Senegal - Agricultural Credit Project

C- ~ 5 (RESTRICTED FILE Report No. P-660 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 The report may not be published nor may it be quoted as representing their views.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 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIREC TORS ON A PROPOSED LOAN AND CREDIT TO THE REPUBLIC OF SENEGAL January 2, 1969  INTERiNATIOiNAL BANIK FOR RECONSTRUCTION AN11D DEVELOPM!ENT IHTERIITATIOAVLL DEVELOPEiJT AS SOCIATION REPORT ANGD RECOE1gENDATION OF THE PRESIDENT TO THE, EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE R=UBLIC OF SE-E;GAL 1. I submit the following report and recommendation on a proposed operation consisting of a Bank loan in an amount in various currencies equivalent to USt;3.5 million and an IDA credit, in an amrount in varicus currencies, equivalent to US$6.o million, to the Republic of Senegal. PART I - HISTORICAL 2. In kpril 1967, the Government of Senegal applied to IDA for a credit to help finance the continuation of the groundnut/millet production improvement program started in 1964 with financial assistance from the European Econcmic Conmunity (EEC). 3. The application was preceded by an IBRD/IDA identification mission in Harch 1966, and preparation and follow-up missions in November 1966 and March 1967. The project was appraised in July/August 1967, December 1967 and lKay 1968. The original application contemplated an IDA credit of US$9.4 million. Subsequently, in view of the shortage of IDA funds, it was agreed that Bank Group financing would consist of a us$6.0 million IDA credit and a US$3.5 million Bank loan. Negotiations for the proposed Bank loan and IDA credit were completed in Washington on November 1, 1968. The Goverrnment of Senegal was represented by a delegation headed by Mr. Abdou Diouf, Miinister of Planning and Industry. 4. The proposed operation would be the fourth IBRD/IDA financing in Senegal, bringing total assistance to Senegal to US$30.0 million equivalenti.  - 2 - v. Tile LolloArn- is a surrunanr statarient of Bank loans and IDA credits to Senegal as of November 30, 1968: Loan or qnount Credit (US$lillion) ETumber Year Borrower Pupose Banlk IDA Undisbursed 100-FR 19354 Office Central LLilwaiWs 7.5 des Chemins de Fer de la France d'Cutre 14er 96-SE 1966 Republic of Railways 9.0 7.4 Senegal 493-SE 1967 Port Autonome Port 4.0 3.0 de Dakar Total 11.5 of which has been repaid to Bank and others 7-. Total now outstanding 4.0 9.0 Amount sold: .4 Total now held by Bank and IDA 3.6 9.0 Total undisbursed 3.0 7.4 10.4 6. Execution of the railway and harbor projects financed in 1966 and 1967, has boen slower than planmed, due to delays in bidding procedures and to weahmess in the ranageinent of the railwayrs. These problems are now being resolved, and it is expected that -the railway project will be com- pleted in mid-1970 (one year behind the original schedule) and the port project in late 1970 (ten months behind schedule). 7. In August 1966 IFC made an equity investment of US$1.0 million in, and a long-term loan of US$2.46 million to, Societe Industrielle des Engrais du S6negal (S.I.E.S.), a Senegalese company wrhich operates a fertilizer plant near Dak-ar. The amount disbursed on these investments as of November 30, 1968 was about $2.7 million.  - 3 - 8. No further proposals for Bank loans or IDA credits are expected to be presented to the Executive Directors in the present fiscal year. However, other projects in agriculture and transport, in particular for rice production and feeder roads, are at an early stage of consideration. PAR.T II - DESCRIPTION OF TIE P-1OPOSED FINANCING 9. BO0ROW-ER: Republic of Senegal BENEFICIARY: The Banque INationale de Developpement du Sen6gal (3NDs) and various other organizations active in the field of groundnut cultivation and marketing. PURPOSE: Continuation of a program to improve production in the "groundnut basin" of Senegal, mainly through provision of credit for small farm implements and technical assistance. AMOUNTS: IBRD Loan: US$ 3.5 million. IDA Credit: us$ 6.o million. AMORTIZATION: IBRD Loan: In 30 years includin6 a 10-year period of grace, through semi- annual installments beginning on January 1, 1979 and ending July 1, 1998. IDA Credit: In 50 years including a 10-year period of grace, through semi- annual installmonts of 1/2 of 1% from January 1, 1979 through July 1, 1988 and 1 and 1/2% from January 1, 1989 through July 1, 2018. INTEREST RATE: On IBRD Loan: 6-1/2H,. MERVICE CHARGE: On IDA Credit: 3/4 of 1% per annum on the principal amount of the credit disbursed and outstanding. CO)MIT1E2NT CHARGE: On IBRD Loan; 3/4 of 1%. REIELDZIG TERMS: Up to US$6.92 million of the proceeds of tho Loan and tho Crodit vill be relent to BHDS at a rate of 3 .5 for 14 years including a grace period of four years, for onlending to the farmers on terms described in the Appraisal Report (paragraph 3.20).  