Tunisia - National Rural Finance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6526-TUN MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT To US$65 MILLION TO THE NATIONAL AGRICULTURAL BANK(BNA) WITH THE GUARANTEE OF THE REPUBLIC OF TrUNISIA FOR A NATIONAL RURAL FINANCE PROJECT APRIL 25, 1995 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 = Tunisian Dinar (TD) TD 1.00 = US$1.00 (As of March 1995) FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES ha = hectare (2.47 acres) mt = metric ton (2,204 pounds) GLOSSARY OF ABBREVIATIONS ADB African Development Bank (Banque Africaine de D6veloppement) ANPE Agence Nationale de Protection de l'Environnement APB Association Professionnelle des Banques (Professional Rankers' Association) APIA Agricultural Investment Promotion Agency (Agence de Promotion des Investissements Agricoles) ASAL Agricultural Sector Adjustment Loan (Prtt Sectoriel d'Ajustement Agricole) ASIL Agricultural Sector Investment Loan (Pret Sectoriel d'Investissement Agricole) BCT Central Bank of Tunisia (Banque Centrale de Tunisie) BNA National Agricultural Bank (Banque Nationale Agricole) CAS Country Assistance Strategy CFD Caisse Fran,,aise de D6veloppement CLCM Local Mutual Credit Fund (Caisse Locale de Credit Mutuel) CNEA Centre National des Etudes Agricoles (National Center for Agricultural Studies) CRDA Regional Agricultural Development Commission (Commissariat Regional de Developpement Agricole) CTAMA Compagnie Tunisienne d'Assurances Mutuelles Agricoles EFRSL Economic and Financial Reforms Support Loan FNG National Guarantee Fund/Drought Risk Fund (Fonds National de Garantie) GOT Government of Tunisia (Gouvernement de Tunisie) IFAD International Fund for Agricultural Development (Fonds International pour le 1Dveloppement Agricole) KfW Kreditanstalt fiur Wiederaufbau of Germany MFF Ministere de la Femmne et de la Famille (Woman and Family Ministry) MOA Ministry of Agriculture (Ministbre de l'Agriculture) MMR Money Market Rate (Taux du Marchd Mon6taire) MTASAP Medium-Term Agricultural Sector Adjustment Program OC National Cereal Board (Office National des Cerdales) ONH National Olive Oil Board (Office National de l'Huile) PDRI Programme de D6veloppement Rural Int6grd (Rural Poverty Alleviation Program) PICP Private Investment Credit Project (Projet de Credit A l'Investissement Priv6) SCMA Agricultural Mutual Guarantee Society (SocietE de Caution Mutuelle Agricole) UTAP Tunisian Association for AgricultLire and Fisheries (Union Tunisienne de l'Agriculture et de la Peche)  FOR OFFICIAL USE ONLY REPUBLIC OF TUNISIA NATIONAL RURAL FINANCE PROJECT Loan and Project Summary Borrower: Banque Nationale Agricole (BNA) Guarantor: Republic of Tunisia Amount: US$65 million equivalent Terms: 17 years, including five years of grace, at the Bank's standard variable interest rate, plus commitrnent of 0.75% less any waiver. Onlending by BNA to private investors and farmers would be at market conditions. The Govermment would assume the foreign exchange risk against a fee charged to BNA, as for any other bank in Tunisia. Fnancineg: US$ Million IBRD 65.0 CFD 35.0 KfW 25.0 BNA 177.0 Sub-Borrowers 82.5 Govermnent 35.5 TOTAL 420.0 Environmental Rating: B Poverty Category: Program of targeted interventions: the project contains some elements of targeted interventions (up to 25% of loan amount) to respond to the credit demand for investment at market conditions of small farmers, small fishermen, rural women, artisans, service cooperatives supporting small farms, and for rural housing. Staff Appraisal Report: No. 13922-TUN Date: April 25, 1995 This document has a restricted distibution and may be used by recipients only in the perfonnance of |their flcial duties. Its contents may not otherwise be disclosed without World Bank authorization  MEMORANDUM AND RECOMMENDATION OF flE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO TUE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$65 MILLION TO THE NAnONAL AGRICTURAL BANK (BNA) WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA FOR A NATIONAL RURAL FINANCE PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed financial intermediary loan to the National Agricultural Bank (BNA) with the Guarantee of the Republic of Tunisia, for US$65 million equivalent. The loan would have a term of 17 years, including five years of grace, at the standard variable IBRD rate. It would help finance a rural credit project at market terms and conditions. Consistent with the Government's priorities, and the Country Assistance Strategy (para. 10) the objective of the project is to assist Tunisia and the BNA for 1995-98 in developing a financially sound rural finance system, well integrated into an increasingly liberalized financial system. The project includes some elements of targeted interventions to the rural poor. BNA, a major comqliercial bank-which is the key bank for agriculture in Tunisia-would be the Borrower, and the Republic of Tunisia the Guarantor. The project would be cofinanced by CFD of France, and KfW of Germany for a total additional US$60 million equivalent. 