Mozambique - Agricultural Rehabilitation and Development Project

Dcnment of Th:^ World Bank FOR OFFICIAL USE ONLY Report No. 8467-MOZ STAFF APPRAISAL REPORT MOZAMBIQUE AGRICULTURAL REHABILITATION AND DEVELOPMENT PROJECT AUGUST 14, 1990 Southern Africa Department Agriculture Operations Division 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 Currency Unit = Mozambican Metical (MT) USD 1.00 - MT 935 (July 1990) MT 1,000 = USD 1.07 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AERU - Agricultural Enterprise Restructuring Unit AfDB - African Development Bank AGRICOM - State Enterprise for Agricultural Marketing BM - Bank of Mozambique (Banco de Mocambique) BPD - People's Development Bank (Banco Popular de Desenvolvimento) BSTM - Standard Totta Bank of Mozambique (Banco Standard Totta de Mocambique) CM - State Cashew Enterprise (Caju de Mocambique) CNP - National Planning Commission CCADR - Agricultural Credit and Rural Development Fund CNSP - National Commission for Salaries and Prices DEA - Directorate for Agricultural Economics DINAGECA - National Directorate for Land Survey and Cadastre DNE - CNP's Directorate of National Statistics EAP - Economic Action Program, 1984-1986 ENACOMO - State Enterprise for Agricultural Exports ERP - Economic Rehabilitation Program, 1987-1989 PAO - Food and Agriculture Organization FEW - Field Extension Worker FERS - Foreign Exchange Retention Scheme FOT - Farmer Organization Team FRELIMO - Front for the Liberation of Mozambique (Official Government Party) GOM - Government of Mozambique GDP - Gross Domestic Product IDA - International Development Association IFAD - International Fund for Agricultural Development IMF - International Monetary Fund INIA - National Agricultural Research Institute LOMACO - Joint Government - Private Enterprise Farm MOA - Ministry of Agriculture MOCARGO - State Sea and Land Freight Company MONAP - Mozambique Nordic Agricultural Program PFI - Participating Financial Institution PFP - Policy Framework Paper PIC - Integrated Cashew Program SEHi - State Secretariat for Agricultural Hydraulics SEC - State Secretariat for Cashew SIREMO - State Enterprise for the Operation and Maintenance of the Chokwe Irrigation Scheme UNDP - United Nations Development Program WB - World Bank FISCAL YEAR: Government of Mozambique: January 1 - December 31  FOR OMCIAL USE ONLY MUZABIQUE AGRICULTURAL REHABILITATION AND DEVELOPIT PROJECT TABLE OF CONTENTS Pane No. CREDIT AND PROJECT SUMMARY i I. Background 1 A. Project Genesis 1 B. Main Country Characteristics 1 C. Economic Context 2 D. The Agricultural Sector 3 E. The Financial Sector 7 F. The Cashewnut Subsector 8 G. Agricultural Enterprises 11 H. Sectoral Strategy, IDA's Involvement, and Rationale for Additional Involvement in the Sector 12 II. The Proiect 14 A. Project Objectives and Main Features 14 B. Detailed Project Features 15 1. Cashew Rehabilitation and Development Component 15 2. Assistance to State and Commercial Agricultural Enterprises 19 3. Studies and Surveys 20 III. Proiect Implementation 22 A. Organization and Management 22 B. Programming of Activities 26 C. Project Implementation Review 27 D. Reporting, Monitoring and Evaluation 27 IV. Cost Estimates, Financing and Procurement 29 A. Cost Estimates 29 B. Financing 30 C. Procurement 31 D. Disbursements 34 E. Accounts and Audits 35 This document has a restricted distribution and may be used by recipients only in the pefformance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  V. Benefits, Risks, Sustainability and Environmental Effect 37 A. Benefits 37 B. Risks 39 C. Sustainability 39 D. EnvironmentaL Effects 40 E. Focus on Women 40 VI. Agreements to be Reached and Recommendation 41 ANNEXES Annex 1 Organization Chart 47 Annex 2 Cost Tables and Statistical Data 53 Annex 3 Description of the Cashew Subsector 61 Annex 4 The Financial Sector 73 Annex 5 Implementation Arrangements for Line of Credit 85 Annex 6 Terms of Reference for Agricultural Enterprise Restructuring Unit 87 Annex 7 Terms of Reference for Studies, Surveys and Consultants 89 Annex 8 Implementation Schedule 105 Annex 9 Supervision Plan 109 Annex 10 Documents Available in Project File 113 MAP IBRD No. 21984 This report is based on the findings of an IDA appraisal mission which visited Mozambique in SeptemLer 1989. The mission consisted of G. Keynan (Leader), R. Ranasinghe (IDA), and J. Intrator and T. McCarthy (Consultants).  - i - MOZAMBIQUE AGRICULTURAL RETABILITATION AND DEVELOPMENT PROJECT CREDIT AND PROJECT SUMMARY Borrower People's Republic of Mozambique Beneficiaries Ministry of Agriculture, participating banks, small-scale family and commercial farmers, traders and truckers, cashewnut processing enterprises, and agricultural enterprises. Amount SDR 11.9 million (USD 15.4 million equivalent) Terms Standard IDA terms, with 40 years maturity Onlending Terms From the IDA funds of USD 15.4 million equivalent, the Bank of Mozambique (BM), acting as executing agent, would make available approximately USD 3.5 million to the participating financial institutions (PFIs), for onlenc'-ng on the basis of actual loan approvals and agreed eligibility criteria. The PFIs would onlend the credit proceeds in local currency to beneficiaries at adjustable interest rates based on the structure of rates prevailing in Mozambique. The onlending credit risk would be borne by the PFIs who would receive a spread as determined within the banking system. The foreign exchange risk would be borne by the Ministry of Finance on behalf of the Government, and would be covered by the interest yield on funds onlent, net of the service charge on the IDA credit, the administration costs, and the spreads of the PFIs on onlending. Subloans under the Credit would have a maturity of 3 to 12 years with 2 to 4 years grace. ine onlending terms and conditions will be reviewed annually. Proiect Description Project components would include: (a) rehabilitation and development of the cashew subsector; (b) building up the institutional capacity for assisting in the rehabilitation and restructuring of agricultural enterprises; and (c) carrying out subsectoral studies and surveys. Under the first component, financing would be provided for: (a) equipment, incremental costs and technical assistance to agricultural extension, research and cashewnut nurseries; (b) investment credit (equipment and materials) to commercial farmers and traders and for the rehabilitation of three cashew processing factories; (c) technical assistance, equipment and incremental costs to the State Secretariat for Cashew and the State Enterprise for Cashewnut; and (d) carrying out evaluative surveys. Under the second component, financing for technical assistance, incremental costs and equipment would be provided in order to develop capacity within MOA to address the rehabilitation needs of state and private agricultural enterprises; and particularly the provision of managerial and planning assistance and training. Under the third component, complementary studie and surveys -- an Irrigation Development Master Plan, a Cashew Tree Population Survey and a Cashew Development Master Plan including new areas -- would be financed. Benefits and Risks The project would directly benefit cashewaut producers in terms of increased production of intercalated food crops and cashewnuts and improve Mozambique's balance of payment through increased cashevnut  - ii - exports and reduced imports of food. Institutional strengthening would enhance agricultural services to farmers. Restructuring of agricultural enterprises would make them more efficient and profitable. Moreover, integrated pest management and farm management practices to be introduced would help safeguard the environment. Lastly, a study to be carried out early in project life would determine measures to be taken to enhance project benefits for women. Main project risks include the unpredictable security situation, borrower inexperience, organizational difficulties, and inadequate and untimely funding of project activities. To minimize these risks: (a) the project would be restricted to relatively secure areas; (b) multi-disciplinary technical assistance to train and help local staff carry out the rehabilitation process would be provided; and (c) assurances were obtained that GOM budgetary provisions, which are consistent with the Public Expenditure Review recommendations, would be made on time and would cover planned project costs. Total Proiect Costs Lical Foreig.n Total (USD million) A. Cashew Subsector Rehabilitation 3.1 7.5 10.6 B. Agricultural Enterprise Restructuring 0.4 2.5 2.9 C. Studies and Surveys 0.2 .0.8 1.0 Total Baseline Costs 3.7 10.8 14.5 Physical Contingencies 0.1 0.4 0.5 Price Contingencies 1.3 1.5 2.8 Total Project Costs 5.1 12.7 17.8 Financing Plan Source of Finance Local Forei%n Total (USD million) 1. IDA 2.7 12.7 15.4 2. Government 1.2 - 1.2 3. Participating Banks 0.7 0.7 4. Credit Beneficiaries 0.5 - 0.5 Total: 5.1 12.7 17.8 Estimated IDA Disbursement Schedule IDA FY 1991 1992 1993 1994 1995 1996 1997 1998 (USD million) Annual 2.9 3.4 2.4 2.4 1.7 1.2 0.8 0.6 Cumulative 2.9 6.3 8.7 11.1 12.8 14.0 14.8 15.4 Percentage of Total Credit 19 41 56 72 8n 91 96 100  MOZAMBIQUE AGRICULTURAL REHABILITATION AND DEVELOPMENT PROJECT