Document of FILE COPYThe World Bank

FOR OFFICIAL USE ONLY

Rqot N. P-2834-EC

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO THE

REPUBLIC OF ECUADOR

FOR A

SMALL SCALE ENTERPRISE CREDIT PROJECT

May 30, 1980

ThIS iseOnut kms £ eltd dIbrIenbuto nd may be used by recipients ony in the pggorunace oftho$r 6cIk 411i_ Its contents may not oterwine be discled witot Wod Bak aiwlbozn.

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CURRENCY EQUIVALENTS

Currency Unit - Sucre (S/.)

Calendar 1978 May 1, 1980

US$1 - S/. 25 S/. 25S/. I - US$0.04 US$0.04

FISCAL YEAR

January 1 to December 31

ABBREVIATIONS

BNF - Banco Nacional de Fomento(National Development Bank)

CENAPIA - Centro Nacional de Pequena Industria y Artesania(National Small Scale Enterprise and Artisan Center)

CFN - Corporacion Financiera Nacional(National Finance Corporation)

COFIEC - Ecuatoriana de Desarrollo S.A., Compania Financiera(Ecuadorian Development Finance Company)

FUND - CFN's Fund for Small Industry and Artisan Development

MICEI - Ministerio de Industria, Comercio e Integracion(Ministry of Industry, Commerce and Integration)

SSE - Small Scale Enterprise

ECUADOR FOR OFFICIAL USE ONLY

SMALL SCALE ENTERPRISE CREDIT PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Republic of Ecuador

Beneficiaries: Corporacion Financiera Nacional (CFN) and eligiblebanks and development finance companies

Amount: US$20.0 million equivalent

Terms: Repayable over 17 years on a fixed amortization schedule,including 4 years of grace, at 8.25 percent interest perannum.

Relending Terms: The Central Bank, as fiscal agent, would onlend the proposedloan in sucres to CFN, the executing agency, on the sameterms and conditions as the Bank loan would bear. Theloan's proceeds, blended with Government and CFN contribu-tions, would be onlent to participating financial interme-diaries at 10 percent interest per annum except that therelending rate to financial intermediaries for subloansto very small enterprises (with assets below US$25,000)would be 6 percent per annum. Participating intermediarieswould onlend to small scale enterprises at interest ratesof 12 to 16 percent, depending on the terms of subloans andfirm size. The maturities on funds onlent by CFN tofinancial intermediaries and by the latter to ultimatebeneficiaries would vary according to the subprojects butwould not exceed 10 years, including 3 years of grace. TheGovernment would assume the foreign exchange risk for theloan.

Project The proposed loan would assist the Government of EcuadorDescription: to develop a more dynamic small scale enterprise (SSE)

sector which would help generate employment, improve incomeand promote regional development. In order to help achievethese objectives, the project would make available a line ofcredit to the SSE sector of US$33.3 million. CFN would alsomanage a program of technical assistance to SSEs, and wouldtrain staff of interested financial institutions in evalua-tion and supervision of SSE projects. About 625 subloansaveraging US$53,000 are expected to be made to SSEs whosefixed assets are no greater than US$350,000. There is arisk that delays in subloan financing would occur becausethe administrative mechanism for channelling resources isas yet untested. Agreements satisfactory to the Bankspelling out procedures and responsibilities which are tobe signed between Central Bank and CFN and between CFN andeach participating intermediary should reduce this risk.Moreover, to minimize further the risk, Bank staff wouldclosely supervise the project, particularly during itsstart-up, as well as review the CFN-Central Bank adminis-trative mechanism no later than six months after loaneffectiveness and revise it if necessary.

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 authorization.

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Lo cal Foreign Total

------ (US$ million)------

Estimated Costs:

Investment projects 17.5 2C.0 37.5

Technical assistance 0.3 - 0.3

17.8 20.0 37.8

Financing Plan:

Bank - 20.0 20.0

Central Government 6.0 - 6.0

CFN 4.3 - 4.3Financial Intermediaries 3.3 - 3.3

SSE Beneficiaries 4.2 - 4.2

Total 17.8 20.0 37.8

EstimatedDisbursements: ----- US$ thousands by Bank FY-------

1981 1982 1983 1984 1985

Annual 700 5,700 9,500 3,600 500

Cumulative 700 6,400 15,900 19,500 20,000

Staff AppraisalReport: Report No. 2941-EC, dated May 23, 1980.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRDTO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE

REPUBLIC OF ECUADOR FOR ASMALL SCALE ENTERPRISE CREDIT PROJECT

1. I submit the following report and recommendation on a proposedloan to the Republic of Ecuador for the equivalent of US$20.0 million tohelp finance a Small Scale Enterprise Credit Project. The loan would berepayable over 17 years on a fixed amortization basis, including four yearsof grace, with interest at 8.25 percent per annum. The proceeds of the loanwould be blended by Corporacion Financiera Nacional with its existing re-sources for small industry and with the Government's capital contributionand relent to eligible banks and development finance companies at 10 percentexcept for subloans to the smallest enterprises, for which the relending rateto be paid by the financial intermediaries would be 6 percent. Onlending termsto be charged by participating intermediaries would be for up to 10 years withup to 3 years of grace, depending on the terms of subloans and the type ofproject to be financed, at interest rates of 12 to 16 percent.

PART I - THE ECONOMY

2. The most recent economic report on Ecuador, Report No. 2373-ECentitled "Development Problems and Prospects of Ecuador: Special Report" wasdistributed to the Executive Directors on June 18, 1979. This President'sReport incorporates the main conclusions of the economic report. Annex Isummarizes the main social and economic indicators.

Growth

3. During the past six years, the Ecuadorian economy has experiencedrapid economic growth spurred mainly by exports. GDP annual growth which hadbeen on average 10.2 percent during the 1972-76 period fell to an average 5.5percent during the subsequent years. Several factors interacted to generatethis phenomenon. Firstly, production of petroleum has virtually stagnatedand its export volume has declined. This decline in volume not withstanding,petroleum (crude and derivatives) still accounted for 59 percent of the valueof goods exports in 1979. Secondly, the agricultural sector, which has beencontributing more than 20 percent of GDP, has suffered from three successiveyears of drought.