2. Background. The Government of Tunisia (GOT) has undertaken far-reaching reforms to build a more efficient, market-oriented and outward-looking economy. Since 1986, the Bank has supported these reforms through six structural adjustment loans. The most recent, the Economic and Financial Reforms Support Loan (EFRSL, 1992) seeks to remove distortions in the financial sector while strengthening the prudential and regulatory framework for banks. Of particular relevance to agriculture, some of the major measures undertaken were the following: (i) lending rates of commercial banks were substantially liberalized; (ii) incentives to priority activities (agricultural oroduction, exports, small-and medium-scale enterprises in industry and commerce, and energy saving industries) in the form of fiscal and financial advantages were reformulated more adequately in the new ITnified Investment Code approved in 1993; (iii) requirements that commercial banks lend a certain percentage of their deposits to the above priority activities at regulated rates were relaxed from 18% to 10%; and (iv) the supervisory and prudential regulation of banks was aligned to international standards. To complement the liberalization measures at the macro and trade levels, the two ASALs (1987, 1989) have linked selectec domestic prices to world prices, reduced input subsidies, equalized distribution margins between parastatals and the private sector and removed legal barriers to entry in domestic cereals marketing. An ASIL (1993) is complementing these policy reforms through improved management of public resources in irrigation and water-usc efficiency, natural resource management, animal health and production, and land consolidation. Reform was also initiated in agricultural credit by the Tunisians with Bank support. 3. Place of Agriculture in the Economy. Agriculture plays a key role in Tunisia's economy. It generates 16% of GDP, employs almost one out of every three workers in the labor force, and contributes about 11 % to total export earnings. The main import substitutes are cereals and meat; the main exports are olive oil, fruits and vegetables. Tunisia agriculture is predominantly rainfed. A majority of Tunisian farmers work small holdings with low income. Out of the 387,000 farm holdings,  86% operate farms that have less than 20 ha, but many of them are part-time or subsistence farmers. High population density and limited land supply mean that future growth will depend largely on intensifying production on both irrigated and rainfed land, diversifying farm crop mix, and on increasing efficiency. Agriculture is a priority sector and its continuing development a main concern of GOT, whose strategy is to promote food security, increase exports, alleviate poverty and create employment, especially in rural areas to stop rural to urban area migration. 4. Government strategy in the Eighth Economic Development Plan (1992-1996). The main objective of GOT strategy (initiated under the previous plan period, 1987 - 1991) continues to be increased emphasis on efficiency and food security; on export promotion and outward orientation rather than import substitution; on reliance on private sector rather than public sector; and on decentralized market mechanisms rather than on centralized public controls. Specifically, the GOT has implemented a program of structural adjustments to achieve the following: (i) improve the pricing and marketing framework; (ii) reform parastatals and privatize; (iii) redemarcate activities for valid public sector intervention; (iv) reorient public expenditures to strengthening these activities; and (v) improve the monitoring and evaluation capabilities of the Ministry of Agriculture. 5. Agricultural Credit, Approach and Issues. Since the early sixties, GOT has been directly involved in agricultural credit; it considered credit as an important tool to help all farm households, large and small. This latter category, including subsistence and some noncreditworthy mall farms, represents about two-thirds of the farm population. The GOT has recognized that the rural financial system is characterized by market imperfections, specific risks, and deep poverty that limits commercial banks' involvement and thus demands some government intervention. The financial effort has been substantial in the past but misguided. GOT intervention involved Special Government Funds with subsidized interest rates to agriculture, and linked credit programs with grants to all categories of farmers, including those who were not creditworthy. In times of adverse climatic conditions and(or unfavorable circumstances, it intervened through postponement or rescheduling of interest and principal repayments. 6. On the institutional side, to allocate and deliver credit, it created in 1959 a national agricultural credit bank, expanded into a multipurpose commercial bank in 1969, which developed a country-wide regional branch network to make credit accessible, including to small-and medium-size farms. This bank conducted credit operations on its own resources but also administered direct GOT credit lipes (at GOT's risk) aimed principally at small farmers. GOT also attempted to develop farmers' associations, at the village level, which would handle the credit for their members; the members, in urn, would assume mutual responsibility for repayment of the loans. In 1963, these took the form of Caisses Locales de Credit Mutuel (CLCM) and, in 1973, of SocWsds de Caion Mutuelle Agnicole (SCMA). Both CLCM and SCMA played a minor role in lending to small farmers; GOT eventally had to assume their extnsive arrears. GOT in its desire and concern to reach small farmers maintained an interventionist policy in agricultural operations but, over time, allowed market rates in lending to larger farmers. 