6.1S over the decade. The current account deficit in the balance of payments, which averaged 5 to 6% of GDP was easily financed. However, the pace of growth slowed down near the end of the period and in the early 1980's, mostly because a series of droughts greatly reduced the contribution of agriculture to the economy. The only major problem during the decade was a high rate of unemployment.  - 2 - 2.02 Recent Economic Trends. Economic performance deteriorated during the Sixth Development Plan (1982-86) fo: a variety of reasons. These include a stagnation in oil production, the 1982/83 and 1985/86 droughts, which offset the 35-year peak of grain preduction in 1984/85; technical problems in the phosphate and cement industries; declines in tourism and exports of manufactured goods due to the recession in Europe; high domestic prices and a sizeable appreciation of the Tunisian Dinar vis-a-vis the currencies of most competitor countries. More recently, economic performance was adversely affected by the decline in oil prices, lower tourism revenues due to political uncertainties in the Mediterranean region and lower workers' remittances. 2.03 Recent Policy Measutes. Faced with this deterioration of the economic situation, the Goveenment started in 1983 to implement a series of folicy measures aimed at stabilizing the economy: (a) beginning in 1983, wage t,nd salary increases were frozen or held to minimal increases; (b) in July 1985, a more flexible exchange rate policy was introduced which resulted by mid-1986 in a gradual depreciation of the dinar of over 181 vis-&-vis a basket of seven currencies; and the dinar was formally devalued by 91 in August 1986; (c) since 1985, certain interest rates, including those applied to agricultural credit, have been raised by 0.75 to 2 percentage points; (d) in 1986, measures were taken to reduce the budget deficit to about 3.2% of GDP (from 3.7% of GDP in 1985) by cutting recurrent expenditures, new non-priority investments, and subsidies to households and public enterprises; (e) agricultural producer prices were gradually decontrolled, so that by end-1985 nearly 751 of agricultural production was sold freely in the domestic market and/or abroad; (f) investment cantrols were limited somewhat to focus more sharply on new investment priorities; under the new industrial investment code to be promulgated shortly, controls will be removed; a-d (g) measures were taken to promote exports. These policy measures, taken together with the imposition of drastic foreign exchange controls and import restrictions, brought the current account deficit in the balance of payments from 111 of GDP in 1984 down to about 7% in 1985, despite reduced export and tourism revenues. In September 1986, the Government requested from the International Monetary Fund (IMF) an 18-month stand-by arrangement in an amount equivalent to SDR 103.65 million, which was approved in November 1986 along with a purchase of SDR 114.71 million under the Compensatory Financing of Export Fluctuations scheme. The IMF assistance, together with a series of Bank policy adjustment loans, is intended to support a gradual adjustment and liberalization of the Tunisian economy under the Seventh Plan (1987-91) that is needed to encourage stability and long-term growth (para. 2.07). B. Place of Ag4iculture in the Economv 2.04 Tunisia is at a stage of its development where agriculture accounts for about 131 of GDP, 351 of employment and 81 of export earnings, which represent sharp drops from 1960 levels of 241 of GDP, 56% of employment , and 601 of export earnings. Despite relatively good performance by the sector (para. 2.05), Tunisia is experiencing a widening "food gap" which has placed an increasing strain on the balance of payments. Agricultural imports,.I' consisting mainly of cereals (451), soybean oil (121), meat (10%), milk (91), and sugar (61), increased from D81 million in 1976 to D363 million in 1984 (down to D270 million in 1985). Agricultural exports,1' consisting mainly of olive oil (48%), dates (141), citrus (51) and wine (41), grew more slowly (from D65 million in 1976 to D140 million in 1984, and down to D132 million in 1985). As a result, the agricultural sector has accounted for a rising share of the overall trade deficit (from 51 in 1976 to 20% in 1984 and 1985). 1/ expressed in current prices.  