FILE COPY. Report. LJ- w R E S T R I C T E D

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized LJ- w FILE COPY R E S T R I C T E D Report This 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. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLICA ORIENTAL DEL URUGUAY FOR A LIVESTOCK IMPROVEMENT PROTECT December 17, 1959

2 REPORT AND RECONMNDATIONS OF TIE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLICA ORIENTAL DEL URUGUAY lo I submit the following report and recommendations on a proposed loan in an amount in various currencies equivalent to $7 million to the Republica Oriental del Uruguay to help finance a project for the irrprovement of livestock production in Uruguay. PART I -- HISTORICAL 20 In 1950, at the request of the Government, a joint IBRD-FAO mission made an agricultural survey of Uruguay. A special government commission was subsequently set up to prepare a program along lines recommended by the joint mission to improve and increase livestock production. An application for a loan to help finance this program was presented by the Government to the Bank at the end of In 1953, -fter a Bank mission had visited Uruguay and discussed modifications of The program and methods of executing it, the Bank informed the Government that, subject to the satisfactory resolution of administrative and organizational problems, the Bank would be willing to assist in financing the program. Progress in completing preparations was retarded by a number of factors including the change in administration following the 1954 elections. It was not until July 1957 that a law establishing the basis for the execution of the program was enacted by the Uruguayan Parliament 0 4. In February 1958 a special commission was established to direct and supervise the operation of the Livestock Plan. The Government subsequently indicated its desire to move forward with the project but the imminence of elections delayed the opening of negotiations. Following the change in Government after the elections in November 1958, preliminary discussions began with the Ambassador of Uruguay to the United States. Formal negotiations were begun on September 25, 1959 with Mr. Juan Ferrando, Director of Public Credit of Uruguay, and Hr. Walter Lusiardo, Adviser to the Minister of Finance of Uruguay. 5. The proposed loan would be the Bank's fourth in Uruguay and would bring the total of Bank loans in Uruguay to about $71 million equivalent. There have been no caaicellations. Loans previously made are:

3 -2- Amount (Equivalent Year No. Borrower Purpose in millions of U.S.$) UR Administracion Electricity 33.0 General de las and tele- Usinas Electri- phones cas y los Telefonos del Estado (UTE) UR U.T.E. Power 5 5 development UR U.T.E. Baygorria 25-5 hydroelectric project Total: 6h4o0 of which has been repaid: 8.7 Total now outstanding: 55.3 Amount sold: 2.8 of which has been repaid: Net amount now held by Bank: / includes $5i million not yet disbursed.

4 -3 PART II -- DESCRIPTION OF TIE PROPOSED LOAN 6., The proposed loan would have the following characteristics: Borrawer: Amount: Purpose: Amortization: Interest Rate: Commitment Charge: Republica Oriental del Uruguay. The equivalent in various currencies of $7 million. The project is a three-year program for the technical improvement of livestock production in Uruguay on a pilot group of about 600 farms. 17 semi-annual instalments, December 1963 to December per cent per annum, including commission, 3/4 of 1 per cent per annum. Payment Dates: June 1 and December 1. PART III - LEGAL INSTRUPEMTS AID AUTHORITY 7. A draft loan agreement between the Republic of Uruguay and the Bank (No. 1) is attached. It is in substantially the usual form; prot visions of special interest are as follows: (i) The preamble, Schedile 2 and Section 3Q01 of the Loan Agreement indicate that the Honorary Comirssion acting on behalf of the Borrower is to be responsible for directing and supervising the project. (ii) (iii) In Section 5Ol(b) the Borrower agrees to cause an agricultural expert satisfactory to the Bank to be employed by the Honorary Commission on satisfactory terms and conditions. Section 7.01(c) provides for the preparation of internal regulations satisfactory to the Bank covering the operating procedures of the Honorary Commission before the loan becomes effective, and in Section 5.O 8 the Borrower agrees that, without the prior agreement of the Bank, no changes in such regulations shall be adopted which will adv -sely affect the carrying out of the project.