7. Reorientation in GOT Agricultural Credit. In the mid-eighties, GOT altered the orientation of its economic policy and undertook broad reforms to build a more efficient, market-oriented and outward-looking economy. In agricultural credit, it introduced major policy reforms to gradually eliminate the interest rate differential between agricultural and market rates and to disengage GOT from direct involvement in credit operations. There has been progress in implementing these changes but they need to be pursued further. Most interest rates including in agriculture are now free, and rates which remain regulated by the Central Bank (at 10% to 11% for the so-called priority activities) are above  -3- market rates (8.8% since November 1993), but in view of the high risks involved (drought), agricultural lending remains financially unattractive to most banks. The GOT confirmed in March 1995 that a drought risk management scheme that will reduce risk for farmers and banks in the future has been made fully operational. This was achieved by (i) modifying (decree No. 93-2374 of November 22, 1993), the National Guarantee Fund (Ponds Natonal de Garantde-FNG) to provide farmers and banks appropriate safeguards against drought, and (ii) spelling out eligibility criteria to the modified FNG in July 1994, and implementation modalities in March 1995. Over the 1990-93 period, despite good progress in the policy environment, the legacy of the past appeared in the form of high accumulated arrears on Govermnent- sponsored credit programs. After restructuring in 1994, the number of these programs was reduced from 48 to four with full effect as of March 1995, and volumes have sharply decreased but the past situation has weakened the agricultural credit system at a time when it is expected that the banking sector will assume an increasing role in the rural credit delivery system. 8. Lessons from Previous Bank Jnvolveint. Performance of agricultural credit projects in Tunisia has been good compared to agreed objectives at the time, and trend improving. The OED's Performance Audit Report of June 1993 on the Fourth Credit Project undersccres the need to continue institutional and financial improvements at BNA. 9. GOr policies have shaped the present agricultural credit system in which the lead bank for agriculture, BNA (the largest commercial bank in Tunisia -- renamed after the merger in 1939 of the National Bank of Tunisia, created in 1969, and the National Agricultural Development Bank, created in 1983), dominates formal lending to agriculture and the rural sector. BNA's share capital (40% private) is priced at the stock exchange of Tunis. Other commercial banks have concentrated on financing commercial and industrial activities, including short-term financing of agro-industry and of imports of cereals, and prefinancing of exports. Because of the high risks and entry costs into rural fmance, other banks have been reluctant to lend for agriculunral investments and input supplies, especially for small- and medium-scale farmers. 10. Rationale for Bank Involvement. The Bank's involvement in the rural financial sector of Tunisia is integral to the Co-w.try Assistance Strategy articulated in 1993 (attached to the Memorandum of the President on a Second Forestry Development Project discussed by the Board on May 11, 1993 (R93-70), by supporting govermment efforts to develop the rural private sector and to alleviate rural poverty. Within this framework, the strengthening of the rural financial sector plays a leading role. The financing of agriculture, where smaliholders predominate and are geographically scattered, is a risky business. Bank involvement through the proposed project would help Tunisia in: (i) broadening and improving the accessibility of agricultural credit by developing the sustaiinable foundations of a sound rural finance system well-integrated into an increasingly liberalized financial sector; (ii) promoting the financial viability of rural lending by separating normal credit risk from climatic risk and from income transfers; and (iii) strengthening the operational capacity of the lead bank for agriculture, the BNA. The proposed project is thus a key complement to the on-going macro and financial reforms to transform Tunisia into a market driven, private sector economy. 11. Project Objectives: Institufional and Development Agenda. Consistent with the Government's priorities, the primary objectives of the project are to assist Tunisia and BNA in promoting viable private investment in rural areas and in strengthening, on a sustainable basis, the financial viability and institutional reform process of BNA in order to improve its development impact on the country's rural sector. Specifically, the project would assist in the following: (i) supporting the implementation of a sound action plan to recapitalize BNA, deal with the arears problem, and improve BNA's overall  -4.- profltabllity; (ii) developing n offctive strategic planning process, decentralized organizational plan and internal' controls for BNA to Implement Improved lending policies, risk analysis and client selection, provide credit to all creditworthy farmers (including small farmers), and expand financial Intermediation (credit and savings) In rural areas; and (Wii) developing a pilot program for the establishment of group lending schemes at village level. 