4. Furthermore, economic activity in 1978 and 1979 was affected by atight credit policy, and by uncertainties related to the outcome of electionsand the economic policies to be carried out by the Government which tookoffice August 10, 1979. These factors contributed to a slowdown of privateinvestment which increased at an average annual rate of 0.8 percent duringthe past two years. The decline in economic activity would have been worsehad it not been for a substantial improvement in the terms of trade, as boththe price of oil and of agricultural products increased in 1978 and 1979.

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Social Development and Change

5. Despite the rapid economic growth which led to the present relativelyhigh average per capita income level, much of the Ecuadorian populationcontinues to live in poverty. In 1975, the average annual per capita incomeof the poorest 25 percent of urban dwellers represented less than one-fifthof the country average per capita income. The corresponding figure in thecountryside was much lower. While open unemployment is only about three per-cent of the country's labor force, marginal i.e., low productivity, low-incomeemployment is estimated to be as much as 30 percent. Highly concentratedownership of land and other productive resources, low rates of retention inprimary schools and poor health conditions have limited the possibility ofthe poor to improve their living conditions. The high rate of populationgrowth -- 3 percent per annum in the last three years -- remains anotherimpediment to the alleviation of underemployment and poverty. The role ofEcuador's population program is still too limited to produce a notabledecrease in the birth rate.

6. During the past decade -- and in particular during the years follow-ing the beginnings of oil exploitation (1972) and the increase of petroleumexport prices (1973) -- an important urban middle class has emerged. It iscomposed mainly of entrepreneurs, civil servants and employees of the modernsectors. This urban middle class has been growing both in size and inrelative income and has been the major beneficiary of recent economic growth.

7. Despite the considerable movement of the rural population to thecities -- the share ol city dwellers in total population changed from 28.5percent in 1950 to 43.5 percent in 1978 -- the economy and society of Ecuadorstill suffer from a pronounced dualistic structure. The indigenous populationof Ecuador accounts for over one-third of total population, and it is in thisgroup, settled predominantly in rural areas, as well as within the marginalurban population, that the poverty roots are deeply anchored. This populationbenefits relatively much less from basic infrastructure -- education, publicutilities, roads -- than other segments of the population.

8. The Ecuadorian administration is increasingly aware of the need tointegrate social policy with general development policy. In the rural areas,the strategy of rapid agricultural growth is now pursued in a context ofregional development. In the urban areas, increasing attention is given tosmall- and medium-scale enterprises and to production of labor-intensivemanufactured goods. These are, however, only the first steps in a long andintricate process of increased attention to social needs.

Basic External and Internal Financial Equilibria

9. Recovery in world prices for Ecuadorian agricultural exports (mainlybananas, coffee and cocoa) contributed to the maintenance of the overallbuoyancy of the economy during 1978-1979. They also led to substantial gainsin income, which against the backdrop of slow growth of the domestic supply offood, resulted in inflationary pressures. A strong and decisively implementedmonetary and credit policy, price controls and heavy imports of food stapleshelped to curb these pressures. As a consequence, the annual rise in consumerprices did not surpass an annual average of 11 percent in the period 1977-1979.

10. During 1970-79, Ecuadorian imports increased at an average rateof 11.7 percent in real terms. The main forces behind this increase were:(i) the high investment rates achieved during the period and the related demandfor imported capital goods, mainly for the industrial and transport sectors;(ii) the steep demand for inputs by the industrial sector; and (iii) lately,the growing demand for some agricultural products.

11. Real exports of goods were increasing annually by 12.6 percent during1970-79. Petroleum was responsible for most of this growth, since non-oilexports remained practically constant in real terms between 1970 and 1979.Thanks to the recovery of terms of trade, the resource gap has been negligiblein the last two years. The current account balance of payments deficit,equivalent to 2.2 percent of GDP in 1978, decreased to 1.5 percent in 1979despite a steep increase in factor payments.

12. Fiscal policies in the 1977-79 period were expansionary. The publicsector deficit peaked in 1977 at 8.7 percent and fell to 6.6 percent and 2.7percent of the GDP during the two subsequent years. This declining trend is acombined result of budgetary restraints imposed on public investment during1978 and 1979 and more than a doubling of petroleum revenues during theperiod 1977-79. Furthermore, to reduce the inflationary impact of fiscalpolicies, authorities turned strongly to foreign borrowing and launched salesof foreign-currency denominated bonds in the domestic capital market. Finally,starting in mid-1977, the monetary authorities introduced restrictive monetarypolicies which resulted in a declining rate of growth of money supply. Netcredit to the private sector from the consolidated banking sector followedthe same pattern of deceleration.

13. As financing of the fiscal deficit was increasingly sought inexternal financial markets, public external debt outstanding at the end of1977 grew by 58.9 percent compared with the end of 1976. Terms, maturity andgrace periods of the newly contracted debt hardened as most of it was providedby commercial sources. Ecuador's debt-service ratio increased from 4.5percent in 1975 to 11.7 percent in 1978. The Government made efforts during1978 and 1979 to soften the accumulated debt by being more careful in thechoice of foreign credits used to finance part of its deficit and, at thebeginning of 1979, was able to renegotiate US$510 million -- or about onequarter of its foreign debt -- contracted with commercial banks on the leastadvantageous terms, in order to improve the debt profile and lighten thefuture debt-service burden. Pre-payment of these hard-term loans during1979 raised the debt-service ratio for that year to 39.2 percent. This ratioexcluding the one-time debt prepayment would have been only 17.9 percent. Thedebt service ratio is not expected to exceed 15 percent in the period 1980-84.

Sectoral Developments

14. Agriculture accounted for 19 percent of GDP in 1979, a decline from28 percent in 1970. This sector, which had been growing at a satisfactoryrate of 5.1 percent during the period 1970-76, started to decline from 1976with an average annual increase of 1.7 percent, and a fall in real terms ofcrop production.

15. Ecuadorian agriculture was -- and still is -- constrained by inade-

quate infrastructure, limited farm-level technical guidance, substantial pricefluctuations, erratic credit availability, marketing shortcomings, poor manage-ment at farm level and uncertaintirs with regard to the future of the landredistribution program. All these factors hampered farmers' investmentintentions and made productivity increases difficult.

16. The Government intervenes in the distribution of agriculturalproducts by regulating the pricing and marketing of farm products. Thisresulted in high-cost distribution systems, and has motivated smuggling toneighboring countries due to low prices paid to producers on some crops. Theexisting subsidy system is regressive and rather counterproductive. Wheatimport subsidies ostensibly introduced to stabilize food prices also benefithigher income groups more than others and adversely affect incentives toproduce cereals, roots and tubers domestically.