DISBUSE!ENT: The IBRD Loan and the IDA Credit would be made at the same time and for the same purpose. The allocation of proceeds would be the same for both the Credit and the Loan. The IDA Credit would be entirely disbursed before the Government of Senegal would draw on the IBI2D Loan. ESTLUITOD ECONiiOT -E c7 TUPJ: 25. PART III - TI-E PftOJECT 10. Awn appraisal report entitled "Agricultural Credit Project - Senegal" (TO-685a) on the proposed project is attached. 11. Agriculture is Senegal's main economic sector, employing 70% of the active population. Subsistence farming predominates, and groundnuts are the one important cash crop and the main source of foreign exchange, accounting for about 60% of exports. The other main crops, which are produced for internal consumption, include millet, cassava and rice. Tle Government of Sene-al is making considerable efforts to diversify agri- cultural production and to increase output in order to increase exports, and reduce imports of foodstuffs and rawy materials. 12. The project financed by the proposed loan and credit is an important feature of the overall agricultural development program, and is directed toward solving one of Senegal's major economic problems. Senegal faces a considerable loss of export revenues as a result of the progressive el.1iination of preferential arrangements for marketing its groundnut crop in France. To compensate for this loss, a five-year (1965-69) production imLaprovement program is being carried out with financ- ing from the Fonds Europeen de Developpement (FED). The objective of this program is to bring about a 205' overall increase in production of groundnuts, by increasing acreages and yields, while expanding at the same time pro- duction of other crops, notably millet. The provram directly affects about one million rural inhabitants, over one quarter of the population of Senegal. It involves provision of extension services, subsidies to encourage the use of fertilizers, soil and seed improvement, and process- ing and storage facilities. The total cost over the period 1965-1969 is expected to be about $19.6 million equivalent.  13. The proposed project is essen-ltially : continuation on a broader basis, includlin- a redistribution of inst-itutional responsibilities, of the FZD-financed pro-rara. It is difficult to evaluate the precise impact of tihe entire proEramn to date because of climatic factors, but its long- term results wiill clearly be beneficial, particularly in familiarizing farmers with -the use of fertilizers and better h1usbandryr practices, and it is expected thlat the target rate of increase of production (5% a year) rill be substantially achieved. The average annual net retun- to the economy of the production improvemenit program that covers the period from 1964 to 1972, includain the project costs and calculated over a life of 10 years, is estimated on reasonable assnmptions at about 25. If the estimated value of output for the rest of the life of the program were reduced by 10Q, the rate of return would be about 20%. If in addition the estimated costs of inputs increased by 10W, then the rate of return would be about 14,'. 14. The project iwill cover the three years 1969/70 through 1971/72. It will provide financing for three interlocking aspects: (i) credit to farmers through the BEDS for the purchase of farn implements; (ii) irnprovement of the operation of the Office 11ational de CooD6ration et d'Assistance pour le D6veloppement (ONCCAD); and (iii) serv-ices nrovided to the farmers on behalf of the cooperatives whichl are necessary until O'TCaD's oper tions are improved. 