Morocco - Agricultural Credit Project

FILE COPY RESTRICTED Report No. P-454 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE CAISSE NATIONALE DE CREDIT AGRICOLE (MOROCCO) FOR AN AGRICULTURAL CREDIT PROJECT October 21, 1965  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE CAISSE NATIONALE DE CREDIT AGRICOLE (MOROCCO) FOR AN AGRICULTURAL CREDIT PROJECT 1. I submit herewith the following report and recommendation on a pro- poased loan in various currencies equivalent to $10 million to the Caisse Nationale de Credit Agricole (CNCA), an autonomous agency of the Kingdom of Morocco, to help finance an Agricultural Credit Project. PART I - HISTORICAL 2. In October 1964, CNCA requested a loan from the Bank to expand its lending operations. The request was appraised in February 1965 and supple- mentary information was obtained by a mission in September 1965. Negotia- tions took place in August/September 1965. 3. The proposed loan wqould be the third operation of the Bank in Morocco. In December 1962 the Bank made a $15 million loan (and IFC joined with a $1.5 million investment) to the Banque Nationale pour le Developpement Economique (BNDE). In August 1964 the Bank made a loan equivalent to $17.5 million to help carry out the Sidi Slimane agricultural development and irrigation program. An IDA credit equivalent to $11 million for a secondary education project was signed on October 11, 1965. 4. As of September 30, 1965, the status of the two Bank loans was as follows: (US$ millions) Year Borrower Purpose Amount Undisbursed Balance 1962 Banque Nationale Industry 15.0 7.4 pour le Develop- pement Economique 1964 Kingdom of Agriculture 17.5 13.8 Morocco Total 32.5 21.2 of which has been repaid 0.5 Total outstanding 32.0 Amount Sold 0.1 of which repaid - 0.1 Net Amount held by Bank 31.9  -2- PART II - DESCRIPTION OF THE LOAN 5. Borrower: Caisse Nationale de Credit Agricole (CNCA) Guarantor: The Kingdom of Morocco Amount: The equivalent in various currencies of $10 million Interest Rate: 5-1/2% per annum Commitment Charge: 3/8 of 1% per annum Amortization: 12-1/2 years in 25 semi-annual payments beginning March 1, 1970 and ending March 1, 1982 Purpose: To help finance CNCA's 3-year (1965/66- 1967/68) medium and long term lending program to farmers and its medium term lending program to the Centrale de Gestion des Exploitations Agricoles (CGEA) to purchase equipment for farms adminis- tered by CGEA PART III - APPRAISAL OF THE PROPOSED LOAN 6. A report entitled "Agricultural Credit Project - Morocco" (TO 494a) is attached. 7. Agriculture produces about one-third of Morocco's gross national product and one-half of its exports and provides employment for 70% of the population. Most of the farmers work small farms on traditional subsist- ance lines and only about 1.5 million hectares, or about 10%, of the agri- cultural land is being farmed with modern methods. The Caisse Nationale de Credit Agricole (CNCA), established in 1962, is the only agency pro- viding substantial short, medium and long term credit to farmers and agricultural development institutions. The provision of adequate, well administered agricultural credit is essential to Morocco's development and the proposed loan to CNCA has been devised to further this objective. The Project U. CNCA proposes to undertake a three-year (1965/66-1967/68) short, medium and long term lending program of about DH 260 million ($52 million). In addition to short term lending, this program has two main elements: (a) the purchase of farms and livestock, on-farm development, light proces- sing and storage facilities which are too small to be financed by the Banque Nationale pour le Developpement Economique, and (b) the purchase of machin- ery for farms taken over from foreign settlers and presently run by the Centrale de Gestion des Exploitations Agricoles (CGEA), which is adminis- tratively part of the autonomous land development agency of the Moroccan  -3- Government (OMVA). These farms will in due course be transferred by CGEA to individual Moroccan farmers and cooperatives. 9. The proposed Bank loan would be in support of medium and long term lending by CNCA amounting to DH 100 million ($20 million equivalent). Of this, DH 60 million would be lent to individual farmers and cooperatives (who will be required to put up an additional DH 30 million from their own resources) and DH 40 million to finance equipment for CGEA. The proposed Bank loan would finance two-thirds of CNCA loans to farmers and cooperatives and one-quarter of CNCA loans for CGEA equipment purchases. It would not be used for CNCA's short term operations nor for the acquisition of land and livestock, for which local financing will be made available. 10. The proposed investments are aimed at maintaining and increasing out- put on existing modern farms as well as facilitating the modernization and improvement of traditional farms which are economically viable units. The provision of machinery and equipment for use on land managed by CGEA is of urgent economic priority. Farms administered by CGEA are located on some of Morocco's most fertile land and turn out a substantial share of the country's cash and export crops. 11. The benefits of the project would be: (a) increased production from farms of commercial size located mostly within development perimeters organ- ized by the Government; (b) maintenance and increase of production on CGEA farms; (c) increased value added to farm products through the provision of agricultural processing and marketing facilities; (d) strengthening of the only credit institution providing sizable and suitable credit facilities to farmers; and (e) other indirect benefits, including extension of modern farm techniques and increased productive employment. The Borrower 12. Since its establishment in 1962, CNCA has made fair progress in building its organization and expanding its operations, although government restrictions on recruitment of staff adversely affected both the quality of its work and the pace of development. These restrictions have recently been lifted and salaries offered by CNCA are now in line with those prevail- ing in the private