17. The agricultural potential of Ecuador is at present underutilizedand could be used both as an engine for medium-term growth and as a meansto alleviate social inequities. Ecuador has enough fertile land to expandagricultural and livestock output at a reasonable cost. It also has forestryand fisheries potential. While increases in production of crops and livestockshould mainly satisfy the domestic demand, forestry and fisheries productscould be directed to the foreign markets. In particular, the agriculturalpotential of one important region of the country -- the Costa -- is very

substantial. Regional institutions have been created in order to managethe development of th-s zone. The use of new lands, better access to landthrough broadly distributed ownership or rental in traditional agriculturalregions, and improved techniques of cultivation could slow down the ruralexodus, relieve the pressure on urban labor markets, and help to improve thedistribution of income.

18. The manufacturing sector of Ecuador, representing 16.8 percent ofGDP, expanded in 1970-79 by 9.7 percent annually and should help to sustaineconomic growth in the next several years. Ecuadorian industry, predominantlyprivately owned, has been largely geared to import-substitution in consumergoods, and has been operating in a strongly protective environment. This hasdeflected entrepreneurs' interest from transformation of the country's naturalresources. Moreover, with the relative prices of capital and labor distortedby the system of investment incentives, favoring the price of capital, produc-tion techniques have become increasingly capital-intensive. These investmentpolicies in the past have been largely responsible for discouraging theindustrial sector from involvement in activities in which it could have astrong comparative advantage. Measures to change such policies have beendiscussed with the Ecuadorian Government. Their final design and implementa-tion, to be decided by the recently installed Government, could have animportant effect on restructuring the industrial sector, and should result ina stronger, more efficient growth pattern. This will require, in particular,changes in tariff, price and interest policies in order to strengthen sectorswith more favorable export prospects and to reduce the incentives for estab-lishing inefficient industries. On the whole, however, the industrial sectorhas an important role to play in the future.

19. Petroleum production on a major scale began in Ecuador in 1972.Increases in international prices since 1973 considerably enhanced the sector'srole in the economy: it contributed 16 percent to Ecuador's GDP, accountedfor about 50 percent of export earnings and for 37 percent of current publicrevenues in 1974. Production, after reaching 76 million barrels in 1973, fellto a level of around 65 million in 1978. However, it rebounded to 77 millionbarrels in 1979. Net crude oil exports (excluding those needed to pay forimports of derived products) which attained 59 million barrels in 1973, havebeen declining steadily to 42 million barrels in 1978.

20. Domestic consumption of petroleum and of its products has beengrowing at 16 percent per annum in the last several years. By 1979, one-thirdof the country's petroleum output was consumed internally. Although thegrowth rate of domestic consumption is expected to slow in the coming yearsas a result of the lower GDP growth rate, the amount of petroleum availablefor export -- in the absence of countervailing policies -- could still continueto decline, limiting the country's import capacity. Under these circumstances,and unless new petroleum resources are discovered and exploited, the country'simport capacity would become a serious constraint to the growth of the economy.

21. The decline in the volume of petroleum exports may slow down ifEcuador resumes oil exploration, which has slackened in the past few years.Investment in rehabilitation of known oil fields will also be needed. Toaccomplish improved oil exports, two main economic decisions will have tobe implemented -- first, the decision to invest substantially in oil explor-ation -- whether with own resources or through risk-taking foreign enterprise,and, second, the decision to increase domestic prices of petroleum. Petro-leum prices in Ecuador are among the lowest in the world -- less than 204per gallon of gasoline -- and this has largely stimulated the excessivedomestic consumption. The Government recently tripled prices of fuel usedin shipping and increased prices for jet fuel by about 75 percent and 60percent for foreign and domestic carriers, respectively, but this changecovers only 8 percent of total domestic consumption. More significant raisesare expected during this calendar year. Economic decisions of this type callfor an approval by the legislative branch of the Government but frequentstalemates occurred in the recent past in this area. An idea of a referendumto decide on the relative roles of the legislative and executive bodies inshaping inter alia the economic policies has been seriously discussed inEcuador during past months.

Outlook

22. During most of the past decade, the overall economic management inEcuador could be considered moderately successful, although there were seriousweaknesses in public administration and in the use of incentives, especiallyfor the development of the agricultural sector. The Government has resistedthe temptation to sink oil revenues into wasteful and grandiose schemes andhas, instead, used the proceeds of petroleum exports for more modest invest-ment projects, generally corresponding to real needs of the economy. It hasalso fostered a climate conducive to increased private investment during mostof the seventies which resulted in an acceleration of the industrialization

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process. In the future, the success of the Government would largely depend onits resolve to make and implement sometimes unpopular decisions, such as thatregarding the domestic price of petroleum, that are necessary to relax theconstraints liable to limit economic growth.

23. Ecuador's GDP growth rate is estimated to remain at a level of5 percent in 1980 -- in spite of favorable oil prices -- as a combined resultof a very low rate of growth of agriculture, stagnation in petroleum productionand lagging investment. In the medium term, the Ecuadorian economy has fairgrowth prospects. The external sector may not exert in the future as stronga growth-propelling role on the economy as in the past, mainly because oilexports are expected to continue their decline while agricultural exports maybe constrained by price trends and prospects of the international markets.

24. The new Government has prepared a five-year plan (1980-84) whosemain goal is to combine economic development with social justice. The Planforesees the creation of 490,000 new jobs, or more than the new entries tothe labor force, which, if it materializes and if the productivity and wageincreases take place as planned, would raise the share of labor in nationalincome from 37 percent to 40 percent. The planned investment program impliesa strong shift toward rural investment, social infrastructure (which togetherwill account for 42 percent of total new public investment compared with 34percent during the past five years), petroleum and, to a lesser extent,industry. Overall, this plan considers an ambitious increase in publicinvestment by 70 percent in real terms over the preceding five years, neededto sustain a rate of GDP growth of 6.5 percent over the period. To financethis investment, increased external borrowings would be necessary.

25. Ecuador has considerable natural and human resource potential. Todevelop it fully and efficiently, far reaching changes in its economic policiesare needed. Some were initiated by the previous Government but more remainsto be done by the new Administration. The size of the country's foreign debtis not excessive and its recent and successful efforts to improve the debtstructure should make its debt service payments manageable. Therefore,Ecuador remains creditworthy for borrowing on conventional terms. Its netexternal borrowing needs could increase steeply by the mid-1980's in spiteof expected policy improvements, since the medium-term prospects for non-oilexports are not impressive and the volume of oil exports will have to fall inthe immediate future even if significant domestic petroleum price rises areundertaken.

