Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-4471-TUN

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

TNTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO USt3O.O MILLION

TO

THE NATIONAL BANK OF TUNISIA

WITH THE GUARANTEE OF

THE REPUBLIC OF TUNISIA

FOR A

FOURTH AGRICULTURAL CREDIT PROJECT

June 1, 1987

I This document has a restricted distribution and may be used by recipients only in the performance oftheir official dities. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Tunisian Dinar (D)D 1.00 = US$ 1.15US$ 1.00 = D 0.87

(as of December, 1986)

FISCAL YEAR

January 1 to December 31

ACRONYMS

ASAL Agricultural Sector Adjustment Loan

BCT Central Bank of Tunisia

BNDA National Bank for Agricultural Development

BNT National Bank of Tunisia

FOSDA Special Fund for Agricultural Development

FOSEP Special Fund for Fishery

FNG National Guarantee Fund

MIS Management Information Systems

2419£

FOR OFFICIAL USE ONLY

REPUBLIC OF TUNISIA

FOURTH AGRICULTURAL CREDIT PROJECT

Loan and Project Summary

Borrower: National Bank of Tunisia (BNT)

Guarantor: Republic of Tunisia

Amount: US$30 million equivalent

Terms: 17 years, including four years of grace, at the standardvariable interest rate.

Financing Plan:

us$ million

IBRD 30.0BNT 12.7Government 4.3Sub-borrowers 12.0

TOTAL 59.0

Staff Appraisal Report: No. 6622-TUN Date: June 1, 1987

Map No.: IBRD 14921R

24 1 9E

This document has a restricLed distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

MEMORANDUM AND RECOMbIMENDATION OF THE PRESIDENTOF THE I&TERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORSON A PROPOSED LOAN

TO THE NATIONAL BANK OF TUNISIAWITH THE GUARANTEE OFTHE REPUBLIC OF TUNISIA

FOR A FOURTH AGRICULTURAL CREDIT PROJECT

1. The following report on a proposed investment loan to Tunisia forUS$30 million equivalent is submitted for approval. The proposed loan wouldhave a term of 17 years, including 4 years of grace, at the standard variableinterest rate. It would help finance an agricultural credit project andpromote development of a financially sound rural credit system. The NationalBank of Tunisia (BNT), a major commercial bank since 1969, would be theBorrower, and the Republic of Tunisia the Guarantor.

2. Background. The Sixth Development Plan in Tunisia (1982-86) calledfor an increase in capital investment in agriculture, which is a prioritysector. The Seventh Plan (1987-91) will continue to treat agriculture as apriority sector and emphasize greater involvement of private sector financingof agriculture as part of the current adjustment program. Agricultural creditwill therefore continue to be important. Issues relevant to the project are:(a) inadequacy of interest rates and spreads; (b) arrears; (c) proliferationof agricultural credit programs, with different lending conditions; (d) costof subsidies under the Special Funds for Agricultural Development and Fishery(FOSDA/FOSEP), and excessive State intervention in some credit operations.Recent measures taken include: (a) raising of interest rates by 0.75% to 2%;(b) enforcing collection of arrears; and (c) making operational the NationalGuarantee Fund (FNG) to cover part of the risk of default on subloans made tosmall and medium farmers.

3. Project Objectives and Rationale for Bank involvement. The projecthas been designed in the light of experience gained under earlier creditprojects (in particular the third credit line), and the Agricultural SectorAdjustment Loan (ASAL) discussions. The main objectives of the new projectare to (a) restructure the complex institutional system by which agriculturalcredit is made available; (b) encourage BNT and the banking sector to increasetheir role in mobilizing resources and in financing agriculture throughfurther interest rate reforms; (c) improve the financial viability of

2419E

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agricultural credit operations and harmonize credit terms and conditions; (d)assist Government in its efforts to develop private investment in theagricultural sector to meet its objective of raising investment in the sector;and (e) promote savings schemes tied to eligibility for credit. The Bank'spresence will be catalytic in achieving these objectives more rapidly, and insetting the stage to bring other commercial banks into agricultural lendingover the next three to five years.

4. Project Description. The project would support two major componentsfrom September 1987 to September 1990:

(a) BNT Credit Program: Ci) on-farm investments by small and medium, andlarge private farmers, particularly the former; (ii) investments bycooperatives; (iii) investments by agricultural and agro-industryenterprises, and selected investments (repairs) by creditworthyfishermen;

(b) Institutional Development: (i) the MIS software, equipment andtraining needed to modernize and strengthen, on a decentralizedbasis, BNT organizational structure, planning process, managementcontrol, accounting systems, and loan monitoring systems; and (ii)the strengthening of the agricultural credit policy coordinationbetween the Ministries of Planning and Finance, Agriculture andAgricultural production, the Central Bank (BCT), BNT and the NationalBank for Agricultural Development CBNDA), a Government developmentbank created in 1983. The Coordinating Committee would plan andmonitor reforms, and coordinate the execution of the subsequentGovernment policy decisions.

