Document of

The World Bank

FOR OFMFCIAL USE ONLY

Report No. P-4659-TA

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

OF SDR 22.0 MILLION

TO THE

UNITED REPUBLIC OF TANZANIA

FOR AN

AGRICULTURAL EXPORT REHABILITATION PROJ'ACT

March 1, 1988

Southern Africa DepartmentAgriculture Operations Division

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CURRENCY AND EQUIVALENT UNITS

Currency Unit Tanzania Shilling (Tsh)US$1.00 Tsh 90.0Tsh 1.00 - US$0.011

ABRREVIATIONS

CRDB - Cooperative and Rural Development BankERP - Economic Recovery ProgramGOT - Government of TanzaniaIDA - International Development AssociationMRC - Multi-Sector RehabiLitation Credit

GOVERNMENT FISCAL YEAR

July 1 - June 30

FOR OMCIAL US ONLY

TANZANIAAGRICULTURAL EXPORT REHABILITATION PROJECT

Credit and Proiect Summary

Borrower: Government of Tanzania

ImplementingAgency: Cooperative and Rural Development Bank (CRDB)

Beneficiaries: Enterprises engaged in export agriculture and CRDB.

Amount: SDR 22.0 million (US$30.0 million)

Terms: Standard, with 40 years maturity.

On-Lending Termsand Conditions: US$26.7 million from IDA Credit of US$30.0 million

equivalent would be on-lent to CRDB by the Government at2.0 percent and CRDB would on-lend it to sub-borrowersat a fixed interest rate of 8.0 percent. The balance ofIDA Credit (US$3.3 million) would be made available toCRDB as a grant for institution building. The loan toCRDB and to sub-borrowers would be denominated inforeign exchange with the sub-borrowers bearing theexcharge risks. Maximum maturities of the sub-loans tosub-borrowers would be 15 years with up to 3 years ofgrace period. CRDB would have loan maturities of up to16 years, and a grace period of up to 5 years.

Financing Plan:CRDB US$ 2.0 millionSub-borrowers US$ 8.0 millionIDA US$30.0 millionTOTAL US$40.0 million

Economic Rateof Return: Not applicable to the Project as a whole, but the

economic rate of return on each individual sub-projectwould not be less than 15 percent.

Staff AppraisalReport: No. 6958-TA

Man: IBRD No. 19829

This document has a restricted distribution and may be used by recipients only in the performa-neof their official duties. its contents may not otherwise be disclosed without World Bank authorizra:k..j

.. w___4

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORSON A PROPOSED CREDIT

TO THE UNITED REPUBLIC OF TANZANIAFOR AN AGRICULTURAL EXPORT REHABILITATION PROJECT

1. The following memorandum and recommendation on a proposeddevelopment Credit to Tanzania for SDR22.0 million (US$30.0 millionequivalent) is submitted for approval. The proposed Credit would be madeon standard IDA terms with 40 years maturity. It would finance enterprisesengaged in export agriculture as well as technical assistance and trainingto the Cooperative and Rural Development Bank (CRDB).

2. Background. Agriculture is the most important sector inTanzania's economy although its contribution to GDP declined from 57percent in 1960 to 46 percent in 1984. It contributes 80 percent ofexports and provides employment to 83 percent of the labor force, and is amajor source of food and raw materials for the urban and industrial sectorsand of Government revenues needed for the development of the economy. Theagricultural population is an important market for the goods and servicesproduced in the industrial sector.

3. Agricultural production and exports of major crops were the engineof economic growth in Tanzania until the mid-1970s when they began todecline rapidly. This was mainly caused by Government's macro-economicpolicies and institutional changes which did not provide sufficientincentives and resources to sustain agricultural production. To reversethe trend of declining agricultural production, the Government of Tanzania(GOT) through its Economic Recovery Program (ERP), has started remedyingthe defects of past policies. In addition to a major devaluation andcontinuing real adjustments in the exchange rate, GOT has introduced majorreforms in the agricultural sector. GOT has increased producer prices inreal terms, widened quality margins, substantially liberalized themarketing of food grains, re-established cooperative unions to take overfrom parastatals the responsibilities for farm-level crop purchases,liberalized the marketing of minor export crops, and permitted severalprivate estates to market their produce directly instead of throughmarketing boards. The Government has agreed to liberalize agriculturalexport marketing and the importation and distribution of all agriculturalinputs other than fertilizers and seeds. The next step in the reformprocess is expected to focus on opening up the marketing of export crops atthe farm level to tll marketing agents, including private traders.