C. Agticultural Performnwe and Government Strategy 2.05 After a period of rapid growth in the late 1960s and the first half of the 1970s, when agricultural GDP grew at 8.81 p.a. (1967-76), growth slowed to on average 3.32 in the last 10 years (1977-86). This slower growth rate suggests a decline in efficiency in view of the growth of 62 p.a. in gross fixed investment in agriculture during the decade 1975 to 1985, a rate about twice as high as for the economy as a whole. During the Sixth Plan (1982-86), agriculture represented 162 of total investment, somewhat more than its contribution to GDP. Investments by the public sector were concentrated in irrigation (422 compared to 222 in the early 1970s). As a result, most of Tunisia's irrigation potential is now harnessed, but investments and activities needed to ensure optimal utilization are lagging behind. The private sector accounted for only 31% of investment in agriculture, significantly less than the Plan projections of 50X. The Seventh Plan (1987-91), recognizing the present budgetary constraints, again provides for the private sector's share of investment in agriculture to rise to 50S. This shift requires not only a prioritization and adjustment of public expenditures to focus on improved use of existing productive capacity, but also a selective reduction in the public sector role to create the room for private sector participation, and a shift in sector policies to provide greater incentives to private investments. 2.06 Agricultural Sector Adjustment Program (1987-91). The need for medium-term adjustments in the sector to address existing constraints has led the Government, with Bank assistance, to develop a Medium-Term Agricultural Sector Adjustment Program to support the implementation of the Seventh Plan (1987-91). The overall objective of the sector adjustment program is to maintain the growth rate in agriculture in order to reduce the sector trade deficit while staying within the overall macroeconomic constraints on public spending. To achieve this objective, the program provides for short- and medium-term actions to: (a) improve the prices and incentives framework; (b) re-orient the public investment program in agriculture towards low- cost, high-priority projects; (c) strengthen agricultural support services and transfer some of them to the private sector; (d) improve the management of land, forests and fisheries; and (e) build up institutional capacity for sector performance monitoring and policy analysis. 2.07 The Agricultural Adjustment Program is complementary to the Government's macroeconomic restructuring program which focuses on measures to limit growth of domestic demand (wage and salary, budget and monetary policies), to stimulate growth of non-traditional exports (exchange rate policies, export promotion), and to improve the allocation and use of scarce economic resources (interest rate policies, gradual liberalization of domestic prices, investments and imports). The macro-program is also expected to increase new employment more rapidly and reduce underemployment. The AXricultural Sector Adjustment Loan which supports the Program (Loan 2754-TUN)  - 4 - is being used to finance general imports and agricultural inputs needed to stimulate agricultural production. The inputs include fertilizer and raw materials for its manufacture, insecticides and herbicides, animal feed, diesel fuel, spare parts, tractors and pumps, veterinary supplies, raw materials for the manufacture of irrigation pipes and fisheries inputs. The reforms agreed tuader the Loan are expected to crep'e a more favorable environment for overall economic and sectoral growth in a time of resource constraints. D. Bank-Financed Agricultural Projects 2.08 Bank group lending for agriculture in Tunisia started in 1967, and to date 17 projects (eight ongoing) and one sector loan (ASAL-I) have been approved for a total of US$557.9 million of Bank/IDA funds. Performance under these projects has been mixed reflecting the institutional constraints in the sector. The First Fisheries Project (Cr. 270-TUN) was completed at the end of 1979, and the Project Performance Audit Report (PPAR) identified cost overruns and low loan recoveries for boats as major problems. These problems were addressed under the Second Fisheries Project (Ln. 1746-TUN), but recoveries remain a problem. The First and Second Agricultural Credit Pro1ects (Ln./Cr. 779/263-TUN and Ln. 1340-TUN) financed lending by BNT for on-farm development. While the projects achieved good rates of return, the continuing problem of higher interest rates on Bank funds than on Government-supplied credit and the lack of profitability of agricultural credit operations, as highlighted in the PPARs for these projects, caused disbursements to be slower than anticipated. The Third Agricultural Credi. Project (Ln. 1885-TUN) is addressing priority credit problenas including the level of interest rates and recoveries. Action has been taken to decentralize BNT's operations, raise interest rates, and encourage improved recoveries.' The physical implementation of the poverty-oriented Northwest Rural Development Project (Ln. 1997-TUN) is proceeding satisfactorily. The physical implementation of the Grain Distribution and Storage Project (Ln. 2052-TUN) is also progressing well after initial delays, but the envisaged introduction of institutional improvements has been very slow. Under the fechnical Assistance Project (Ln. 2197-TUN), strategies have been or are being developed for