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FOR OFFICIAL USE ONLY

Report No.P-2048-ZR

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

TO THE

REPUBLIC OF ZAIRE

FOR A

FOURTH SOFIDE (SOCIETE FINANCIERE DE DEVELOPPEMENT) PROJECT

April 7, 1977

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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ZAIRE

FOURTH SOFIDE PROJECT

CURRENCY EQUIVALENTS

Currency Unit - Zaire (5), Z1.00 = 100 makuta (k)51.00 - 1 SDR (Special Drawing Right) US$1.15

ABBREVIATIONS

CCCE - Caisse Centrale de Cooperation Economique

EIB - European Investment Bank

KfW - Kreditanstalt fur Wiederaufbau

OPEZ - Office de Promotion des Petites et MoyennesEntreprises Zairoises

SBI - Societe Belge d'Investissements

SOFIDE - Societe Financiere de Developpement

GOVERNMENT OF ZAIRE FISCAL YEAR

January 1 to December 31

FOR OFFICIAL USE ONLY

INTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A PROPOSED

CREDIT TO THE REPUBLIC OF ZAIRE FOR A FOURTH SOFIDE(SOCIETE FINANCIERE DE DEVELOPPEMENT) PROJECT

1. I submit the following report and recommendation on a proposeddevelopment credit to the Republic of Zaire for the equivalent of US$10million on standard IDA terms to finance a fourth development financecompany project. The proceeds of this credit would be relent by the ZairianGovernment to SOFIDE at an interest rate of 8.5 percent per annum, with aflexible amortization schedule conforming to the aggregate amortizationschedule of SOFIDE's subloans.

PART I - THE ECONOMY

2. A Basic Economic Mission visited Zaire in April-May 1974 and itsreport, entitled "Economy of Zaire" (No. 821-ZR), was distributed to theExecutive Directors on August 8, 1975. An updating economic mission wasconducted in May-June 1976, and its report is being finalized. Country dataare attached as Annex I.

3. Zaire, the third largest country in Africa, is rich in mineral,agricultural, forestry and energy resources, but the country is among thepoorest in terms of per capita income. The key constraints to developmentare: (a) shortage of skilled manpower and overall weakness of developmentinstitutions; (b) very poor social conditions, particularly low nutritionaland educational levels; (c) a transport network which is inadequate to servethe scattered population; (d) deterioration of agricultural production, which,however, remains the only source of employment and income for over 75 percentof the population; and (e) heavy dependence on one export, copper, which issubject to wide and uncontrollable price fluctuations.

4. Few countries suffered as much disruption and chaos as did Zairein the first 6-7 years of its independence. Political order and stabilitywere established in 1967 and only then could Government begin to promoteeconomic development. From 1967 to 1970, GDP grew by about 10 percentannually (in real terms); government savings rose to US$110 million com-pared with a deficit in 1966; and the resource surplus grew from US$15 mil-lion to US$60 million. These favorable developments were due, in part, torising copper prices, which increased by over 25 percent between 1967 and1970 (12 percent in real terms), and to an increase in copper production,which rose from 317,000 tons in 1966 to 385,000 tons in 1970.

5. In 1970-74 GDP growth slowed to about 5 percent per annum. Possi-bilities of growth based on unutilized capacity in the manufacturing andservice sectors gradually narrowed. Attempts by Government to transfer

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authoriution.

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foreign-owned assets in agriculture, industry and commerce to private orpublic Zairian ownership, without adequate advance preparation, disruptedthe modern sectors of production and distribution. Further, the prevailingexchange rate increasingly favored the expansion of import demand, whilewiping out most incentives for exports. Particularly adverse pricing pol-icies led to declining agricultural production and exports, and to furtherdiversion of resources to finance food imports for the growing urban popu-lation. Lack of appropriate project evaluation and selection proceduresresulted in the initiation of investment projects whose return would nothelp the servicing of the external debt contracted for their financing.Moreover, these projects absorbed a large part of the country's limitedmanagement resources, and reduced its capacity for further borrowing.

6. In 1974, revenues from taxation of copper exports increased sub-stantially as a result of record world prices for this commodity. Theincrease in revenues encouraged the Government to step up its expendituressignificantly. The latter were also affected by high cost increases dueto steeply rising import and domestic prices. Reflecting the combined effectof these factors, government expenditures rose by 60 percent during that year,far beyond the resources that could be mobilized domestically, and the overallfiscal deficit almost doubled, attaining F224 million. Deficit financing,together with credit expansion for the business sector and rapidly risingimport prices, led to a 28 percent domestic inflation rate, as well as to adraw down of net international reserves of about 39 percent (from US$220.6 toUS$134.2 million). Thus, a combination of government policies and externalfactors led to the severe economic and financial crisis which the country hasbeen experiencing since early 1975.

7. To deal with the worsening economic and financial situation, theGovernment attempted in early 1975 to reduce the budget deficit, to restrictthe expansion of credit and to allocate scarce foreign exchange to prioritypayments, i.e., service of external debt, transfer of expatriate salaries,and import of essential raw materials. In addition, the Government con-tracted a loan for US$50 million from Abu Dhabi for balance of paymentssupport, and drew about US$90 million from the IMF, about one half of whichwas secured under the 1974 oil facility.

8. Given the difficulties inherited from the earlier years, thesemeasures could only have partial success. In 1975, expansion of credit toenterprises was substantial, but shortage of raw materials, spare parts andother essential imports, as well as continued high inflation, slowed down do-mestic production and GDP declined by 2 percent in real terms. Unemploymentincreased and consumption per capita decreased in real terms by about 8 per-cent. In 1975, government expenditures were reduced by 21 percent in currentterms (50 percent in real value) to F585 million, but a larger reduction inrevenues resulted in a budget deficit of 9180 million, only 930 million lessthan the record 1974 deficit. Imports of goods and services in 1975 are

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estimated at about US$1,830 million, about 2 percent lower in nominal termsthan in 1974. However, the current account deficit was, in current prices,larger than in 1974 (US$846 million as compared to US$330 million), mainlybecause of lower copper prices. Despite substantial amounts of capital in-flows and accumulation of arrears, the country's international reserves becamenegative by about US$106 million in December 1975.

9. In November 1975, the Government entered into consultations withthe IMF on a comprehensive Stabilization Program. The Stabilization Program,agreed with the IMF in March 1976, provided for about US$150 million in IMFassistance (first tranche, compensatory financing and 1975 oil facility), allof which was drawn in 1976 in response to the Government's commitment to carryout a detailed program covering public finances, credit, exchange rate, ex-ternal debt, and price policies. The program's three main objectives wereto reduce the expansion of domestic demand, to transfer real resources to theexport sector and to stimulate the growth of production. It covered a one-year period and its implementation was monitored by a high-level Stabiliza-tion Committee, comprising the Director of the Office of the President, theGovernor of the Central Bank, and the Ministers for Finance and Public Enter-prise.

10. In order to dampen the expansion of domestic demand, the Stabiliza-tion Program provided for a reduction of the budget deficit to M6O million,to be financed principally by a 13 percent increase in domestic bank credit.Salary increases, including government salaries, and expansion of credit toenterprises and households, were to be limited. The budget implied a nominalreduction in current expenditure in 1976 of 4 percent.

11. In order to improve the balance of payments situation, the nationalcurrency previously linked to the US dollar at the rate of Z I = US$2, waspegged to the SDR on March 12, 1976, at the central rate of Z 1 = SDR 1,implying a reduction in the value of the zaire of 42 percent in terms ofthe SDR. Foreign exchange controls were maintained in order to limit thebalance of payments deficit to US$100 million at the new exchange rate. Thesystem of import controls introduced in 1975 was retained, and deposit require-ments up to 100 percent were imposed on importers. Some firms, which couldnot continue operation due to lack of foreign exchange, received a specialallocation and GECAMINES (Generale des Carrieres et des Mines), which is thecountry's main copper producer and foreign exchange earner, was allowed toretain half of its net foreign exchange earnings.

12. It is too early to make a final judgment on the implementationof the Stabilization Program. It is estimated that the budgetary deficit wasabout Z225 million in 1976, as compared with the target of Z60 million set inthe Stabilization Program. Of this deficit, about F105 million would be dueto lower revenue than foreseen in the budget and X6O million to expendituresgreater than were expected. Due to a 20 percent increase in salaries in thepublic sector, to the high rate of inflation, and to the effect of exchange

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rate realignment on expenditures in foreign currency, total budgetary expend-itures were estimated at about 27 percent higher in 1976 than in 1975. How-ever, such an increase would imply a decline in government consumption in realterms. The low level of revenues is the consequence of a lower than expectedvolume of exports, in particular of copper, the low level of imports, thecontinued generally depressed level of economic activity and of a tax rebateof US$64 million equivalent to GECAMINES, which was needed to enable GECAMINESto continue its operations.

13. Real wages have been eroded, especially those of the lower incomeworkers. Price increases in the first half of the year were of the orderof 50-60 percent. They were spurred by the Government's deficit financing,the devaluation in March, the adjustments in official prices, especially ofagricultural producer prices, subsequent to devaluation, and finally by thescarcities resulting from the lack of foreign exchange. Since then, however,inflation appears to have slowed down. The Stabilization Program also aimedat limiting expansion of credit to the private sector to 35 percent over theprevious year, and credit policies seem to have followed the program guide-lines. The Bank of Zaire turned away from a policy of indirect controls andreinstated credit ceilings by bank and by sector. Commercial banks were nolonger authorized to extend credit to enterprises with negative workingcapital, except with specific Bank of Zaire authorization. The programobjectives of diversifying the export base and increasing production willtake longer to achieve.

14. The balance of payments current account deficit is estimated atabout US$480 million in 1976, as compared to US$846 million in 1975. Thecountry's imports of merchandise are estimated to have been about US$1,050million in 1976 as compared to US$1,350 million in 1975. Exports of mer-chandise are estimated to have been US$1,1201million as against US$850million in 1975.

15. As part of the Stabilization Program, the Government had offeredin November 1975 to return 40 percent of the share capital of nationalizedfirms to the original owners. On September 16, 1976 the Stabilization Com-mittee, chaired personally by the President on that occasion, decided toreturn the management and total ownership of Zairianized or nationalizedfirms to their original owners provided that 40 percent of equity is offeredto Zairian citizens, chosen by the foreign owners, over a reasonable periodof time. In the energy, transport and forestry sectors, the Government wouldreserve for itself the 40 percent share of equity to be allocated to Zairianpartners. In the plantation and ranching sectors, property will only bereturned if it is established that the Zairian owner has been a bad manager,or an absentee owner. Compensation is being made available to owners ofproperties whose return is either not possible or not desired. In the oilpalm sector, major plantations are being returned and in the case of Uni-lever's plantations, for example, the Government has offered to take the 40percent equity share reserved to Zairians. In the ranching sector, arrange-ments are being negotiated to return 60 percent of the equity to previousowners.

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16. The actual outcome of these developments cannot be predicted withcertainty. The Government's intentions are clear but the extent to which itwill be able to carry out its policies remains to be seen. Furthermore, it isnot yet known what will be the attitude of foreign owners and investors. Thepreliminary reactions of the foreign business community seem to be favorableand commercial credits in Europe (especially in Belgium) now appear morereadily available. Recent arrangements concerning Zaire's external debt(paras. 19 and 20) should further improve the investment climate.

17. Zaire's medium- and long-term external public debt outstanding atthe end of 1975, including undisbursed, was provisionally estimated at US$2.7billion, as compared to US$760 million three years earlier. The disbursedportion of the debt at the end of 1975 was about US$1.7 billion, of whichUS$55 million was owed to the Bank Group. Service payments falling due in1975 amounted to about US$240 million.

18. Zaire has been in default on some of its external debt obligationssince the end of 1975. Some service payments, including those to the BankGroup, are being made. Exporters are instructed to deposit ten percent ofexport receipts with the Federal Reserve Bank of New York as a special re-serve for debt servicing. It seems that this arrangement is functioning.