Total projept cost is estimated at US$59 million equivalent, includingUS$30 million equivalent or about 51% in foreign exchange. A breakdown ofcosts and the financing plan are shown in Schedule A. Retroactive financingof up to 10% of the loan amount (US$3 million) would be made available to theBorrower to help bridge the financing gap between the Third Credit Line andthis loan and ensure that the BNT institutional component is not unreasonablydelayed. Amounts and methods of procurement and of disbursements, and thedisbursement schedule are shown in Schedule B. A timetable of key projectprocessing events and the status of Bank Group operations in Tunisia are givenin Schedules C and D, respectively. A map is also attached. The StaffAppraisal Report, No. 6622-TUN dated June 1, 1987, is being distributedseparately.

5. Actions agreed. Under the recent ASAL, the Government agreed to (a)the principle of achieving, during the Seventh Plan period, an interest rateand spread structure for agriculture which covers the financial and operatingcosts at reasonable efficiency and a reasonable part of the risks, with theobjective of encouraging the banking sector to play its role more fully infinancing development; a first interest rate adjustment, acceptable to theBank, is a condition of second tranche release and (b) the reduction andbetter targetting of budgetary allocations to the credit part of FOSDA, withcurrent, sharply reduced levels to be maintained in 1987 and a further 15%reduction for 1988. Under the Project, specific actions have been defined andagreed to achieve:

Z4 1 SE

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(a) the agreed medium-term adjustment on interest rates and spreads; thisincludes agreement to increase interest rates by not less than 0.5%for medium-term and 0.25% for short-term rates by August 31, l987-'as a first step to bring agricultural interest rates in line withmarket rates, and an agreed schedule of adjustments in 1988, 1989,1990, and 1991 so that market rates are reached by end 1991 as agreedunder the ASAL.

(b) continued action to reduce budgetary allocations to the FOSDAsubsidized credit programs: this includes agreement on a 15%Leduction by end 1989 and another 151 by end 1990 over the reducedlevel of Dll million, such level to be reached in nominal terms byend 1988 under the ASAL.

In addition, Government has (i) agreed on improving bad debts policy, and FNGoperating procedures; (ii) defined in April 1987 the eligibility of small- andmedium-scale farmers to institutional credit in a way satisfactory to theBank; (iii) rescheduled in March 1987 the debts due by farmers where this wasjustified; and (iv) agreed on promoting farmers bank savings schemes linked toeligibility for credit during project implementation. Government has also:Ci) signed a poliLy letter to be implemented by BNT and incorporating theproject proposals, in particular those on interest rates, spreads, FOSDA,recoveries, savings, risks, guarantees, provision for bad debts, andharmonization of subloan lending terms, conditions and procedures; and (ii)specifically confirmed in the policy letter that measures taken and to betaken to complete by December 31, 1989 the nationwide subloan harmonizationprocess would lead in particular to the merger of BNT agricultural creditprograms (including FOSDA) into a single fund managed by BNT (fungibility offunds). BNT's improved MIS will be put in place during the project period.Government would set up the Agricultural Credit Policy Coordinating Committeeby December 31, 1987.

6. Justification. The proposed project would support the Government'smedium-term adjustment effort to establish a policy and institutionalframework which would promote development of a financially sound rural creditsystem. Through provision of investment credit to private farmers, theproject would also contribute to increased agricultural production and ruralemployment. Bank involvement is justified because of the sectorwideimprovements being introduced under the project.

7. Risks. On the basis of past experience, the risks are mainly theGovernment's possible lack of commitment to go ahead with the proposedreforms. Since the project has been designed to be fully consistent with theGovernment's medium-term program already mutually agreed by the Bank and theGovernment under the ASAL, this risk is considered reduced.

1/ In any event not later than loan effectiveness of the proposedagricultural credit project.

2,41 9 E

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8. Recommendation. I am satisfied that the proposed loan would complywith the Articles of Agreement of the Bank and recommend that the ExecutiveDirectors approve the proposed loan.

