FILE COPY. rthis report was prepared for use within the Bank. In making it R E S T R I C T E D. Report No.P-219

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE COPY rthis report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. R E S T R I C T E D Report No.P-219 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE FEDERATION OF RHODESIA AND NYASALAND March 23, 1960

2 REPORT AND RECCiT'EUDATTONS OF THE PRESID1ET TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE FEDERATION OF RHODESTA AND NYASALAND 1. I submit the following report and recommendations on a proposed loan of $5.6 million for the development of African agriculture in Southern Rhodesia. PART I - HISTORICAL 2. On the occasion of my trip to Africa in 1958, I was asked by some African leaders in the Federation of Rhodesia and Nyasaland about the possibility of the Bank's being of assistance in financing development projects having a direct impact on African life. Their approach was later supported by the United Kingdom Government and by the Government of the Federation of Rhodesia and Nyasaland. Among the projects suggested for the Bank's assistance was the completion of the Southern Rhodesia Government's seven-year plan for development of African agriculture. On the basis of preliminary information received late in 1958, the Bank indicated its willingness to consider this project. 3. A formal request and supporting data were received early in A mission from the Bank went to the Federation of Rhodesia and Nyasaland in September 1959 to examine the economy and the proposed project. Negotiations for the proposed loan were carried out in Washington in February- March h. The Bank has already made the following loans in the constituent territories of the Federation: Amount as of March 15, 1960 (expressed Year Borrower Purpose in $ million) 1952 Colony of Southern Rhodesia Power Territory of Northern Rhodesia Railways lb.o 1956 Federal Power Board Power Federation of Rhodesia and Nyasaland Railways 19.0 Total 11.0 Of which has been repaid 7.5 Total outstanding Amount sold 23.4 Of which has been repaid Net amount held by the Bank The total outstanding includes $18.2 million not yet disbursed. 5. The Bank has made the following loans with the guarantee of t+he United Kingdom:

3 -2- Amount as of March 15, 1960 (expres- Year Borrower Purpose sed in $ million)_ Federation of Rhodesia and Nyasaland Power and or its constituent territories railways fll East Africa High Commission Railways and Harbours 2h Nigeria Railways 28.0 Total Of which has been repaid 9.9 Total now outstanding 1 / Amount sold 32.5 Of which has been repaid Net amount held by the Bank / Includes $26.8 million not disbursed as of March 15, A proposed loan of $1.25 million to the Colony of British Guiana for agricultural credit is also about to be presented to the Executive Directors. PART II - DESCRIPTION OF THE PROPOSED LOAN 6. The main characteristics of the proposed loan would be as follows: Borrower: G;uarantor: Amount: Amortization: Interest rate: Federation of Rhodesia and Nyasaland. United Kingdom. The equivalent in various currencies of $5.6 million. In 15 semi-annual installments, commencing on December 1, 1962 and terminating on December 1, /4%, including 1% commission. Commitment Charge: 3/4 of 1%. Purpose: Land surveys and allocation of individual land plots to African farmers, development of water supplies, farmto-market roads, soil conservation, and expansion of various agricultural services.

4 -3-. PART III - LEGaAL INSTRUMENTS AND AUTHORITY 7. Drafts of the following loan dneuments are attached: (a) Loan Agreement between the Federation of Rhodesia and Nyasaland and the Bank (No.1); (b) Guarantee Agreement between the United Kingdom and the Bank (No.2); (c) Project Agreement between the Colony of Southern Rhodesia and the Bank (No.3). The draft Loan and Guarantee Agreements conform generally to the pattern of the previous Loan and Guarantee Agreements with the Federation and the United Kingdom concluded in 1958 for the Rhodesia Railways Project. 8. The Loan Agreement would require the Federation to re-lend the proceeds of the Bank loan to Southern Rhodesia under a Subsidiary Loan Agreement, the terms of which would have to be satisfactory to the Bank and could be changed only with the consent of the Bank (Section 5.01 (a)). In the event of a shortfall of funds available to meet Project expenditures, the Federation would be obligated to make arrangements satisfactory to the Bank to cover the shortfall ('ection 5.07). Should Southern Rhodesia prepay the subsidiary loan the Federation would thereupon have to prepay an equivalent portion of the Bank loan (Section 5.08). 9. Article VI of the Loan Agreement would make a default by Southern Rhodesia under the Project Agreement an additional event entitling the Bank to premature the Loan. The due execution and delivery of a Bankapproved Subsidiary Loan Agreement and the due authorization or ratification of the Project Agreement, together with appropriate legal opinions in respect thereof, would be additional conditions to the effectiveness of the Loan Agreement (Sections 7.01 and 7.02). It is contemplated that appropriate legislation for these purposes would be introduced at the ne±t Southern Rhodesian legislative session, to be convened late in June In keeping with established practice between them, it is proposed that the United Kingdom and the Bank confirm their understanding as to the interpretation of Section 2.02 of the Guarantee Agreement as set forth in the form of the attached draft letter (No.4). II. The Project Agreement, which follows generally the pattern of the Bank's previous project agreements, contains undertakings in the usual form relating to carrying out the Project, exchange of information, inspection and the maintenance of separate records. PART IV - APPRAISAL OF THE PROPOSED LOAM 12. An appraisal of the proposed project is given in the attached technical report No. TO 230n (No.5). Also attached is a report No. EA 1055b