19. Two sets of parallel negotiations have been conducted between Zaireand its creditors on debt rescheduling. The first one, within the frameworkof the "Paris Club," was with creditor governments and official guaranteeinstitutions, and was concluded in June 1976 with a general agreement toreschedule over ten years all of Zaire's arrears for 1975 and the first sixmonths of 1976, plus the principal due in the second half of 1976. Thisgeneral agreement will be implemented through bilateral agreements withcreditor governments. The first such agreement was concluded with Belgiumin September, consolidating an amount of about $20 million. Agreements withFrance and Germany were also finalized recently. The Paris Club reschedulingof maturities falling due in 1975-76 alleviated Zaire's debt service by aboutUS$160 million according to Zairian sources and by US$200 million accordingto creditor sources. Another meeting of the Paris Club, likely to take placein the near future, is expected to consider rescheduling of the principalamounts falling due in 1977.

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20. The second set of negotiations was with the private creditors andbanks. Between September and November 1976, four meetings were held. Anagreement was reached at the last meeting on November 4 and it providedfor immediate payment of all interest in arrears, amounting to about US$40million. These payments were made as agreed. Principal payments are ex-pected to resume shortly. In return, the bankers have agreed to use theirbest efforts to obtain for Zaire a new line of credit of US$250 millionprovided a new standby agreement is concluded between the IMF and Zaire,such an agreement covering the second tranche and part of the third trancheis presently being negotiated.

21. To manage its public debt the Government of Zaire has also estab-lished, on September 16, 1976, a new governmental agency (OGEDEP - Office ofPublic Debt Management) charged with the task of: (i) servicing the country'spublic debt out of special revenues and budget allocations; (ii) centraliz-ing the records and management of loans and of all related transactions, and(iii) advising government authorities on new loans, and on possibilities andprospects for borrowings.

22. Zaire's export earnings and government revenues will continue to beheavily dependent on the price of copper. World copper prices are expectedto recover during the remainder of the decade, although in real terms they areunlikely to reach the average attained during 1970-74. Zaire's export earningsare expected, nevertheless, to grow by about 19 percent per annum in 1976-80in current terms, and about 5 percent in real terms, mainly on account ofthe maturation of current investments in agriculture and mining. Apart fromcopper, Zaire has the potential to produce many commodities for which marketprospects are favorable: tropical woods, many agricultural products, andseveral minerals, including petroleum.

23. Gross capital requirements are tentatively projected at about US$850million a year in 1977-80, compared with a yearly average of US$530 millionin 1973-75. The debt service ratio was 23 percent in 1974; with reschedul-ing, it dropped to 14 percent in 1975, and, with the assumed capital inflow,it would rise to about 22 percent in 1980. In view of the adverse effectsof the recent recession on domestic resource mobilization, and the effortsthe Zairian authorities are making with regard to the implementation of theStabilization Program, there appears to be a reasonable case for the financ-ing of a large share of project cost, including some local costs, by externallenders.

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PART II - BANK GROUP OPERATIONS IN ZAIRE

24. From 1969 through 1976, Zaire received eleven IDA credits totalingUS$174.5 million for transport, development finance company operations, watersupply, agriculture and education projects. The Bank has also extended grantstotaling US$400,000 as contributions toward the cost of two planning assistanceprojects in Zaire. In 1975, a Bank loan of US$100 million, which was made forthe GECAMINES Mining Expansion Project, cofinanced by the European InvestmentBank (EIB) and by the Libyan Arab Foreign Bank (LAFB), provided for specialrepayment arrangements linked to the project's export earnings. The IFC,which has a US$760,000 participation in the Societe Financiere de Developpe-ment (SOFIDE), the development finance company, has expressed interest in

financing several projects in Zaire.

25. To date, Bank Group assistance to Zaire has been limited comparedto the needs of the country. An important restricting factor has been the in-adequate project preparation and implementation capability of the Government,but this is slowly being overcome. The Bank Group's share of Zaire's totalcommitments is about 10 percent, its share of disbursed loans about 4 percentand of current debt service slightly more than one percent. Annex II con-tains a summary statement of Bank loans, IDA credits and IFC investments asof December 31, 1976, and notes on the status of ongoing projects.

26. Disbursements on IDA credits, which were slow for a long time, haveaccelerated and amounted to US$53.1 million as of December 31, 1976. Projectimplementation has been poor, due primarily to the country's inadequate sup-ply of trained manpower and management capacity. For example, execution ofthe First Education Project (1972) was delayed because of administrativeweakness, and faulty selection and coordination of foreign consultants. TheGovernment has asked for a reduction in the scope of the project which hasbeen approved by the Executive Directors (See Memorandum of the Presidentto the Executive Directors of December 15, 1976). Also, the technical assis-tance component of the Second Highway Project (1972) was poorly implemented,and the civil works were started only in 1975, due to the shortage of ex-perienced local personnel, and delays in procurement and in the implementa-tion of organizational reforms. On the other hand, certain other entitieswhich have benefited from IDA credits and Bank loans, the development financecompany (SOFIDE), the National Water Authority (REGIDESO) and GECAMINES, areexecuting projects in an acceptable manner.

27. A main objective of Bank Group operations in Zaire has been insti-tution-building. The development finance company (SOFIDE), was establishedin 1970 with assistance from IFC and IDA. The River Transport Project (1971)helped strengthen the agencies concerned with waterways, i.e., the OfficeNational des Transports (ONATRA), the Regie des Voies Fluviales (RVF),and the Regie des Voies Maritimes (RVM). The Railway and River TransportProject (1975) continued this assistance and provided funds for a majormanagement training program for ONATRA. The First, Second and Third HighwayProjects (1969, 1972 and 1975) provided technical assistance to establishand operate the Bureau of Roads. The Education Project (1972) included a

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manpower survey to furnish data for a review of the educational system, andthe Livestock Project (1974) helped establish the National Livestock Devel-opment Authority, which has since acquired responsibilities beyond the proj-ect area.

28. The Bank Group's main efforts are directed towards assisting inthe rehabilitation and improvement of transport, agriculture and education,

all high priority sectors in which the Bank Group should be able to makea contribution to institution-building. Lesser emphasis has been given to

development finance company operations and water supply. This concentrationshould assist the Government to design and implement appropriate policiesin these critical sectors. In most projects this will mean providing for

transitional technical assistance and training.

29. Lack of transport is the major physical impediment to the country's

development. The Government has placed considerable emphasis on the improve-ment of its river/rail arterial network, and the Association is helping tofinance both studies and new investments designed to extend and improve this

system. Roads are essential for inter-regional commerce, agricultural devel-opment and as a feeder network for the river/rail system. Agriculture hasreceived insufficient attention from the Government. Preference should begiven in the short run to increasing agricultural production thru rehabilita-tion. This includes the rehabilitation and expansion of large plantations,while the capacity to implement rural development projects is established inthe Government. A second livestock project which is geared to small-holdersin the northeastern part of Zaire and will contribute to the rehabilitation of

the livestock industry [was approved on April 12, 1977 ]. A palm oil project,focusing on rehabilitation of existing plantations to meet rising internal

demand, is also being prepared. A project for increasing maize production iscurrently in the identification stage.

30. In education, there is a need for curriculum reform, and emphasison non-formal and vocational education, especially agricultural training. In

this area our objective will be to assist the Government in framing appro-priate policies through project formulation. In industry, we are continuingour support for the development finance company (SOFIDE). In the area of pub-lic utilities, our assistance would be directed toward assuring broader accessto these essential facilities and strengthening the executing agencies. TheBank is also assisting the country through the UNDP Planning Assistance Project,for which the Bank is Executing Agency.

31. An expansion of the Bank Group's activities in Zaire will be pos-sible only if substantial efforts toward improving the country's economicmanagement are initiated and sustained progress is achieved. The Governmentis aware of the pressing need to take corrective action and is cooperatingwith the IMF in preparing a second program of economic stabilization. TheGovernment has also recently requested the Bank to convene a meeting of theConsultative Group [which is now scheduled for June 8-10].

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PART III - THE INDUSTRIAL AND BANKING SECTOR

Industry

32. Between 1970 and 1975 manufacturing accounted for about 9 to 10percent of GDP at market prices, and total value added in the sector increasedat an annual rate of 5.0 percent. Production of consumer goods - mainlybeverages, food processing and clothing - accounted for about two thirds oftotal value added by the manufacturing sector and grew faster than capitalgoods industries. The main capital goods industries are textile equipmentand nonferrous minerals.

33. According to a survey conducted in 1970 by the Department ofNational Economy, 35 percent and 24 percent, respectively, of manufacturingplants were located in Kinshasa, the capital, and in the Province of Shaba,providing salaried employment to about 117,000 persons. Since then, theimportance of Kinshasa as an industrial area has further increased. Theindustrial sector employed an estimated 150,000 persons in 1973. It is al-most entirely directed to supplying the domestic market. Nonmineral indus-trial exports in current prices were estimated at only US$12.9 million in1974, representing 0.9 percent of total merchandise exports. Chemicalproducts, cement and tobacco products are the main nonmineral industrialexports. Effective protection rates range from low for agro-industries tohigh for import dependent industries producing consumer goods, such as shoes, tex-tiles and auto-assembly industries. This has discouraged the growth of industriesbased on local raw materials, to the benefit of industries with a high importdependency.

34. In 1969, the Government adopted an Investment Code which allowscertain tax exemptions (on profits, expatriate income taxes, property taxes,import duties on capital equipment) and guarantees for repatriation of in-vested capital, profits and interest. The code specified that litigationarising from foreign investments may be arbitrated at the request of anyparty, under the provisions of the International Convention for the Settlementof Investment Disputes (ICSID). The code also established an InvestmentCommission to examine all project applications for approval and granting ofincentives,'but the small staff of the commission, which meets informallyon an ad hoc basis, has not been able to review adequately the large numberof applications and it appears 'that, for lack of overall guidelines or objec-tives, it takes decisions witho'ut adequate financial and economic analysis.Moreover, decisions to grant the advantages of the Investment Code are some-times taken by other authorities without consulting the Commission. Conse-quently, although the Code succeeded in attracting foreign capital, mainlyin the period preceeding the nationalization measures, it has not been usedas an effective tool to channel investment to priority areas.

35. In early 1975, the Government took a series of measures to limitthe import of merchandise and services, which are still applicable. Foressential commoditios (food, pharmaceutical products, raw materials, spareparts), commercial banks remained free to issue import licenses. For the

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importation of nonessential goods, the prior approval of the Central Bank isnecessary. Under the current Stabilization Program, the Bank of Zaire nowclaims 100 percent deposit from importers, although imports of raw materialsand spare parts are exempted. In the case of non-factor services, the Bank ofZaire suspended the transfer of rent, other revenue from capital, and profits(except for the profits of enterprises established under the Investment Code).

36. The Government controls prices paid to producers and to manufac-turers. Since 1967 it has been reluctant to allow increases in prices andthis has resulted in reduced profits for some manufacturing enterprises.However, following the March 1976 devaluation, the Government raised producerprices for a number of important agricultural products and retail prices fora wide range of manufactured goods.

37. The Government's attempt to play an increasing role in the indus-trial sector through nationalization and Zairianization (see paras. 5, 14and 15), as well as retrocession of most foreign-owned property, has primarilyaffected the agricultural, trade and commercial sectors; it has also createda climate of uncertainty in the business community, contributing to a slowdownin the rate of expansion in the industrial sector. Moreover, many foreignenterprises experienced serious difficulties as a consequence of these poli-cies. This was aggravated by pressures from the Government to reduce thenumber of expatriates and reluctance to grant price increases and to allocatescarce foreign exchange. The retrocession measures taken at the end of 1975were accompanied by a more liberal policy regarding the employment of expa-triate managers, and special allocations of foreign exchange were designedto permit enterprises to operate normally. Difficulties remain, however, forthe repatriation of past and current profits due to the acute foreign exchangesituation. Although no time limit was fixed for the transfer to Zairians of40 percent of the retroceded firms, it is expected that this will be donewithin five years. This could pose difficulties, as there are relatively fewZairians who can afford to buy shares.