Barber ConablePresident

Attachments

Washington DCJune 1, 1987

2413E

Schedule A

Estimated Cost Local Foreign Cotal----- US$ million ----

BNT credit operations 27.5 27.5 55.0(Medium- and long-term)

Institutional Development 1.5 2.5 4.0(Software, equipment, training,

consultants)

Total Project Cost 29.0 /a 30.0 59.0 /a

Financing Plan

IBRD - 30.0 30.0BNT 12.7 - 12.7Government 4.3 _ 4.3Sub-borrowers 12.0 - 12.0

TOTAL 29.0 30.0 59.0

/a Includes US$9.4 million of taxes and duties.

2419E

-6-

Schedule BPROCUREMENT METHODS(US$ million) /a

ICB LCB Other N/A Total Cost

1. Farm machinery, equipment,civil works, silos, livestock, - - 55.0 - 55.0fishing gear and farm - - (27.5) - (27.5)development under subloans

2. Computer equipment 2.8 - - - 2.8(1.9) - - - (1.9)

3. Consultants lb - - 0.2 - 0.2- - (0.15) - (0.15)

4. Software, Computer maintenance - - 1.0 - 1.0and Training Programs - - (0.45) - (0.45)

TOTAL 2.8 56.2 59.0(1.9) (28.1) (30.0)

(a Figures in parentheses represent Bank loan financinglb includes training specialists.

DISBUR.SEMENT PROCEDURES

Category Amount of the Loan Z of ExpendituresAllocated to be financed(US$ million)

1. Subloans to small andmedium farmers 8.0 )

2. Subloans to large farmers 8.0 )3. Subloans to Cooperatives 3.5 ) 75Z of amounts

) disbursed by 3NT4. Subloans to agricultural and ) under such suba-loans

agro-industry enterprises 4.5 )5. Subloans to fishermen 3.5 )6. Computer equipment and

maintenance, software, 2.5 100% of foreign expendituresconsultants and training and 70% of local expenditures

TOTAL 30.0

Estimated Disbursements:

Bank FY 1988 1989 1990 1991 1992…---- (US$ million) - - -

Annual 5.0 7.0 8.0 7.0 3.0Cumulative 5.0 12.0 20.0 27.0 30.0

Z41SE

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Schedule C

TUNISIA

FOURTH AGRICULTURAL CREDIT PROJECT

Timetable of Key Processing Events

(a) Time taken to prepare: One year

(b) Prepared by: BNT and Government T:ithconsultants' assistance

(c) Bank First Preparation Mission: September 1985

(d) Appraisal mission departure: November 9, 1986

(e) Negotiations: April 13-17, 1987

(f) Planned Date of Effectiveness: November 2, 1987

(g) List of relevant PCRs and PPARS: First Agricultural Credit(PPAR/PCR No. 2497)Second Agricultural Credit(PPAR/PCR No. 5401)

241 9E

Page 1 of 2

THE STATUS Of BANK GROUP OPERATIONS 1IN TUNISIA I/

A.STATEMENT OF RANK LOANS AND IDA CERDITS (Ag of'March J1, 9flU

US $ MillionLoan or Amount (LessCreditNumber mur BrruwCr Purpahsl "an Ia UadUsLbw.

Farty-sin Loans and Credits Fully Disbursed 549.29 75.15

1601 1978 Republic of Tunia Rural Roads (Third Highways) 30.00 0.401675 1979 Republic of Tunisia Second Urban Sewerage 26.50 5.661746 1979 Republic of Tunisia Second Fisheries 28.50 6.741796 1980 Republic of Tunisia Southern Irrigation 19.50 2.161797 198D OfFice des Ports Notionaux Third PorL 42.50 8.841841 1980 Republic of Tunisia Fourth Highways 36.50 1D.191864 1980 Socidtd Tunislonno do

lEloctricite et du Ga: Second Natural Gas Pipeline 27.00 1,631961 1981 Ropublic of Tunisia Fourth Education 21.00 13.331969 1981 Republic of Tunisia Small Scala Industry Devalopment 30.00 11.401997 1901 Republic of Tunisia Northwest Rural Oevelopment 24.00 12.902005 1981 Republic of Tunisia Health and Population 8.S0 4.862052 1901 Republic of Tunisia Grain Distribution and Storage 38.00 8.892108 1982 Republic of Tunisia Fifth Highway (Rural Roads) 35.50 17.052113 1q92 8DE0 Electrical and Mechanical Industries 30.50 9.882134 1982 SONEDE Sixth Water Supply 30.50 2.182157 1982 Republic of Tunisia Irrigation Development 17.00 9.102197 1982 Republic of Tunisia Technical Assistance 4.50 2.002223 1983 Republic of Tunisia Urban Development III 25.00 20.232230 1983 Republic of Tunisia Education V 27.0D 22.902234 1983 Republic of Tunisia Central Tunisia Irrigation 16.50 10.212255 1983 Republic of Tunisia Urban Scwcrage ITI 34.00 30.312289 1983 Republic of Tunisia Sfax Flood Protection 25.00 14.752301 1983 SOFOMECA Industry (TV) Foundry 16.80 4.692346 1984 Rcpublic of Tunisia Mining Technical Assi anre 13.40 10.102368 1984 Republic of Tunisia Seventh Water Supply 50.00 39.922429 1984 Republic of Tunisia Second Urban Transport 33.00 32.922455 1984 Societe tunisienne de