PART II - BANK GROUP OPERATIONS IN ECUADOR

26. Bank group operations in Ecuador date back to 1954 when a loanwas made for a first highway project. In all, the Bank and IDA have extended24 loans and six credits to Ecuador totalling US$365.7 million net ofcancellations. As of April 30, 1980, US$197.4 million of this amount hadbeen disbursed. The IFC has made five loans in Ecuador. Two were for a largetextile company, and one each in a sugar mill, a cement company and a pulp andpaper firm. IFC has also purchased capital shares in COFIEC, a developmentfinance company. These operations have amounted to US$26.6 million in commit-ments of which IFC now holds US$22.1 million.

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27. Execution of Bank Group financed projects has often been hamperedby weaknesses in Ecuador's implementation capacity. This, in turn, reflectsthe insufficiency of the country's public sector managerial and technicalresources--a constraint that is still a serious obstacle to Ecuador's eco-nomic and social development. Annex II contains a summary statement of Bankloans, IDA credits and IFC operations as of April 30, 1980, as well asnotes on the execution of ongoing projects.

28. Bank and IDA lending in Ecuador was originally concentrated intransport and power, where there were--and still are--substantial bottlenecksto be overcome. To date, approximately 31 percent of Bank Group lending hasbeen for transport. Six of the eight loans and credits extended for trans-port were to improve the country's road network and two to help finance theexpansion of the port of Guayaquil. Lending for power has aimed at improvinggeneration and distribution facilities in Quito. The first livestock develop-ment loan, approved in FY67, marked the beginning of a diversification in theBank Group's lending program away from straight infrastructure. Since then,the Bank Group has made eight loans and credits for agriculture and fisheries,four DFC loans to support industrial development, a credit and a loan foreducation, one loan each for water supply and urban development and twotechnical assistance loans. Bank Group involvement in the directly productiveand social sectors has grown to the point where it now accounts for about60 percent of total Bank Group lending.

29. Turning to the future, Bank lending will continue to assist in(i) the creation of a physical and social infrastructure base capable offostering development; (ii) the expansion of productive capacity in crucialsectors; (iii) the strengthening of agencies to implement projects effec-tively; and (iv) the improvement of living conditions for the urban andrural poor. In addition to the small scale enterprise project which thisreport recommends, and to the feeder roads-cum-maintenance project which hasrecently been circulated to the Executive Directors for consideration, theBank is preparing a second rural development operation, an electrical trans-mission project, a loan for petroleum development and a fishing port operation.Most of these projects would have important institution building aspects andinclude sizable technical assistance components.

30. Substantial development financing has also been provided to Ecuadorby the Inter-American Development Bank (IDB) and the Agency for InternationalDevelopment (USAID) and, to a lesser extent, by other bilateral sources. IDBhas been, by far, the single largest lender to Ecuador. Approved loans fromIDB to the country as of December 31, 1979 totalled almost US$567 millionequivalent. Past IDB lending has been concentrated in the power, agriculture,health/sanitation and transport fields. Most of IDB's loans to the countryhave come from the Fund for Special Operations and normally carry 2 percentinterest, a 10 year grace period and repayment terms of up to 40 years. It islikely that IDB will remain Ecuador's major development lender in the immediatefuture with power, agriculture and socially-oriented projects accounting for anincreasingly large share of its lending program. USAID, which has lentEcuador US$103.6 million equivalent, made no new commitments to the countrybetween 1973 and 1979. Recently, however, this agency has renewed its opera-tions in the country and proposes to concentrate its program in the rural andurban development sectors.

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31. As of December 31, 1978, Ecuador's outstanding public externaldebt, including undisbursed, amounted to about US$2.3 billion. Bank Grouplending constituted about 12 percent of this amount and absorbed about 3.6percent of the Government's external debt service. IDB lending was equivalentto about 21 e2rcent of Ecuador's debt and USAID accounted for about 5 percent.Assuming increased recourse to long-term bilateral and multilateral debt, by1985 the Bank's share of Ecuador's outstanding public foreign debt could reach17 percent and its share in debt service would climb to around 12 percent.

PART III - THE INDUSTRIAL SECTOR

General Characteristics

32. Ecuador's industrial growth was high during the 1970's, stimulatedby the oil boom and a favorable investment climate. Industry's share of GDP,excluding the petroleum sector, expanded from 17.5 percent to 21 percent(in constant prices) during the 1970-79 period. Its share of exports morethan doubled, rising from 8 percent to 20 percent between 1970 and 1977.This was largely due to the substitution of processed cocoa for raw cocoa.Industrial employment grew about 2.7 percent p.a. between 1972 and 1977,adding around 60,000 jobs; the sector currently employs 340,000 workers,about 15 percent of the total labor force.

33. Wichin the ndustrial sector, a small modern segment of predominantlylarge- and medium-sca1 e import-substitution industries co-exists with a largetraditional manufacturing sector of mostly smaller firms meeting local consumerdemand. Almost 80 percent of industries are concentrated in two urban areas:Guayaquil, the country's largest city and main port, and Quito, Ecuador'scapital. Medium- and large-scale industries, which predominate in the food,basic metals and minerals subsectors, import nearly half of their inputs.Small-scale industries are more concentrated in clothing, furniture, footwear,small metal products and final chemical products, which generally requiresmaller investments per firm and less sophisticated technology.

Institutional Framework

34. Within the Government, responsibility for stimulating industrialdevelopment is shared by the National Planning Council (CONADE), the Ministryof Industry, Commerce and Integration (MICEI) and the state-owned NationalFinance Corporation (CFN). The first two establish the sector's policies anddevelopment strategy. CFN, the country's largest development bank, providesfinancing for industrial sector activities. A number of private sectorassociations represent the country's industry. These include the Chambers ofAgriculture, Commerce and Industry of the Costa and the Sierra and the smallscale industrialist associations located in every province and coordinatedby a national federation headquartered in Quito.