5 -'4- on the economic position and prospects of the Federation of Rhodesia and Nyrasaland (No.6). The Project 13. The project for wihich the Bank's loan would be made consists of the second half of the Southern Rhodesia Government's seven-year plan for development of its African agriculture which is to be carried out during the three and a half-year period ending December 31, This plan is designed essentially to arrest soil deterioration, to establish settled communities of African farmers with individually allocated arable land holdings and grazing rights, to spread the use of improved farming methods, and to increase the farmers' production, for both subsistence and cash income. Under the project, provision is made for surveying and assessing the arable or grazing quality of land, allocation of individual plots and settlement areas, development of water supplies, and construction and improvement of simple farm-to-market roads. The project also provides for soil conservation measures, and improvement and expansion of auxiliary services, such as agricultural credit, marketing, livestock dipping, agricultural research, demonstration, and extension. 14. The project is estimated to cost about ; 11.7 million. This figure represents a substantial increase compared with the previous three and a half-year period. Except for the Bank's contribution, funds necessary to complete the project would be provided by the Southern Rhodesia Governmnent from its general revenue and from contributions by African farmers to the Government's Native Development Fund. 15. Host of the expenditure would be for drilling boreholes and wells, constructing small dams, road building and improvements, and on salaries, housing, transport, and equipment for European and African staff. The Southern Rhodesia Government's Ministry of Native Affairs would be responsible for the execution of the project. It is efficiently organized and has competent technical and administrative staff. 16. The execution of the project will result in better crop yields and gradually increasing money incomes for African farmers. The direct benefits amply justify this expenditure. The increased production would be sold mostly within the Federation, but an appreciable increase in exports of "Turkish-type " tobacco and beef can be expected. Procurement and Disbursement 17. Major works under the project are to be executed by contractors, selected through competitive bidding under which both Rhodesian and non- Rhodesian firms are eligible to bid. The contractors normally purchase their equipment from domestic suppliers of imported equipment and machinery. Government purchases costing not more than E 300 each (b 750 in the case of purchases from the Native Development Fund) are made from local dealers; purchases exceeding these amounts are subject to formal bidding under which both domestic and foreign suppliers may tender. Sup-