38. The situation of companies which were Zairianized varied widely.Small-scale enterprises are largely disorganized. In some of the largerfirms, the new Zairian owners and, subsequently, the government-appointed"delegues generaux", worked closely with the former owners or kept expatriatemanagement; these companies are in relatively good shape. Other companieswere mismanaged and are in difficulty. Owners who left Zaire when their firmswere taken over are gradually coming back and the reaction of the foreignbusiness community to the Government's retrocession measures has generallybeen favorable. Foreign investors consider that the Government is now takinga more pragmatic attitude towards foreign investment.

39. The 1976 devaluation should have a positive impact on the manufactur-ing sector by increasing the attractiveness to the investors of manufacturingprojects with a potential for exports. However, for most of the existingmanufacturing firms, which depend heavily on imports, the devaluation hasincreased operating costs. Generally, companies are experiencing workingcapital shortages, as there is a scarcity of both foreign and local currency.As a result of the foreign exchange shortage, Zairian companies have difficulty

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in securing imported raw materials, spare parts and replacement equipment.At the same time, the budgetary and credit tightening has resulted in seriouscash problems for most firms. Given the uncertainties of the situation and theimmediate problems of financing inventories and securing imported raw materialsand spare parts, there is currently a greater demand for financing workingcapital than for financing expansion of plants and equipment. However, whenZaire's foreign exchange problems are alleviated, demand for financing ofexpansion and new projects is expected to be strong.

Banking

40. Eight commercial banks, with a total of 46 branch offices, covervirtually the entire country. The Banque Commerciale Zairoise is by farthe largest, with 20 branch offices and deposits accounting for more than 60percent of all commercial bank deposits. The second largest is Banque duPeuple, controlled by a multinational group of banks. The third is UnionZairoise de Banques (UZB). The newest commercial banks are the Banque deKinshasa, almost fully Zairian-owned, which opened for business in 1970, theBanque Internationale pour l'Afrique Occidentale (BIAO) and the First NationalCity Bank, which opened a branch in 1971. Since the Central Bank does notrediscount medium-term credits, commercial banks are reluctant to providesuch credits beyond three years, although through revolving short-term creditsthey have significantly contributed to financing the development programs oflarge-scale public and private enterprises. SOFIDE, which was created in1970, is the only development bank in the country.

41. The control of bank credit to the private sector, exercised throughquantitative limits until 1969, was progressively relaxed. Credit policybecame sharply expansionary toward the end of 1973, when the balance of pay-ments and credit situationswere favorable. Following the Zairianization mea-sures, the pattern of credit to industrial and commercial enterprises changed.The managements of newly Zairianized companies were not interested in newinvestments, and demand for medium-and long-term credit dropped. The lattercontinued to decline in 1975 and, as a result, their share in total creditfell during 1974-75. At the same time some nationalized activities began torequire credits to cover deficits. Credit expansion was allowed to continueunabated through 1974, even after the availability of foreign credits haddeteriorated. In 1975, in order to restrict credit expansion, the reserverequirement of 40 percent (introduced in February 1974 to replace creditceilings) was raised to 45 percent. As part of the Stabilization Program ofMarch 1976, a limit was set on the expansion of credit to enterprises andhouseholds during 1976. However, this limitwas not applicable to SOFIDE.

42. Between 1970 and 1975, lending to industry has increased from 16percent to 26 percent of total lending, and lending to commercial enterprisesfrom 19.9 percent to 27 percent. The share of agriculture in total bank lend-ing has declined from 35 percent in 1970 to 18.7 percent in 1975, in spite ofthe concessional rates available for agricultural credit. Loans for agricul-tural investment account for only 20 percent of total bank lending for thissector. Maximum interest rates applicable to commercial bank medium- andlong-term loans to industry, which averaged 13-14 percent between 1971-73,

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have risen recently to 15 percent for medium- and long-term loans. Conces-sional rates (for which banks are subsidized by the Central Bank via redis-count privileges), however, have for some time now been available for agri-culture at 6 percent and small-scale enterprises at 8 percent.

PART IV - THE PROJECT

43. The appraisal report for this project, entitled "Appraisal of theSociete Financiere de Developpement in Zaire" No. 1371a-ZR dated April 5, 1977,is being circulated separately. The appraisal mission visited Zaire in Mayand September 1976. Negotiations were held in Washington on March 10 and 11.The Government delegation was led by Mr. Kazadi Membu, Director General ofSOFIDE.

44. The project would support Zaire's industrial development by con-tinuing IDA financial and technical assistance to the Societe Financierede Developpement (SOFIDE). Specifically, it would provide financing toproductive enterprises in Zaire through SOFIDE and would continue to supportthe growth of SOFIDE by strengthening its resource base, its project appraisalcapabilities, and its internal organization and procedures. Three IDA cre-dits have already been made for SOFIDE in 1970, 1972, and 1974 for a totalamount of US$25 million. This proposed fourth credit would provide US$10million to finance about 34 percent of SOFIDE's total financing require-

ments and about 45 percent of its foreign exchange needs for the period fromSeptember 30, 1976 to December 31, 1978.

45. Background of SOFIDE. In 1968, the Government of Zaire and theAssociation examined the need for a development finance institution in Zaireand concluded that there was substantial unsatisfied demand for medium- andlong-term finance for investment in the manufacturing sector, and that theestablishment of a development finance company would be justified. The BankGroup took an active part in promoting a development finance company and madearrangements for a group of foreign investors to participate with Zairianinvestors and the Government of Zaire in its share capital. SOFIDE was es-tablished in January 1970 and the Bank Group provided a substantial shareof its initial resources, through an IFC equity investment of US$750,000 andan IDA credit of US$5 million. In September 1971 and February 1974, the secondand third IDA credits to SOFIDE were signed for US$10 million each. Disburse-ments on the first credit were completed on April 30, 1975. The third creditis now almost fully committed.

46. In 1976, the Bank's Operations Evaluation Department conducted aproject performance audit of the first credit to SOFIDE. Insummary, it found as follows: "SOFIDE has been generally successful in ful-filling the objectives set for it. It has built a competent organization.Though its operations remain small in terms of total fixed capital formation,they have grown rapidly during the period under review and SOFIDE has partici-pated, if marginally in some cases, in a significant proportion of the invest-ments in the sectors to which it lent. It has made little progress in foster-ing the growth of the local capital market for reasons beyond its control."

- 13 -

It was, however, pointed out that SOFIDE was slow in adopting economic criteriafor project selection and in supervising its investments. Both of these issues

are specifically dealt with in this report (para 57). The OED report notedSOFIDE's independence from the Government, but indicated that closer coopera-tion with the Government's Investment Commission would be desirable (para 65).

47. Organization, Management and Staff. SOFIDE's Board of Directorsconsists of nine members: three designated by private Zairian shareholders,two by the Government and the Central Bank, three by non-Zairian shareholders,and one by IFC. SOFIDE's Director General is presently the Chairman of theBoard. The Board meets four to five times a year. It is required to reviewloans exceeding F150,000 and equity investments above 950,000. An ExecutiveCommittee, on which IFC is not represented, is empowered to approve indi-vidual loans up to S150,000 and equity investments up to 750,000. Boarddecisions have been generally good, despite the variable quality of SOFIDE'sproject appraisals and the operating difficulties resulting from the drasticchanges in the economic environment of the country. The presence of an IFCrepresentative in the Board has contributed significantly to the Board'seffectiveness.

48. From 1970 to May 1973, SOFIDE's Director General was seconded toSOFIDE by the Bank Group. A Zairian, formerly head of the Central Bank'sCredit Department, succeeded him, and shared management responsibility witha Principal Advisor, a UNDP-financed expert recruited from the French CaisseCentrale de Cooperation Economique (CCCE), who was subsequently appointedDeputy Director General. In September 1976, a Bank staff member replaced theCCCE expert as Deputy Director General. The Director General and his Deputyhave been an efficient management team. Two technical assistance positions offinancial analyst and engineer were financed under a UNDP project that expiredin mid-1976. The UNDP has also been financing, since May 1976, three expertsfor a three-year period to help SOFIDE develop its project promotion andprocessing capabilities in the agricultural sector. SOFIDE has recentlyrecruited a new expatriate engineer to head its Technical Department.

49. SOFIDE is divided into six departments: a Project Department, incharge of the financial aspects of project appraisal,and a Technical Depart-ment in charge of the engineering aspects; a Supervision Department, respon-sible for project implementation and follow-up; a Department of Research,Documentation and Promotion; an Accounting and Administrative ServicesDepartment; and an Agricultural Department. As of December 1976, SOFIDE'sstaff totaled 83, including 18 Zairian professionals and two expatriateprofessionals. Most of the Zairian professionals are university graduates whojoined SOFIDE at the end of their studies and have proven to be dedicated tothe work of the Company. They have also received on-the-job training or haveattended courses at the Centre d'Etudes Financieres, Economiques et Bancaires(CEFEB) of the Caisse Centrale, or EDI. The overall quality of the staff isgood, but given its relatively limited working experience it still needs closesupervision.

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50. Capital Structure and Operational Policies. SOFIDE's share capitalof A2 million is fully paid in. Thirty percent of the share capital is heldby private investors in Zaire, and 25 percent by the Government and the CentralBank. Private foreign investors hold 26.25 percent of the capital, and IFC18.75 percent. Its quasi-capital consists of an interest-free subordinatedadvance from the Government of 91 million, which will remain at the disposalof SOFIDE during its entire corporate existence, and a subordinated loan of 92million with a 40-year term and a 20-year grace period at an interest rate ofone percent per annum. SOFIDE is now considering increasing its quasi-capitalin 1977 and its capital in 1979 in order to increase its capacity to financemajor investment projects.

5i. SOFIDE's Policy Statement was prepared in cooperation with the BankGroup and adopted by SOFIDE's Board in 1970. It was amended in 1973 to allowSOFIDE to lend to the increasingly important parastatal sector. The key pro-visions of the Statement are: a) the Company shall finance private enterprises,but may also finance parastatal enterprises up to a limit of 25 percent of itstotal commitments; b) the Company's loans or equity participations should notnormally be less than 910,000; c) the total amount of any loan granted by theCompany, together with its equity participations and any other commitments ofa financial nature to a single enterprise, may not exceed 20 percent of thepaid-in share capital, the unimpaired reserves and the quasi-capital contri-buted by the Government; d) SOFIDE may not contract debts of more than a oneyear term in excess of three times the amount of its capital plus quasi-capital;e) SOFIDE may not accept the exchange risk on borrowings of foreign currency.

52. Since 1971 and until the end of 1975, SOFIDE charged interest ratesof 8 to 9 percent per annum for loans to agro-industry and small-scale enter-prises and 10.5 percent for other loans. This latter rate was increased to11.5 percent at the end of 1975. In January 1977, SOFIDE raised its lendingrate to large foreign enterprises from 11.5 percent to 12.5 percent. Other

rates remain unchanged. The foreign exchange risk on all SOFIDE's externalborrowings has been borne by the Government, except that, under the third IDAcredit, industrial clients of SOFIDE with total assets exceeding 3150,000 havethe option of either taking the foreign exchange risk or of paying a one per-cent per annum premium, transferred by SOFIDE to the Government for the cover-age of the foreign exchange risk.

53. Operations. In the financing of industrial projects, SOFIDE is,in theory, competing with commercial banks. However, in practice, commercialbanks provide mostly short-term credits (see para. 40). For long-term financ-ing, SOFIDE's major competitors are not, therefore, commercial banks, butsuppliers' credits which have traditionally been used by major enterprises.In the past, such enterprises had no difficulty in obtaining suppliers'credits at rates between 6-7 percent. Recently, however, the significance ofsuppliers' credits has been considerably diminished owing to their higherinterest rates (now around 10 percent), the foreign exchange risk associatedwith them and the reluctance to give such credits to Zaire in the presenteconomic situation.

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54. SOFIDE's operations started up rapidly in 1970-71 but slowed downin 1972 as the investment climate in Zaire deteriorated. Between 1973 and1975, approvals of projects by SOFIDE increased, but disbursements were consid-erably reduced due to serious delays in project implementation. During 1976,as the investment climate started to improve, approvals increased by 91 per-cent and disbursements by 72 percent.

