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RESTRICTED
FElE COPY Report No. p-441
This report was prepared for use within the Bank and its affiliated organizations.| They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RE3CONSTRUCTION AND DEVELOPMENT
REPORT AND RECOMMENDATION
OF THE
PRESIDENT
TO THE
EXECUTIVE DIRECTORS
ON A
PROPOSED LOAN
TO
THE PAKISTAN INDUSTRIAL CREDIT AND
INVESTMENT CORPORATION LIMITED
June 30, 1965Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPIENT
REPORT AND RECOMMENDATION OF THE PRESIDENT
TO THE EXECUTIVE DIRECTORS ON A PROPOSED ILOAN TO
THE PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LIMITED
1. I submit the following report and recommendation on a proposed
loan to The Pakistan Industrial Credit and Investment Corporation Limited (PICIC) in an amount in various currencies equivalent to $30 million.
PART I -BACKGROUND
2. The proposed loan would be the Bank's sixth loan to PICIC and
twenty-first loan to Pakistan. It would increase the total of Bank loans to Pakistan (net of cancellations) to $391.1 million. The status of the previous loans as of May 31, 1965, was as follows: $ Million
Total loans, net of cancellations 361.1
of which repaid 59.8
Total outstanding 301.3
Amount sold 17.6
of which repaid 10.2 7.4
Net amount held by Bank 293.9
Disbursement of Bank loans is proceeding satisfactorily. Of the net amount of $293.9 million held by the Bank, $157.6 million was undisbursed on May 31,
1965, including $81.9 million from the $90 million Indus Basin loan (No.266-PAN)
made in 1960 which is not being disbursed pending the full disbursement of the IDA credit of $58.54 million for the same project.
3. The Association has now made 16 credits to Pakistan and another
credit is expected to be made shortly which would bring the total to about $270 million. This total includes $58.54 million for the Indus Basin Project which is not included under the pledges made within the Consortium arrangements. The rate of disbursement has been slow for the reasons stated in my Report and Recommendation on the proposed IDA Credit for an Agricultural Development Bank
Project recently circulated to you.
4. Pledges made by the Bank/IDA within the Consortium arrangements for
Pakistan's Second Five-Year Plan (1960/61 -1964/65) total $369.4 million. As of May 31, 1965, about $331 million of the total Bank/IDA pledges for the Second Plan had been committed, leaving an uncommitted balance of about $38 million - $14 million from the Bank and $24 million from IDA for the year to June 30, 1965. -2-
PART II -DESCRIPTION OF THE PROPOSED LOAN
5. Borrower: The Pakistan Industrial Credit and Investment
Corporation Limited.
G_arantor: The Islamic Republic of Pakistan.
Amount: The equivalent in various currencies of $30 million. Purpose: To meet the foreign exchange cost of projects to be financed by PICIC.
Interest Rate: 5-1/2% per annum.
Term and 17 years, with payments beginning on January 15, Amortization: 1968, and ending on January 15, 1982. The Bank and PICIC will agree from time to time on changes in the amortization schedule so that it will conform substantially to the aggregate of the repayment schedules applicable to PICIC's loans and investments which arc financed out of tho proceods of the proposcd loan. Exccpt as otherwise agreed, none of these repayiaent schedules wlill extend bayond 15 ro. Commitment 3/8 of 1 per cent per annum, accruing from the time Charge: the Loan Account is credited with parts of the Loan for individual investment projects.
PART III -APPRAISAL OF THE PROPOSED PROJECT
The Project
6. A detailed appraisal of the project (Report No. DB-21a, June 23, 1965)
is attached.
7. PICIC is one of the largest development finance companies associated
with the Bank. It began operations in November 1957. The Bank has made five loans to it totalling $79.2 million. In May 1963, IFC invested about $450hO,0 in PICIC's share capital. By the end of 1964, PICIC had had access to total resources amounting to about $183 million equivalent. These comprised share capital of $8.4 million, accumulated reserves of about $2.5 million, two Government loans totalling $12.6 million and foreign borrowings totalling about $160 million from the Bank, the U.S., France, Japan, Germany and the U.K.
8. In its seven years of operations to the end of 1964, it had made
405 loans totalling $163 million. Of this, 352 loans totalling some $155 million
were in foreign exchange, and 53 loans totalling $7.5 million in rupees. There are a variety of reasons for the preponderance of foreign exchange loans and the relatively small volume of rupee loans in PICIC's total lending. On the one hand, the import component of industrial projects in Pakistan is generally high; -3- Pakistan's foreign exchange position has been stringent; and PICIC is a principal source of foreign exchange for the private industrial sector. On the other hand, Pakistan's industry has been profitable; business savings have been high; and commercial bank credit apparently has been quite abundant.
9. About half of the number and two-thirds of the amount of the loans
were for new projects or expansion of existing enterprises, and the rest for balancing and modernization equipment. The greater part (58%) of the total amount had gone to cotton and jute products and food processing; another 30% to engineering, chemicals, building material and paper products, and the remaining 12% to inland shipping and miscellaneous projects. About three-fourths of the total lending was for enterprises in West Pakistan and the rest for those in East Pakistan.
10. Compared with its lending operations in foreign exchange, PICIC's other
activities such as equity investments and underwriting are modest. Up to the end of 1964, its portfolio of equity investments totalled $4.4 million and its eight underwriting operations amounted to $9.3 million. In 1964 there was a notable increase in these activities, and PICIC is trying to expand these operations in the future.
11. With continued growth expected in the private industrial sector,
PICIC's foreign exchange lending is projected at about $50-60 million annually for the next several years. PICIC estimates that it could effectively use additional foreign exchange resources of about $100-120 million for the next two years to mid-1967. The proposed loan would therefore only cover a part of its needs and PICIC will have to borrow from other external sources enough to meet the balance of its needs. As in the case of the previous loan, the terms of the proposed loan would allow PICIC to make loans of up to $2 million for individual projects without requiring the Bank's prior approval.