6 pliers of machinery and equipment from Commonwealth countries are normally granted a customs preference, which generally ranges between 5-10%. Rhodesian offers of manufactured goods, such as steel, are given a special preference of 7 1/2% over similar foreign offers. 18. It is estimated that about 18% of the total cost of the project fill require expenditure in foreign exchange. Aa ths e_expemw iture on the project proceeds, the Bank would disburse funds under the proposed loan in this proportion. The Need for the Loan 19. Like other constituent territories of the Federation, the economy of Southern Rhodesia is still divided essentially between the European money economy and the African tribal subsistence economy. Increasing number of Africans are participating in the European economy as laborers or growers of cash crops and this should continue in future at a faster rate. As yet, most of the Africans, who account for 96% of the Federation's total population, still live in the African tribal areas and practice subsistence agriculture. Little improvement has taken place in their very low standard of living despite a spectacular growth of the Federation's economy over the post war period. 20. The poverty of the African population is related to inefficient use of land, including the traditional system of tribal land tenure, and to a serious deterioration of land and its natural plantcover, which led to loss in fertility and to serious erosion. The African population continues to increase at an annual rate of over 2 1/2% and, unless vigorous action is taken, the situation will get worse. 21. To tackle the problem the Government of Southern Rhodesia launched in 1955 a seven-year plan, providing for comprehensive action to improve African farming by establishing individual rights and responsibility for land and by introducing better and more efficient farming methods. For the second half of its term, this plan has been revised to cover a larger area and expanded agricultural services. 22. The Southern Rhodesia Government relies on borrowing for financing a substantial part of its public investment program and has not had enough money to carry out the second half of the seven-year plan at a pace necessary for its full effectiveness. It has, therefore, requested a loan for this purpose from the Government of the Federation of Rhodesia and Nyasaland which in turn has approached the Bank for assistance. 23. Since 1956 the Federation's spectacular post war economic growth slowed down and no increase was recorded in This was the consequence of a sharp decline in the price of copper, the Federation's principal export product, and a "credit squeeze" imposed by the authorities, to restrain demand for imports. By early 1959, the price for copper had recovered somewhat, the "credit squeeze" had been relaxed, and the growth of the economny had been resumied at a moderate rate. however, mainly as a result of lower

7 -6- yields from income tax, including tax receipts from mining companies, and customs duties, both Federal and Territorial governments' revenues have declined since 1957 and, because of a time lag between the realization of profits and the collection of taxes, it is likely to remain low in Any increase in the governmental revenues during the next few years would not support more than a modest increase in public expenditure. 24. Over the last two years, the Federation's balance of trade has shown a significant improvement; but, although the flow of official funds has been substantial, private capital inflow has not yet fully reached its previous level. Sterling balances, including those held by mining companies and commercial banks, are equivalent to slightly over two-thirds of the total cost of the Federation's annual imports bill. In view of the large fluctuations in its export earnings, these reserves are not excessive. In the circumstances, the Federation is justified in borrowing externally to support the Southern Rhodesia Government's African agricultural development project, rather than drawing on its reserves. Prospects of Fulfillment of Obligations 25. Aside from its important general economic and social benefits, the project should result in a substantial increase in the Southern Rhodesia Government's direct revenue, since roughly 10% of the proceeds of African sales of produce is retained by the Government's Native Development Fund for expenditure on development works in African areas. The planned increase in the Africanst cash incomes should also result in larger taration receipts by both the Southern Rhodesia Government and the Government of the Federation of Rhodesia and Nyasaland. 26. The Federation's ability to service its external debt depends to a large measure on its ability to produce and market its major exports, mainly copper and tobacco. The production prospects for both of these are good. The reserves of copper ore are very large while the cost of production are still low and highly competitive. The present world prices are quite remunerative for the industry. The quality of the Rhodesian tobacco is improving and, despite growing competition in its established markets as a result of more liberal imports from the North American sources, it should be able to hold its own. There is also a growing number of lesser exports, including chrome and asbestos, the long-run outlook for which should be reasonably good. Manufacturing industries which serve mainly the domestic market have been growing and help to diversify the economy. 27. The Federation's external public debt, including those of its constituent territories, is equivalent to about $550 million. Service on this and on the expected borrowing this year throughout the tsixties would be equivalent to 7-8% of current annual external earnings. There are also sizable payments on account of foreign investments in the Federation, but profits generally vary with the export receipts and the transfer of investment income has never caused serious difficulty. It does not seem likely that the service of external debt will prove unmanageable.