55. From 1970 to December 1976, SOFIDE approved 128 loans totaling about934 million and 10 equity investments totaling Z1.7 million. Disbursementson loans amounted to a20.6 million, and disbursements on equity investmentstotaled F0.9 million. Projects financed by SOFIDE during the period underreview represented a total investment of about 970 million, of which Z45million were for import requirements. The projects ranged in total cost from925,000 to F8.6 million. About 30 percent of approvals were for small- andmedium-size projects. The most important subsectors assisted were food andbeverages (14.4 percent of total approvals), transport (14.1 percent), hotels,restaurants and tour agencies (8.3 percent) and mining (7.3 percent). Of allthe projects approved, 14 percent were new projects and 86 percent were forthe expansion of existing facilities. Beneficiaries of loans were predomi-nantly located in the Kinshasa area (55.6 percent of total approvals) andthe Shaba area. About 51 percent of loans approved had a maturity of 5 to 7years, 29 percent less than 5 years and 20 percent more than 7 years.

56. Agricultural credit is not very developed in Zaire and there is noagricultural credit bank. From the start of its operations, SOFIDE hascharged lower rates for loans for agro-industrial projects than for loans toother enterprises. The creation of an agricultural credit bank has been understudy for several years. As a first step, it was decided to create withinSOFIDE an Agricultural Department which would determine the potential andpriorities for the financing of agriculture in Zaire and would appraise alimited number of agricultural projects for SOFIDE's financing. The depart-ment started its operations in May 1976 with UNDP-FAO assistance. SOFIDEintends to limit itself at first to financing projects with high economicreturn and low -risk and to providing financing to smallholders through agri-cultural cooperatives or through large agricultural projects which can provideextension service and supervision.

57. Appraisal and loan administration: SOFIDE's procedures forproject appraisal, supervision, procurement and disbursements have been onlypartially set down in writing, and the Company does not yet have a compre-hensive operational manual. SOFIDE agreed to prepare, by December 31, 1977,such a manual (Section 2.09 of the Project Agreement). In the case of itsappraisals SOFIDE has usually prepared a financial rate of return calculation,but has rarely made an economic rate of return calculation. On the basis ofdata presented to IDA by SOFIDE for projects to be financed by IDA, we havefound economic rates of return ranging from 18 percent to 27 percent. Sub-sequent verification of these rates has not been possible, but in generalSOFIDE's financial decisions do appear to have been sound and economically

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justified. Henceforth all projects submitted by SOFIDE to IDA for approvalwill be required to include an economic rate of return calculation(Section 2.02(b) of the Project Agreement). Furthermore, SOFIDE still lacksa systematic approach to supervision and there are no regular on-site visitsnor periodic reports to management. Until two years ago, the need to super-vise projects regularly was not felt by SOFIDE's management since very fewborrowers defaulted. SOFIDE has agreed to strengthen its supervision programby December 1977 (Section 2.09 of the Project Agreement).

58. Available Resources. On September 30, 1976, resources availablefor new project approvals amounted to F8.9 million (US$10.2 million), ofwhich 98.7 million (US$10 million) was in foreign exchange. SOFIDE's localresources consist of its share capital (92 million) and quasi-capital (s3million), and rolled-over IDA funds (i1 million) (funds repaid to the Govern-ment by SOFIDE on the first two IDA credits and then relent by the Governmentto SOFIDE).

59. SOFIDE's foreign resources come mainly from the three IDA creditstotaling US$25 million. In 1971, SOFIDE also obtained a US$0.8 million loanfrom EIB to finance a single textile project (9 years at 6.5 percent perannum). A US$2 million loan granted in 1972 by the Societe InternationaleFinanciere pour les Investissements et le Developpement en Afrique (SIFIDA)has been totally repaid. SOFIDE also obtained a line of credit of BF 300million (US$7.9) from the Societe Belge d'Investissement (SBI) and a line ofcredit of DM 6.5 (US$2.6 million) from Kreditanstalt fur Wiederaufbau (KfW).Under the SBI line of credit (8.25 percent per annum), SOFIDE can refinanceits loans and equity investments with maturities up to 12 years, includinglocal currency expenditures, but is limited to financing projects with Belgianparticipation or improving Belgo-Zairian economic relations. The KfW loan hasa 30-year maturity, including a 10-year grace period, and must be used forloans to small- and medium-scale private enterprises located outside Kinshasa(up to a limit of 100,000 per project). The interest rate is 7.5 percent,but only 2 percent is paid to KfW; the other 5.5 percent is set aside bySOFIDE to finance promotional studies and technical assistance to Zairian-owned enterprises, directly or through specialized institutions. As ofSeptember 30, 1976, only 9250,000 had been disbursed out of the KfW line ofcredit. KfW has indicated, however, that the use of this line of Credit couldbe extended to small scale enterprises in the Kinshasa area. It is expectedthat SOFIDE should have no difficulties matching the funds from the SBI and KfWcredits with eligible projects to be approved during the period 1976 to 1978.

60. Financial Performance. SOFIDE's profitability declined steadilyfrom 1973 to 1975. Net profits, which represented 8.9 percent of average networth in 1973, declined continuously in subsequent years to only 2.7 percentin 1975. This unfavorable situation has been caused by a substantial increasein administrative expenses, slow disbursements, and increasing financial charges

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on borrowings (from 3.5 percent average in 1971-72 to 5.6 percent in 1974-75),whereas income from loans remained more or less constant at about 11 percentof average loan portfolio between 1972 and 1975.

61. Appropriate measures have been taken by SOFIDE and the Government toreverse the decreasing trend of SOFIDE's profits in recent years. The interestrate charged by SOFIDE on its loans to medium and large enterprises has beenincreased from 10.5 percent to 11.5 percent at the end of 1975 and from 11.5percent to 12.5 percent effective January 1, 1977. The Government has agreedto charge a one percent interest rate when relending to SOFIDE loan repaymentsreceived from the institution, which will be used to increase the quasi-capitalin 1977, and only 4 percent per annum on the remaining rolled over funds (para.58), instead of the 8.5 percent interest rate previously charged, thus leavingSOFIDE a much wider spread. This measure was applied retroactively as of January1, 1976 and the appropriateness of the interest rate spread on funds relent by theGovernment to SOFIDE will be reviewed by the Government and IDA no later thanDecember 31, 1979. The growth of administrative expenses will be controlled morestrictly and the ratio of administrative expenses to total assets is expected todecrease from 3.3 percent in 1976 to 2.2 percent in 1979. In 1976 SOFIDE had anet profit of Z234,000 representing 10.4 percent of its average net worth. Thisfavorable development was due mainly to an increase in disbursements after theslowdown of 1975 and to the wider margin on SOFIDE's operations.

62. At the end of December 1976, SOFIDE's financial position was sound,with capital and quasi-capital totaling Z5.3 million and term borrowings of911.6 million against a total portfolio of about 913 million and net currentassets of 92.7 million, i.e., more than 3 months of disbursements. Provisionsfor losses at the end of 1976 amounted to a258,000 (about 2 percent of totalportfolio). Given SOFIDE's generally sound portfolio, these provisions areadequate. SOFIDE's ratio of term-debt to the total of capital, plus quasi-capital, at the end of December 1976 was at 2.2:1, below the permissiblemaximum of three specified in SOFIDE's policy statement.

63. As of December 31, 1976, SOFIDE's total loan portfolio amounted toZ12.1 million, i.e., an increase of 33 percent above the levels of December1975 reflecting a faster pace of disbursements during 1976. As of the samedate SOFIDE also had equity participations in five companies for a total ofB885,000. Despite the adverse effect of government policies in 1973-1975,the portfolio is of good quality and well diversified. Total arrears ofmore than three months as of December 31, 1976 totaled a283,000 and affected9 percent of the loan portfolio, which is acceptable.

64. Future Operations. As of August 1976, SOFIDE had a pipeline of13 projects, representing a total investment of 135 million. The potentialSOFIDE financing of these projects amounts to F9 million, of which 96 millionis for equipment replacement and expansions, and F3 million for new projects.

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Approvals are projected to increase by 10 percent yearly, starting in 1977.Such an increase would be consistent with a rather slow recovery of theeconomy. If a second Stabilization Program is agreed and successfullyimplemented, claims on SOFIDE's resources could be higher than forecast. Insuch event, the Government would support SOFIDE's efforts to raise additionalforeign exchange resources.

65. The most urgent task facing Zaire in the industrial sector remainsthe rehabilitation of medium- and large-scale enterprises following the mea-sures of retrocession (see paras 5, 15, 16, 37 and 38). SOFIDE is expectedto commit itself to concentrating in the near future on helping these enter-prises. To this end, SOFIDE intends to strengthen its relations with theInvestment Commission. The Government would take steps to insure that SOFIDEwill participate in the work of the Investment Commission (see para 34 above)(Section 3.04 of the Credit Agreement). Assistance to small enterprisesremains a major objective. However, owing to the high risk of lending in thissector and to OPEZ' limited capacity to provide technical assistance, SOFIDEwill limit its lending to small-scale enterprises such as bakeries, saw millsand transport, where risks would be acceptable.

66. SOFIDE's equity investments will, we estimate, grow progressivelybut moderately. It is thought that SOFIDE could play a useful role asrepresentative of Zairian interests in joint ventures with foreign investors.SOFIDE intends, however, to make equity investments mainly in expansionprojects, so as to get a quick return on its investments and thus protect itsequity base against monetary erosion.

67. Future Resources Situation. SOFIDE's total requirements during theperiod from September 30, 1976 through December 31, 1978, are expected toamount to Z25.9 million (US$29.8 million), the foreign exchange cost of whichis estimated at g19 .4 million (US$22.3 million). Considering the availabilityof 98.9 million (US$10.2 million) of which 98.7 million (US$10 million) is inforeign exchange (see para. 58 above) and an expected repayment of foreignborrowings of ZO.4 million, there would be a gap of 11.1 million (US$12.8 mil-lion). The IDA credit would cover US$10 million of this gap and SOFIDE willneed to obtain about US$3 million from other sources. SOFIDE has already con-tacted a number of foreign and international agencies, including KfW, CCCEand the African Development Bank and it appears that the CCCE is prepared tomake credits available to SOFIDE in an amount sufficient to cover the gap.Sufficient resources will be available to cover local currency requirements fromcash flow from operations, increases in capital and quasi-capital, and rolled-over IDA funds.

68. Relending terms: the Government would relend the proposed creditto SOFIDE at an interest rate of 8.5 percent per annum with a flexibleamortization schedule conforming to the aggregate amortization schedule ofSOFIDE's subloans, none of which should exceed 15 years. SOFIDE would relend

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the funds to its borrowers, including small and agro-industrial enterprises,at a minimum rate of 12.5 percent per annum (Section 2.01(b) of the draftProject Agreement) plus a one time charge of one percent at the time thecommitment is made to reimburse SOFIDE for appraisal costs. As in the caseof previous credits, SOFIDE would pay to the Government a commitment chargeof 3/4 percent per annum on the undisbursed amount of the credit, starting 60days after signature. The free limit for individual subprojects would remainUS$150,000 and the aggregate limit US$2 million. The proceeds of IDA credits190-ZR and 271-ZR repaid to the Government would be used in part: i) toincrease SOFIDE's quasi-capital in 1977, and(ii) to provide the increase inthe combined share subscription of the Government and the Central Bank from25 percent to 40 percent of SOFIDE's capital when it will be increased in1979.

69. In the past, the Government assumed the foreign exchange risk onall SOFIDE's direct or indirect borrowings. For the third IDA Credit it wasdecided that large borrowers (those with assets exceeding Zr150,000) shouldreimburse the Government for accepting this risk by paying a commission of1 percent per annum. Considering the recent effective devaluation of theZaire and the continuing high rate of inflation in Zaire (55 percent in 1976),it was agreed that for the fourth IDA Credit, the Government should not con-tinue to bear this risk except in the case of small-scale enterprise (now de-fined as those with assets less than the equivalent of $250,000). Theseenterprises will, however, be required to pay a commission of 1 percent perannum through SOFIDE to the Government for its acceptance of the foreign ex-change risk. Individual loans made by SOFIDE to this category of clients wouldnot be financed by IDA in amounts greater than US$100,000 equivalent. However,small enterprise demand for loans funded by the proceeds of the Credit is ex-pected to be slight in view of the lower interest rate available to such enter-prises on loans made out of SOFIDE's other resources.