several sub-sectors including farm input distribution, farm mechanization, produce marketing, research and extension, and improved operation and maintenance of existing irrigation infrastructure. These strategies have contributed to the design of the ASAL-I (Loan 2754-TUN) described above in paragraphs 2.06 and 2.07. Implementation of the irrigation projects - First Irrigation Rehabilitation Project (Ln. 1068-TUN), Sidi Salem ProJect (Ln. 1431-TUN), Southern Irrigation Project (Ln. 1796-TUN), Medjerda/Nebhana Irrigation Project (Ln. 2157-TUN), Central Tunisia Irrigation Project (Ln. 2234-TUN), and the recently started Gabes Irrigation ProJect (Ln. 2605-TUN) - has generally been satisfactory and on schedule. The PPAR for the First Irrigation Rehabilitation Project found that the increased reliability of water supply brought about by rehabilitation works had a major impact on farm production and incomes in the project area by encouraging farmers to take risks in planting higher value crops. The Northwest Agricultural Production Project (Ln. 2502-TUN) will help alleviate the constraints to increased production of cereals and livestock projects in Northwest Tunisia, inter alia, by introducing an extension system based on the Training and Visit (T&V) system. Partly to reduce future needs for rehabilitation, the Irrigation Management Improvement Project (Ln. 2573-TUN) 1/ A more detailed description of the performance under the First, Second and Third Agricultural Credit Projects is in Annex 1. (31 3 X )  is supporting nationwide improvements in the operation and maintenance of existing irrigation systems and encouraging policy and institutional reforms to increase the efficiency and self-financing of the irrigation development agencies (OMVs). The First Agricultural Sector Adjustment Loan (Loan 2754-TUN) has made a good start, and action plans were prepared tc meet the conditions of second tranche release and fulfill the obligations under the sector policy letter. m. AGRICULTURAL CREDIT SYSTEMS AND INSfITUTIONS A. Financial Sector BackMund 3.01 Tunisia has a well-developed system of financial institutions comprising, in addition to the Central Bank, ten commercial (deposit) banks, nine development (investment) banks, sixteen local mutual credit funds (CLCMs), two specialized savings institutions, one leasing company, eight portfolio-management agencies, seven off-shore banks, a network of postal checking offices, six representative offices of foreign banks, and the stock exchange. Most banks are private or semi-private institutions. The Government owns one major commercial bank, two investment banks and the savings institutions; it also holds about 30% of the shares of two other commercial banks and one investment bank. There are constraints, however, on the autonomy of these institutions and on the competition among them.1' First, the number of financial institutions operating in the small Tunisia market is quite large. Experience in Tunisia shows that specialized institutions are too vulnerable to the difficulties of their specific sectors and consequently often seek to diversify their operations. Second, the Tunisian banks are used to operate within a tight regulatory environment,-' set and controlled by the Central Bank of Tunisia (BCT) through detailed rules and practices that define and guide banking activities: liquidity and other ratio requirements, limited access to borrowings on the money market, preferentiel access to rediscounting facilities at BCT, loan pre-approval, interest rate ceilings,-" and provision for bad debts. At the end of 1985, the commercial banks, which engage primarily in short-term trade financing and working capital lending, had about 375 branches throughout the country and employed 10,000 persons. Development banks employ about 700. 3.02 Resources of the Banking Institutions. The commercial (deposit) banks are in a better situation than the development (investment) banks in the raising and average cost of resources. The resource structure (1980-1985) of commercial and development banks is given in Tables 1 and 2. With more than D 5 billion (about US$6.5 billion) at end 1985, commercial banks have been providing three-quarters of the resources of the banking system. Total resources grew by an average 25% p.a. in current dinars during 1980-1984, the growth being higher in development banks (33%) than in commercial banks (23%). In 1985, growth slowed down to 20% and 15% respectively despite increased resource needs. About 64% of the total resources of the deposit banks comes from demand, time and savings account deposits. Also, the deposit banks, enjoy BCT rediscot.nting and advance facilities up to a limit of 18% of their aggregate deposits, and since September 1986, this 18% limit can be 1/ The World Bank, "Tunisia, Financial Sector Report", No. 5263-TUN, December 16, 1985. 