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FOR OFFaCIAL
USE ONLY
Rept No. P 6240-BUL
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$50 MILLION TO THE REPUBLIC OF BULGARIA
FOR THE
AGRICULTURAL DEVELOPMENT PROJECT
MAY 23, 1994
Agriculture
and Environment Operations
Division
Country Department I
Europe and Central Asia Regional Offic
MICROGRAPHICS
This document has a resticted ditdbution and may b
their omfca duties. Its contents may not otherwise
Report
No:
P-
6240 BG
Type: MOP
Public Disclosure Authorized
Public Disclosure Authorized
Public Disclosure Authorized
CURRENCY EQUIVALENTS
Currency Unit = Bulgarian Leva
Value of USS1.00 in Lev&
1989 0.84 1990 2.19 1991 18.20 1992 23.30 1993 29.00 1994 (April) 56.00
ABBREVIATIONS AND ACRONYMS
BNB - Bulgarian National Bank
CAS - Country Assistance Strategy
GDP - Gross Domestic Product
GOB - Government of Bulgaria
PFIs - Participating Financial Intermediaries
SAL - Structural Adjustment Loan
TA - Technical Assistance
BULGARIA - FISCAL YEAR
FOR OFFICIAL USE ONLY
8U2LGARIAAGRICULTURAL DELoPMENT PROJECT Loan and Project Sunmar"
Borrower: Republic of Bulgaria (GOB)
Beneficiaries: Private farmers, farmers, associatione, agribusiness, participating financial intermediaries
Amount: US$50.00 million equivalent
Terms: Seventeen years, including a four-year grace
period, at the Bank's standard variable interest rate and repayment schedule.
On-lending Terms: GOB would on-lend the proceeds from the Bank's currency pool loan through the Bulgarian National Bank (BNB) to the
Participating Financial Intermediaries (PFIB) in fixed-rate loans in two of the major currencies of the Bank's currency pool: US dollars or Deutsche marks. On-lending rates would be based on the prevailing yield of the 10-year benchmark US Treasury note (for US dollar loans) and the 10-year
benchma4k German government bond (for Deutsche marks loans) plus a market-based spread. The PFIs would re-lend the proceeds to sub-borrowers with market-based spread to be determined by each PFI. Private enterprises and individuals would borrow for a minimum of three years and a maximum of twelve years, including a maximum grace period of two years. They would bear the foreign exchange risk. The PFIs would bear the full credit risks of their sub-loans. GOB would bear the credit risk of the PFIs, and the cross currency risk between the US dollar or the Deutsche mark and the Bank's currency pool as well as interest rate risk. Lending would be on 2 first-come-first-served basis. For the
provision of equipment to the PFIs under the technical assistance component, GOB would on-lend the funds to the PFIs in US dollars at its cost of funds for ten years, including a three-year grace period.
FinancinE PLan: IBRD US$50.0 million
Foreign Donors 0.6 million
Private Enterprises 11.8 million
PFIs 1.0 million
Total US$63.4 million
Economic Rate 15% minimum for sub-loans exceeding $750,000 and
of Return: acceptable financial rate of return or payback period for smaller sub-loans.
Staff A=praisal Reoort: Report No. 12674-BUL
Poverty Cateoorv: Not Applicable
Map: IBRD 25962
This document
has a etricted 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 authorizaton.
MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT
OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS
ON A PROPOSED LOAN TO THIE REPUBLIC OF BULGARIA FOR THE AGRICULTURAL DEVELOPMENT PROJECT
1. I submit for your approval the following memorandum and
recommendation on a proposed loan to the Republic of Bulgaria for US$50 million equivalent. The proposed loan would be on standard IBRD terms with 17 years' maturity, including a four-year grace period, and would help finance the Agricultural Development Project.
2. Country and Sectoral Bagkaround. Since the economic reform program
was initiated in February 1991, a major objective of the Government of Bulgaria has been to create a market-oriented agriculture based on private ownership of land and privatized input supply, processing and marketing sectors. This objective is consistent with the broad goals of a reform aimed at reallocating resources in line with comparative advantage and developing an internationally competitive economy. To reverse economic decline, restrictive monetary and fiscal policies, including sharply higher interest rates, were adopted and combined with a tight incomes policy and a market-based floating exchange rate. Important structural and institutional reforms were initiated and preliminary agreements with foreign official and commercial creditors on the restructuring of foreign debt were reached in 1993.