I'Electricite et du Gaz Fourth Power 21.70 19.952502 I905 Republic of Tunisia North West Agricultural Production 15 00 15.002522 1985 Republic of Tunisia Export Tndustries 50.00 50.002534 1985 Republic of Tunisia Second Electrical and Mechanical 54.00 53.64

Industr ieS2573 2985 Republic of Tunisia Irrigation Management Improvement 22.00 22.00260S 1985 Republic of Tunisia Gabes Irrigation 27.70 26.502735 1986 Republic of Tunisia Energy Conservation 4.00 4.002736 1986 Republic of Tunisia Fourth Urban Development 30.202754 1986 Republic of Tunisia Agricultural Sector Adjustment 150.00 103.142781 1987 Republic of Tunisia Industrial S Trade Policy Adjust. 150.00 2/

TOTAL i.764Sg 175.15 607.47Of which nas been repaid 329t48 10±79Total now outstanding 1.435.11 64,36Amount Sold 25.53

of which has becn repaid 2.85Total now held by Bank and IDA 1.43226 2/ 6436

Total Undisoursed 607.47

If The status of the projects listed in Part A ts described in a separate report on all Bank/IDA financed projectsin execution, which is uDdated twice yearly and circulated to the EKecutive Oirectors on April 30 and October 31.

a/ Not yet effective: signed on March 6, 1987.j/ Prior to exchange rate adjustment.

1061S/9 C2968Ep57)April 17, 1987

-~~~~~~~~~~~~~~~~5rcalc 4 pAge 2 of 2

SIATlHCNLD[. 1rtHlhI%NtSLiUN1I&A5 Of MARC" .31. 12u1?

Y.tr Obigor 0CfD.: Ty-pe or ujmc45 AMouni Of I5$ millionLomn Equity TptLl

13 NlPK Enqrai:i roUtilizor% s2.0 i's 3.51966/70/70 Socite NALion4le

dIlnvo5ti!siemont (now DO1T) DDv. rinance Co. 2.3 2.31969 corir Tou,i5m (now DNOT) oev. rin.incc Co. 11.0 10.1973 Societe ToUrlstique et

HNtceare PAYM SA Toj rr,r l,.b 0.2 Ir1974 Industries Chimlque'i du rlijor Chemic.l e.4 0 e1975 Societe d'Etude-i at de

4 Ooveloppemont de Soui.se Nord Tourl-,mr 2.5 0.6 all1985/06 Soclete Tunislenne de LeCasing Le.ling Co 1.4 0.5 3.9

1985 SoclatC Miniore do SparFluor at de Garytine(rluob.r) Mining Co. 0.3 0.3

1986 STEX Tantile.i and ribor! 5.O 3.2 5.21987 Adwyn. S.A. Chemic.a1-6,Petrochemic.1f5 2.3 0.3 2'.61987 Roz:1 :dllni1a Industrinl Prefabric.Ltod Panels 1.3 0.4 1I7

iz3taLa Tunisia

Total Gross Comnistments 26.1 12.2 111.3Less cancellations

Terminations. Repiymentsand Sales U.9 Z.8

rotal Conunitments nowheld by IFC '12. q 4 Zl.6

total Undi;burscd .)1'0 1a.4

j/ In addition, an inve.tment in Comete Engineering was approvcd an April 1. 1987

10615/4 (2968Ep58)

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3rrT U N I S I A TA OUN

FOURTH AGRICULTURAL CREDIT PROJECT

* BNT AgenciesA BNT Agencies. non-agricultural

Main Roads >

Secondary RoadsRailroads

- Rivers1,.' Ports ) Remada

Salt Lakes * ° Jrl3 7EP 4 7 I-~/TuLASIA s

International Airports - 1,,^,.,,t,,,,~~~~~ oCities and Towns) ... _

ea0r"~ 3 Governorate Capitals

® r>6 National Capital A L G E R I A32~~- L I a Y A Governorate Boundaries 32I

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'0 8 - 9 1l- /.NIGER P CHAD 4_