5 (iv) In Sections 5.Ol(c) and 5Ol(d) the Borrower agrees to ensure that necessary credit on terms and conditions satisfactory to the Bank and the Honorary Commission is available to farmers participating in the project, and Section 7.01(d) provides that arrangements satisfactory to the Bank for ensuring this must have been made before the loan becomes effective 0 8. The loan agreement would be ratified by the Uruguayan Legislature before bei-oming effective. 9. The report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank is attached (lio. 2). PART IV -- APPRAISAL OF THE PROPOSED LOAN Justification oi the Project 10. A detailed description of the project (T.O. 233a) is attached (No. 3). 11. Natural conditions in Uruguay are particularly favorable for pastures and almost 90 per cent of the 17 million hectares suitable for agriculture are used for grazing livestock. There is thus little additional land available which is suitable for grazing and any increase in the level of pastoral production must come from improving the use of existing pastures. 12. Despite very favorable conditions, pastoral production in Uruguay has been relatively static, in sharp contrast to countries with comparable conditions for pasture growth where production from pastures has grown rapidly. Inadequate technical knowledge among farmers, shortages of essential imported equipment and materials, and the scarcity of credit for pasture development have been the main factors limiting the applica*- tion of modern methods of pasture improvement and management. 13. Under the project, which is designed to overcome these limiting factors, a pilot group of about 600 farms is to be selected on wihidh improved methods of livestock production will be introduced. These methods include the improvement of pastures and soil fertility by fertilizing and re-seeding, the subdivision of farms by additional fencing to permit controlled rotational grazing, the provision of additional water points in subdivided pastures, the conservation of forage for supplemental feeding, and better control of livestock diseases.

6 1J4. The potentialities of the program are very great, It is estimated that an investment of about pesos on the average farm of 1,000 hectares along the lines envisaged in the program would increase net annual farm revenue before debt service by about 59,000 pesos, or 70 per cent, by the fourth year, If individual farm programs are, as is expected, continued beyond the project to the stage that 50 per cent of a farm is under improved pasture, the total increase in annual farm revenue would be about 150,000 pesos, or 170 per cent. 15. Within four years the project should bring about an increase in net annual farm revenue on the participating farms of about 36 million pesos, or about 30 per cent of the investment. The project should increase annual foreign exchange earnings, mainly from wool exports, by the equivalent of US$ 3-4 million by the sixth year. Over the 12-year life of the proposed loan, the increase in foreign exchange earnings attributable directly to the project should amount to the equivalent of US$ 30 million. 16. The project would also serve a much wider purpose in demonstrating the advantages of modern techniques of pasture improvement and management to the operators of the 14 million hectares of pastoral land not participating in the pilot project. If the improved methods are widr2 y adopted, it would be quite possible for pastoral production in U- Oauay to double within about 15 years. Financial Arrangements 17. The cost of the project would amount to approximately 111 million pesos, of which about 29 million pesos would be financed from private resources. The remainder would be financed from the resources of a special Livestock Fund wxhich, under the law creating the Livestock Plan, would be administered by the Bank of the Republic. 18. The resources of the special Livestock Fund would be derived from the proceeds of the proposed Bank loan equivalent, at the current rate of exchange, to 70 million pesos, to be supplemented by other resources to be provided by the Bank of the Republic and the Uruguayan Government. Procurement 19. Equipment and materials would be imported through normal trade channels. Farmers would be free to choose the particular make of the type of equipment agreed necessary by the Commission and there would be effective competition at retail level.

7 Administration and Organization 20. The pro,ect will be administered by an Honorary Conmlission, a quasi-autonomo- oody under the Mlinistry of Livestock and Agriculture, with powers defined by law enacted by Parliament. The Commission consists of 7 members, of whom four are appointed by private farmers' associations, one by the IMinistry of Livestock and Agriculture, and one by the Bank of the Republic. The President of the Comrnission is appointed by the Government on the recommendation of the six other members. All appointments are for four years; the terms are staggered. 21. The duties of the Commission are to publicize the objectives of the project, select farmers eligible to participate, work out and appraise improvement programs appropriate to each farm, recommend an adequate financial plan for individual programs to the Bank of the Republic as a basis for credit, supervise and technically assist the execution of the programs on each farm, undertake research and extension and generally to initiate action for the more effective realization of the Plan. 22. A Technical Executive Director, who must be a technician acceptable to the Bank, is to be in charge of technical operations. 23e The financial plan recommended for each participating farmer would be presented to the Bank of the Republic which may refuse credit only for lack of creditworthiness; otherwise it must finance the farm program as recommended by the Commission. Economic Position 24. A report on Uruguay's economic position and prospects (R-1008) was distributecd on October 8, A report of the International Monetary Fund &ied August 12, 1959 is distributed herewith (Iio. 4). The Government is now preparing to embark upon a program of financial refora and we cxpect to prepare a neu report on Uruguay's econonmc position after it has been put into effect. 25. Uruguay's agricultural and pastoral resources have given it the fourth highest level of per capita income in Latin America and provide a basis for a strong economy and a high rate of growth. In recent years, however, its financial position has deteriorated and its rate of growth slowed down, primarily because of poor economic management. 264 The difficulties besetting the Uruguayan economy became more acute in 1957 when exports fell to just over half their previous level. The decline was caused in part by adverse weather but was due mainly to the refusal of exporters to sell because of unfavorable exchange rates. With imports at about the level of previous years, net gold and foreign exchange reserves declined from US$ 203 million to US$ 148 million.