3. Delays in policies promoting structural adjustment threaten to
undermine macroeconomic stability and prospects for economic growth. The budget deficit reached 9% of GDP and inflation remained at about 70% in 1993. There has been substantial progress in private sector development through restitution of small businesses, urban property and agricultural land. However, delays in privatization and banking reform, and the adverse impact of the embargo against the former Yugoslavia have increased pressure on the budget and the balance of payments. The financial losses of state-owned enterprises continue to grow rapidly and only a few have been privatized. During 1993, the economy declined by about 3% and unemployment increased to about 15.5% by year's end.
4. Agricultural GDP declined by about 3% in 1993 partly due to ongoing decollectivization and land reform and partly due to a severe drought. This follows a decline of 7.7% in 1992. However, the private sector has performed better than expected by official forecasts and its share in agricultural production increased to more than 50% by 1993. Agriculture and agroindustries employ about 16% of the labor force, contribute 20% of GDP and account for 22% of exports. The total land area of Bulgaria is 11.1 million ha, of which about 4.7 million ha is cultivated and 1.5 million is used for pastures and meadows. Agriculture is adjusting to the emerging market environment and is becoming more efficient and competitive. While the supply of food on the domestic market and food exports improved considerably, farm employment has been reduced by more than 30%, consumption of inputs has declined to more efficient levels, farm inventories were reduced, livestock numbers declined, adjusting to market demand, and new private agricultural enterprises are being established. However, the reform process is still incomplete, and unlocking Bulgaria's considerable
agricultural potential requires continued progress in four key strategic areas:
(i) restoration of private property rights in agriculture and the agro-processing chain; (ii) further liberalization of prices and trade; (iii) promotion of a sustainable finance and credit system; and (iv) strengthened institutional support for private agriculture.
2
-5, Rationale for Bank Involvement. Since becoming a Bank member in
September 1990, Bulgaria has looked to the Bank for assistance in the transformation and revival of its economy. In response, the Bank has prepared a country assistance strategy focusing on: (a) support for the design and
implementation of market reforms and mitigation of the impact of reforms on the poor through an adequate social safety net, through adjustment operations and technical assistance; (b) the restoration of creditworthiness by aiding in a debt reduction deal with the country's commercial and official creditors ar.d through aid coordination; and (c) the generation of an adequate supply response from the productive sectors by promoting the private sector and by modernization of Bulgaria's infrastructure through investment operations. The presposed project is consistent with the most recent country assistance strategy (CAS), presented to the Board on March 9, 1993. One of the key CAS objectives is to stimulate a supply response from private enterprises through lines of credit to agricultural and industrial sectors. The centerpiece of the Bank's initial activities in Bulgaria was the Structural Adjustment Loan (SAL) (Ln.3397-BUL) approved in August 1991. The second tranche of the SAL was released in March 1994.
6. A basic rationale for the proposed project, the Bank's first
operation in the agricultural sector, is to help mobilize medium- and long-term credit for private sector needs generated by the transition. The country's foreign debt moratorium has limited access to international financial markets and reduced the availability of foreign exchange credits. This situation is likely to persist even after the recent preliminary agreements with foreign creditors, since it will take time to reestablish Bulgaria's creditworthiness and to improve access to international financial markets. The project would provide some relief for the agricultural sector while debt restructuring is arranged, and supply medium- and long-term funds to support growing private activity in the sector and begin the process of strengthening financial institutions involved in market-oriented rural credit. Lessons learned from OED performance audits for similar projects have been incorporated in project design with emphasis, in particular, on financial discipline of participants and quality preparation of sub-loans. 7. The proposed project is considered the most suitable for conditions now prevailing in Bulgarian agriculture. It is expected that private investors would respond relatively quickly to the opportunities created by the reforms. Public investments would need to be targeted to areas with strong "public good" justification and only to the highest priorities, because of limited Government resources and difficulties in restructuring of public sector organizations. As the transition in agriculture proceeds and the most pressing credit requirements are met, future Bank support for agricultural infrastructure (e.g., irrigation rehabilitation) and support services (e.g., research, extension), may be warranted.
8. Proiect Obiectives. The project aims to improve access of the
private sector to medium- and long-term credit for investments in primary agriculture and agribusiness. Medium- and long-term foreign exchange resources would be made available through Bank-approved participating financial
intermediaries to finance imports of farm machinery and other equipment. The project would help to strengthen the capacity of PFIs for appraisal and
supervision of investment projects in agriculture and agribusiness.