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Industrial Policy

35. The Government has stimulated industrial development through fiscalinvestment incentives, provision of credit, tariff protection and, to a lesserextent, through an export promotion program. To encourage industry to investin less developed parts of the country, fiscal incentives are higher for firmslocated outside the two main urban areas (Quito and Guayaquil). Governmentpolicies have stimulated industrial growth, modernization and diversification,but the incentives have also generated capital- and import-intensive forms ofproduction and the emergence of oligopolistic structures, mainly in import-substituting industries. The Government is currently in the process ofmodifying industrial incentives so as to promote the generation of employmentand value added, linkages with the rest of the economy, and foreign exchangeearnings or savings.

Small Scale Enterprises

36. There are an estimated 35,000 to 40,000 small scale industrial andartisan enterprises in Ecuador, employing about 250,000 persons. SSE firmsgenerate three-quarters of total industrial employment and about one-third ofindustrial value-added. SSEs are generally more labor-intensive. The averagecapital investment per job in small industries is US$8,700, compared toUS$23,000 in larger firms. Annual output per employee in firms with fewerthan 7 employees grew by 5.4 percent per annum during the period 1970-78,compared to 3.0 percent for larger firms.

37. Smaller firms are less concentrated around Quito and Guayaquil:40 percent of SSEs are in other provinces. New firms registering as smallindustries with MICEI are even more decentralized with over half locatedoutside the area of these two cities. SSEs make greater use of local re-sources and produce mostly final consumer products. Only in a few cases dosmall firms now manufacture inputs for general industry.

Government Support to Small Scale Enterprises

38. Major fiscal incentives offered to SSEs include: (i) duty-freeimports of capital goods and intermediate inputs not produced domestically;(ii) exemption from numerous small taxes and registration fees; and (iii)income tax exemptions for reinvested profits. In addition, the Government hasbeen developing and leasing industrial parks for small scale enterprises tofacilitate their access to reliable power and water, transport facilities andtechnical assistance services. Wlhile the import duty exemptions allowedSSEs tend to encourage imports and capital-intensive technologies, the actualuse of the available incentives is limited. Only 2,500 firms have everregistered with MICEI to benefit from the incentives granted by the smallscale industry law, in part because SSEs directly import very little and haveonly minor tax liabilities.

39. Promotion of small scale enterprises ranks high in the Government'sstated industrial strategy. The current five-year plan (1980-84) projects anaverage industrial sector growth of 9.7 percent per annum and calls for thegeneration of 72,500 new manufacturing jobs. While these projections appear

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to be overly optimistic--particularly with respect to employment generationgiven the limitation of financial resources and of skilled and semi-skilledlabor--small enterprises can make an important contribution to employment,income distribution and regional development goals if credit and technicalconstraints are overcome. On the negative side, recent increeoes in theminimum wages decreed by Congress (50-58 percent for SSEs) may cut into profitmargins although some of these wage increases will probably be passed on toconsumers through higher prices. In the longer run, changing factor costrelationships may result in SSEs investing more in capital goods if the newminimum wage laws are enforced.

The Financial System and SSE Financing

40. Ecuador's financial system includes 29 commercial banks and twogovernment-owned banks (the National Development Bank--BNF--and a housingbank), a cooperatives bank, 11 savings and loan institutions, the EcuadorianSocial Security Institute (IESS), ten development finance companies and 53specialized institutions, mostly insurance companies and foreign exchangehouses. Banks and finance companies lend to industry, agriculture and commerce.The housing sector is mainly financed by the housing bank, savings and loaninstitutions, commercial banks and the IESS.

41. To complement the operations of the private banking sector andpromote specific programs in agriculture, tourism, small industry and fishing,the Government traditionally used two main public sector financial institutions:the Central Bank and BNF. In the Central Bank, a Financial Funds Mechanismwas established in 1973. The law governing this mechanism provides thatprivate banks must hold 20 percent of their portfolio in priority sectorlending, including credit to SSEs. Above this quota, the banks can rediscount

these operations at low interest rates (currently 3 percent) with the CentralBank. This mechanism now accounts for 12 percent of total industrial credit.BNF has chanelled credit to agriculture, livestock, and small industry forsixteen years. In 1978, it provided close to 9 percent of formal creditnationwide. With 72 offices and agencies around the country, BNF is the mainsource of credit for agriculture.

42. Between 70 and 75 percent of credit provided by the financial systemis at the maximum nominal interest rate for lending in Ecuador, 12 percent perannum. The effective lending rates on medium- and long-term loans rise to14-16 percent per annum, including allowable commissions. The remaining 25-30percent of formal credit consists of (i) loans granted by commercial banksunder the Central Bank's Financial Funds Mechanism, which carry an interestof 9 percent per annum to ultimate borrowers; (ii) export promotion loans (8percent interest annually); and (iii) loans to small farmers at 11 percent per

annum. Ecuador's interest rate structure has been improving through a gradualincrease of interest rates, an institution building feature of previous Bankoperations.

43. Interest rates on savings range from 6 to 9 percent in Ecuador.These variations, coupled with differing lending rates, result in a wide rangeof spreads depending on the source, use and maturity of the operation. Thecurrent structure of interest rates and commissions, although a considerable

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improvement on the past, has not yet given financial institutions sufficientincentive to mobilize significant long-term resources. The Government isreviewing the general interest rate structure to determine ways of broadeningdomestic resource mobilization and channelling of credit to priority sectors.In this regard, it is considering increasing savings rates by 4 points andlending rates by two to three points.

44. One of the most serious constraints faced by small scale industriesand artisans has traditionally been the lack of adequate and timely credit.In a recent survey of SSEs in Pichincha Province (where Quito is located),about 74 percent of SSEs reported having some access to credit, but only 12percent obtained long-term credit. Firms surveyed had debt-equity ratios ofas low as 0.5 to 1. They further noted difficulties in providing institutionallenders with the required documentation and guarantees. Finally, because smallerborrowers do not offer banks the possibility of profitable complementaryoperations, such as letters of credit and guarantees, they are usually lesspreferred clients. There are indications that this is beginning to change.Within the more competitive commercial banking environment now emerging, somebanks are beginning actively to seek SSE borrowers. No separate financialinstitution exists exclusively for SSE lending.

45. Most of the credit received by Ecuador's SSEs is provided by finan-cial institutions. In 1978, the financial sector extended US$114 millionin credit to SSEs, 85 percent of which was short term. Commercial banksprovided 67 percent of this credit, largely in response to Central Bank'sportfolio requirements (para 41), with the BNF and development financecompanies extending another 25 and 8 percent, respectively. In addition, SSEsreceive some credit from suppliers and informal sources, e.g., family membersand money lenders. Most credit still finances working capital.