70. Disbursements: Disbursements would be made against 100 percentof the cif cost of imported goods, 85 percent of the cost of goods purchasedlocally and previously imported, 70 percent of the cost of goods producedlocally from imported materials, and up to 55 percent of the cost of con-struction works.

71. Risks: The special risks posed by this project stem from Zaire'sgeneral economic difficulties. During the past two years, SOFIDE has been con-fronted with major problems, due to the deterioration of the economy and un-certainties of governmental policy regarding future ownership and managementof industrial enterprises. SOFIDE's management must be credited with main-taining the company on an even keel through this difficult period and assuringthat it attained its principal development objectives. With the expected re-covery of the economy, SOFIDE's profitability should increase substantially.However, should the Government revert to policies which had a negative impacton industrial activity, the risks associated with the project would increasemeasurably.

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PART V - LEGAL INSTRUMENTS AND AUTHORITY

72. The draft Development Credit Agreement between the Republic ofZaire and the Association, the draft Project Agreement between the Associa-tion and SOFIDE, the Report of the Committee provided for in Article V,Section l(d) of the Articles of Agreement, and the text of the draft Reso-lution approving the proposed credit are being distributed to the ExecutiveDirectors separately.

73. Features of the draft Credit and Project Agreements of specialinterest are referred to in paragraphs 57 and 65 and are listed in Section IIIof Annex IV of this report.

74. I am satisfied that the proposed credit would comply with theArticles of Agreement of the Association.

PART VI - RECOMMENDATION

75. I recommend that the Executive Directors approve the proposedcredit.

Robert S. McNamaraPresident

Attachments

April 7 , 1977

Page 1 of 4 pages

TABLE 3AZ A liE- SOCIAL INDICATORS OATA SHEET

LAND AREA (THOU KN2) ...........................------------ ZAIRE REFERENCE COUNTRIES (1970)

TOTAL 2345.4 MOST REkCENTAGRIC. .. 1960 1910 ESTIMATE 'ETHIOPIA NIGERIA BRAZIL**

GNP PER CAPITA (USA) 60O.0 11 0.01OO 10.0 170.0 540.0

POPULATION AND VITAL STATISTICS

POPULATION (MIO-TR. MILLION) 16. 6 2 .6 24j.7 2 4.6 66.-2 92.6

POPULATION DENSITTPER SQUARE KM. I1.0 9. 0 11 .0 20.0 12 .0 11. 0PER SQ. KM. AGRICULTURAL LAND ... .. 30 .0 . 6 6.0

VITAL STATISTICSCRUDE BIRTH RATEO (/THOU, AV. 4~7 3 46.8 45~.2 50.3 49.8 38. 4CRUM8 OKTH RATE UTSD A". 26.0 23. 20. 28 .7 24.5 9.9INFANT MORTALITY RmATE (/THOU) 104.0 ~ ... .. 1.LIFE EXPECTANCY AT BIRTH Y RS) 39.5 4)2.0 1)3.5 38.0 38.5 59.7GROSS REPRODUCTION RATE . 2.8 2.9 2.9 3.3 2.6

POPuLATION GROWTH RATE CZ)TOT AL .. 2.17 2.7 2 .1 2 .5 2. 9URBAN .. 3.7 8.0 9.4 j, 5. 0 5. 0

URBAN POPULATION CZ OF TOTAL) 19.7 21.6 26.1) 9 .1 2 3.0 56.0

AGE STRUCTURE (PERCENT)0 TO 14 YEARS 4~3.7 44h.4 I4J.2 4)3.0 4 4 .8 4 2. 0

15 TO 64 YEARS 52.5 52.8 53.0 54)3 5 3. 0 5 5. 065 YEARS ANO OVER 3.8 2.8 2.8 2.7 2.-2 3.0

AGE DEPENDENCY RATIO 0.9 0.9 0 .9 0.9 0 .9 0.6aECONOMIC DEPENDENCY RATIO 1.0A 1.0 / 1.1 /a 1. 21. 1. 5

FAMILY PLANNINGACCEPTORS (CUMULATIVE, THOU) .. . 12.9 250.0USERS (I OF MARRIED WOMEN) ... .. .1. 6

EMIPLOYMENT

TOTAL LABOR FORCE (THOUSAND) 80010.0 9800.0 10800.0 . 2 5600 .0 2 9600.0LABOR FORCE IN AGRICULTURE (I) 84.0 18.0 11.D / 85.0 6 1. 0 4 4. 0UNEMPLOYED CZ OF LABOR FORCE) . ..

INCOME DISTRIBUTION

I OF PRIVATE INCOME REC'0 BYTHIGHEST 51 OF HOUSEHOLDS 35 . 0. /a.HIGHEST 201 OF HOUSEHOLDS . .. .. 6 2. 0 LOWEST 201 OF HOUSEHOLDS .. . .. 3.0 7LOWEST 401 Of HOUSEHOLDS .. . .. . 10. 0

DISTRIBUTION OF LAND OWNERSHIP

1 OWNED BT TOP lill OF OWNERS .. . ... 45.0X OWNED BY SMALLEST 101 OWNERS . . .. . 1.5

HEALTH AND NUTRITION

POPULATION PER PHYSICIAN . 3011a0.0 2,790. 0 73300.0 24 66 0 .0 go 1910.0POPULATION PER NURSING PERSON . 13230.0 11680.0 fc 2361)0.0 /b 5070.0 L 3220.0A~POPULATION PER HOSPITAL BED . 3 20. 0 2980.0 22 20. 0 240. 0

PER CAPITA SUPPLY OF -CALORIES (I DF REQUIREMENTS) 92.0 9 2. 0 93.0 Ld 92 .0 91.0 109.0PROTEIN (GRAMS PER DAY) 33. 0 33.0 33.0 Pd 6 9.0 60.0 6 4.0

-OF WHICH ANIMAL AND PULSE . 16.0 A . 25. 0 16.0 39. 0

DEATH RATE (/THOU) AGES 1-4 . ...

EDUCATION

ADJUSTED ENROLLMENT RATIOPRIMARY SCHOOL 12.0 66.0

8 6.0/c 18.0 3 4.0 810

SECONDARY SCHOOL 3.0 11 .0 14s.0o 4.0 4.0 2.YEARS OF SCHOOLING PROVIDED ~c28

(FIRST AND SECOND LEVEL) . 13.0 12. 0 1 2.0 14.0 1 3. 0VOCATIONAL ENROLLMENT

(I OF SECONDARY) 21.0 10.0j& I .. L 5.0a 8.0 17.0ADULT LITERACY RATE (1) . 1 3.0 15.0 . 6BS. 0

HOUS ING

PERZSONS PER MOON (MTwAN) ... ... 1.0OCCUPIED DWELLINGS WITHOUT

PIPED WATER (I) .. . . .. 3.0 /ACCESS To ELECTRICITY

CZ OF ALL DWELLINGS).. . 2.0 /c .. 48.0RURAL DWELLINGS CONNECTED

TO ELECTRICITY CZ) .. . .. .8.0

CONSUMPTION

RADIO RECEIVERS (PER THOU Pop) 3.0 3.0 4.0 6.0 23.0 60.0PASSENGER CARS (PER THOU POP) 3.0 3.0 4. 0 2.0 1.0 25. 0ELECTRICITY (KWH/YR PER CAP) 137.0 1h1.0 164.0 2 1.0 28.0 49 1.0NEWSPRINT (KG/YR PER CAP) .. .02 0.05 . 0. 3 2.17

…-- - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - -SEE NOTES AND DEFINITIONIS ON REVERSE

ABNEX IPage 2 of 4. pages

Ulslos otherwise acted, data for 1960 refer to sny year betwee n 1959 ahd 1961, for 1970 between 1968 and 1970 and for Most Recent totimate between

1973 and 1975i

fl Brazil has been selected as am objective country for Zaire eoau.. of the comparability of oboe and natoral reanorce endowmet of the twocoontrIee, plus the faot that Brasil has a high growth rote and is at a higher jnoos level.

Z 1960 /A 1955-58, African population only; /b Ratio of population under 15 and 61 and 00cr to total labor force.

1970 A/0 Ratio of population under 15 and 65 and over to total labor force; /0 196i-661 ac imludlog pont-primary technicalechmolo.

MOST RECENT FSTThTEs / Ratio of population under 15 and 65 and over to total labor force; /b As per-stage of omploy.sst;

ac 1972; ad 1969-71 averge; /e 1971; /f tocludiog poat-prieary technical scboola.

ETHIOPIA 1.2 /a 1965-70; As Including sidwines and public health nuroco.

NIGERiIA 1970 A/0 Ratio of population under 15 and 65 and over to to tal labor force; /A Regiotered, not all practicing in the country.

BBAZTh 1970 /a E.onosically active population; /b Hospital personnel; Ic Inside only.

86, Januar 3, 1977

DEFINITIONS OF SOCIAL INDICATORS

Land Ars (thou km ) PopuIutioo per nursing 000000 - Populatioc divided by comber of practicing

Totol1 Toto1 surface area coprising land area and iniand caters- mate and fomlo graduete 000000, 'trained or "certifiod" ore,and

Agri..- Most -rcet cetioute of aiotoa area used t-nporarily or .u..tMary por.nono 1 with traioing orvpeic.

pare..vontiy for crop,, pooturee, macbet & bit.bso gardens or to lite Popuiation per honoital hod - Popoiction divided by comber of hosyitu1 bedsfuliva. ava~~~~~~~~~~~~~ituble in public and private genora1 ovd speocIited bcopitai and

rehabilitation ceners eIcdon coretog h.... ..od ostublinhoo..te for

GBP per capita (US$) - GNP per capito eatimaten at uresct aneket priceo, custodial acd prv-c.tivscarc.calculated by cas over io ethod uo Wan1d Bank Atlas (1973-75 basin); Pvr capita ..pply of caoisM of reuitrene..to) - Cvmputed fr..eccrBy

1960, 1970 sod 1975 dote. eqoivalet of net food supplies -viloblo in -ootry per capita per duy,a-aiablc supplies com prise domestic Production, imports leaa epocto,

Popolation a.nd vita; etatianic and vhsng es in etock;,oc oupplen eaid animalI fesd, needst,qoati-

Popotarcof (id-yr, million) -As of July fitrt, if not avilabic, tIes led tofod procsoog ad looe iv dttihutic; rqoir-etsavresort o nd-y-u esioe;19ff, 2970 and 1975 data, were ot iouted by FAD bascd non yhyaiolugicui ned for nunouI act ivity

and health coid -iisor-nv -l tocyorotore, body lnights, u0 nond

Population do...ity- r soa o-Mid-year population pnr sqoare kilo- enditr ihotoe ofPoPu1tioo, al oIIoeimg 107. for waste at house-

meter 1M00 hectarns ofqtotal aron boild i-1.Populatiow dscutty - per snuare ho of usric. land - Computed an bh-e for Per -apitu auppi fpo o(rm per day) - Protein coctont of perugrivolior.. toe.d only. caPita net opyp of food por day; net nayply of fool -o drfiovda

vit.1 l~~~~~~~~~~~~~~~~~~bove, reqoirementn for a1 -rll cootlo escal-hod by USDlA i oi

01001 acatlscics ivacarob Sorviocs ~~~~~~provid fuc a vnio vm ....oac oef 6i crams of totni

Crude hini rtet per thb....san ..d uvro-decA...I lint bitrh. per thecoand proteil pcr day, aend 20 gcun of oniol anod pulen protic, of which

of id-yosr pepulatiac; too-year ari -thei avorgo nodig in 1960 and i grac should he -vi-a1 protoie; ith- stuedardo are 1-c tham thone

I10f, sod five-ynur average ending in 1975 for .0cc recent ostit, e. of 75 grams of total prtvli enod 23 gcas of anioul protete en on

Cro'de do-th waco pe thouosnd,-avrugo - Ae..uai deatho per theoosd of mid- average, for the world, proponed by FAG in the Third Werld Pood Sur-y.