12. ProjectDescription. Theprojectwould supportthefollowing activities over afour-year implementation period (1995-1999): (a) BNA's Credit Program: (I) on-farm processing and marketing investrnents by creditworthy farmers (small, medium and large, including women farmers), cooperatives, and crop and livestock enterprises; (ii) fisheries; (iii) other rural investments (farm and off-farm) including for rural services enterprises and rural women's activities; and (iv) rural housing; (b) BN.A's Institutional Development: (i) implementation of a strategic and organizational plan and decentralized management information systems (MIS) that aims at: improving management effectiveness; enhancing key banking functions; strengthening branch offices for intensification of rural outreach, loan management for improved identification, supervision and recovery of loans and agricultural staff training for effective rural outreach and loan management; (ii) implementation of an action plan to absorb BNA's arrears and strengthen its financial sitation; and (iii) improvement of the transparency of its resources and activities by separating GOT-funded credit lines from its regular operations and by establishing a cost accounting system for its branch network; and (c) Inonnal Rural Fance and Group Lending Schemes: developing and carrying out with BNA-GOT, by March 31, 1996, a study to assess the feasibility of group leDding *L village level, covering two parts: (i) informal rural markets and the operation uf group lending to better understand the riskiness, terms and recovery; and (ii) the institutional framework Oegal and regulatory) to better understand how best to promote mutual guarantee credit groups and credit unions at the farm and village level. By uniting, smallholders can reduce costs of borrowing, keep collection rates high and improve access to credit. Based on study recommnendations, pilot implementation would start by November 1, 1996. Total project cost is estimated at US$420 million equivalent, with a foreign exchange component of US$223 million, or about 53 % of total cost. The proposed Bank loan of US$65 million would finance less than 16% of total project costs and 29% of the estimated foreign exchange costs of the project. A breakdown of costs and the financing plan are shown in Scbedule A. Retroactive financing of up to 10% of the loan amount (US$6.5 million) would be made to the Borrower to permit contracting for eligible subloans during the FY95 agricultural season. Amounts and methods of procurement and disbursements, as well as disbursement estimates, are presented in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Tunisia are given in Schedules C and D, respectively. The Staff Appraisal Report (No. 13922-TUN), dated April 25, 1995 is being distributed separately. 13. Agreed Actions. BNA has provided a satisfactory, updated action plan (adopted on February 2S, 1995 for 1995-97) for financial restructuring on a sustainable basis of the institution with monitorable indicators. BNA has also provided, with its approved action plan, a satisfactory financial  - - performance development letter (signed March 25, 1995). The action plan includes tho following: (i) on BNA financial performance--monitorable Indicators aimed at maintaining minimum standards of capital adequacy (a required 5% by June 30, 1996), liquidity, profit, financial margin, and recovery rates (current capital adequacy level is 3.7 %--see Schedule E); (ii) on BNA subquality loans--a recovery plan; (iii) on provisions and capital adequacy-adequate provisioning based on the Central Bank prudential regulations, measures to reduce BNA's credit and overdraft exposure to three large public enterprises, and a capital increase; (iv) on institutional strengthening--first, formulating, by December 31, 1995, a new strategic planning process and related MIS and internal controls, and make them operational by December 31, 1996, to translate more efficiently goals, strategies and tasks into financial and operational targets; second, introducing a decentralized cost-accounting system by June 30, 1996 to determine financial results by sector and by regional branch; and third, an annual training program for BNA staff (to be furnished to the Bank by November 30 each Year for the following year). Furthermore, BNA will (i) on reporting--prepare and furnish to the Bank semi-annual progress reports on the project; (ii) on audit-send to the Bank annual audit reports of international standards; and (iii) on implementation performance-carry out a mid-term review (according to agreed terms of reference) with the Bank not later than April 30, 1997, to assess progress on implementation. With the GOT, tIe action program agreed upon is a study (by March 31, 1996) and the implementation (as of November 1, 1996) of a pilot program on informal group lending; and covenanted agreements to Oi suitably maintain the FNG; (ii) implement with due diligence and efficiency the measures agreed in March 1995 on 44 restructured and phased out GOT funded credit lines including the repayment to BNA by end 1998 of past advances made by BNA to prefinance these GOT funds, and on BNA's role and remuneration of services for managing four remaining funds; and (iii) further reduce BNA's exposure to selected public enterprises by June 30, 1996. These actions will reduce BNA subsidies to GOT (Schedule F) and increase BNA's financial viability. 