Technical Assistance to SSE

46. While the Government and private sector industrial associationshave provided a wide variety of technical assistance and services to SSEs,such efforts are thin, scattered and generally uncoordinated. No in-depthstudy of SSE technical assistance needs has been done. CENAPIA (the NationalSmall Scale Enterprise and Artisan Center), an agency of MICEI, seeks topromote small industry and artisan development through seminars, technicalassistance and explanation of government incentives. CENAPIA's seminars inmanagement, marketing and accounting, and in-plant assistance in productiontechniques and project preparation are directed to obvious SSE weaknesses.Nevertheless, with only 26 professionals for the entire country, the agencyis unable to keep up with current requests. MICEI has added a new division tocoordinate technical assistance to industry, including a UNIDO program inproduction techniques for specific industrial sub-sectors (wood, food process-ing, clothing). More recently, a private foundation was established with thefinancial and technical help of the Konrad Adenauer Foundation (a privateGerman organization) to explore the problems of SSEs and to set up a pilotloan guaranty fund in Pinchincha Province.

- 12 -

Past Bank Lending and Strategy

47. While the proposed loan represents the first direct Bank supportfor the development of SSEs on a national level, the Bank has extended fourdevelopment b^"iking loans to Ecuador totalling US$93.8 million, net of can-cellations. The DFC loans have been primarily onlent to CFN and COFIEC,Ecuador's largest private finance company, although newly established financecompanies are also eligible to participate in the two most recent DFC loans.

48. Both the first and second development banking projects (financedwith the help of Loan 721-EC approved on December 15, 1970 and Loan 930-ECapproved on June 26, 1973) are completed. The third project, financed byLoan 1359-EC approved on December 28, 1976, is 88 percent disbursed and90 percent committed and the fourth loan was signed December 17, 1979. ABank Project Performance Audit Report has been issued in connection with thefirst two projects and concludes that both loans were successful in increasinglong-term financing to industry and in helping to build CFN and COFIEC intostrong and mature institutions with improved subproject appraisal and super-vision capabilities. Moreover, the report's recommendations regarding long-term mobilization of domestic resources had already been reflected in theFourth DFC Loan's provisions for establishing a capital market unit in theCentral Bank.

49. Current Bank operations in agricultural credit (Loan 1459-EC,approved in June 1977), rural development (Loan 1644-EC, approved in December1978) and urban develo,ment (Loan 1776-EC, approved in December 1979) havesmall industry credit -omponents. CENAPIA is providing technical assistanceto SSEs under Loans 1459-EC and 1776-EC. In the Guayaquil Urban DevelopmentProject (1776-EC), the SSE credit component is based on the successful artisanprogram run by the Banco del Pacifico, a commercial bank which is expectedto be an important financial intermediary in the proposed project as well.

50. Bank strategy for the SSE sector is, in line with Governmentobjectives, to support employment-intensive and export-generating industriesas well as those making greater use of local resources. Lending to firmsoutside of Ecuador's two major cities, Quito and Guayaquil, would also bestressed. Furthermore, Bank strategy includes continuation of the economicdialogue and supportive lending to eliminate undesirable subsidies to capital(through tariff exemptions and low interest rates) and to strengthen thecountry's capital market.

PART IV - THE PROJECT

51. The project was identified by Bank missions in June 1978 andSeptember 1979 and was prepared by CFN with the help of Bank staff. It wasappraised in November/December 1979 and the appraisal mission's report (No.2941-EC dated May 23, 1980) and entitled "Staff Appraisal Report - SmallScale Enterprise Credit Project" is being distributed separately. Annex IIIcontains a Supplementary Project Data Sheet. Negotiations of the loan tookplace in Washington from May 8 through May 14, 1980 and the EcuadorianDelegation was headed by Mr. Luis Veintimilla of the Ministry of Financeand Public Credit. Representatives of CFN, the Central Bank and the AttorneyGeneral's office also attended.

- 13 -

Project Obiectives

52. The proposed US$20 million loan would be the Bank's first to supportsmall scale enterprise development in Ecuador on a national level. The projectwould assist the Government to generate employment, increase the use oflocal resources and expand exports (or substitute imports) by building a moredynamic SSE sector. More specifically, it would increase available termfinancing for SSEs and create, within the financial system, an improvedcapacity to promote, appraise and supervise SSE lending. It would also expandcapacity to deliver technical assistance services to this sector and encourageparticipation of beneficiaries in the design of such services.

Project Description

53. The proposed project's main component would be a line of creditof approximately US$33.3 million (including financial intermediaries' contri-butions) in medium- and long-term resources to SSEs. The line of credit wouldprovide CFET with the opportunity for increased and more efficient SSE lendingthrough financial intermediaries and is expected to result in total investmentsof about US$37.5 million by SSEs, assuming a contribution of US$4.2 million bythe SSEs themselves. CFN would also help to finance technical assistance toSSEs under the project. Beneficiaries would be private sector enterpriseswith fixed assets of less than US$350,000, which corresponds to firms of upto 25-30 employees. Most firms of this size have had little or no access toterm financing in recent years. About 625 subloans averaging US$53,000 areexpected to be made, contributing to the generation of some 4,300 jobs.Simplified approval procedures and wider spreads for financial intermediaries'lending to the smallest firms are expected to result in over two-thirdsof subloans (over one-quarter of project funds) being US$40,000 or lessin size.

Project Execution

54. CFN has operated a Fund for Small Industry and Artisan Development(Fund) since 1964. The Fund's current assets are about US$4 million. Thevolume of the Fund's operations has been relatively low, however, averagingonly around US$1.1 million in recent years. Because of its past low levelsof activity, the Fund has had no full time staff or clear policies and proce-dures. In mid-1979 in line with the declared objectives of the new Government,CFN management began to seek resources with which to expand the Fund's opera-tions. Under the proposed project, CFN would expand and restructure this Fundand assign a special unit to administer it. The Fund would have primaryresponsibility for executing the project.

