Tanzania - Agricultural Export Rehabilitation Project

Document of The World Bank FOR OFMFCIAL USE ONLY Report No. P-4659-TA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 22.0 MILLION TO THE UNITED REPUBLIC OF TANZANIA FOR AN AGRICULTURAL EXPORT REHABILITATION PROJ'ACT March 1, 1988 Southern Africa Department Agriculture Operations Division Thb docme bas a reticed dusubo md may be asd by n e onl h te peufonfmo of thi offlcid duies. Its coaents y m otherie be disLsed Wodd 3ank  CURRENCY AND EQUIVALENT UNITS Currency Unit Tanzania Shilling (Tsh) US$1.00 Tsh 90.0 Tsh 1.00 - US$0.011 ABRREVIATIONS CRDB - Cooperative and Rural Development Bank ERP - Economic Recovery Program GOT - Government of Tanzania IDA - International Development Association MRC - Multi-Sector RehabiLitation Credit GOVERNMENT FISCAL YEAR July 1 - June 30  FOR OMCIAL US ONLY TANZANIA AGRICULTURAL EXPORT REHABILITATION PROJECT Credit and Proiect Summary Borrower: Government of Tanzania Implementing Agency: Cooperative and Rural Development Bank (CRDB) Beneficiaries: Enterprises engaged in export agriculture and CRDB. Amount: SDR 22.0 million (US$30.0 million) Terms: Standard, with 40 years maturity. On-Lending Terms and Conditions: US$26.7 million from IDA Credit of US$30.0 million equivalent would be on-lent to CRDB by the Government at 2.0 percent and CRDB would on-lend it to sub-borrowers at a fixed interest rate of 8.0 percent. The balance of IDA Credit (US$3.3 million) would be made available to CRDB as a grant for institution building. The loan to CRDB and to sub-borrowers would be denominated in foreign exchange with the sub-borrowers bearing the excharge risks. Maximum maturities of the sub-loans to sub-borrowers would be 15 years with up to 3 years of grace period. CRDB would have loan maturities of up to 16 years, and a grace period of up to 5 years. Financing Plan: CRDB US$ 2.0 million Sub-borrowers US$ 8.0 million IDA US$30.0 million TOTAL US$40.0 million Economic Rate of Return: Not applicable to the Project as a whole, but the economic rate of return on each individual sub-project would not be less than 15 percent. Staff Appraisal Report: No. 6958-TA Man: IBRD No. 19829 This document has a restricted distribution and may be used by recipients only in the performa-ne of their official duties. its contents may not otherwise be disclosed without World Bank authorizra:k..j . . w___4  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR AN AGRICULTURAL EXPORT REHABILITATION PROJECT 1. The following memorandum and recommendation on a proposed development Credit to Tanzania for SDR22.0 million (US$30.0 million equivalent) is submitted for approval. The proposed Credit would be made on standard IDA terms with 40 years maturity. It would finance enterprises engaged in export agriculture as well as technical assistance and training to the Cooperative and Rural Development Bank (CRDB). 2. Background. Agriculture is the most important sector in Tanzania's economy although its contribution to GDP declined from 57 percent in 1960 to 46 percent in 1984. It contributes 80 percent of exports and provides employment to 83 percent of the labor force, and is a major source of food and raw materials for the urban and industrial sectors and of Government revenues needed for the development of the economy. The agricultural population is an important market for the goods and services produced in the industrial sector. 3. Agricultural production and exports of major crops were the engine of economic growth in Tanzania until the mid-1970s when they began to decline rapidly. This was mainly caused by Government's macro-economic policies and institutional changes which did not provide sufficient incentives and resources to sustain agricultural production. To reverse the trend of declining agricultural production, the Government of Tanzania (GOT) through its Economic Recovery Program (ERP), has started remedying the defects of past policies. In addition to a major devaluation and continuing real adjustments in the exchange rate, GOT has introduced major reforms in the agricultural sector. GOT has increased producer prices in real terms, widened quality margins, substantially liberalized the marketing of food grains, re-established cooperative unions to take over from parastatals the responsibilities for farm-level crop purchases, liberalized the marketing of minor export crops, and permitted several private estates to market their produce directly instead of through marketing boards. The Government has agreed to liberalize agricultural export marketing and the importation and distribution of all agricultural inputs other than fertilizers and seeds. The next step in the reform process is expected to focus on opening up the marketing of export crops at the farm level to tll marketing agents, including private traders. 