8 One of the risks inherent in lending in a multiracial country such as the Federation is that tensions between races might become so acute that the economy would be disrupted and the maintenance of debt service imperiled. As elsewhere in Africa, the course of race relations in the Federation cannot be predicted far ahead with any degree of assurance. Developments in the neighbouring territories might influence events in the Federation. The Federation's own Constitution is at present under review and some of its African leaders have been asking for a dissolution of the Federal set-up. As far as can be judged today, however, the risks are not excessive that the situation will get out of control and interfere with the due execution by the Federation and by Southern Rhodesia of their obligations in connection with the proposed borrowing from the Barnk. In any event, resort could eventually be had to the guarantee by the United Kingdom. The Uni-ted Kingdom 29. The United Kingdom, as Guarantor of the proposed loan would assume a contingent financial liability to the Bank. In 1952 when the first Bank loan was made to a British colony, the total external debt of the United Kingdom was $6.4 billion equivalent; it is now $6.0 billion equivalent, not including Ml33 million of Banlk loans guarenteed by the United Kingdom. The annual total debt service payments have remained at around 2% of total current external earnings. With the increase in productive strength and in the external ct ital assets of the United Kingdom that has occurred in these years, the basic conclusion of the Bank's earlier reports is reinforced: the obligations being assumed by the United Kingdom in guaranteeing Bank loans to the British dependent territories should not be a matter of concern. 30. During this period, real gross national product increased by a fifth while population increased by 3%. Total exports increased by a quarter, exports to North America by 2-1/2 times and, in 1959, the United Kingdom had a favorable balance of trade with the United States for the first timne since The Bankts lending to the British dependent territories has been small compared to the export of capital from the United Kingdom itself. In the eight years, , the net outflow of private long-term capital is roughly estimated at a total of around b 1,600 million. Since 1952 the gross outward movement on private account has been at an average rate of around b 330 million a year. As gross foreign private capital investment in the United Kingdom has averaged around ; 130 million a year, the overall net improvement in the British international private capital position has been about ; 200 million a year. In addition, the United Kingdom Exchequer paid out a total of around ; 730 million in assistance for overseas development (in bilateral grants, loans and technical assistance and multilateral assistance) in the period from April 1, 1951 to March 31, The balance of payments crises wjhich the United Kingdom has suffered have not been due to the inability of the United Kingdom to pay her way. They have arisen because the United Kingdom did not have a

9 -8- current account surplus large enough both to provide for the capital she was exporting and to strengthen her external reserves. As the Radcliffe report pointed out, the crises were related immediately to the insufficiently large official foreign exchange reserves held against the swings in the balance of payments items (particularly in imports due to swings in inventories and import prices) and fluctuations in the movement of capital (particularly in the holdings of sterling balances and "leads and lags" in payments). The reserves have been, in short, an inadequate buffer between changes in the balance of payments and domestic policy. At times, however, the balance of payments crises have served a purpose in dramatizing the need to make the changes in domestic policy necessary to correct the pressure on the external position. 33. In the last few months, because of some indication that internal expansion might be going too fast, restraining measures have been applied, In February, Bank rate was raised from 4% to 5% and government support was withdrawn from the bond market. In a recent speech the Governor of the Bank of England warned that "if the country were again to allow itself to be overstrained or for any other reason to see an upsurge of costs and prices, it would only mean more trouble and another violent application of the brakes". 3h. The recent increase in the International Monetary Fund quotas and in the United Kingdom's own reserves has improved the ability of the United Kingdom to meet exchange fluctuations. Short term difficulties cannot be ruled out but as pointed out above, the authorities have already shown themselves to be aware of the dangers that may lie ahead and ready to take prompt action to cope with them if necessary; moreover the long term prospects continue to be good based as they are on growing industrial strengtn and competent management of the country's affairs. 35. The United Kingdom has existing contingent external obligations - all arising out of Bank loans to British dependent territories - amounting to $183 million equivalent, of which $160 million are still held by the Bank. Including service on the present borrowing, dollar payments for the United Kingdom's own debts and debts guaranteed by her would fluctuate around $200 million a year in the 'sixties. This remains small in relation to her external earnings, currently some $13.5 billion a year. PART V - COMPLIANACE IvaTH ARTICLES OF AGREEPTENT 36. I am satisfied that the proposed loan will comply with the requirements of the Articles of Agreement of the Bank. The report of the Committee provided for in Article III, Section 4, (iii) of the Articles of Agreement is attached (No.7).

10 -9- PARP VI - RFCCrIHENDUATION%S 37. I recomrmend that the Bank at this time make a loan to the Federation of Rhodesia and Nyasaland in an amount in various currencies equivalent to $5.6 million for a total term of about 13 years, with interest (including commission) at a 6 1/% per annum and on such other terms as are specified in the attached draft Loan,Guarantee, anc renents,,and Project Agree- that the Executive Directors adopt a resolution to that in effect the form attached (No.8). Attachments Eugene R. Black President W,tiashington D.C. March 23, 1960