Agricultural credit II project Report No: ; Type: Report/Evaluation Memorandum ; Country: Ecuador; Region: Latin America And Caribbean; Sector: Agriculture Adjustment; Major Sector: Agriculture; ProjectID: P007093 The Ecuador Agricultural Credit II project, supported by Loan 2752-EC for US$48 million equivalent, was approved in FY87 and closed on December 31, 1994, six months later than originally planned. An undisbursed amount of US$4.1 million was canceled. The Latin America and the Caribbean Regional Office prepared the Implementation Completion Report (ICR). The borrower’s comments do not differ substantively from the ICR. The project’s objectives were to: (a) expand production, especially of exportable products, and increase farmers’ incomes; (b) improve the National Development Bank’s (Banco Nacional de Fomento, BNF) operating efficiency and enhance its resource mobilization capacity; and (c) stimulate medium and long-term agricultural lending by private banks (PB). A credit component of US$40 million was to be onlent by the Central Bank to BNF and those PB eligible to rediscount subloans. About 5,000 farm families were expected to benefit. An institutional strengthening component of US$8 million was to provide training, studies, vehicles and office equipment for BNF. The evidence of the ICR suggests the project reached its production and income objectives. On- farm investments were closely supervised by BNF and the PB, and little diversion of funds was reported. The longer lending terms permitted the intermediaries to finance capital improvements that they otherwise would have avoided. However, data limitations at the farm level prevent an accurate assessment of the value added to both domestic and export production attributable to the investments. Financial and economic rates of return derived from appraisal models in the range from 30–40 percent were not re-estimated at project completion. The project also succeeded in stimulating PB participation: they accounted for 8 percent of the 3,931 subloans issued and 70 percent of their total value. PB subloans were concentrated mostly on export crops and averaged US$93,000. BNF subloans were concentrated mostly on cattle and other domestic enterprises and averaged US$3,400. The institutional strengthening objective was not achieved. Half of the funds allocated to this component were canceled. Although this reduction was compensated by technical assistance funds provided to BNF by the Inter-American Development Bank, they were not able to arrest the declining viability of the overall portfolio. Due to a series of macro-economic shocks, and government’s reluctance to continue financial reform policies, inflation rates ranged between 30 and 90 percent throughout the six years, 1988–1993, and for most of that period exceeded BNF and PB interest rates on project subloans. The Loan Agreement committed government to maintain either positive real interest rates or a rate close to that on a ninety-day certificate of deposit. Government chose the second option. But the deposit rate also fell below inflation rates for most of the period. By allowing this subsidy the Bank and government contributed to the erosion of the real value of the project fund and to BNF’s financial distress. This was aggravated by high arrears: in 1994 BNF reported that it had provisioned 17 percent of its project portfolio as nonperforming. The extent to which nonpayment correlated to subproject failure or willful default is unknown. In the inflationary environment, the resource mobilization subcomponent for BNF proved inoperative. The Operations Evaluation Department agrees with the ICR in rating project outcome as marginally satisfactory, institutional development as negligible, and sustainability as uncertain. The credit program was successful, but the expected improvement in BNF’s resource base, collection performance, client orientation and profitability did not occur. The Bank’s assumption at appraisal that government’s financial sector reform program would continue proved unjustified: it retreated on these reforms in the face of macro- instability and maintained the subsidy policy inadvertently sanctioned in the Loan Agreement. The ICR claims that without a change in BNF’s public sector mandate to subsidize the sector, its future is in doubt and a follow-on credit project is unjustified. PB capacity to appraise and supervise investment subprojects improved, but the longer-term lending lines are unlikely to continue in the absence of additional external support. Bank performance is rated satisfactory overall, although the weakness of the conditions concerning financial reform and positive interest rates earns an unsatisfactory rating in the ICR for Bank appraisal. Key lessons for operations elsewhere are: (a) a credit intermediary such as BNF must be financially viable to achieve training and other technical assistance objectives; (b) when those objectives include improving resource mobilization, this cannot be managed unless interest rates are positive; and (c) a credit project with real sector targets should include measurable indicators of success, in this case export value added resulting from subproject investments, new subloan clients, etc. The ICR is satisfactory. No audit is planned.