SUPPLEMENTAL STATEMENT ON THE LOAN TO LUXEMBOURG. Stability. The Ducby of Luxembourg is a conatitutional monarchy whose Government

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1 Public Disclosure Authorized Stability SUPPLEMENTAL STATEMENT ON THE LOAN TO LUXEMBOURG The Ducby of Luxembourg is a conatitutional monarchy whose Government has shown marked political stability sinco the establishment of a democratic Public Disclosure Authorized Public Disclosure Authorized constitution in It has no record of default on any Government obligations, except for interruption of service during the German occupation. Physical DestructiQn as Result of the War As a result of the "Battle of the Bulge", fought in the winter of 1944 and 1945, substantial damage was suffered by the agricultural North of Luxembourg but the Industrial South escaped with little direct loss from military operations. The railroad system of the country was seriously damaged by aerial bonbardments throughout the war; 22 per cent of the then existing railroad bridges and 20 per cent of the tracks and other inetallations were damaged or destroyed and most of the rolling stock was damaged, worn out, or carried away. Industrial output under the German ocupation was low because of lack of imports of raw materi4as ad spare parts and through lack of proper Public Disclosure Authorized maintenance of equipment; agriculture lacked fertilizers and necessary replacemonts of farm machinery. Economic Developments While 40 per cent of Luxembourg's area is intensively cultivated and domestic agricultural production supplies three-fourths of the country's requirements, irqn and steel production is the predominant factor in the LuzArhourg economy. In the years immediately preceding the war, exports oif iulvgical products constituted as much as 80 per cent of all exports.

2 -2- During the war the Luxembourg iron and steel industry was unable either to modernize or to maintain its equipment. The relatively low output in 1946 of 66 per cent of the average production of in that industry, however, was due primarily to reduced supplies oz..cok6 allocated to Luxembourg as a result of the coal shortage. In 1947 the production of pig iron and steel has been constantly increasing, and in June 1947 the productton of pig iron reached the level of 93 per cent and output of steel 90 per cent of level; this represented, however, only approximately 65 per cent of the country's iron and steel production capacity. Other industries in Luxembourg, which include leather and textile manufacturing and quarrying, are of lesser importance. Chiefly located in the northern part of the country, they still beer the marks of the Battle of the Bulge, with the consequence that production in these industries is lagging. On the other hand, agricultural production is in a better position. Most of the damage to the soil has already been repaired, and dairy output may soon reach pre-war levels, particularly if farm buildings are restored expeditiously. Under the guidance of the Government, and due to the energy of its people, Luyembourg has made considerable progress in the rehabilitation of its economy sinpe the liberation. Nevertheless, largely on account of the low levels of steel productiol, the Luxembourg Government estimates that real national income in 1947 will be only 70 per cent of that in Because of the vital importance of the Luxembourg steel industry ix the national econoipy, restoration of the pre-war real national income, which on a per capita basis was one of the highest in Europe, will depend (1) on the increased output of the iron a4d steel industry which is conditioned upo4 increased supplies of coal, and (2) on the output of high valued steel products which should result from the modernization of the steel industry.

3 -3- Confronted Vith the necessity and pressures for increasing expenditures for reconstruction and indemnification of war damages, the Government has been unable to raise adequate receipts to meet expenditures, and sizeable budgetary deficits have resulted. The appearance of deficits represents a decided change from the pre-war situation when, except in 1935, the Luxembourg budget was consistently in balance. In 1945, the first full year after liberation, lack of receipts rather than magnitude of expenditures was largely responsible for a budgetary deficit of L.frs. 1,613 million ($36.8 million). There was a further but smaller deficit in 1946 and there will be a deficit in 1947 due, mainly, to extraotdinary capital expenditures. It can be reasonably expected that the increase of production in 1947 and the consequent rise in the national income will further reduce the deficit in 1948 and should enable the Government to cover the balance by internal borrowing. As a result of deficit financing made necessary by the war, Luxembourg's interest,-bearing public debt increased between 1938 and 1946 from Lfre.725 million to L.fre. 4,658 millionii whereas natonal. income in money terms rose only about 73 per cent during the same period. Luxembourg entered i4to an Economic Union with Belgium effective May 1, The trade terms of the Convention,provided for unrestricted trade between Luxembourg and Belgium and the abolition of all customs barriers between the two countries. Monetary terms of the Convention, as revised by an agreement signed in London in 1944 in anticipation oz the liberation of the Union*s territories, created a single new authority to cont-ol foreign exchange operations. This authority, the Institut bplgoluxedoirgeois du Change (I.B,L.C.), consists of a board of nine, with seven -cepresentatives from Belgium and two from Luxembourg,

4 4 and formulates foreign exchange policies for the Union. Although the arrangement between Luxembourg and Belgium does not4. prevent either Government from obtaining loans abroad, the I.B.L.C. has to approve any allocation of foreign exchange for service payments on the external debt of either country. The Loan Agreement provides that it will become effective upon receipt by the Bank of evidence of ratification by Luxembourg and satisfactory assurances from I.B.L.C. and from Belgian authorities that foreign exchange required to meet the service of the loan will be made available to the Luxembourg Government. The Belgian Government has informed the Bank that such assurances will be given. The Projects Luxembourg's railways form a vital adjunct to the country's heavy industry. Most of the coal and coke consumed in the manufacture of iron and steel originates in the Ruhr and must be transported by rail to the steel centers in southern Luxembourg; moreover, tonnage of iron ore transported over the cou3itry's freight lines in the form of exports or imports amounts to twice the tonnage smelted in Luxembourg steel foundries. The Duchy's railways also play an important role as an international rail center linking the Ruhr, the Saar, Lorraine, Switzerland, other inland areas, and the Low Country ports. One of the main coalcarrying lines between the Ruhr and Frapee passes through Luxembourg and shipments of perishable commodities between North Sea ports and its southern hinterland accounted for a large volume of pre-war traffic which made the Duchy's railway system an important segment of the national economy.