14. Project Implementation. BNA will be responsible for the implementation of the project, and the GOT will provide its full support to BNA and be accountable for maintaining operational the drought risk coverage mechanism of the Fonds National de Garantie - FNG; and for launching the study on informal rural finance and on group lending. BNA is in the process of delegating an increasing amount of decision-making authority to the regions and giving greater autonomy to the regional and branch offices. The goal is to make regional and local managers more responsible for operational decisions. BNA will assume the full credit risk on subloans. The agreements reached are summarized in Schedule G. 15. Benefits. The ultimate beneficiaries would be a wide range of private investors and in particular the small and medium-scale farmers who could benefit from an improved rural financial system and drought risk coverage mechanism. BNA, a critical bank in Tunisia not just because of its size but because of its involvement in the strategic sector, would be strengthened at a crucial stage in its institutional development. In addition, measures complementary to the project are already helping GOT reorient its rural credit policy which, over time, would make rural financal intermediation more attractive, hence more competitive. This reoriented approach separates credit from income transfer and addresses each of the three major sources of risk in financial intermediation separately, namely credit, moral and climatic. Instead of having to deal with the three types of risks, BNA will focus on credit risk. By separating GOT and BNA accounts, the GOT has taken a first step in ending the confusion between credit and income transfer, a confusion for lender and borrower alike, which has undermined credit discipline. With the focus on credit risk, BNA would place its agricultural and rural activities on a sounder financial and operational footing and benefit from lasting improvements in recovery. An increased number of creditworthy smaliholders should benefit from BNA's strengthened rural outreach. To address climatic risk, the project is supporting the GOT's decision to use the FNG to help both  -6 - farmers and credit institutions to better manage the effects of drought. The objective here is to provide a more efficient alternative to pest GOT direct interventions which contributed to poor credit discipline. Over time, rural financial intermediation will expand and become more competitive as a clear demarcation is maintained between credit and income transfer, as interest rates become more attractive, and the risk of drought is better managed, 16. Risks. The project carries two types of risks. One set of risks is outside the control of the main interlocutor, BNA. The other is manageable by the institution. (a) Risks Outside the Control of BNA. The major risk outside the control of BNA is that new droughts (as in 1993-94) could undermine BNA's recovery performance although the drought risk scheme is fully operational. The project is taking measures to help BNA in recovery and in buffering the negative financial impact. (b) Risks Within the Control of BNA. The major risk is that credit discipline will not be fully reestablished. BNA is addressing the problem of past poor repayment discipline by restructuring its rural operations in the following ways: (i) improving the creditworthiness of low income borrowers by grouping them (group lending); (ii) tightening eligibility criteria on creditworthiness; (iii) linking savings and past repayment record to new loans; and (iv) strengthening rural outreach. 17. Environmental Aspects. This is a category B project. The environmental issues are of limited scope. The focus for action will be on (i) sound appraisal procedures for subloans to agro- industries and fisheries in particular; and (ii) training in environmental assessment methods. 18. Country Portfolio Management: Implementation of the Bank's portfolio in Tunisia is satisfactory, and this includes the EFRSL, the ASIL and the PICP. 19. Reconuendation. I am satisfied that the proposed loan to BNA would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the Loan. Lewis T. Preston President Attachments Washington, D.C. By (autm S. Kaji Apil 25, 1995  -7 - Schedule A REPUBLIC OF TUNISIA NATIONAL RURAL FINANCE PROJECT ESTIMATID COSTS AND FINANCING PLAN Estimated Costts Cost (D or US$mlulon)f Local Foreign Total 1. Agricultural Development Enterprises 36.5 24.5 61.0 2. Small- and Medium-scale Fanmers 83.0 92.0 175.0 irrigation 25.0 25.0 50.0 livestock 18.4 27.6 46.0 plantation 31.4 7.6 39.0 equipment 8.2 31.8 40.0 3. Large-scale Farmers 33.6 40.4 74.0 irrigation 10.0 10.0 20.0 livestock 6.4 9.6 16.0 plantation 12.8 3.2 16.0 equipment 4.4 17.6 22.0 4. Fishermen 6.9 16.1 23.0 small 4.8 11.2 16.0 large 2.1 4.9 7.0 5. Service Co-ops and Medium Enterprises 25.6 38.4 64.0 Cereal storage 10.4 15.6 26.0 Cold storage/processing 15.2 22.8 38.0 6. Rural Housing 3.0 2.0 5.0 7. Artisans' & Rural Women's Enterprises 5.2 4.8 10.0 8. Institutional Development 2.8 5.2 8.0 Total Project Cost 197.0 223.0 420.0 Total Base Costs 183.0 205.0 388.0 Contingencies 14.0 18.0 32.0 /a Includes taxes and duties estimated at TD 62 million; /b TDOI US$1. Fmancing Plan (US$ mbion) Subborrower's BNA's G0OT'h IBRD KfW CD Towl Equity onn Contribution Loan AU Funds Sources 1. Agricultual Development Enterprises 15.3 