4. With these reforms, the decline in agricultural output in recentyears has been arrested and agricultural exports have been enhanced. Thisis because, in the new policy environment, many agricultural exportenterprises in the various crop sub-sectors now find it profitable to begininvesting in the rehabilitation and upgrading of their plants andequipment. These enterprises, including potential new entrants, needmedium- and long-term foreign exchange credit for this purpose. Thefinancial intermediary, the Cooperative and Rural Development Bank, throughwhich most agricultural credit is channelled, itself requires strengtheningto enhance its capacity to service the agricultural sector effectively.

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5. Rationale for IDA Involvement. The rationale for IDA involvement,particularly its timing, lies in helping agricultural export-relatedenterprises to expani their exports in response to the changes in thepolicy environment as described in paras 2-4 and agreed under the Multi-Sector Rehabilitation Credit (MRC). By helping these enterprises andthereby improving the country's balance of payments position, IDA wouldcontribute to the sustainability of the liberalization which is a majorelement of IDA sector development and overall macro development strategyfor Tanzania. IDA's role is crucial in supporting entrepreneurship amongTanzanian nationals in the agricultural sector and ensuring that thelonger-te-m task of building the capacity of CRDB to supply medium- tolong-term agricultural credit gets underway and fits within a proper policyframework. The provision of agricultural credit is an essential part ofIDA's strategy for improving basic services including research, extension,credit and marketing. There are many donors in the agricultural sector inTanzania; however, there remains a considerable need which is not currentlybeing met with regard to foreign exchange credit to export agriculture.IDA's assistance under this project would fill part of this gap and therebysupplement the assistance provided by other donors.

6. Proiect Obiectives. The project's aims are to increase exportsthrough support to export-related agricultural enterprises and strengthenthe capability of CRDB, Tanzania's only specialized agricultural bank, tobecome a viable agricultural lending institution.

7. Project Description. The project, to be implemented over a periodof up to eight years, provides funds for capital and recurrent import costsrequired to rehabilitate or expand agricultural export enterprises,training of CRDB staff, and technical assistance support to CRDB. Thetotal cost of the project is estimated at US$40.0 million equivalent, witha foreign exchange component of US$28.0 million (70Z). A breakdown ofcosts and the financing plan are shown in Schedule A. The amounts andmethods of procurement and of disbursements, and the disbursement scheduleare shown in Schedule B A timetable of key project processing events andthe status of Bank Group operations in Tanzania are given in Schedules Cand D, respectively. A map of Tanzania, IBRD No. 19829 and Staff AppraisalReport, No. 6958-TA dated March 1, 1988 are attached.

8. Agreed Actions. All major issues have been resolved with theGovernment. The Government has agreed on the following actions asconditions of Credit effectiveness: (a) converting its outstanding loansto CRDB (TSh 588.0 million) into equity capital and CRDB using it to write-off its outstanding bad debts as of June 30, 1987; (b) restructuring andmaintaining CRDB's loan committee with membership and terms of referencesatisfactory to the Association; and (c) signing of a Subsidiary LoanAgreement between the Government and CRDB satisfactory to the Association.

9. At Negotiations, assurances were obtained from the Borrower on amonitorable action program requiring CRDB to take actions in order toimprove its performance as follows: (a) complete its staff redeploymentand where warranted retrenchment by September 30, 1989; (b) furrnish to theAssociation by not later than September 30, 1988, a financial plan with aview to achieving and maintaining (i) in all its ordinary operations anadequate financial spread over its borrowing rates to cover its costs ofoperation and ensure a reasonable profit margin, (ii) a fixed chargescoverage of at least 1.25 times, (iii) a liquidity ratio of at least 1.5 by

- 3 -

June 30, 1990, (iv) an operating profit margin of at least 102 by June 30,1990, and (v) a rate of return of at least 1.2Z on total average assets and102 on equity by June 30, 1990; (c) furnish to the Association by not laterthan September 30, 1988 a plan to reduce its remaining loan arrears as ofJune 30, 1987 by 331/3Z annually leading to the elimination of such arrearsby not later than June 30, 1991; and (d) complete the review of itsaccounting and computer systems by September 30, 1988, and update theaccounting system and implement financial information system by June 30,1989.