2/ The recent move towa i liberalization of banking activities (para. 3.03) is also described in the ITPAL report No. P-4449-TUN, January 28, 1987. 3/ For all sectors of the economy till end 1986 (para. 3.03). T31 13S)  exceeded to refinance medium-term credits to small-scale enterprises and priority activities (mainly agriculture and exports). In addition, deposit banks have access - as do the development banks - to special resources of the Government, or resources raised abroad by the Government, to finance certain types of selective credits, in particular agricultural loans (para. 4.12). The special resources held by deposit banks were equal at the end of 1985 to 102 of their total assets, down from 12S in 1980. Equity funds are financing only about 5% of deposit banks' total a&sets. The investment banks are not allowed to accept deposits (except, within very narrow limits, for accounts used by their clients) and do not have access to BCT rediscounting (except for limited rediscounting facilities in favor of BDET). They finance their operations mainly from (a) equity funds; (b) the issue of obligations; and (c) special resources furnished or raised abroad by the Government. Because the local financial market is small, it offers the development banks only very limited possibilities to raise resources. 3.03 Financial Sector Reforms. Following the World Bank review of the financial sector in Tunisia in 1984/85, a series of steps were taken by the Goveaiment to start a gradual liberalization of the centrally managed financial system. Recommendations included (a) strengthening policies and institutions to increase domestic resource mobilization and improve investment allocatioa.: (b) introducing a system of credit which would promote greater discipline on the expansion of credit by the banking system; and (c) adopting an active interest rate policy which would form an integral part of the overall credit policy. More specifically, and as part of its recent monetary and credit policy aimed at decontrolling interest rates and simplifying their structure, Government has, beginning January 1, 1987, classified interest rates into two principal categories: (i) preferential rates for priority sectors (export activities, agriculture, small-scale enterprises, and energy-saving projects), which will continue to be administered by BCT; and (ii) rates freely determined by the market (subject to a ceiling to prevent usurious rates, varying with the monetary situation). For maximum impact, greater financial liberalization will go hand in hand with greater relaxation of price, investment and trade policies (paras. 2.03 and 2.06). B. Trends in Agricultural Credit 3.04 The Government of Tunisia has long been engaged in sizeable agricultural credit programs to support capital investment in agriculture. The diversified financial efforts involved - institutional credit provided by BNT, special subsidized funds and agricultural projects or integrated projects with bupervised credit components - have been substantial but have so far failed to add up to a system which provides adequately for the needs of the sector. 3.05 The short- medium- and long-term credit made available to the agriculture sector over the period 1980-1985 is shown in Table 3. Agricultural credit outstanding end 1985 amounted t" about D 429 million (US$558 million) or 11.4b of total credit outstanding in the economy. From 1980 to 1985, credit to agriculture increased by 24.3S a year, a higher rate than was observed in other sectors. The proportion of medium- and long-term credit in total agricultural credit remained virtually constant at around 502. (31131)  - 7 - 3.06 Under the 1982 Agricultural Investment Code, private investments in agriculture currently benefit from a package of financial and tax incentivest'. Typically, farmers finance directly 10% to 302 of the cost of their investments, with about 702 to 90% coming from the credit system. Subsidies under the Code are mainly in the form of tax (duty) rebates equivalent to 10-202 of investment. Private investment accounts for about one third of total investment in agriculture, a figure unchanged from the Fifth Plan (1977-81). Under the sixth Plan (1982-86) the private sector accounted for over 90Q of the investments made in farm machinery, greenhouses and fruit trees, and lesser shares in livestock (561), fisheries (302), irrigation (122) and forestry (8S). Agricultural credit is expected to have an even more important role in private investment financing under the adjustment program of the Seventh Plan (1987-1991). C. Agri ultural Credit Institutions 3.07 The institutional system by which agricultural credit is made available is complex. The main features are: (a) BCT instruments of control and refinancing; (b) the predominance of BNT in financing agricultural credit and managing special subsidized Government credit funds (including FOSDA); and (C) the specific (and limited) role of other commercial banks and other agencies (CLCMe, SCMAS and BNDA). Table 4 gives details of agricultural lending carried out by the banking system, and the uses and sources of FOSDA funds. The constraints in the agricultural credit system are to be found primarily in policy, not in BNT's institutional shortcomings (para. 3.14). Central Bank Instruments and Refinancing Facilities 3.08 BCT's instruments of control include rediscounting, money market operations, reserve and ratio requirements, setting preferential interest rates for priority sectors (para. 3.03), and credit distribution. Controls related to the financing of agriculture include# (a) Interest Rates. BCT controls the rates commercial banks are permitted to charge agricultural customers, and these rates are below market rates. Although most agricultural rates charged to farmers are now positive in real terms following an increase in 1985 (para. 2.03), they do not yet cover the full financial and operating costs and risks of the lenders. In response to this problem, the Government agreed under the ASAL (para. 3.16) to implement a five-year action program to establish more appropriate agricultural interest rates and spreads; (b) Financing Through Rediscount. Access to rediscounting is provided under several headings. The seasonal financing quotas ("cotes saisonnieres") affect the financing of short term credit. This lending, which carries 6.752 interest, may be rediscounted with BCT at 4.52"' for up to 802 of the disbursements made to farmers by the commercial banks. There are also special facilities for rediscounting credit granted to Mutual Guarantee Agricultural S-cieties (SCMAs) at 4.75% of which 22 go to the National Guarantee 1/ Law 82/67 of August 6, 1982, available in the Project File 2/ Advances on cereals, olive oil and wine are rediscounted at 5.5X. T2 I I2)  - 8 - Fund (see (d) below). Medium-torm agricultural credit (less than 7 years) granted by the commercial banks from their own resources carries interest at 71 and can be rediscounted at 5.52. In addition, deposit banks can rediscount (at 10.5X) up to 70% of long-term credit (7-15 years) made available to finance investment in buildings for use in stockraising, establishment of tree-crop plantations, creation of water-supply points and irrigated areas, and ac:uisition of fishing equipment and tackle. This credit is made available to borrowers, with BCT pre-authorization, at 121 and may amount to a maximum of 80l of the cost of a project. All interest and rediscounting rates mentioned above are those applicable since 1985. Previously, these rates were lower (Table 5). Extraordinary rediscount quotas ("hors cote") are sometimes given for special purposes. From 1987, rediscounts at fixed rates will be available only to finance priority sectors as noted in para. 3.03, and thia includes agriculture; (c) Activity ratio requirement."' Since September 1986, commercial banks have been required to comply with a specific minimum medium-term credits/deposits ratio for the financing of priority activities (agriculture, export, small-scale enterprises and energy-saving activities). Each commercial bank must have at least 71 of its core deposits loaned out to these priority activities in September 1986, 8% in March 1987; SI1 in September 1987; and 101 in March 1988. If the ratio is not met, the unused portion of the deposits is frozen in a BCT account and bears no interest; and (d) The National Guarantee Fund (FNG). The FNG ("Fonds National de Garantie"), created by law in December 1981 but operational only since end 1984, is managed by BCT. The FNG guarantees loans that commercial banks make from their own and borrowed resources to small- and medium-size enterprises principally in agriculture, and primarily for the establishment or expansion of production units and their export operations. An FNG guarantee covers 701 of outstanding principal. The commercial banks (including BNT) must bear the remaining 301 of the default risk (51 for loans granted through SCMAs) plus interest. FNG's funds come from the following sources: (i) a 5/81 levy on short-term bank overdrafts not representing rediscountable credits; (ii) a one-time levy of 1/81 on investment loans not eligible for FNG guarantee granted by banks out of their equity resources to non-agricultural sectors; and (iii) a 1/8% one-time levy (22 for short-term loans through SCMAs) on the total amount of guaranteed credit, which is paid by the beneficiaries /2 of such guarantees. In January 1986 the total accumulated resources of FNG amounted to D 22 million with D 5 million allocated to liquidate bankrupt SCMAs and D 5 million to compensate for irrecoverable export credits. The operations of FNG could provide more effective risk coverage in agriculture. Measures would be introduced under the Project to achieve this (para. 6.05). l/ Ratio des activites prioritaires. 2/ i.e., commercial banks' customers who are eligible to the FNG guarantee. (3 1.