your ppu tle; a-yo srt tio -onruc ending ic 1960 and 1907 aend Pv' caPIta prutoi nopply fros coibol avd poise - Proteic nupply of food

fiv-year. -vrg.eondieg to 1975 for nont toreect rotcnate. drvdfen -ai aad pulnca in coons per day.fnfat _orc1ity rain C/thou) - An..o.l deaths of infants under one year of Death rats C/hico) ogen 1-4 - uncool denthe per thou...nd in age group

age per thousa nd live births. 1-4 years, to children in th- ace group; noggacetd a.n a oirator ofLifec eapeote_o v t bir th (yes-) - Averaga cober of yearn of life remaining valn tr itin

at bIrth, onw.Ily five-your ad or.gro ending in 1960, 197f and 1973 for

deveoping cooti ins. EducaLionr srerdcilm rate -Average ounber of lIve duoghtora a oa ill Adilooted cccoln-ntracc -rPriourv -chuol - Eoro1llen of at] agoo as

bea,r in her norml rerduc.tive1period if.she onpueto...cs proen..t age- percontage of primary ochool-age popuILti.on includro hilidren uged

specfic fertiity ra to;uo y fIv-_yea averages coding in 1960, 6-li years hot aijuntod tar diff-enrt Ilngthe of pri-ory odoco.tiot;

1970 and 1975 for dve-Ip ig .... vtrI_a for .o..i ico with universal edocotic, -nr11-oL nay .emond 1007.Popolaci-n growth rate (7. - total - Conpoovd aonu... grooth rates of mid- sire come pupil. are bviw or oho.c the off-ciu1 achool ago.

yearpoplaton or 950-60, 1961-70 and 19791-75. Adluotodcrooatrutl- ..ccd-r school - Computed an above.Puplatiov go thrts . ra - Coptd lihe growth rate of total ecnay odonalc rqor orbut four yours of approved prmy

Popula-tion, diffsrent definltto- of urban ocean .ya affect com pare- i-atru-ttn; pr-idcn generlt., vctoa r t tciorcroing

bility f data an ng conrb.isrc n for popiln of 12 tc 17 y-ro of oge; correaPoedd.c.

Urban ppontaion (7. of .tota) - cR.io of urhan to total population; 00u0500 are generally vooloded.difretdfinitiomo of orban areas may off ot comparability of data Ynuro of orkoulieg pr-oldd (first nod necood Ir-eisl - Total years of

a nog ecren schooling; at seCondary Iv-vi, voctional inocruccioc map be par-Age p!ctu-jJ ~mj- ChIldren ll-14 ycrar), working-age (15-64 ysar-), c.ialyor co_pIeloly e-1ldod.

an,d tinredy (65i yersad over aa perorncgee of aid-your population. Vocational c-rllmct (7. of nocondory) - Vncational iootitotiemn imolods

Andependee rto- Ratio of popolacion under 15 and 65 and over tm tcohnical, lodastrll orother programs which opertet lndopndvetly or

rih- ofIgn i theough 64. an .dpartmnncs of endarytsittoatonncdependency oc1r atio_ti of population under iS and 65 and ov.r Adult lit eray rate (7) - Litrarte udolts (oily to read and write) a

to ths labor force in agc grou p of li-6i years. percentage of total adult Population oged is years ood ove..

Pamiiy pin..ming -accptors (umulative, thou) - Counlai-e mnhber ofuceetorst of hirth-coetro1 devicen under aospicnn of national family

TMo-oLg

planning program since incoption. Per-onn per room (urban) - overage camber of p-rsoo per room io

Family planning - usern (7. of narried wovvm) - Percen.tages of carried occ.pind convetional duellingo in urban areal; d-11tinge -ocldnwmeof chil d-hearing age (15-44. yearn) who use hirth-coetro1 d-niono non-pornan..nt stutrsand unccpied parts.

to all married women in nam age groop. Occupied duollimgn aitboot piped water M% - Occupied conventiena1

duollting in orion ed roraI area without -nide or outside pipedEoployoent _otcr fac,iticnaaspcercntageof. al occupied delltingo.

Total labor force (theo..avd) - Econcei-aiy active persons, including A.cco t elorily o l due11in&o) - Convetional danllings with

arced forces aed uamplepod but -orludiog houseolves, students, etc.; elcrctInlvn uresas povo fttldelnsi ra

deflnicon inro oneoer o r not comparable. and rura aras

Labor force in agriculture (7. - Agricultural labor forcn (in farming, Rural dosllings conncoctd to electricity (7.) - Computed an above for

forestry huting sod fiohig au percentage of tota lahor foos-rra dwellingn only.lOno yayed (7. of la.bor force) -IUomploynd are usually definodfaspeon.eh. are able and willing t. cabs a Joh, oat ofIaJoh en a given day, Coomtmengind out of a job, and ...oking watk fee a specified inians period Raircivr (per thou pup) - All typen of roeelirs for radio bread-

net oceedin one- eok; may nout be coepoesble betl.sso gouenteioe due to casto to gonera-l public per thoo..and of population; occudes unlicensed

differenrt dfinitiono of unemplo yed and s.urte. of data, a.g., smploy- c-cive- it moonteiss and in years when registration of radio sootwa

sent office statistics, sample ar-cy, compulsor.y -nmpll4nset insuronce. in offeoc; data for receet yeors may nout he coparbLleinite ...at

countrino abo1iohod li-nmimg.

Income diotribntio -Psr -trgv of private ino..s (both in cash and hind) Passenmr cars (per thou PoP) - P...ngergn cars tonpriss sotor car a sct-rovoi-ed hy richest 57., richest DOT, poorest 20%, and pearept 40% of lg lesa than sight persons; eaclude.sobnhu.a.oes, hearses and silicon7h....eho1ds. v-hi.ls..

Electricity (khub/r per cap) - Aenual consamption of ieduatrtsl, coo-Di.itrihution of land oworship - Percencagee of land owad by wealthiest mercint, public and private electricity in kilowa.tt hours per capital

10% and pocroa fln mss genrai haeed on prodacti n data, wttheut lew sfor basesc ingrids hat allesing fur imports and oporta af electricity.

Bealth and Batritien Bowaprint 1kg/yr p-e oapj- Per capita annua consauptivn in kilograms

Peaota per phosician -Population dividod by machr of practicing estimated from domestic production plus met imports of -cuprint.

physicians qa letd fro a mdical scheal at university lvl

ANNEX IPage 3 of 4

ECONOMIC INDICATORS

GROSS NATIONAL PRODUCT IN 1975 ANNUAL RATE OF GROWTH (%, constant prices)

US$ Mln. % 1960 -69 1970 -74 1975

GNP at Market Prices 3593.6 100.0 .. 5.3 - 0.7Gross Domestic Investment 1290.0 35.9 .. 10.3 1.6Gross National Saving 272.4 7.6 .. 16.3 - 3.4Current Account Balance 845.8 23.5Exports of Goods, NFS 1024.2 28.5 .. 10.0 -14.3Imports of Goods, NFS 1830.0 50.9 .. 8.0 -11.3

OUTPUT, LABOR FORCE ANDPRODUCTIVITY IN 1975

Value Added Labor Force V. A. Per WorkerUS$ Mln. US$

Agriculture 589.0 16.2Industry 1081.2 29.8Services 1962.4 54.0Unallocated

Total/Average363t.6-1/ i00.0 TOO-0

GOVERNMENT FINANCEGeneral Government -Central Government

z Z -Mln.) sof GDP ( Z Nln.) % of GDP1974 1974 1971-73 1974 1974 1571-573

Current Receipts 671.0 36.5 32.5Current Expenditure 579.0 31.5 27.2Current Surplus 92.0 5.0.Capital Expenditures 316.1 17.2 10.7External Assistance (net) 83.4 4.5 3.0

MONEY, CREDIT and PRICES 1970 1971 197; 1973 1974 1975illion z outstanding end periodT

Money and Quasi Money 231.3 261.5 298.4 440.3 608.1 597.7Bank credit to Public Sector 3 26. 294 403 681 577Bank Credit to Private Sector 9 130.6 160.5 188.5 327.5 445.442.9 60.3 91.6 137.9 234.3 326.5

(Percentages or Index Numbers)

Money and Quasi Money as % of GDP 24.3 25.8 27.2 29.6 33.2 31.4General Price Index (1970 - 100) 100.0 108.1 122.7 136.6 174.6 230.1

Annual percentage changes insGeneral Price Index 3/ .8.1 13.5 11.3 27.8 31.8Bank credit to Public Sector 13.4 31.0 22.9 17.4 73.7 36.0Bank credit to Private Sector 53.8 40.6 51.9 50.5 69.9 39.4

NOTE: All conversions to dollars in this table are at the average exchange rate prevailing during the periodcovered.

1/ GDP at factor cost.

2/ Includes budgetary and non budgetary Central Government operations.

3/ Retail price index.

not availablenot applicable

ANNEX I

ntADB PATMENTS AND CAPITAL FWWb Page 4 of 4

BALAHCE OF PAYMZNTS MERCHANDISE EXPORTS (AVERAGE 1973-75)

1973 1976 1975 US $ Mln %(Millions US $)

Copper 693.4 62.2

Exports of Goods, NFS 1123.4 1633.8 1024.2 Cobalt 77.4 6.9

Imports of Goods, NFS 1285.2 1861.0 1830.0 Diamonds 58.8 5.3

Resource Gap (deficit 8 -) -161.8 -227.2 -805.8 Coffee 56.9 5.1

Jnterest Payments (net) -68.0.2 -110.2 -50.0Workers' Remittances -124.2 -129.8 ..Other Factor Payments (net) - 0.4 - 8.6 -162.0-_Net Transfers 151.2 145.4 172.0 All other commodities 191.7 17.3

Balance on Current Account -203.2 -330.4 -845.8 Total 1114.2 100.0

Direct Foreign Investment - - - EXTERNAL DEBT. DECEMBER 31, 1975Net MLT Borrowing

Disbursements 429.4 507.8 649.2 US $ MlnAmortization 172.2 268.4 95.0Subtotal 257.2 239.4 554.2 Public Debt, incl. guaranteed 1684.2

Capital Grants - - - Non-Guaranteed Private Debt

Other Capital (net) - - - Total outstanding & Disbursed

Other items n.e.i 7.6 4.6 50.8 1/Increase in Reserves (+) 61.6 - 86.4 -240.8 DEBT SERVICE RATIO for 1975-

Gross Reserves (end year) 265.8 200.8 216.2Net Reserves (end year) 220.6 134.2 -106.6 Public Debt. incl. guaranteed 14.2

Non-Guaranteed Private DebtFuel and Related Materials Total outstanding & Disbursed

Imports 48.0 101.0of uhich: Petroleum 48.0 101.0

Exports 0.7 -

of which: Petroleum 0.7 - * IBRD/IDA LENDING. December 31, 1976 Million US$

RATE OF EXCHANGE IBRD IDA

From hLpe 23 967 to March 11. 19T76. *Slzce March 12, 9760utstanding & Disbursed 32.4 53.1__ 1~~~~~~~~, ~~~~~ In~~L~ disbursed 67.6 121.4

US $ 1.00 ! zn.5 SDR 1.0 = Zl.0 Outstanding incl. Undisbursed lUU.U6 T7.5

Zaire 1.00 = US $ 2.0

1/ Ratio of Debt Service to Exports of Goods and Non-Factor Services.