10. In addition, assurances were also obtained from Government atNegotiations that: (a) the sub-borrowers would be permitted to maintainforeign exchange escrow accounts sufficient to cover the debt-servicerequirements of loans under the project from their export proceeds; (b)CRDB would be permitted to maintain a foreign exchange account to coverloss provisions from their earnings under the project; and (c) Governmentwould set non-discriminatory terms and ensure equal access to the credit byeligible sub-borrowers without regard to form of ownership.

il. Benefits. A broad spectrum of agricultural enterprises throughoutTanzania would benefit from the project. This should help strengthen theentrepreneurial basis of the agricultural sector. The project would fostergreater capacity utilization, improved productivity and efficiency, andimproved agricultural term-lending capacity of CRDB. However, the mainbenefit from the project is expected to be an increase in Tanzania'sexports following the rehabilitation and expansion of viable enterprises,and an improvement in the quality of produce and hence price. The economicrate of return for individual sub-loan investments are expected to exceed15? and in most cases, would be substantially higher.

12. Risks. The main risks associated with the project relate to thepossible waning of the Government's commitment to maintain the momentum ofpolicy reform, particularly as it relates to liberalization of crop andinput marketing and producer pricing. Thus far, indications are that theGovernment's determination has not waned and this project would, in fact,help consolidate the reform process by providing inputs urgently requiredto obtain an export response. There is also the risk that the creditdisbursement could be delayed if there are delays in the restructuring ofCRDB and the strengthening of its capacity to process loan applications.This risk has been minimized by front-loading of studies and agreementsrelated to the restructuring of CRDB, and by providing technical assistanceto prepare feasibility studies of sub-projects and assist CRDB in projectimplementation.

13. Recommendation. I am satisfied that the proposed Credit wouldcomply with the Articles of Agreement of the Association and recommend thatthe Executive Directors approve the proposed Credit.

Barber B. Conab'ePresident

Attachments

Washington, D.C.March 1, 1988

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SCHEDULE ATANZANIA

AGRICULTURAL EXPORT REHABILITATION PROJECT

ESTIMATED COSTS AND FINANCING PLAN

Estimated Costs a/Local Foreign Total-(US$ Million)----

Line of Credit to Sub-borrowers

Investment and Working Capital 10.0 24.1 34.1Feasibility Studies for Sub-projects 0.3 0.8 1.1Management Assistance and Training 0.1 0.4 0.5

Institution Building

Restructuring of CRDB 0.9 1.2 2.1Computer Equipment 0.1 0.4 0.5Training to CRDB Staff 0.3 0.3 0.6Technical Assistance 0.2 0.7 0.9Contingencies 0.1 0.1 0.2

Total Project Costs 12.0 28.0 40.0

a/ Exclisive of taxes and duties

Financing Plan'ocal Foreign Total-___----(USS MLillion)----------

IDA 2.0 28.0 30.0CRDB 2.0 - 2.0Beneficiaries (Sub-borrowers) 8.0 - 8.0

Total 12.0 28.0 40.0

-5-

SCHEDULE BTANZANIA

AGRICULTURAL EXPORT REHABILITATION PROJECT

PROCUREMENT METHOD AND DISBURSEMENTS

Procurement MethodTotal

Proiect Element ICB LCB Other Cost(--- US$ Million)------------

Investment and Working Capital - - 35.7 35.7(26.7) (26.7)

CRDB Institution Building - ^ 1.5 1.5_ _ (0.5) (0.5)

Technical Assistance - - 2.8 2.8and Training (2.8) (2.8)

TOTAL - _ 40.0 40.0(0.0) (0.0) (30.0) (30.0)

Note: Values in parentheses reflect amounts estimated to be financed byIDA.

Disbursemeats

Category Amount S---(US$ Million)---

Sub-loans 26.7 100? of foreignexpenditures and up to70£ of costs of locallyprocured imported items.

Consultants' Services and 2.8 100t of expendituresTraining

Computer 0.5 lOOZ of expendi.tures

Estimated IDA Disbursements

IDA Piscal Year1989 1990 1991 1992 1993 1994 1995 1996--______ __ _____________US$ Million----------------------

Annual 1.7 4.0 6.0 6.0 4.8 3.4 2.5 1.6

Cumulative 1.7 5.7 11.7 17.7 22.5 25.9 28.4 30.0

-6

SCHEDULE C

TAN2ANIA

AGRICULTURAL EXPORT REHABILITATION PROJECT

Timetable of Rey Prolect Processing Events

(a) Time Taken to Prepare Project : 15 months(b) Project Prepared By : CRDB with IDA Assistance(c) First IDA Mission s November 1986(d) Appraisal Mission : April 1987(e) Negotiations s February 1988(f) Planned Date of Effectiveness t June 1988(g) List of Relevant PCRs and PPARs: PCR-CRDB (Cr. 987-TA)