55. Ecuador's Central Bank would act as the Government's fiscal agentfor the proposed loan signing a contractual agreement with the Governmentsatisfactory to the Bank as a condition of loan effectiveness (Sections3.01(c) and 6.01(a) of the draft Loan Agreement). The Central Bank wouldonlend the loan's proceeds to CFN on the same terms as the proposed loan(Section 3.02(a) of the draft Loan Agreement). CFN would establish a specificproject account for its SSE Fund in the Central Bank. The Government woulddeposit US$6 million in the project account in three installments as a capitalcontribution to the Fund (Section (3.01(d) of the draft Loan Agreement). Halfof this amount (US$3 million) would be deposited as a condition of loaneffectiveness (Section 6.01(d) of the draft Loan Agreement). The second and

- 14 -

third contributions of US$1.5 million each would be made no later thanJune 30, 1981 and October 31, 1981, respectively (Section 3.01 (d) ofthe draft Loan Agreement). Each contribution would be a condition fordisbursing more than US$10 million and more than US$15 million of the proposedloan, respectively (Section 2.02(d) of the draft Loan Agreemeri-). CFN's Fundresources (US$4 million), combined with the Government's contribution, wouldprovide US$10 million in public sector resources for the project.

56. The Central Bank would, for a fee of one-eighth of one percent,serve as disbursement and collection agent for CFN's Fund. On the basis ofdocumented requests from the Fund, the Central Bank would rediscount approvedsubloans submitted by participating financial intermediaries. CFN's fundwould, however, be responsible for managing the loan and project and forpromoting and supervising SSE lending. The Central Bank and CFN would enterinto a subsidiary loan agreement, satisfactory to the Bank and detailingdisbursement and collection procedures as well as responsibilities for manage-ment of Fund resources, as a condition of loan effectiveness (Sections 3.02(a)and 6.01(b) of the draft Loan Agreement). These procedures would be reviewedand, if necessary, revised no later than six months after loan effectivenessand from time to time thereafter to assure that they allow an efficientresource flow (Section 3.02(b) of the draft Loan Agreement).

57. The Fund would, in cooperation with the Central Bank, channel projectresources through participating financial intermediaries to SSE beneficiariesin accordance with policies and procedures acceptable to the Bank. Adoption byCFN's Board of a policy statement, operating procedures, an organization andstaffing plan and appraisal and supervision guidelines for the Fund, allsatisfactory to the Bank, would be a condition of loan effectiveness (Section6.01(c) of the draft Loan Agreement). Any bank or financial institutionlegally established and operating in Ecuador would be eligible to participate.CFN would enter into a participation agreement, satisfactory to the Bank, witheach financial intermediary and each such agreement would be a condition ofdisbursement of loan proceeds to that intermediary (Section 2.02(b) (iii)(A)of the draft Loan Agreement). The revenues from SSE operations would financethe administrative costs of the Fund unit, grants for SSE technical assistance(para. 59), and increases in capital for future lending, in addition tointerest payments on the proposed loan.

58. The chief of the Fund's operating unit would be responsible formanaging its day-to-day operations and would report to CFN's Manager of LoanOperations. CFN has appointed a well qualified Fund chief, satisfactory tothe Bank. During the first year, the Fund's staff is expected to include fivepersons in addition to the chief: a loan appraiser at Quito headquarters andtwo more in branch offices, one person responsible for supervision and coordi-nation of technical assistance and one person to handle data, evaluation andadministrative arrangements. CFN would train the staff and of interestedintermediaries in the preparation, evaluation and supervision of SSE subprojects.

Technical Assistance

59. CFN would finance technical assistance for SSE sub-borrowersby making available as grants some of the operating revenues of the Fund or,where an ultimate beneficiary firm desired direct consultant services, througha subloan. CFN would organize a Technical Cooperation Committee to administer

- 15 -

the grant funds. The Committee would include representatives from MICEI, thenational Federation of Chambers of Small Industry and the CFN. CFN, MICEI andthe Federation would also enter into agreements, satisfactory to the Bank, togovern the provision of CFN grants for technical assistance to SSEs (Section2.11 of the draft Project Agreement). The main executors of these grant-fundedprograms would be CENAPIA and the provincial chambers of small industry. Theseagencies would prepare and submit to the Technical Cooperation Committeeproposals for project preparation assistance, seminars or other services. Aspecial program would assist very small firms in preparation of investmentprojects. Between 1981 and 1984, the equivalent of approximately 32 man-yearsof assistance would be financed by CFN for all of these programs. Suchtechnical assistance would complement that already being provided to the SSEsector by CENAPIA and other agencies with financial assistance provided byUNIDO, the Inter-American Development Bank and the Konrad Adenauer Foundation.

CFN's Operations and Performance

60. CFN, the oldest and largest development finance company in Ecuador,has been a beneficiary under all four Bank-financed DFC projects in Ecuador.CFN's total assets as of 1979 amounted to US$266 million and its equitystood at US$46.6 million. It has traditionally directed investment mostly tomedium- and large-scale industry and remains the single largest source of termcredit for the industrial sector. CFN's performance under the Bank projectshas been satisfactory, gaining it a reputation as one of Ecuador's mostefficient public sector agencies. CFN has developed a skilled project appraisalstaff and continues to attract quality professionals. For the past severalyears, CFN's net income has been relatively low in relation to its assets. In1979, it suffered a net operating loss stemming from four factors: (i) itsover-exposure to a deficit-ridden Government-sponsored sugar mill; (ii) the in-creasing costs of CFN's Eurodollar resources while interest rates on subloansfinanced with these resources remained fixed; (iii) its past policy of chargingless than market rates in fees and commissions on guarantee and letter ofcredit operations, particularly when operating on behalf of public sectorcompanies; and (iv) its failure to expand aggressively profitable letter ofcredit, guarantee and repeater loan operations.

61. To help tackle some of the financial problems mentioned above, underthe FY79 Fourth DFC Loan, CFN committed itself to submit to the Bank by June 30,1980 programs aimed: (i) at disposing of its over-exposure in individual firms(including the sugar mill); and (ii) at reducing its foreign borrowings.Both programs are now being drawn up. Meanwhile, CFN's new manager has takenadditional steps to strengthen CFN's finances including: (i) using the Govern-ment's recent US$20 million capital contribution to reduce CFN's Eurodollarobligations; (ii) limiting further investments in equity shares to the minimumconsistent with prior commitments; and (iii) seeking to expand guarantee andother service operations. An increase from one to two percent in fees forsuch operations was approved by CFN's Board in January 1980. Further actionby CFN to charge up to the maximum allowable fees and commissions would betaken by June 30, 1981 (Section 2.10 of the draft Project Agreement). Acomputer-assisted financial information system is being installed and shouldfurther improve CFN's ability to monitor its operations and conduct financialplanning. These measures should put CFN on a sounder financial footing.