9. Proiect Components. The proposed project would consist of two
components: (a) investment credits (US$47.0 million equivalent) for the financing of medium- and long-term sub-loans exclusively for eligible private investments. These would finance imports of fixed and movable assets and associated permanent
agriculture, agribusiness and related activities such as transport, trade, handicrafts, rural tourism, and associated services; and (b) institutional development to PFIs that would include (i) TA to strengthen their capacity in the appraisal and supervision of sub-loans by training to be financed by grants (US$600,000 equivalent); and (ii) the financing of part of PFI equipment needs from project proceeds (US$3.0 million equivalent).
10. Agreed Actions. During negotiations, agreements with the Government were reached regarding:
A. Loan Covenant. The Government would phase out the existing short-term farm credit interest subsidy programs by December 31, 1996 according to the following
schedule: (a) the maximum contribution by the Government to interest payments due by the farm credit recipients to the banking institutions would be set at half the BNB basic rate for short-term farm credits granted on of after JanQary 1, 1995 and one-thirds of the BNB basic rate for short-term farm credits granted on or after January 1, 1996; and (b) the state budget amount for the farm credit interest subsidy program would be limited to Leva 1.5 billion for 1995 and Leva 1.5 billion for 1996. B. Conditions of Loan Effectiveness. (a) the Government
would sign Subsidiary Loan Agreements, satisfactory to the Bank, with, at least, two eligible PFIs; and (b) the boards of directors of PFIs would adopt Policy Statements and Corporate Strategy Statements, agreed with the Bank.
C. Other Agreements. (a) the Government would further liberalize agricultural prices and trade. Specifically, it would lift the export ban on major food and feed grains and, over time, phase out export taxes on these products; (b) the Government would agree to an annual policy review related to progress in agricultural price, trade, and lending policies with the Bank; (c) PFIs would participate in the staff training and systems installation for project appraisal and supervision; and
(d) PFIs would ensure that sub-project appraisals be undertaken in accordance with appropriate environmental standards satisiactory to the Bank.
11. Environmental Asnects. All sub-borrowers under the proposed project would be required to comply with environmental protection regulations of the country, acceptable to the Bank. In appraising sub-projects, the PFIs would ensure that sub-borrowers have received clearance from the relevant regulmtory agencies regarding the environmental impact of their investments. Environmental agencies in Bulgaria, while relatively new and inexperienced, are being strengthened. Sub-borrowers would be required to submit evidence of clearance as part of standard sub-loan processing. The PFIs would review compliance with environmental regulations and requirements of sub-projects in the course of normal sub-project supervision. The PFIs would report and coordinate regularly with the environmental regulators, who are ultimately responsible for monitoring
4
-compliance. This approach to environmental protection by the PFIs would be reflected in their policy and corporate strategy statements to be agreed with the Bank.
12. Benefits. The project would improve credit supplies to support the transition of agriculture to a market ecornmy and strengthen key financial institutions necessary for sustained development of the sector. Improved access to credit would help stimulate private farming, establish private agricultural cooperatives, and foster privatization of agro-processing enterprises. The establishment of new businesses would contribute to a more competitive environment, with benefits to both producers and consumers. New investments consistent with market forces are expected to increase efficiency of production, improve the volume and quality of the domestic food supply, expand exports and
improve incomes for newly-independent farmers and entrepreneurs. Increased economic activity would generate tax revenue to the Government and emphasis on institutional strengthening would facilitate long-term sustainability of market-oriented banking operations. The project would also contribute to the development of the banking sector by introducing medium- and long-term fixed-rate instruments and obliging BNB to manage currency and interest rate risk and the PFIs to gain experience with foreign currency lending.
13. Risks. Perceived project risks are of several types. The major
economic risk is the possibility of macroeconomic destabilization which would undermine the reform program and adversely affect the agriculture sector and the demand for credit. Risks specific to agriculture includet (i) delays in the implementation of the Land Law; (ii) delays in the process of decollectivization and privatization; and (iii) reversals and/or delays in moving toward more liberal agricultural price and trade policies. They will be addressed by implementation assistance and progress monitoring. The main proiect risk is that sub-borrowers will fail to repay their loans in full and on time because of inadequate preparation and supervision of sub-projects, macroeconomic destabilization, adverse price developments, lack of credit discipline, etc. This risk will be addressed bys (i) provision of professional expertise and technical assistance to the PFIs to ensure high quality appraisals; (ii) close supervision by the Bank; and (iii) monitoring of PYle by BNB. A related risk is that GOB would continue to emphasize farm credit subsidies and thus ma'-s project funds less competitive. This risk is being addressed by conditional; ies under the project. There is also a risk that Prls may have d,.fficulty in identifying groups of sub-borrowers among Primarv Producers able to prepare sub-loan applications of a size large enough to be of interest to the PFIs. Political and economic uncertainties in Bulgaria are likely to remain significant. To help contain risks, the project would be subject to a "project launch workshop* early
In the period, a comprehensive "mid-term review", and close supervision.