_ 7 _ SCHEDULE D

STATUS OF BANK NROUP OPERATIONS 1 TANZANIA Page 1 of 2SUJNARY STATENENT OF LOANSICREDITS(LDA DATA AS OF 1130180 - NIS DAtA AS OF 02/25189)

AMOUNT LESSLOAN/ CANCELLATIONS UNDtS- CLOSINGCREDIT 4 YEAR BORROWER PROJECT ANE (USt NILLIONS) BURSED DATE

60 LOAN(S)/CREDIT(S) CLOSED 792.43

* CREDITS

CQ80O 1978 G0t CASHEW NUTS 11 24.50 2.58 12W31/87 R)C08410 1979 GOVERNENT EDUCATION-VI 12.00 2.80 06/30/88WR)C08760 1979 NINISTRY OF WORKS HIGHWAY V rf.50 2.15 12/30/96(R)C09870 1980 TANZANIA TRDB(RURAL DEV) 7.00 .5S 12/31/86(R)C10150 1980 TANZANIA GRAIN STORAGE & ILU 43.00 34.44 06/30/89W)C10370 1980 TANZANIA SNALNOLDER TEA 14.00 7.44 12/31/88(R)C10560 1981 TANZANIA EDUCATION VIl 25.00 11.40 09/30/86b(gC10600 1981 TANZANIA T.A.It 11.00 3.59 06/30/87(R)C10700 1981 TANZANIA COCONUT PILOT 6.80 .77 03/31/88(R)C12060 1902 TANZANIA TECH.ASST. Il 12.00 -. 02 06/30187C12290 1982 TANZANIA FORESTRY Il 12.00 5.51 12131/881R)C13120 1983 GOVERNMENT DAR SEWERAGE 22.50 8.68 12/31/88(R)C13700 1983 TANZANIA NUFINDI PULPUPAPER 18.00 5.60 12/31189C13)10 1983 TANZANIA COAL ENG.CREDIT 6.30 3.08 06/30/87C14050 1984 TANZANIA POVER IV - NTERA 35.00 11.00 06/30/89M)C15240 1985 TANZANIA TAS IV 10.00 3.99 06/30/88C15360 1985 TANZANIA PORTS REHAB. 27.00 9.61 06/30/90R)C16040 1985 GOVERNNENT PETRO.SECTOR.T.A 8.00 5.72 06/30189C16870 1986 GOVT. POWER REHAB./ENERGY 40.00 33.61 12/31/90C16080 1986 GOVT. ROADS REHAB. 50.00 46.82 06130/M9IR)C17410 1987 GOVT. NULTI-SEC.RH I 50.00 21.20 12131/88C17411 1987 GOVT. NULTI-SEC.RH I 27.24 27.24 12/31/86C19100 1987 GOVERNENT TELEC. II 23.00 20.22 06/30/95

TOTAL NlH8ER CREDITS = 23 504.84 268.21

*4. TOTAL (NET APPROVED) 1,297.27OF WHICH HAS BEEN REPAID TO THE BANK (ANORT.& INTEREST) 251.53

TOTAL N0 OUTSTAkdING 1,045.74

TOTAL UNDISBURSED 269.21

NOTES:

* NOT YET EFFECTIVEii NOT YET SIGNED'ii TOTAL APPROVED REPAYMENTS, AND OUTSTANDING BALANCE REPRESENT BOTH ACTIVE AND INACTIVE LOANS AND CREDITS.(R)-INDICATES FORNALLY REVISED CLOSING DATE, OTHERWISE ORIGINAL DATE IS GIVEN

THE APPROVED,CANLELLATION & DISOURSEMENT AMOUNTS FOR IDA-6/IDA-7 CREDITS AS TAKEN FRON ACCMUNTING HAVE BEENCONVERTED TO THEIR $ EUIJiALENTS BASED ON THE CURRENT EXCHANGE RATE.

SCHEDULE DPage 2 of 2

B. STATEMENT OF IFC INVESTMENTS IN TANZANIA

AS OF SEPTEMBER 30, 1987

FiscalYear Obliger .4mount in US$ Million

Loan Equity Total

1985 Amboni 3.8 0.0 3.8

1978 Highland 1.4 0.4 1.8

1960 & 64 Kilombero 0.0 0.0 0.0

1979 Metal Products 0.7 0.2 0.9

Total Cross Commitments 5.9 0.6 6.5

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