15. OJC-- was formed in 1966 to provide techLnical services to farm cooperatives, marlcet grounidnuts collected by the cooperatives, nage and supervise -the production and distribution of groundnut seed, and ensure the supply, distribution and transportation of farm inputs (im- plements, fertllizer, seed, etc.) to cooperatives. The Government has invited qualified consultants to review O0NCAD's operations and to supply the mana-erial and technical services necess-sar to improve them. US$l.75 million equivalent of the proposed IBFD/IDA financing would meet the estimated foreign exchange costs of these services and of fellolwships for members of QTCADs staff. Evaluation of consultants' proposals will be made by the C-overnment, and negotiation of the contract with the successful consultant would be made in cooperation with the Bank. 16. Eatension services have been provided in the past by the Societe d'Aide Technique et de Cooperation (SATEC), a French consulting firm with a majority of public capital. A Senegalese enterprise, Societe de Deve- loppement et de Vulgarisation (SODEVA) has been for;med to take over the SATEC operations. Satisfactory arrangements have been co-ncluded amnong SATEC, SODEVA and the Governnent to ensure management of SODEVA by SATEC during its initial years. In addition to the project, the Caisse Centrale  - 6 - de Cooperation Economique, a Frenc'n Government-controlled agency, plans to contribute approxirnately US$1 .i million equivalent towards the total costs of extension services in the project area through a long-term loan. 17. An important measure is the formation of a Project Coordinating Committee to ensure close cooperation between the organizations involved in execution of the project. This Cammittee would also be authorized to centralize the credit requirements of the cooperatives and to make recom- mendations as to the size of the overall credit program, thus expediting what has proved in past years to be a cumbersome and involved process. 18. The total cost of the project, covering the crop years 1969/70, 1970/71 and 1971/72, is expected to be about US$2'24.2 million equivalent, of which at least US$7.0 million equivalent would be in foreign exchange. The project will be financed 395, by the ITBD/IDA, 6l by contributions from fanners, 34'! b- the BDDS from its oin resources, and 11 by the Senegal Govermtnent. The proposed financing from the Bank and the Asso- ciation would total US$9.5 million. Of this amo-unt, about US$5 mrillion would be disbursed for foreign expenditure, the remaining US$2 million of the foreis-n cost of the project representing the purchase of imported fertilizer from funds provided by the Goverrnaent. The balance of the financing to be provided by the Bank and the Association, amounting to US-43.5 million, wlould be disbursed for local expenditure. As noted in paragraph 26 belowi, Senegal is pursuing a rigorous domestic financial policy despite serious difficulties encountered in recent years; at the same time it is making every reasonable effort to mobilize development assistance from abroad. Senegal has a soundly-designed development program, and additional fiinancing in some form is required if its objectives are to be achieved. Against tlhis background, and in view of the strategic place of the proposed project in the development program, it is considered that the circumstances fully jus-tify participation by the Bank and the Asso- ciation in tais project on the scale proposed. 19. Procurement of implements for which credit would be provided from the proposed IBRD/IDA financing, would be on the basis of local competitive bidding. Local agents of foreign agricultural machinery manufacturers and SISCOI4A, a Senegalese firm which produces agricultural implements, are expected to participate in the bidding. This procedure would ensure that procurement is carried out on the most economical basis consistent wiith the rather simple and specialized nature of the implements being purchased. The Government has agreed that it will promptly grant the necessary licences and foreign exchange authorizations to local agents of forei-n suppliers who are awrarded contracts. 