I. Background A. Proiect Genesis 1.01 In 1986, the Government of Mozambique (GOM), assisted by IDA, carried out four agricultural studies addressing the cashew, irrigation, cotton, and forestry subsectors. Based on the recommendations of these studies the Bank agreed to provide assistance to the cashew and irrigation subsectors, and for the development of agricultural institutions and manpower. Two Task Forces were established: one dealing with the cashew subsector which was set up in the State Secretariat for Cashew (SEC), the other dealing with agricultural institutions and manpower which was set up in the Directorate for Agricultural Economics (DEA) or the Ministry of Agriculture (MOA). Taking into consideration the subsector studies, the Task Forces began preparation of the two project components in mid-1988 and final proposals were submitted in April 1989. The State Secretariat for Agricultural Hydraulics (SEHA) did not set up a task force to prepare the irrigation component. It contracted a consulting firm for this purpose. However, preparation has not yet reached the stage which would have permitted appraisal and inclusion of an irrigation component in this project. The proposed project is based on the reports of the Task Forces and consultants, and on the findings of an IDA appraisal mission which visited Mozambique in September 1989. During this mission and the post-appraisal mission which took place in January 1990, the Government affirmed its commitment to continue implementing the policy reforms (para 1.07) required to ensure a successful project outcome. The proposed project represents the first phase of a long-term program to rehabilitate and develop one of the major cash crops of the country's agricultural sector, namely the cashew subsector. It contains a rehabilitation approach which is based on supporting the small- scale family producer through mobilization and provision of agricultural services; institution strengthening; rehabilitation of existing infrastructure and agricultural enterprises; staff training; and development of a local capacity to sustain project benefits. B. Main Country Characteristics 1.02 Mozambique is situated on the eastern coast of southern Africa, betwees the Indian Ocean and the central land mass of Southern and Central Africa. It has a total land area of 786,380 sq. km, with an additional 13,000 sq. km of inland waters which include Lake Cabora Bassa and part of Lake Malawi. The country is bordered by Tanzania to the north, Malawi and Zambia to the northwest, Zimbabwe and South Africa to the west, and Swaziland to the southwest. Its predominant physiographic feature is a steady rise in elevation from the coastal belt in the east to the mountainous areas in the west. Three main altitude zones up to 1,000 m can be distinguished, which  together cover about 962 of the country. A fourth altitude zor.e above 1,000 m is found in a few small, widely dispersed locations. 1.03 The country's resource base is favorable for agricultural production. Land is plentiful relative to the population, soils are reasonably fertile, and rainfall usually is adequate. However, the South is characterized by a tropical dry climate with a low annual rainfall (400-800 mm) concentrated in a short rainy season, relatively light soils, and average temperatures of 23-26 C. Under the current security situation, large parts of the country are either inaccessible or accessible only by air. About one- third of the rural population is displaced or otherwise affected by war and must depend on food aid and provisions from the Emergency Program. New and existing structures frequently are destroyed and, in many cases, the provision of agricultural services such as extension, marketing, and credit is hampered by ongoing hostilities. C. Economic Context 1.04 Economic Performance. Despite the country'n well-endowed and diversified resource base, Mozambique's Gross Domestic Product (GDP) per capita has fallen fairly consistently since Independence and until 1987. In 1988, GDP per capita was estimated at around USD 100-120, making Mozambique one of the poorest countries in the world. Between 1980 and 1986, overall production fell by about 301 and exports were reduced by nearly 752. In 1985, imports were down more than one-third their level of 1980, although they recovered somewhat in 1986. External imbalances, aggravated by an increasingly overvalued exchange rate, led to the rapid accumulation of arrears on external debt service. Internally, large fiscal deficits and unconstrained bank financing of public enterprise losses resulted in a tripling of the money stock despite shrinking output. Administrative measures were taken to control prices and the allocation of resources. Although intended to promote efficiency and social welfare, these measures introduced rigidities and disincentives which worked against allocative efficiency. As shortages increased, barter, inflation, and parallel markets for goods and foreign exchange became widespread. 