banking sector. CNCA's staff can now be expected to in- crease by about 50% within a year or two. This should allow CNCA to handle an increasing amount of business and to improve substantially the quality of its appraisal and supervision work. 13. In the past, CNCA has also been handicapped by shortage of funds, pressures to lend for social rather than economic objectives and lending rates that were set too low. The Government has now agreed to provide CNCA with permanent capital and assured access to borrowed resources on favor- able terms from the Treasury and the Central Bank. Furthermore, the Govern- ment is taking steps to set up a special fund for socially oriented credit, which CNCA will administer independently from its development lending and be adequately remunerated by the Government for so doing. Finally, CNCA has agreed to raise its lending rate from an average of 4.5% to a minimum of 6%. Together these measures should provide the basis for sound  -4- financial management. 14. The appraisal of CNCA's financial and personnel requirements neces- sarily involves making various assumptions about the prospects of Moroccan agriculture, the capacity of the extension services and the impact of CNCA's new lending procedures on the demand for credit. To check the continuing validity of these assumptions, it has been agreed that disbursements for on- farm development, storage and processing facilities after June 30, 1967 or in excess of $5 million would be made only after a full review by the Bank had shown CNCA's performance, organization, financial position and pros- pects to be satisfactory. 15. In view of its importance as a client of CNCA, the Bank carried out a separate appraisal of CGEA in September 1965, which is reflected in Annex 13 of the Appraisal Report. CGEA was found to be well managed and compe- tently staffed. Its operations have been highly profitable. The equipment to be financed under the project is appropriate to the needs of the farms concerned, and its estimated cost is reasonable. However, there is as yet no detailed plan or timetable for the redistribution to cooperatives of land being provisionally managed by CGEA. There is consequently some un- certainty about CGEA's eventual equipment needs. The proposed Bank support for the CGEh program has accordingly been limited to knouM requirements for the current year. CNCA loans to OMVA for CGEA are guaranteed by the Caisse Centrale de Garantie, a government agency. Disbursement 16. Disbursement of the Bank loan to farmers and cooperatives will be on the basis of 67% of the amount actually disbursed by CNCA. Disburse- ment of the Bank loan to OMVA in respect to equipment purchased by CGEA will amount to about 25% of CNCA's loan disbursements to CGEA and will be limited to the current fiscal year and to a maximum aggregate amount of DH 10 million ($2 million). It will represent up to one-half of the esti- mated foreign exchange component of CGEA procurement during the same period. The exchange risk on the proposed Bank loan will be borne by the Government. Procurement 17. Procurement by farmers under their loans would be through normal trade channels. A number of international firms handling farm machinery and equipment are represented in Morocco. Equipment for CGEA farms is be- ing purchased through the official tender system which provides for inter- national competitive bidding under which local as well as foreign suppliers can submit proposals. A 15% preference for local suppliers has been provided. Orders have already been placed under these procedures for part of the CGEA equipment in order to have it available for the planting season, which starts in November. Disbursements against such orders will be subject to the Bank's review of the tender procedures.  -5- The Economy 18. A memorandum on "Recent Economic Developments in Morocco" (AF-36) was distributed on September 27 and summarized in the President's Report and Recommendation on the Moroccan Education Project (P-453) dated September 24. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 19. A draft Loan Agreement (Agricultural Credit Project) between the Bank and the Caisse Nationale de Credit Agricole and a draft Guarantee Agreement (Agricultural Credit Project) between Kingdom of Morocco and the Bank are being distributed separately. The Agreements generally follow the pattern of those for projects of this type. Attention is drawn to the following pro- visions: (a) Section 5.02 of the Loan Agreement providing for the relend- ing by the Borrower to OMVA of the portion of the Loan allo- cated for CGEA. (b) Section 6.02 (a) of the Loan Agreement which has the effect of giving the Bank the right to suspend disbursements, or to premature the Loan, if the legislation specified in such Sec- tion shall have been amended, suspended, terminated or repealed so as to affect adversely the ability of the Borrower to carry out its obligations; (c) Section 6.03 of the Loan Agreement, which permits the Bank to terminate the right of the Borrower to make withdrawals with respect to the portion of the Loan allocated for loans to farmers and cooperatives. (See paragraph 14 above.) 20. The report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank is also being distributed separately. PART V - COMPLIANCE WITH ARTICLES OF AGREEMENT 21. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 22. I recommend that the Executive Directors adopt the following reso- lution: RESOLVED: THAT the Bank shall grant a loan to Caisse Nationale de Credit Agricole, to be guaranteed by Kingdom of Morocco, in an amount in various currencies equivalent to ten million United States dollars (US$10,000,000), to mature on and prior to March 1, 1982, to bear interest at the rate of five and one- half percent (5-1/2%) per annum, and to be upon such other terms  and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Agricultural Credit Project) between the Bank and Caisse Nationale de Credit Agricole and the form of Guarantee Agreement (Agricultural Credit Project) between Kingdom of Morocco and the Bank, which have been presented to this meeting. George D. Woods President Attachment