20. Due to planning requirements and to the time required to work out the necessary institutional arrangements, 0-T:CD has had to place advance orders covering about one third of the implements and carts needed for the  - 7 - 1969/70 plantinC season. It is reccmmended that retroactive financing be accepted for payments made on these contr-acts since October 1, 1968, amounting to some Q910,000, as well as for about :2 5,000 in technical services. The advance orders for implements, in the amount of about $760,000, were placed with SISCOUEA'I without competitive bidding but it is recommended that, as an exceptional matter, these orders be accopted as a basis for disbursements, especially since the prices obtained appear to be quite comparable with those that might have been obtained through competitive bidding. PART IV - LEGAL INSTRUi ENMTS 21. Drafts are being distributed to the Executive Directors separately of: (i) the Loan Agreement between the Bank and the ILepublic of Senegal; and (ii) the Development Credit Agreement between the Association and the i,epublic of Senegal. The 2epo-rt of the Coraittee provided for in Article III, Section 4(iii) of the A3rticles of Agreement of the Bank, and the '7ecommendation of the Committee provided for in Airticle V, Sec-tion l(d) of the Articles of Agreement of the Association are also being distributed separately. 22. The 2olloaing features of the Loan, Credit and Subsidiary Loan Agreements are of particular interest: (a) Section 2.03 (b) of the Loan Agreement provides that, except as shall otherwise be agreed between the Borrower and the Bank, no withdraw,als shall be made f rom the Loan Account on account of any expenditures on the Project until the amount of the Credit shall have been fully wiithdrawn. In Iceeping wfith the foregoing, the Loan and Credit Agreements include an identical Schedule on the allocation of Loan and Credit Proceeds (Sched- ule 2 to the Loan Agreement and Schedule 2 to the Credit Agreement). (b) Section 4.01 of the Credit Agreement incorporates by reference Sections 5.01, 5.02, 5.03, 5.04, 5.05, 5.09 and 5.10 of the Loan Agreement which constitute particular covenants of the Borrower equally pertinent to the Credit Agreement.  - 8 - (c) The effectiveness of the Loan and the Credit Agreeimients respectively are conditional on the effectiveness of each other. Additional conditions of effectiveness include: (i) the signature and effectiveness of the Subsidiary Loan Agreement, required pursuant to Section 5.02 (b) of the Loan Agreement, between the Borrower and the B ln<nqte Nationale de D6veloppement du Senegal; anc (ii) the employment by the Borrower of the management consultants as required under Section 5.01 (d) of the Loan Agreement. PART V - THE ECOICMY 23. A report on "Current Economic Position and Prospects of Senegal" No. AF-73a, dated February 29, 1968 was circulated to Executive Directors on M-arch 18, 1968. 24. Since Senegal became independent in 1960, the growth of GDP at current prices has averaged 4% a year, but real per capita income may have fallen by as much as 1.4 per annum. This lowr growrth rate was accom- panied by stagnating investments (averaging 10.5` of GDP) and national savings (8; of GDP). LOW growth rates in the 1960's are associated with the problems of transition after independence when Senegal lost its former position as the center of administration, manufacturing and services of French-spealdng r-est Africa; the loss of income resulting from the with- drawal of Frenc'n budget support and personmel; and an inherited high cost structure. Y,anufacturing, in particular, suffered from the loss of ex.port markets within the LTest Africa PJIonetary Union, and the high cost structure inhibited exports outside the union. Private investment has, however, recovered somewhat after 1966. 2-,. Stimulated by gradual growth in groundnut production, Senegal?s most important cash crop, and renewed expansion in manufacturing, the economic stagnation was about to be overcome when the French price guarantee for Senegalese groundnuts came to an end in 1967, resulting in a 20% fall of export prices. This again reduced the demand for manufactured goods through a fall in purchasing power of the farming population. In the spring of 1968, following social disturbances, basic wages in the private sector were raised by 25%. This will probably lead to price increases, worsening Senegal's position as a high cost producer.  - 9 - 26. In spite of these difficulties, the Government has followed a conservative f1nancial policy. Since 1962, current public expenditures have been tightly controlled w?hile a high level of revenues (averaging 22" of GDP) permnitted maintenance of a current budget surplus. However, as a result of decreasing imports and revenues from customs duties, the major sources of Government income, this surplus has been declining and no surplus is foreseen in the 1968-69 budget. Wplith the local sources thus declining, the Senegal Government has made continuous efforts to obtain additional finance for development through external aid or borrowing. During the last five years, over half of public investment has been financed by external aid, r,lainly grants from France and the EEC, while about 1Q'l has been financed through a long-term local bond issue. In October 1967, Senegal floated for the first time a long-tern bond issue ($6 million, 7% interest) on the French market withl a French Government guarantee. 27. Growth prospects depend mainly on the success of agricultural policy, which focusses on increasing productivity for groundnuts and on accelerating diversification through the development of cotton, rice, vegetables and livestock. These efforts, however, are unlikely to show quiclc results and the short-term outlook is still determined by the recent fall in groundnut prices which has already influenced manufacturing output and private investments. Thus economic growth over the coming 2-3 years is expected to be slowi, and the financial position of the Govern- ment will remain tight. Longer term prospects, however, are more encour- aging since a large part of the country's best agricultural potential is still unused, opening possibilities for considerable expansion of agri- cultural output provided the necessary institutional framework is created and an adequate agricultural extension service established. Institution building as well as farmer training form part of the groundnut-nillet project. 28. Given the present outlook for relatively slow economic growth, a net capital inflow will be required on a substantial scale for some years mainly to finance agricultural diversification as a base for renewed economic growth. If the bulk of this financing were on conventional terms, there would be a sizeable debt service burden by the mid-1970's. It is therefore desirable that Senegal continue to receive the rmajor part of its external capital on concessionary terms. However, given the present low level of external debt service - around 2c' of merchandise exports - and the sound management of economic affairs which has been characteristic of the Senegalese administration, Senegal should be able to contract a moderate amount of loans on conventional terms. After an IDA credit of $9 million (1966), and a Bank loan of $4 million (1967), the proposed blend of Bankc Group financing for the groundiut-maillet project would appear to be consistent with the capacity of Senegal to service external debt.  - 10 - Pi"A)T VI - CCTPLI:P-TI CE ,T.TH ARTICIQS OF AGREEIENT 29. I am satisfied that the proposed loan and credit would comply with the Articles of Agreement of the Bank and IDA. PART VII - RECOPThINDATION 30. I recomruend that the D:ecutive Directors adopt the followifing resolutions- P2-MOLUTIOibT iIO . Approval of Loan to the Republic of Senegal (Agricultural Credit Project) in an aiaount equivalent to U. S. $3,500,000 RESOLVED: THAT the Bank shall grant a loan to the Republic of Senegal, in an amount in various currencies equivalent to three million five hundred thousand United States dollars (U.S.$3,500,000), to mature on and prior to July 1, 1998, to bear inturost at thc rato of six and one- half per cent (6-1/2,) 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 Loan Agreement (Agricultural Credit Project) between the Repuolic of Senegal and the Bank, which has been presented to this meeting. RESOLUTION NO. Approval of a Development Credit to the Republic of Senegal (Agricultural Credit Project) in an amount equivalent to U. S. $6,000,000 RESOLVED: THAT the Association shall grant a development credit to the Republic of Senegal in an amount in various currencies equivalent to six million dollars (U.S.$6,ooo,000), to mature on and prior to July 1, 2018, to bear a service charge at the rate of thlree-fourths of one per cent (3/4 of 12,) per annum, and to be on such other terms and conditions as  - 11 - shlall be substantially in accordance with the terms and conditions set forth in the form of Development Credit A;greement (Agricultural Credit Project) bettTeen the Republic of Senegal and the Association w;'hich has been prcsented at thlis meeting. Robert S. McNamara President by J. Burke Knapp Attachment January 2, 1969