4. With these reforms, the decline in agricultural output in recent years has been arrested and agricultural exports have been enhanced. This is because, in the new policy environment, many agricultural export enterprises in the various crop sub-sectors now find it profitable to begin investing in the rehabilitation and upgrading of their plants and equipment. These enterprises, including potential new entrants, need medium- and long-term foreign exchange credit for this purpose. The financial intermediary, the Cooperative and Rural Development Bank, through which most agricultural credit is channelled, itself requires strengthening to enhance its capacity to service the agricultural sector effectively.  - 2 - 5. Rationale for IDA Involvement. The rationale for IDA involvement, particularly its timing, lies in helping agricultural export-related enterprises to expani their exports in response to the changes in the policy environment as described in paras 2-4 and agreed under the Multi- Sector Rehabilitation Credit (MRC). By helping these enterprises and thereby improving the country's balance of payments position, IDA would contribute to the sustainability of the liberalization which is a major element of IDA sector development and overall macro development strategy for Tanzania. IDA's role is crucial in supporting entrepreneurship among Tanzanian nationals in the agricultural sector and ensuring that the longer-te-m task of building the capacity of CRDB to supply medium- to long-term agricultural credit gets underway and fits within a proper policy framework. The provision of agricultural credit is an essential part of IDA's strategy for improving basic services including research, extension, credit and marketing. There are many donors in the agricultural sector in Tanzania; however, there remains a considerable need which is not currently being met with regard to foreign exchange credit to export agriculture. IDA's assistance under this project would fill part of this gap and thereby supplement the assistance provided by other donors. 6. Proiect Obiectives. The project's aims are to increase exports through support to export-related agricultural enterprises and strengthen the capability of CRDB, Tanzania's only specialized agricultural bank, to become a viable agricultural lending institution. 7. Project Description. The project, to be implemented over a period of up to eight years, provides funds for capital and recurrent import costs required to rehabilitate or expand agricultural export enterprises, training of CRDB staff, and technical assistance support to CRDB. The total cost of the project is estimated at US$40.0 million equivalent, with a foreign exchange component of US$28.0 million (70Z). A breakdown of costs and the financing plan are shown in Schedule A. The amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B A timetable of key project processing events and the status of Bank Group operations in Tanzania are given in Schedules C and D, respectively. A map of Tanzania, IBRD No. 19829 and Staff Appraisal Report, No. 6958-TA dated March 1, 1988 are attached. 8. Agreed Actions. All major issues have been resolved with the Government. The Government has agreed on the following actions as conditions of Credit effectiveness: (a) converting its outstanding loans to CRDB (TSh 588.0 million) into equity capital and CRDB using it to write- off its outstanding bad debts as of June 30, 1987; (b) restructuring and maintaining CRDB's loan committee with membership and terms of reference satisfactory to the Association; and (c) signing of a Subsidiary Loan Agreement between the Government and CRDB satisfactory to the Association. 