1.05 The difficulties evident in the Mozambican economy have had a major impact on the performance of the agricultural sector. Many of the difficulties result from external factors such as droughts and floods, and the security situation which is disruptive to the rural economy and which has caused widespread displacement of the population. In addition, Mozambique lacks basic physical, economic and social infrastructure, has one of the lowest literacy rates in the world, and faces an acute shortage of skilled managerial and technical manpower. All of these factors make it difficult for the Government to carry out even the most basic policy analysis and planning activities. The poor performance of the agriLultural sector also may be explained by the rigid pricing policies and focus of government expenditure on large, capital-intensive investments. Little attention has been given to the development of institutions and infrastructure for delivering essential agricultural services to family farmers and commercial producers. Basic marketing activities are restricted by the poor state of  roads, scarcity of vehicles, spares, and fuel, inadequate vehicle repair and maintenance facllities, and attacks on vehicles by bandits. 1.06 The Economic Rehabilitation Proaram. To arrest the deterioration in the economy, the Government of Mozambique instituted a comprehensive Economic Rehabilitation Program (ERP) in January 1987. Under this program economic reforms are being introduced to improve the exchange rate, foreign exchange allocation system, trade policies, pricing policy, the budget, and the financial sector. 1.07 In addition to macroeconomic policy changes, the rehabilitation program also addresses policy and institutional reform within key economic sectors. In agriculture, attention has been focused on pricing and marketing policies in order to restore incentives for agricultural production and distribution. Since 1987, prices have been increased on all agricultural commodities, including food crops. The prices of certain products such as wheat, eggs, and tea have been shifted from the fixed to the conditional category, while the controls on prices for other products such as shellfish, potatoes, lamb, and chicken have been removed entirely. The Government accepted the principle of border pricing and as a result, prices increased in real terms. During the 1988189 marketing season, the Government established a minimum pricing system to protect family producers of cashew, cotton, copra, and oilseeds from the monopsony power of local processors. Under this system State enterprises compete in the market alongside other traders but also act as buyers of last resort, guaranteeing to buy up the crop at a minimum price. 1.08 Overall, under the ERP, considerable progress has been made to restore the domestic price incentive, with all the domestic food crops being priced at nearer 80Z of the international price in 1989. Analysis of the official price data also suggests that over the 1986-89 period the agricultural terms of trade improved for export crop producers (cashew, cotton, and copra). While the strategy of the ERP seeks in general terms to enhance production incentives, there is no explicit intention to favor export production. It is nonetheless the case that, compared to the immediate pre- ERP period. incentives for export production, including cashewnut, have received a relative boost (Annex 2, Table 3). As a result of the macroeconomic policy changes, GDP per capita increased on average 4.8 percent a year between 1987 and 1988. At the sectoral level, agriculture has responded positively -- increasing, on average, by 6.4 percent a year over the same period. D. The Agricultural Sector 1.09 General. Agriculture is the most important sector in the Mozambican economy, accounting for about 40-502 of GDP, employing over 802 of the labor force, and generating around 80X of the country's export earnings. The soil is reasonably fertile and supports a variety of crops including maize, rice, sorghum, beans, cassava, groundnuts, sunflower, sesame, fruit and vegetables for internrl consumption, and copra, cashewauts, cotton, tea, sisal and citrus for export. Rainfall usually is adequate, although there is a risk of drought in the E