2/ Investment income

3/ Includes an undetermined amount of workers' remittances

not available

not applicable

EACPII, March 29, 1977

ANNEX IIPage 3 of 6

STATUS OF BANK GROUP OPERATIONS IN ZAIRE

A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of March 31, 1977)

Loan orCredit Fiscal Borrower Amount in US§ MillionNumber Year Purpose Bank IDA / Undisbursed

Prior to Congo & TransportJune 1960 Otraco Infrastructure 91.6 1/

Two Credits Fully Disbursed 11.0

255 1971 ZAIRE River Transport 7.0 1.8271 1972 ZAIRE DFC II 10.0 2.2272 1972 ZAIRE Education 6.5 4.4292 1972 ZAIRE Highway II 19.0 5.6398 1974 ZAIRE Livestock 8.5 4.6463 1974 ZAIRE DFC III 10.0 3.7

1090 1975 ZAIRE GECAMINES 100.0 61.2536 1975 ZAIRE Highway III 26.0 18.8571 1975 ZAIRE Rail.River II 26.0 25.0625 1976 ZAIRE Water Supply 21.5 20.2624 1976 ZAIRE Education II -/ 21.0 21.0660 1977 ZAIRE Cotton Rehabili-

tation 3/ 8.0 8.0

TOTAL (less cancellations): 191.6 174.5 176.5-of which has been repaid 91.6

TOTAL now outstanding: 100.0 174.5

Amount sold: 54.5- of which has been repaid 54.5

TOTAL now held by BANK and IDA 2/ 100.0 174.5

TOTAL Undisbursed: 61.2 115.3 176.5

1/ Guaranteed by the Kingdom of Belgium

2/ Prior to exchange adjustments

3/ Not yet effective.

ANNEX IIPage 2 of 6

B. STATEMENT OF IFC INVESTMENT

Fiscal Type of Amount in US$ MillionsYear Obligor Business Loan Equity Total

1970 Societe Financiere deDeveloppement (SOFIDE) DFC - 0.76 0.76

Total gross commitmentsless cancellations,terminations, repaymentsand sales: - 0.76 0.76

Total commitments nowheld by IFC: - 0.76 0.76

C. PROJECTS IN EXECUTION 1/

Credit 255 River Transport; US$7 Million Credit of June 21, 1971; EffectiveDate: January 17, 1972; Closing Date: December 31, 1977

The project, based on UNDP-financed studies, consists of (a) reha-bilitation of navigational aids, dredging facilities and equipment for theZaire River estuary; (b) improvements of navigation on the Kinshasa-Ilebowaterway; (c) rehabilitation of the ONATRA river fleet; (d) provision ofexperts to fill key positions in ONATRA, RVM and RVF; and (e) a feasibilitystudy of the Voie Nationale, the combination of rail-river links between themining areas of Shaba and Zairian seaports. The river agencies have been setup as autonomous public entities, and most goods and services provided underthe project have been procured or contracted. The completion of the re-habilitation of navigational aids on the Kasai River will be carried outby RVF on force account. After a delay of about one year, resulting froma lack of local currency payments by the Government, construction of twobuoy tenders for the RVF has recommenced. The three agencies involvedin the project, especially ONATRA, continue to suffer from adverse finan-cial positions and institutional weaknesses. The original Closing Date,

1/ These notes are designed to inform the Executive Directors regarding theprogress of projects in execution, and in particular to report any prob-lems which are being encountered, and the action being taken to remedythem. They should be read in this sense, and with the understandingthat they do not purport to present a balanced evaluation of strengthsand weaknesses in project execution.

ANNEX IIPage 3 of 6

December 31, 1973, was extended twice to provide additional time for recruit-ment of technical assistance personnel, for the works related to the rehabil-itation of markings on the Kasai River and for reconditioning of two dredgers.

Credit 271 Second DFC; US$10 Million Credit of September 24, 1971; Effec-tive Date: February 1, 1972; Closing Date: June 30, 1977

Credit 463 Third DFC; US$10 Million Credit of February 20, 1974;Effective Date: July 25, 1974; Closing Date: December 31, 1977

A first line of credit to SOFIDE was made in 1970 and was fullydisbursed. The second line of credit to SOFIDE was made one year after thefirst, since SOFIDE's volume of operations was three times that forecast. Thecredit was not fully committed until December 1973, due to the availability toSOFIDE of other resources. A Bank staff member has been seconded as deputyto the Zairian General Manager for three years. The third line of credit toSOFIDE is almost fully committed. SOFIDE's operations have been conducted ina satisfactory manner and a fourth line of credit of $10 million was recentlynegotiated.

Credit 272 Education; US$6.5 Million Credit of December 17, 1971; Effec-tive Date: May 31, 1972; Closing Date: April 30, 1977

The project consists of construction and rehabilitation of threeteacher training colleges, a demonstration school and four technical second-ary schools, a management study and a survey of manpower requirements. Atthe end of 1975, implementation of the project was more than two and a halfyears behind schedule and a cost overrun of 150 percent over the appraisalestimate was likely. Since the cost overruns could not be financed on thegovernment budget, the Government asked for a reduction in the scope of theproject and this was approved by the Executive Directors (memorandum fromthe President to the Executive Directors of December 15, 1976). As of theend of February 1977, all contracts for civil works had been signed andabout 80 percent of all the contracts for furniture and equipment had beenawarded. Rehabilitation work on one school in Kinshasa was completed. Theimplementation of the project is showing progress, but procurement of con-struction materials from abroad and internal transportation are a cause ofdelay. The management study has been completed. Disbursements have reachedUS$1.1 million and are expected to increase rapidly. The project is continu-ing to be monitored closely. The Closing Date will be postponed to December 31,1979.

Credit 292 Second Highway; US$19 Million Credit of March 23, 1972; Effec-tive Date: September 11. 1972; Closing Date: December 31, 1977

The project, jointly financed by IDA, UNDP, CIDA, FAC and USAID,consists of a comprehensive program to strengthen highway administration andmaintenance, and to rehabilitate high-priority roads. All project components,except rehabilitation works, have been completed. The main institutional ob-jective of the project, the establishment of the Office des Routes (OR) as

ANNEX IIPage 4 of 6

a countrywide organization responsible for highways, was achieved. Twelvecontracts, awarded in early 1974 for rehabilitation of about 1,600 km ofroads, have progressed much more slowly than anticipated, due to the failureor weakening of several contractors, delays in local payments and shortageof critical supplies. By June 1976, about 740 km of road had been resur-faced, that is, about 46 percent of the revised total. Delays have led tocost increases and, due to these cost increases, some contracts have had tobe cancelled or revised. The OR has prepared a revised project completionplan, taking into account the latest estimates of final cost and financingrequirements. The revised program would provide for rehabilitation of 1,265km and for improved maintenance of remaining roads. It would be completed bythe end of 1977. The present Closing Date of December 31, 1977 may have tobe extended.

Credit 398 Livestock Development; US$8.5 Million Credit of June 21, 1973; Ef-fective Date: February 14, 1974; Closing Date: December 31, 1979

The project is intended to develop three government ranches in theShaba region and to help establish a National Livestock Development Authority(ONDE) and also provide substantial assistance (US$1.3 million) for trainingand the preparation of future agricultural projects. The project had a slowstart and is experiencing difficulties, in particular an increase in costs,estimated at about 35 percent in US dollar equivalent as of June 1976, thefailure of Government to adjust producer prices resulting in a negative rateof return and delays in the payment of government counterpart funds. ONDEhas been dissatisfied with the consultant firm's performance and has termi-nated its contract. It is now recruiting staff on an individual basis.We wrote to the Government about the availability of counterpart funds andabout the need to increase producer prices. The Government subsequentlyincreased prices to the level recommended by the mission.

Loan 1090 Mining Expansion Project; US$100 Million Loan of March 8, 1975;Effective Date: December 2, 1975; Closing Date: December 31, 1978

The project consists of expanding the production facilities of thestate-owned Generale des Carrieres et des Mines (GECAMINES) to produce anadditional 120,000 tons per year of refined copper and 4,000 tons per yearof cobalt in the form of copper-cobalt alloy. Project execution is wellunderway. As a result of transport and supply problems, and lack of foreignexchange, it is expected that copper production in 1976 will fall short ofthe projected output. However, the Government has already taken steps toallocate to GECAMINES the necessary foreign exchange. Due to rising copperprices, the availability of stocks, windfall profits on sales of cobalt,and an exemption from supplementary export duties, the company is expectedto make a profit in 1976. Nevertheless, GECAMINES is likely to experience aUS$55 million cash shortfall in 1977, which may impede project implementation.The transfer of marketing responsibilities to SOZACOM, a state-owned company,had caused delays in the financing of GECAMINES shipments. SOZACOM's activi-ties are being closely monitored. Military operations against insurgent forcesare taking place in the area of Kolwezi, the site of the project. It is fearedthat if fighting intensifies,construction contractors might invoke force majeureclauses in their contracts thus delaying completion of the project.

ANNEX IIPage 5 of 6

Credit 536 Third Highway Project; US$26 Million Loan of March 19, 1975;Effective Date: July 31, 1975; Closing Date: December 31, 1978

The project, which is a continuation of the Second Highway Project,is designed to build up an efficient highway administration, to initiatesound highway sector planning and to assist with the rehabilitation of akey road. It consists of the following elements: (a) provision of tech-nical assistance to the Bureau of Roads; (b) organization of a pilot high-way maintenance scheme; (c) establishment of a countrywide logistic supportsystem for highway maintenance; (d) rehabilitation of the gravel surfacedKabinda-Kindu road (about 600 km); (e) a highway traffic survey; and (f) fea-sibility studies affecting about 1,500 km of roads. The total cost of theproject, estimated at US$40 million including taxes, is financed jointly byIDA, UNDP, the Belgian and French governments, and the Government of Zaire.Consultants are carrying out a feasibility study of the Kikwit-Kananga roadand consultants have been retained to assist with the establishment of thelogistic support system for highway maintenance. The maintenance program isprogressing satisfactorily. A contract has been awarded for the first partof the Kabinda-Kindu road and the Government intends to carry out work on thesecond section on force account. The Government has asked for modificationsin the project to allow it to start a ferry maintenance program, pay for addi-tional technical assistance out of the Credit and make an early start on asecond regional, pilot maintenance project. This would require certainchanges including the elimination of a major road feasibility study and areduction in the road works on the Kabinda-Kindu road. These proposals areunder consideration.

Credit 571 Railway and River Transport Project; US$26 Million Creditof July 11, 1975; Effective Date: November 18, 1975;Closing Date: December 31, 1979

The project provides: (a) technical assistance to ONATRA, includ-ing a comprehensive training program; (b) finance for a major part of ONATRA's1975-77 investment requirements for river transport equipment, railroad im-provements and track renewal; and (c) funds for additional river markingson the Kasai river, port studies and a preliminary engineering study forthe Ilebo-Kinshasa rail link. Progress is being made in the award of con-tracts for some of the river craft provided under the project and the rail-way rehabilitation works are proceeding slowly but satisfactorily. The Gov-ernment has asked for some changes in the list of goods to be procured andthis is under consideration. All agencies of ONATRA are limited in theiroperational capacities by a spare parts shortage, resulting from the lackof foreign exchange. Some relief is in sight from the promise of recentlyallocated foreign exchange from stevedoring receipts at Matadi Port and spe-cial bilateral assistance. The Matadi-Kinshasa port development study isnearing completion. In spite of recently approved tariff increases, ONATRA'sfinancial situation will continue to be critical until firm action is takento control and to reduce costs. Its operating losses are expectedto reach some Z15 million in 1976. Declining traffic, collection problems,

ANNEX IIPage 6 of 6

lack of discipline and general instability compound ONATRA's financial prob-lems. ONATRA has recently embarked on a Plan de Redressement designed toimprove the financial situation and has appointed an experienced GeneralManager, We are carefully monitoring the execution of this plan.

Credit 625 Water Supply Project; US$21.5 Million Credit of June 18, 1976;Effective Date: August 4, 1976; Closing Date: September 30,1979

The project comprises construction and expansion of production anddistribution facilities in six major cities, the rehabilitation of existingfacilities, engineering consultant services for the six cities, a comprehensivetraining program and feasibility studies for additional water supply projects.REGIDESO, the state corporation responsible for water supply and electricityin Zaire, is the executing agency. The project, which is cofinanced by ADBand BADEA, will finance approximately half of REGIDESO'S investment programfor 1975-78. Project execution is satisfactory. All contracts were recentlyawarded.