9. At Negotiations, assurances were obtained from the Borrower on a monitorable action program requiring CRDB to take actions in order to improve its performance as follows: (a) complete its staff redeployment and where warranted retrenchment by September 30, 1989; (b) furrnish to the Association by not later than September 30, 1988, a financial plan with a view to achieving and maintaining (i) in all its ordinary operations an adequate financial spread over its borrowing rates to cover its costs of operation and ensure a reasonable profit margin, (ii) a fixed charges coverage of at least 1.25 times, (iii) a liquidity ratio of at least 1.5 by  - 3 - June 30, 1990, (iv) an operating profit margin of at least 102 by June 30, 1990, and (v) a rate of return of at least 1.2Z on total average assets and 102 on equity by June 30, 1990; (c) furnish to the Association by not later than September 30, 1988 a plan to reduce its remaining loan arrears as of June 30, 1987 by 331/3Z annually leading to the elimination of such arrears by not later than June 30, 1991; and (d) complete the review of its accounting and computer systems by September 30, 1988, and update the accounting system and implement financial information system by June 30, 1989. 10. In addition, assurances were also obtained from Government at Negotiations that: (a) the sub-borrowers would be permitted to maintain foreign exchange escrow accounts sufficient to cover the debt-service requirements of loans under the project from their export proceeds; (b) CRDB would be permitted to maintain a foreign exchange account to cover loss provisions from their earnings under the project; and (c) Government would set non-discriminatory terms and ensure equal access to the credit by eligible sub-borrowers without regard to form of ownership. il. Benefits. A broad spectrum of agricultural enterprises throughout Tanzania would benefit from the project. This should help strengthen the entrepreneurial basis of the agricultural sector. The project would foster greater capacity utilization, improved productivity and efficiency, and improved agricultural term-lending capacity of CRDB. However, the main benefit from the project is expected to be an increase in Tanzania's exports following the rehabilitation and expansion of viable enterprises, and an improvement in the quality of produce and hence price. The economic rate of return for individual sub-loan investments are expected to exceed 15? and in most cases, would be substantially higher. 12. Risks. The main risks associated with the project relate to the possible waning of the Government's commitment to maintain the momentum of policy reform, particularly as it relates to liberalization of crop and input marketing and producer pricing. Thus far, indications are that the Government's determination has not waned and this project would, in fact, help consolidate the reform process by providing inputs urgently required to obtain an export response. There is also the risk that the credit disbursement could be delayed if there are delays in the restructuring of CRDB and the strengthening of its capacity to process loan applications. This risk has been minimized by front-loading of studies and agreements related to the restructuring of CRDB, and by providing technical assistance to prepare feasibility studies of sub-projects and assist CRDB in project implementation. 13. Recommendation. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed Credit. Barber B. Conab'e President Attachments Washington, D.C. March 1, 1988  -4- SCHEDULE A TANZANIA AGRICULTURAL EXPORT REHABILITATION PROJECT ESTIMATED COSTS AND FINANCING PLAN Estimated Costs a/ Local Foreign Total -(US$ Million)---- Line of Credit to Sub-borrowers Investment and Working Capital 10.0 24.1 34.1 Feasibility Studies for Sub-projects 0.3 0.8 1.1 Management Assistance and Training 0.1 0.4 0.5 Institution Building Restructuring of CRDB 0.9 1.2 2.1 Computer Equipment 0.1 0.4 0.5 Training to CRDB Staff 0.3 0.3 0.6 Technical Assistance 0.2 0.7 0.9 Contingencies 0.1 0.1 0.2 Total Project Costs 12.0 28.0 40.0 a/ Exclisive of taxes and duties Financing Plan 'ocal Foreign Total -___----(USS MLillion)---------- IDA 2.0 28.0 30.0 CRDB 2.0 - 2.0 Beneficiaries (Sub-borrowers) 8.0 - 8.0 Total 12.0 28.0 40.0  -5- SCHEDULE B TANZANIA AGRICULTURAL EXPORT REHABILITATION PROJECT PROCUREMENT METHOD AND DISBURSEMENTS Procurement Method Total Proiect Element ICB LCB Other Cost (--- US$ Million)------------ Investment and Working Capital - - 35.7 35.7 (26.7) (26.7) CRDB Institution Building - ^ 1.5 1.5 _ _ (0.5) (0.5) Technical Assistance - - 2.8 2.8 and Training (2.8) (2.8) TOTAL - _ 40.0 40.0 (0.0) (0.0) (30.0) (30.0) Note: Values in parentheses reflect amounts estimated to be financed by IDA. Disbursemeats Category Amount S ---(US$ Million)--- Sub-loans 26.7 100? of foreign expenditures and up to 70