18.7 3.0 15.0 4.0 5.0 61.0 2. Small- & Medium-scale Fanmers 25.0 87.8 24.7 10.5 10.0 17.0 175.0 3. Large-scale Farmers 21.0 31.0 3.0 15.0 4.0 - 74.0 4. Fishermen 3.5 10.7 2.3 3.0 - 3.5 23.0 5. Service Co-ops & Medium Enterprises 15.7 21.3 1.5 19.0 3.5 3.0 64.0 6. Rural Housing 1.0 3.0 - 1.0 - - 5.0 7. Arisans' and Rural Women's Enterprise 1.0 2.5 1.0 1.0 1.0 3.5 10.0 8. Institutional Development - 2.0 - 05 2.5 3.0 8.0 Totalll A Activities 823 177.0 353 65.0 25.0 35.0 420.0 %20 42 8.5 15.5 6 8 loU /a in accordance with the 1993 Unified Investment Code.  8- Scheduile B REUBLIC OF TUNISIA NATIONAL RURAL FINANCE PROJECT Summary of Proposed Procurement Arrangements (US$ million cquivalent)' --------Procurement Medtod -------- Total ICB LCB Orelt NBP cost 1. Farm Machinery, farn and non-farm equipment and implements, livestock, fishing gear, civil works and working - - 412.0 - 412.0 capitl under subloansh (64.5) (64.5) 2. ConsultantsM - - 0.2 0.8 1.0 (0.2) (0.2) 3. Software, computer maintenance, - - 0.3 0.7 1.0 training programs (0.3) (0.3) 4. Data processing - - - 6.0 6.0 TOTAL - - 412.5 7.5 420.0 (65.0) (65.0) la Figures in parentheses represent Bank loan financing; lb This represents nonual commerciil pnrctices for good. and civil works for on-fann and non-farm investments; for consultant, Bank guidelines for employment of consultants would be followed; for software, maintene and training, intesnaionul or local shopping would apply; /c NBF: Non Bank- financed; financed by KfW, CFD and BNA;/d Includes taining specialism; le joindy financed wihi lfW, CFD, BNA, and beneficiaies. Disbursement Procedures Category Amount of the Loan Alocated % of Expenditures (US$ Million) to bejiaced 1. Subloams to Agricultual Development Enterprises 15.0 50% of amounts paid by BNA 2. Subloans to Small- & Medium-size farmers 10.5 50% of amounts paid by BNA 3. Subloans to Large Farmers 15.0 50% of amounts paid by BNA 4. Subloans to Fishermen 3.0 50% of amounts paid by BNA 5. Subloans to Service Co-ops and Medium-Size 19.0 50% of amounts paid by BNA Enterprises 6. Subloans for Rural Houing 1.0 60% of amounts paid by BNA 7. Subloans to Artisans' & Women's Enterprises 1.0 60% of amounts paid by DNA 8. Goods and Services 0.3 100% of foreign expenditures and 80% of local expendiures 9. Training and Consultats 0.2 100% of total expenditures Total: 65.0 Estimated Disbursnements(US$ Million) Bank FY 1995 1996 1997 1998 1999 Annual 5 16 16 16 12 Cumulative 5 21 37 53 65  -9- Schedule C REPUBLIC OP TUNISIA NATIONAL RURAL FINANCE PROJECT Timetable of Key Project Processing Event (a) Time Taken to Prepare: 35 months (b) Prepared by: Banque Nationale Agricole (BNA) with Bank's, KfW's, and CFD's assistance and Government's support (June 1992 - May 1994) (c) Malin Preparadon Mission: November 29 - December 11, 1993 (d) Special Audit Reports on 1992 and 1993 BNA's Accounts, Loan Classification, Risk Evaluation, Internal Procedures, in compliance with the Central Bank new Prudential Regulations, and Special Audit Report on BNA's Capital Adequacy (May 1994) (e) Pre-Appraisal bission: April 18-29, 1994 Cf) Time taken to Process: 6 months (g) Appraisal Mission Departure: December 1, 1994 (h) Negotiations: March 31, 1995 (i) Planned Date of Effectiveness: June 30, 1995 (j) List of Relevant PCRs and PPARs: First Agricultural Credit (PPARIPCR No. 2497) Second Agricultural Credit (PPARJPCR No. 5401) Third and Fourth Agricultural Credit Projects (PPAR/PCR No. 11977 of June 11, 1993).  -10- JSnchLeRl The Statu a i Dank Grouio Oneraloknin Tuspigh Statement of Rank Loans and IDA Credils (As or Februnry 2t. 19952 USS Million Amount Loam or Fiscal (less aneellatlon.) CreditQNo. _Yi Borrower Purm ok LIM Undtiabuust Seventy-six loans and 10 credits fully dinhursed 2,123.65 75.16 Of which SALs, SECALs, and Program Loans a 2781 1987 Republic of Tunisia Industry & Trade Policy 150.00 2754 1987 Republic of Tunisia Agiculture Sector Adjustment 150.00 2962 198B Republic of Tunisia SAL I 150.00 3109 1990 Republic of Tunisia PERL 130.00 * 3424 1992 Republic of Tunisia Econnmic & Financial Reform 250.00 Sub-totd 830.00 Disburuine Loans 2573 1985 Republic of Tunisia Irrigation Management lmpmvemn 17.00 1.28 2736 1987 Republc of Tunisia Fourth Urban Development 30.20 4.15 2870 1988 Republic of Tunisia Forestry Development 20.00 1.96 2896 1988 Republic of Tunisia Highways Maintenance & RehabiEta 63.00 7.65 2911 1988 Republic of Tunisia SM 111 28.00 1.50 3054 1989 Republic of Tunisia Education & Training 95.00 14.88 3064 1989 Republic of Tunisia Fifth Urban 58.00 4.56 * 3078 1989 Republic of Tunisia ASAL 11 84.00 3.05 3217 1990 Republic of Tunisia Research & Extension 17.00 10.08 3255 1991 Republic of Tunisia Employment & Training Fund 12.00 1.88 3307 1991 Republic of Tunisia Pbpuladon & Family Health 26.00 15.42 3308 1991 Republic of Tunisia Hospital Research Support 30.00 24.06 3418 1992 Republic of Tunisia Gas Infrastructure 60.00 18.12 3456 1992 Republic of Tunisia Higher Education 75.00 70.50 3507 1993 Republic of Tunisia Municipal Sector 75.00 36.25 3601 1993 Republic of Tunisia Second Forestry 69.00 68.00 3661 1994 Republic of Tunisia Agriculture Investment Sector Loan 120.00 113.78 3671-80 1994 Commercial Banks Private Investment 120.00 104.85 3691 1994 Republic of Tunisia Development of Mts. NW Region 27.50 26.00 3782-83 1995 Republic of Tunisia Water Supply & Sewerage 58.00 58.00 3786 1995 Republic of Tunisia Secondary Education 98.30 98.30 3840 1995 Republic of Tunisia Rural Roads lb 51.50 51.50 TOTAL 3,358.15 75.16 735.77 1 Of which has been repaid (only amortizaion) 1088.53 18.81 Total held by Bank and IDA 2,269.62 56.35 Amount sold 34.82 4.74 of which repaid 34.82 4.74 Total Undisbursed 735.77 * SAL, SECAL or Program Loan \a Approved after FY80 \b Not yet effective  - 11 - _Schedule D (Pase 2 of 2) Statement of IFC Investiment in TUNISIA (As of February 23. 