Credit 624 Second Education Project - US$21 Million Credit of December 28,1976; Effective Date: Not Yet Effective; Closing Date:September 30, 1982

The project is intended to provide facilities for training ruralprimary teachers and agricultural technicians. It comprises: (a) construc-tion, equipping and furnishing of five rural primary teacher training insti-tutes; (b) rehabilitation and repair of six agricultural technician traininginstitutes and one higher institute of agricultural studies; (c) a fellow-ship program to aid the efficient functioning of the project institutions;(d) the evaluation of the new programs promoted in the project institutions;(e) the carrying out of preinvestment studies in preparation for a furthereducation project. After the project was presented to the Executive Direc-tors in April of last year, contract negotiations between the Governmentand the private architectural firm previously designated for the projectbroke down. The Government then proposed that the Centre National de Con-structions Scolaires (CNCS), a school design unit within the Ministry ofEducation, do the architectural work and, on our request, submitted a planfor the strengthening of the CNCS so as to enable it to carry out its obli-gations. The Credit was signed following the approval of this plan by theBank.

Credit 660 Cotton Rehabilitation Project - US$8 Million Credit ofDecember 28, 1976; Effective Date: Not Yet Effective;Closing Date: June 30, 1981

The project will help the Zairian Government to rehabilitate cot-ton production in the Equateur region through reorganization of the buying,transporting and ginning operations of the National Textile Fiber Authority(Office National des Fibres Textiles, ONAFITEX) in the project area. Italso includes rehabilitation of the network of roads linking the productionareas. The project is to be executed by ONAFITEX and the Office des Routes.

ANNEX III

Page 1 of 5

ZAIRE

FOURTH SOFIDE PROJECT

Borrower: Republic of Zaire

Beneficiary: Societe Financiere de Developpement (SOFIDE)

Amount: US$10 million equivalent

Terms: Standard

Onlending Terms: The Government would relend the proceeds of the proposed credit

to SOFIDE at an interest rate of 8.5 percent per annum with a

flexible amortization schedule conforming to the aggregateamortization schedule of SOFIDE's subloans, none of which

should exceed 15 years. SOFIDE would relend the funds toits borrowers at a minimum rate of 12.5 percent per annum.SOFIDE would pay to the Government a commitment charge of

3/4 percent per annum on the undisbursed amount of thecredit. Large enterprises will be required to accept the

foreign exchange risk. The Government will bear theforeign exchange risk in the case of small enterprises(those with assets less than $250,000). Loans made bySOFIDE to this category of clients would not be financed

by IDA in amount greater than US$100,000 equivalent.

Purpose: The credit would finance about 45 percent of SOFIDE'sforeign exchange requirement from September 30, 1976through December 31, 1977.

Final Date forSub-projectSubmission: December 31, 1978

Free Limit: US$150,000 for individual sub-projectsUS$2,000,000 aggregate limit

EstimatedDisbursements: Year ending June 30 FY 1978 1979 1980 1981 1982

Annual (US$ million) 1.5 2.4 3.3 2.2 0.6Cumulative (US$ million) 1.5 3.9 7.2 9.4 10.0

Procurement: Through normal commercial channels

AppraisalReport: A report entitled "Appraisal of Societe Financiere de

Developpement (SOFIDE) - Zaire" (No. 1371a-ZR,datedApril 5, 1977) is being distributed separately.

ANNEX IIIPage 2 of 5

SOFIDE

Forecast of Operations(z'000)

1977 1978 1979 1580 1981APPROVALS

Loans:New loans 1/ 8,580 9,4h0 10,400 11,450 12,600Supplementary financing 2,000 - - -20

Sub-total loans 10,580 9,h4o io,ho00 ll.L50 12,600

Equity investments 165 185 205 225 25W0

Total Approvals 10,7145 9,625 10,605 11,675 12,850

COMMITMENTS

Loans 10,268 9,896 10,016 11,030 12,11O0Equity investments 165 185 20(5 225 250

Total Commitments l0,h33 10,081 10,221 11,255 12,390

DISBURSEKENTS

Loans 9,111 10,082 9,956 10,523 11,585Equity investments 265 185 205 225 250

9,279 10,267 10,161 10,748 11,835

1/ To finance increase in cost of previously approved projects, folloving thedevaluation of the zaire.

EAPIDApril 1977

ANNEX IIIPage 3 of 5

SOFIDE

Balance Sheets (audited)(Z'OOO)

1972 1973 1974 1975 1976uwMa-auditeT

ASSETS

Cash and Bank Deposits 336 944 1,7514 2,020 2,333Treasury Bills 1,000 - - - -

Other Current Assets 406 645 1,132 896 1,00(

Total Current Assets 1,742 1,589 2,886 2,916 3,339

Medium and LT Loans 5,968 6,862 7,460 9,LiO1 12,401

Less provision (60) (20) (230) (2g7) (2CC)Net: 69 U,6514 7700 9,l14lT 12,11l

Equity Investments 403 534 615 6145 885

Fixed Assets (net) 380 372 381 3-56 355

TOTAL ASSETS 8,433 9,149 11,142 13,061 16,722

LIABILITIES

Dividends Payable 100 100 1142 - ,4Payable and Prepaid Income 861/ 90 686 596 670Short-Term Borrowings 500- - -

Total Current Liabilities 686 190 827 596 674

Medium and LT Debts

IDA Credits 1,426 2,494 3,0614 1,386 7,031EIB 170 443 853 729 501SIFIDA Loans 1,010 940 396 - -

KfW 2/ - - - 79 503Government Loans- 2,000 2,000 2,000 2,000 2,000Rolled-over IDA funds - - 920 2,132 11,)!'

Total 4,606 5,877 7,233 9,326 11,57)

Government Advance 1,000 1,000 1,000 1,000 1,00OGovernment Deposit / - - - - 1,100

Eauity

Paid-In Share Capital 1,982 2,000 2,000 2,000 2,000Reserves 39 57 57 66 63Retained Earnings 120 25 25 73 306

Total 2,141 2,082 2,082 2,139 2,369

TOTAL LIABILITIES 8,433 9,149 11,112 13,061 16,722

Debt/Equity + Quasi-Equity 0.9:1 1.2:1 1.4:1 1.8:1 2.2: 1

I/ Short-term loan from Italian bank repaid totally in 1973.

v/ For participation in share capital increase.

3 Quasi equity includes Government loans and a Government advance, as fol1(.h's:Loans: Z2 iuillion, 40 ycars including 20 years graco period; interest 1";Advance: ZI million, interest free, no maturity. Both loan and advance rankpari pacsu with share capital in the event of liquidation.

EAPIDApril. 1977

ANNEX IIIPage 4 of 5

SOFIDE

Income Statements (audited)(Z'O 0)

1972 1973 19714 1975 19'76unaudited

INCOME

Interest on Loans 504 692 749 981 1,253Interest on ST Investments 79 78 79 63 123Gain on Foreign Currency 17 - - -Dividends . 5 21 7 8 -Other Income 1l 25 11 12 26

TOTAL INCOME 609 816 846 1,064 1,402

EXPESES

Interest on Govt. Loans 16 20 20 20 20Interest on ITA Credits 81 ],80 246 4147 V 503 1/Interest on other Foreigni Loans 70 124 110 64 65Vther ]7inancial Expenses 27 28 - - 4Ad-,,inTi.straLive Expenses 209 271 32'7 404 548lBlr~'etcrs and Auditors Expenses 17 21 21 25 23Provision for Bad Debts - 36 22 27 -

TOTAL EXPENSES 420 680 746 1,007 1,168

Profits before general provision forrisks 189 136 100 57 234

General provisions for risks 60 - - 9 _

Profits after general provision forrisks 129 136 100 48 234

Allocated to:Dividends 100 100 100 - _Revenues, retained earnings 29 36 - 48 234

Profit /as % of share capital 9.4 6.8 5-. 2.9 11.7Profit as % of average net worth 8.9 6.4 4.8 2.7 10.4

Administrative Expenses as % ofaverage total assets 3.6 3.3 3.4 3.3 3.7

1/ Including interest paid on "rolled-over' IDA funds" ;117,500 in 1975 andz 62,000 in 1976.

2/ hc,fore general provision for risks.

EAPIDApril 1977

ANNEX IIIPage 5 of 5

SOFIDF.

Past and Projected Finanicial Ratios

Actual______ Pr etd1972 1973 1974 1975 1976 1977 1978 1979 1980 1981

Ilcome Statement Elements as7. of Average Total Assets

1. Total Income 9.1 9.3 8.3 8.8 9.4 9.8 10.4 10.9 11.4 11.9Of Which INtcrcst on loans (7.6) (7.9) (7.4) (8.1) (8.4) (8.8) ( 9.4) (10.1) (10.6) (11.2)

Dividenids (0.1) (0.2) (0.1) (0.1) - (0.2) ( 0.2) ( 0.2) ( 0.2) ( 0.2)Others (Shiort-term (1.4) (1.2) (0.8) (0.6) 1.0 (0.8) ( 0.8) ( 0.6) ( 0.6) ( 0.5)

fi,ti rests, coimiasions)

2. InLtrest Pa'ymn-rs 2.5 3.7 3.7 4.4 3.9 4.9 5. 4 5.3 5.1 5.21. Administrative Exp,ns;es 3.1 3.1 3.2 3.3 3.7 2.7 2.3 2.2 2.2 2.24. Provisions 0.9 0.4 0.2 0.3 1.7 0.9 0.7 0.5 0.4 0.45. NWt Profit 1.9 1.5 0.9 0.4 1.6 1.1 1.9 2.9 2.3 2.5

Proftt.uility Iy.licnrmrs

6. Ilet Primfic as % of Fq-lity 6.0 6.5 4.8 2.2 10.3 9.4 19.0 18.0 15.0 16.77. Dmividend,,s 7. of Average Equity Portfolio 1.2 4.5 1.2 1.2 - 3.9 5.0 4.9 4.9 4.9E. Incim-e fromil Iamms as 7 of Average Loani Portfolio 11.6 10.7 10.5 11.6 11.5 11.0 11.5 12.0 12.5 13.09. C-st of 1.Iit as 3 of Average DebL 4.0 5.2 5.0 5.7 5.1 5.8 6.2 6.2 6.2 6.2

Fin,ancial Strucotwe iidicators

10. T,rm-r.DbIt/Yvar-Fnmid Fqoity 1/ 2.2 2.8 3.5 4.4 4.9 6.1 7.5 4.4 4.8 5.111. 'Icem-lmchm/Yeac-tmmd Equity plus quasi-equity 2/ 0.9 1.2 1.4 1.8 2.2 1.7 1.9 2.0 2.3 2.612. Im C.rcs( Coverage Ratio 3.8 2.2 1.6 1.2 1.5 1.4 1.5 1.6 1.5 1.5

i/, Cv rnmmn .advance (iil million - 0% - no maturity) conside red neither as equity ntor as debt2/ lime lade (imoerimmemit ma1is and Government advance.

EAPIDApril 1977

ANNEX IV

ZAIRE

FOURTH SOFIDE PROJECT

SUPPLEMENTARY PROJECT DATA SHEET

I. Timetable of Key Events

1. Since this credit (the fourth to SOFIDE) is a repeat operationwith an institution which has been closely monitored by the BankGroup since it was created in 1970, the project did not requirespecial preparation before the appraisal mission visited SOFIDEin May 1976. A post-appraisal in August 1976 was made necessarysince several issues arose that had to be at least partiallysolved before appraisal could proceed. These included an in-crease in the interest rates of SOFIDE and the doubling of itsquasi-equity. Negotiations were completed on March 11, 1977.The planned date of effectiveness is July 31, 1977.

II. Special Bank Implementation Actions

2. None.

III. Special Conditions

3. Large borrowers would assume the foreign exchange risk. TheGovernment would assume the foreign exchange risk on SOFIDE'sloans to small-scale Zairian enterprises who would be requiredto pay a commission to the Government of 1 percent per annum.Loans made by SOFIDE to this category of clients would not befinanced by IDA in an amount greater than US$100,000 equivalent(para. 69).

4. SOFIDE's management will strengthen its supervision program(para. 57).

5. SOFIDE's management will prepare a comprehensive operationalmanual (para. 57).

6. All projects submitted by SOFIDE to IDA for financing willinclude the calculation of an internal rate of return (IRR)and all rpojects that involve import substitution will includethe calculation of an economic rate of return (ERR) (para. 57).

7. The Government shall arrange for SOFIDE to participate in thework of the Investment Commission (para. 65).