14. Recommendation. I am satisfied that the proposed loan 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. May 23, 1994
Schedule A
BULGARIA
AGRICULTURAL DEVELOPMENT PROJECT
Estimated Costs and Financino Plan f
(US$ million)
ESTIMATED COSTSs Foreign Private
Bank Ponors P_Is Enterjrisa Total
A. Credit Component Primary Agriculture 23.5 - - 5.9 29.4 Agroindustries 23.5 - - 5.9 29.4 B. Institutional Develonment Training - 0.6 - - 0.6 Equipment 3.0 1.0 - 4.0
C. Total Prolect Cost 50.0 0.6 1.0 11.8 63.4
FINANCING PLAN:
Local Foreion Total
IBRD 0.0 50.0 50.0
Foreign Donors 0.0 0.6 0.6
Private Investors 11.8 0.0 11.8
PFIs -.I0 0.0 1.0
TOTAL 12.8 50.6 63.4
-6-Schedule B BULGARIA
AGRICULTURA_ DEVELOPMENT PROJECT
Procurement Method and Disbursements
(US$ million)
Procurement Method:
Proiect Elements LIB Other W Total Cost
Credit Component 8.8 50.0 58.8 (7.0) (40.0) (47.0) Institutional Development - 4.6 4.6 1 _ 13.0) (3.0! Total 8.8 54.6 63.4 (7.0) (43.0) (50.0)
A/
Up te US$250,000 commercial practices; from US$250,000 to US$1.0 million international shopping; aboveUS$1.0 mitlion limited international bidding (LIS).
Note: Figures in parentheses indicate amount to be financed under the proposed loan.
% of
Amount of the Expenditures
Catecorv Loan Allocated to be Financed
(1) Goods and services 47,000,000 100% of foreign expenditures,
under Part A of the 70% of local experditures for
Project imported items procured locally
and 50% of local expenditures
for services
(2) Equipment and computer 3,000,000 100% of foreign expenditures
software under Part B of and 70% of local expenditures
the Project for imported items procured
locally TOTAL 50,000,000 Estimated Disbureements: FY9 lYX96X9 F9 Annual 7.0 20.0 20.0 3.0 Cumulative 7.0 27.0 47.0 50.0
-7-Schedule C
BULGARIA
AGRICULTURAL DEVELOPMENT PROJECT
Timetable of Key Prolect Processing Events
(a) Time taken to prepare: three years
(b) Prepared by: Ministry of Finance, Ministry
cf Agricuolture, Bulgarian
National Bank and PFIs, with
Bank assistance
(c) First Bank mission: March 1991
(d) Appraisal mission departure: November 1, 1993
(e) Negotiations: April 1994
(f) Planned Date of Effectiveness: September 1994
Schedule D
BULGARIA
AGRICULTURAL DEVELOPMENT PROJECT
STATUS OF BANK GROUP OPERATIONS IN BULGARIA A. STATEMENT OF BANK LOANS
(As of May 12, 1994)
Amount in US$ millions
Loan Fiscal (less cellationsL
No. Year Borrower Purpose Bank Undisbursed
3384-BUL 1991 Pepublio of Bulgaria Technical Assistance 17.00 14.18
3397-BUL 1992 Republic of Bulgaria SAL 1 250.00 35.95
3563-BUL 1993 National Electric Co. Energy/Environment 93.00 90.83 3S92-BUL 1993 Republic of Bulgaria Teleconununications 30.00 28.00 3361-BUL 1993 Republic of Bulgaria Private Sector Dev. 55.00 S5.00
Total 445.00
Total Undisbursed 223.96
STATUS OF BANK GROUP OPERATIONS IN BULGARIA B. STATEMENT OF IFC INVESTMENTS
(As cA May 12, 1994)
IBRD 25962 23 11 2 s 26' 27 28 f gKa T roa R
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