12. PICIC is a well organized and smoothly functioning development finance
company. Its management is able and experienced; its staff is competent; and the quality of its project appraisal is high.
13. PICIC's financial performance is good. Net profits after taxes have
increased steadily since 1958 and amounted to $1.5 million in 1964, about 15 per cent of PICIC's net worth; they are expected to rise to $2.5 million by 1967 or about 19 per cent of net worth. A dividend of 7 per cent (the same as in
1963) has been declared for 1964. However, more than half of these net profits
for that year were allocated to reserves. Total reserves of $2.5 million now represent about 4 per cent of PICIC's loan portf6lio. PICIC's Rs. 10 shares were selling at Rs. 14.3 on May 29, 1965. In general, PICIC's financial position is satisfactory; its investment portfolio is sound; and its prospects are good. It should be able to meet debt service payments on the proposed loan and on other borrowings, as well as to maintain satisfactory dividend payments and adequate allocations to reserves.
14. PICIC has made considerable impact on the economy. It estimates that
in its seven years of operations its total financial assistance of about $168 million has generated investments totalling perhaps about $500 million, which would be nearly half of all private industrial investments in Pakistan during this period, and that PICI(-financed projects have created some 55,000 jobs. rhese projects have achieved substantial foreign exchange savings and earnings for Pakistan.
Economic Situation
15. A report entitled "Economic Development of Pakistan" (A9-109, April
26, 1965) was circulated to the Executive Directors on April 29, 1965.
16. In sharp contrast with the lack of economic progress in Pakistan in
the 1950's, the Second Five-Year Plan (1960-65) targets have been met or exceeded. The five-year growth target of 24 per cent was nearly reached in the first four years of the Plan and for the five years growth will be over 28 per cent. The improved performance of the economy has been largely due to agriculture which has moved from stagnation to a relatively vigorous growth with an average rate of increase of 3.5 per cent per annum. Despite an increase in population larger than expected, per capita income should increase by 14 per cent over the five years. Government policies, particularly as reflected in the reduction of controls over production and trade, have contributed substantially to the important growth in agriculture and also in exports.
17. Planned investment under the Third Five-Year Plan (1965-70) is
Rs. 52 billion ($10,920 million), twice as large as the Second Plan in monetary, terms. The Third Plan aims to increase the annual rate of economic growth to
6.5 per cent compared with about 5.2 per cent for the Second Plan. This and
other Third Plan targets are ambitious but not impossible of achixement and the overall Plan is viewed as a satisfactory framework within which detailed annual development programs can be prepared.
18. Of the Rs. 52 billion, about two-thirds or Rs. 35.5 billion are to be
obtained from domestic resources. To mobilize such an amount while maintaining mcnetary stability will require a strong fiscal effort. The balance, equivalent to Rs. 16.5 billion, will have to be obtained from abroad. The Government has requested new aid commitments from the Consortium totalling $2,700 million (about Rs. 13 billion). This is about 30 per cent more than was committed by the Consortium during the Second Plan. Despite its improved export performance during the Second Plan and its higher export target for the Third Plan, Pakistan's creditworthiness for loans on conventional terms remains limited and a substantial part of its external financial requirements will have to be obtained on concessional terms.
19. On June 1 the Minister of Finance presented his Budget for 1965-66.
It provided a considerable amount of additional taxation, new incentives for private savings and increased exports. He proposed taxation changes geared to encouraging development activities. In recognizing that firm policy measures will be needed to achieve the growth rates in agriculture for the Third Plan, the Minister of Finance said that top priority would be given to this task, and more fertilizers and credit facilities would be provided. Increased duties were imposed on imported capital goods with differential rates for developed and under- developed regions. The administration of tax collection will be tightened to recover arrears and prevent evasion. In stressing the need for still better export performance the Minister stated that export duties on commercial crops would be kept under continuous review so as to ensure that they did not inhibit the free flow of exports. The liberalization policy for raw materials, compon- ents and other items will continue. The Minister emphasized the need for monetary stability and referred to the increase in Bank rate from 4 to 5 per cent and other credit control measures.
PART IV -LBGAL INSTRUNIENTS AND AUTHORITY
20. A draft Loan Agreement (Sixth Industrial Credit and Investment
Project) between the Bank and PICIC and a draft Guarantee Agreement (Sixth Industrial Credit and Investment Project) between Pakistan and the Bank have been d5stributed separately to the Executive Directors. The Agreements follow substantially the pattern of the Bank's recent loans to development finance companies.
21. Also being distributed separately is the report of the Committee
provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank.
PART V -COMPLIAINCE WITH ARTICLES OF AGREEMENT
22. I am satisfied that the proposed loan complies with the requirements
of the Articles of Agreement of the Bank.
PART VI -RECOMMENDATION
23. I recommend that the Executive Directors adopt the following
resolution:
RESOLVED:
THAT the Bank shall grant a loan to The Pakistan
Industrial Credit and Investment Corporation Limited, to be guaranteed by the Islamic Republic of Pakistan, in an amount in various currencies equivalent to thirty million United States dollars (U.S. $30,000,000), to mature on and prior to January 15, 1982, to bear interest at the rate of five and one-half per cent (50g) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Sixth Industrial Credit and Investment Project) between the Bank and The Pakistan Industrial Credit and Investment Corporation Limited and the form of Guarantee Agreement (Sixth Industrial Credit and Investmenu Project) between the Islamic Republic of Pakistan and the Bank, which have been presented to this meeting.
George D. Woods
President
Washington, D. C.
June 30, 1965
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