1995) Oriuinal GCss Commitment Fr.sl (UmsMWilin Year Obliuator T1YDe of Business Loan Enmit Total' 1966/ Banque de Developpemt Development Financing - 2.31 2.31 70178 1969 Banque nationale Develpment Financing 6.83 2.25 9.08 1973/ Societe d'Etudes et de Deve. Tourism 2.53 0.63 3.16 1975 loppueent du Souuse-Nord 1986/ Societe Jndustrielle des Texdles and Fibers 10.00 3.21 13.21 1992 Textiles (STEX 1987/ Adwya S.A. Genead Manuficturing 2.39 0.35 2.74 1991 1987/ COMETE Engineering Indusrial Services - 0.05 0.05 1993 1988 Societe des Industries Textiles Textiles & Fibers 2.88 2.15 5.03 Reunies S.A. (SITER) 1991 Societe Monasirieone des Texfiles and Fibers 3.66 1.24 4.90 Textiles (SOMOTEX) 1992/ Societe Miniere de Bougrine Non-Ferous Metals 14.00 3.10 17.10 1994 1993 Ideal Sanitaire Cemeut & Consuction Mateials 3.06 1.02 4.08 1995 Int. Maglreb Mer. Capital Makets 0.31 0.31 Tota gross coamitments 45.35 16.62 61.97 Less cancellatians, terinatons, repayments sales and exchange adjustnents 26AS 8.00 34.48 Total commitrnts held by IFC 18.87 8.62 27.49 of which undisbursed 3.06 031 337 * Does not include participa  -12- Schedule E REPUBLIC OF TUNISIA NATIONAL RURAL E1NANCE PROJECT BNA Financial Position: Restated Net Worth, and Capital Adequacy Ratio (%) (ICD million) 1992 1993 1994 1994 (Audited) (Audited) (Audited) (Unaudited) 12/31 12/31 3/31 12/31 1. Reajusted Equity 117 110 270 296 2. Provision shortfalls (249) (238) (219) (201) 3. Net Worth (132) (128) 51 95 4. Classified Assets 2,412 2,555 2,555 2,562 5. Capital Adequacy % (5. 5) (5.0) 2.0 3.7  - 13 - Schedule F REPUBLIC OF TUNISIA NATIONAL RURAL FINANCE PROJECT Elenents of Subsidy Analysis of BNA and GOT-related Operations 1 An analysis to determine whether or not subsidies are present in BNA has been made, keeping in mind the main problems of financial institution viability and the project crucial issues. The main finding is that BNA, which is a financially autonomous commercial bank in transition does not depend on GOT's specific subsidies to operate. but is vulnerable to GOT's influence. Priority has therefore been given to selecting widely accepted international standards used by the international banking profession to measure BNA's performance (Table 5 of SAR). The BNA-GOT cross-financing situation is detailed below and additional data are in working file 26. 2. DNA Subsidies to the GOT. One key reality is that BNA has been subsidizing the GOT (a net cumulative total of about TD 190 million in 1993 and TD 214 million in 1994): (a) through huge overdrafts to public enterprises at GOT's request, and financed by BNA at money market rates-MMR (e.g., ONH and OC for a total of TD 835 million in 1993, reduced to TD 500 million in 1994). BNA incurred losses with ONH (I'D 7.7 million), financial costs with both of these large clients (jnterests due at MMR plus 0.5% but not perceived for TI) 94 million in 1993 and TD 46 million in 1994), and additional provisions of TD 167 million representing 71 % of provision shortfalls of TD 238 million in 1993. It is now part of GOT policy and a Central Bank's requirement, fully supported by the Bank under the project, to reduce BNA's exposure to these government-owned enterprises; (b) advances to GOT for budget-funded credit lines (ID 56 million plus TI) 25 million unpaid interest in 1993, down to a total of TD 54 million at the end of 1994 after the repayment of TD 27 million in 1994 ). These advances (stopped in 1992 by BNA's new CEO) have been financed by BNA at MMR resulting in TD 6.4 million additional financial costs; (c) insufficient fee paid by the GOT to BNA for administering past GOT credit lines, resulting in an annual loss of TD 1.4 million for BNA in 1992 and in 1993; and (d) the transfer to BNA, in 1989, of the non-perf'rrming portfolio of the ex-BNDA (about TD 149 million in 1993-asset class four-including TD 14 million of unpaid interests in nonaccrual status) as well as the GOT's liabilities of the ex-BNDA attached to it (I'D 113 million of GOT's outstanding borrowings from the European Investment Bank/European Community and ADB). 3. BNA's Main Sources of Funding.The bulk of BNA's resources come from deposits, which are mobilized in a highly competitive market at fully liberalized interest rates, and in the money market. BNA's share capital (already 40% private) is priced at the Tunis stock exchange. BNA has no exemption from reserve requirement on deposits. 4. Supplemental Margin to All Banks.For priority activities at regulated interest rates of 10% to 11% (with MMR at 8.8%-see para 3107 of SAR), all local commercial banks are compensated by a supplemental margin of 1.8% to 2.8% guaranteed by the Government1 through the Central Bank. This transitory system-in the interim of full liberalization-has enabled the elimination of the recourse to 1/ This represents about TID 6 million for 1994 for all banking system, out of which TD 2.7 million went to BNA (including TD 0.4 million for agricultural production activities).  - 14- rediscounting at the Central Bank to finance the banking sector. Priority activities represented 8% of BNA's commitments at the end of 1994, down from 10% the previous year. 5. Restructured GOT Credit Lines. As a result of the restructuring of the GOT's agricultural credit programs, the ownership of TD133 million of outstanding (uncollected) farmers' loans have been transferred to BNA by the GOT beginning 1994 and this transfer is reflected, on the other side of the balance sheet, as a quasi-equity fund-fonds de dotation. No dividends are paid on it as it is-in accounting terms--a special reserve that is part of total equity for the Cooke ratio calculation, but not part of share capital. This non-liquid reserve, which represents 3.5% of current BNA's total resources, is GOT's contribution to the financial restructuring of the non-performing GOT credit lines, and implies an implicit interest subsidy on the opportunity cost of capital on the money market of about TD 3 million p.a. These restructured GOT credit lines (at least 50% are irrecoverable) will be guaranteed by the GOT (agreement signed in March 1995), as they fall due over the period 1994-2012. Interests due on these loans will be paid to the GOT, not BNA. 6.. Concessional Borrowings. Expected concessional borrowings from CFD (at 6.5%) and KfW (at 4.5%) at below MMR (8.8%) during the four-year project period would lead to some elements of interest subsidy in favor of BNA of TD 1 to 3 million p.a. which would be partly offset by the premium above MMR to be paid by BNA on Bank funds.  - 15 - Schedule G REPUBLIC OF TUNISIA NATIONAL RURAL FINANCE PROJECT Agreements Reached and Recommendation 1. The Guarantor has provided two signed agreements, satisfactory to the Bank on: (a) the transfers of amounts due by GOT to BNA (TD 133 million) under the restructured GOT credit lines, and the implementation modalities of the GOT guarantee on the shortfalls; and (b) the precise role and responsibilities (disbursement, bookkeeping) and remuneration of BNA in the operations of the remaining GOT credit lines; The Guarantor also committed itself to: (a) repaying by end 1998 past advances made by BNA, amounting to TD 54 million as of December 31, 1994, for past GOT credit operations; (b) reducing by June 30, 1996 BNA's exposure to selected public enterprises (OC, Groupe Chimique); and (c) ensuring that the drought risk management scheme established and made operational within the framework of the FNG is suitably maintained. 2. BNA has provided with its adopted action plan for 1995-1997, a satisfactory financial performance development letter, highlighting key monitorable indicators aiming at maintaining minimum standards of capital adequacy (5% in June 1996), liquidity, profitability, financial intermediation margin (of no less than 2%), and pursue a high rate of loan collection and comply with the Central Bank prudential regulations on loan classification and loan loss provisioning so that provision shortfalls are gradually eliminated by Project Completion. 3. Agreement was reached during negotiations on the following: (a) BNA would obtain Bank approval for individual sub-loans to agro-processing/fishery investors, and to agricultural development enterprises of above US$1 million equivalent; (b) BNA would formulate, by December 31, 1995, its new strategic planning process and related management information and control system, and make them operational by December 31, 1996; (c) BNA would introduce a decentralized cost accounting plan by June 30, 1996 aiming at determining its results by sector and by regional branch; (d) BNA would monitor onlending interest rates and spreads on an annual basis so that they cover financial and operating cost and credit risk;  - 16- (e) BNA would send to the Bank semi-annual progress reports, which will include an improved methodology to report on loan collections, and annual audit reports of adequate international standards; (f) BNA would prepare by November 30 each year, as part of its five-year strategic plan for training, an annual training program for the following year acceptable to the Bank including training in environmental matters; (g) BNA and the Government would carry out the study on informal group lending schemes by March 31, 1996 according to terms of reference acceptable to the Bank and start pilot implementation by November 1, 1996 so as to cover the 1996-97 agricultural season; (h) BNA and the Government would carry out a comprehensive mid-term review (according to agreed terms of reference) with the Bank not later than April 30, 1997, to assess progress achieved in project implementation; (i) the Government and BNA would implement with due diligence and efficiency their agreements of March 16 and 25, 1995, on the restructured GOT credit lines, and on BNA remuneration in the operations of the remaining lines; (j) ithe Government and BNA would implement a satisfactory foreign exchange risk coverage for the proposed loan; (k) Fulfillment by BNA of conditions of effectiveness of CFD and KfW loans by June 30, 1996; and (l) Compliance by BNA with the procurement arrangements. 4. In view of the above agreements, the project is suitable for a Loan to BNA, with the Guarantee of the Republic of Tunisia, for US$65 million equivalent with a term of 17 years including a five-year grace period. The project is expected to be completed by March 31, 1999.  I