8 - 7 - In 1958 the trade -ficit was almost completely eliminated, mainly by a sharp reduct.. n of imports enforced by quantitative restrictions, but net gold and foreign exchange reserves declined further to $ 12h million. This is the lowest level in the last 10 years but still equivalent to more than 6 months' imports at the pre-1958 volume. 27. In recent years budget deficits, expansion of credit to the private sector, and heavy losses under the multiple exchange rate system have caused a rapid increase of the money supply. The combination of rising wages and salaries on the onie hand, and a loss of revenues because of small tariff receipts caused by import restrictions on the other, raised serious budgetary problems which were aggravated by substantial losses incurred by some of the State economic enterprises. The cost of living rose by 20 per cent in 1958 and another 20 per cent in the first 5 months of The present Government, which took office in March 1959 after 95 years as an opposition party, is committed to a program of economic reform. To achieve budgetary balance it ordered rigid econcmy in expenditures and resisted attempts to increase wage rates. Progress toward achieving a balance in government finances was seriously hampered by the severe floods in April which caused heavy crop losses, damaged roads and railroads, and reduced the country's electric generating capacity by more than one third. 29. In September 1959 the Government submitted a monetary and exchange reform bill to Parliament which has been approved by the Lower House and which the Senate is expected to approve shortly. The bill sets a new parity for the peso and authorizes the removal of import restrictio<3 and the abolition of multiple rates. The exchange reform, together with the sound principles of fiscal and monetary management to which the present Government is committed, should go a long way toward improving the policy framework within which the economy operates. Exports should increase as a result of the renewal of price incentives as the market outlook for Uruguay's major exports -- wool, meat and hides -- is rather favorable, 30. The long-term external public debt of Uruguay has remained virtually constant in the past decade; it rose from US$ 136 million equivalent in 1946 to US$ 138 million in Annual service payments on the outstanding external public debt during the next several years are about US$ 11 million. This is approximately 7 per cent of the 1958 foreign exchange earnings which were the second lowest in the past decade. Annual service payments on the outstanding external debt, plus the proposed Bank loan, would amount to US$ 12.2 million in 1964s when amortization of the new loan would begin. This would represent 8 per cent of the current low level of foreign exchange earnings. It may be reasonably assumed that exports will soon rise to about US$ 225 million, the average level of , in which case this ratio would be 5.5 per cent.

9 - 8 - Prospects of Fulfillment of Obligations 31. The project is soundly conceived and technically feasible and should contribute to the economic development of Uruguay by improving and expanding the production of its principal export products. 32. The arr. ;gements are adequate to provide a competent organization well adapted to the execution of the project. A suitable qualified and experienced pastoral expert will act as Technical Executive Director of the Plan. 33. Adequate arrangements are being made to provide local currency to carry out the project. 34. The amounts of foreign exchange required for debt service should be within Uruguay's capacity to provide in addition to her other external obligations. PART V -- COMPLIANCE WITH ARTICLES OF AGREEI-EIfT 35. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI -- RECODIENDATIONS 36. I recommend that the Bank make a loan to the Republic of Uruguay in an amount in various currencies equivalent to $7 million with interest (including commission) at 6 per cent per annum and on such other terms as are specified in the attached draft Loan Agreement, and that the Executive Directors adopt a Resolution to that effect in the form attached (No. 5). Eugene R. Black President Washington, D.C. December 17, 1959