5 -5- Before 1940 Luxembourg railways were operated by three companies which over the past 90 years had been under the control at various times of a number of French, German, and Belgian bodies. These arrangements had been unsatisfactory to Luxembourg and after the war steps were taken to unify the railways and bring control within the country. On April 17, 1946, a new company was established, 51 per cent of the Capital of which is to be furnished by the Duchy of Luxembourg, 24.5 per cent by France, and 24.5 per cent by Belgium. Due to the heavy war damage to the railways, the LuXembourg Governme4t has undertaken to furnish as part of its capital subscription locomot'ves, box and gondola freight cars, baggage cara, and miscellaneous equilment. Orders to be placed by the Government in 1947 will amount to L.frs.203 million ($4.6 million) or two-thirds of the total 1947 railway rolling stock program of L.fre.306 million ($7 million). Of these orders $4.5 mi4ion will be financed out of the proceeds of the Bank's loan. Te most urgent problem in the planned modernization of the steel industry As the necessity for increasing the production of sheets and plates for which vt present there is an important growing market. Incioased diversification in the quality of the products manufactured would widenthe marketing potential for the country's output. The new installation w uld (a) considerably increase the present capacity for producing sheets and pltes apd improve the balance of its finishing and ingot cap4city, and (b) permit a reduction in the number of workers employed, a factor of considerable importance in view of the growing manpower shortage in Luxembourg. The cost of ;.ders for reversing steel strip mill equipment will be $13,500,000, of which $7,500,000 will be financed out of the proceeds of the loan.

6 INTERNATIONAL BANK FOR RECONSTRUCTION A1D DEVELOPMENT FOR TEE PRESS FOR IMMDIATE RELEASE Press Release No. 64 August 28, 1947 The Duchy of Luxembourg was granted a $12,000,000 loan by the International Bank for Reconstruction and Development today. The Loan Agreement was signed by Hugues Le Gallais, Minister of Luxembourg in Washington, and Pierre Werner, Commissioner of Bank Control, representing the Luxembourg Government, and by Robert L. Garner, Vice President of the Bank. Luxembourg needs at least the equivalent of $2,000,000 of the loan in Belgian francs for purchases in Belgium, and the Belgian Government has informed the Bank that it will consent to the use of this sum out of Belgium's paid-in subscription to the capital of the Bank. Thus, this loan to Luxembourg presents the Ban* wit:4 its first opportunity to make use of its non-dollar capital. The loan will bear interest at 3 1/4 per cept and the Bank will also charge a commission of 1 per cent a year to be set aside in a special reserve fund, in accordance with its Articles of Agreement. The loan runs for 25 years with amortization payments, beginning in July 1949, providing for retirement by final maturity in The proceeds of the loan will be used by the Government of Luxembourg to finance the purchase of equipment for the steel industry and of rolling stock for the railways. Of the $12,000,000 realised, Luxembourg will apply $4,500,000 to the purchase of locomotives, box and gondola freight cars, baggage cars and miscellaneous railroad equipment, and $7,500,000 toward the

7 -2- purchase of equipment for a modern reversing steel strip mill which will enable the country to produce by modern methods high valued finished products such as sheets, plates, etc. Luxembourg's railways are of vital importance both as adjuncts to the country's heavy industry and as international carriers linking the Ruhr, the Saar, Lorraine, Switzerland, and other inland areas and the Low Country ports. At present, the railways are suffering from a shortage of rolling stock. Iron and steel production is the major industry in Luxembourg and exports of metallurgical products in the years directly preqeding the war constituted as much as 80 per cent of all exports. The loan from the Bank, by providing the means for raising the volume of traffic over Luxembourg's railways and by increasing the country's capacity to produce the type of steel products for which there is a heavy demand, would serve the purposes of increasing the country's national production, income and export potential. In addition, because of the critical shortage of rolling stock in Europe and the part which iron and steel play in the reconstruction of the Continent, the loan should contribute to Europe's recovery. These objectives are in accordance with the Bank's purposes as outlined in its Articles of Agreement. Luxembourg has never defaulted on any Government obligations, except for interruption of service during the German occupation. Under provisions of the Economic Union between Belgium and Luxembourg, the central authority for the formulation of foreign exchange policies is the Institut belgoluxenbourgeqis du Change. The Loan Agreement provides that it will become

8 effective upon receipt by the Bank of evidence of ratification by Luxembourg an4 satisfactory assurances from I.B.L.O. and from Belgian authorities that foreign exchange required to meet the service of the loan will be made available to the Luxembourg Government.. The Belgian Government has informed the Bank that such assurances will be given. Under the Loan Agreement with Luxembourg the Bank will be-furnished with full information concerning all materials to be purchased with the loan proceeds and will satisfy itself about their use. The Luxembourg loan is the third granted by the Bank in August and the fourth loan made since its inception. Previous loans comprised $250,000,000 to France, on May 9; $195,000,000 to the Netherlands, on August 7; and $40,000,000 to Denmark, on August 22.