- 16 -

Cost and Financing

62. The total cost of the investments to be financed with the 625subloans expected to be made under the proposed project is estimated to cometo about US$`'.5 million. The Bank loan of US$20 million would cover thesub-projects' foreign exchange component, equivalent to about 53 percent ofinvestment costs. The Government and CFN would, together, finance US$10million (or 27 percent) of the sub-projects' costs. Participating financialintermediaries and beneficiaries could contribute an additional US$3.3 million(nine percent) and US$4.2 million (11 percent), respectively, to round out theinvestment financing package. Finally, CFN would direct a portion of its netFund revenues to the technical assistance program for SSEs. Between 1981 and1984, about US$325,000 is expected to be allocated for this purpose.

Loan Features

63. Eligible sub-borrowers would be private sector enterprises havingfixed assets (excluding land and buildings) of no more than US$350,000.Firms this size normally employ 25-30 persons or less and have little or noaccess to term financing from the banking system. Subloans would be for:(i) working capital; (ii) the purchase and installation of fixed assets;(iii) the construction and/or expansion of industrial and commercial facili-ties; (iv) preinvestment studies; and (v) technical assistance. While avariety of SSEs would be eligible for financing under the project, it isexpected that nearly two-thirds of credit would benefit food, beverage,metal and wood processors as well as the textile, wearing apparel and shoeindustries. The maxiT,um amount in project funds which could be onlent to asingle firm would be US$300,000. This limit would be reviewed from timeto time and, if necessary, revised (Section 2.02(b)(iii)(B) of the draft LoanAgreement). Over two-thirds of the subloans are expected to be for lessthan US$40,000 and another quarter of subloans would fall between US$40,000and US$150,000. In allocating loan proceeds, the Fund would give priority tosub-projects which would generate employment, increase the use of domesticnatural resources and generate exports or efficiently substitute for imports.

64. Financial intermediaries, in cooperation with sub-borrowers, wouldbe responsible for preparing subprojects. All subproject appraisals would bereviewed by Fund staff and those calling for subloans above US$150,000 wouldrequire prior CFN approval. This free limit for participating financialintermediaries would be adjusted from time to time as appropriate (Section2.04(a) of the draft Project Agreement). Fund review of subprojects below thefree limit would be ex post. The Bank would review and comment on the firstsubloan over US$50,000 submitted by each financial intermediary. All subloansabove US$250,000 would require specific Bank approval (Section 2.02(c) of thedraft Loan Agreement). The Bank would also supervise the project closely andreview a significant sample of the smaller subprojects during the course ofloan supervision. An economic rate of return calculation would be requiredfor all subprojects receiving subloans of US$150,000 or more. This ceilingwould be reviewed after the first 6 months of project execution (Section2.03(b) of the draft Project Agreement). Finally, subject to review by theBank and CFN no later than 18 months after loan signature, no single financialintermediary could commit more than US$12.0 million in project funds (Section2.04(c) of the draft Project Agreement).

- 17 -

Relending Terms

65. The proposed Bank loan would be made to the Republic of Ecuador at8.25 percent interest with the standard commitment fee of 3/4 of 1 percentper annum. It would be repayable over 17 years on a fixed amortization basis,with 4 years of grace. Loan proceeds would be onlent to CFN on the same termsand conditions as the Bank loan. The Borrower would assume the foreignexchange risk and commitment fee without charge to CFN. The Central Bankwould act as fiscal agent for the Government. The Fund would onlend blendedresources (consisting of existing Fund resources, the Government's capitalcontribution and the proposed Loan) to participating intermediaries at differentrates, depending on the asset size of the borrowing enterprise. To encouragelending to the smallest SSE, six percent interest per annum would be chargedto financial intermediaries for subloans to firms with fixed assets (excludingland and buildings) of less than US$25,000. Ten percent would be charged tofinancial intermediaries in the case of subloans to larger sub-borrowers(Schedule 1 of the draft Project Agreement). The Fund would rediscount up to90 percent of subloans and the financial intermediary would finance thebalance. Subloans, in turn, would not exceed 80 percent of subproject costsfor new firms nor 90 percent of subproject costs in the case of expansions(Section 2.04(b) of the draft Project Agreement). It is expected that theFund would receive an average interest rate of about 9.4 percent on itsonlending, allowing it a satisfactory margin of 3.7 percent over the 5.7percent financial cost of its blended resources.

66. The average interest rate to be charged SSEs would be about 15percent. Subloans to SSEs with assets of less than US$25,000 would bear inter-est of at least at 12 percent interest p.a. regardless of the subloan's terms.Subloans to larger SSEs would bear 12 percent interest plus commissions of 2,3, or 4 percent for terms of 2 to 5 years, over 5 to 8, and over 8 years,respectively, resulting in effective interest rates of 14, 15 and 16 percent(Schedule 1 of the draft Project Agreement). These rates would allow partici-pating intermediaries a financial spread of 6 percent in the case of lendingto the smallest enterprises, and of 4 to 6 percent for other SSE lending.The proposed interest and financial spread structure would be consistent withstructures under other Bank loans. Subloan maturities would be up to 10years, with up to three years of grace, but are expected to average 6 to 7years.

67. The maximum legal interest rate in Ecuador has been 12 percent,with commissions of 2-4 percent for medium- and long-term lending. However,the Government is presently considering an upward revision in the interest ratestructure and the interest rates discussed in paras. 65 and 66 would be reviewedno later than 18 months from loan signing and from time to time thereafterto take into consideration changes in market conditions and inflation trends(Section 2.05(c) of the draft Project Agreement). Inflation between 1977-1979averaged around 11 percent. For 1980-1982, the Bank's preliminary estimatesare for inflation to be 14-15 percent. This would make the 15 percentaverage interest to the ultimate beneficiary envisaged under the projectslightly positive in real terms.

- 18 -

Disbursement and Procurement

68. Disbursements under the loan are expected to take place over afour year period running from early 1981 through 1984. The closing date fordisbursements would be December 31, 1984 and the terminal date for submissionof subloan proposals would be December 31, 1983. The Bank would reimburse67 percent of the Fund's financing of sub-projects, equivalent to the esti-mated foreign exchange costs, on the basis of certificates of expendituressubmitted by the Fund. Specific documentation requirements were discussed atnegotiations and supporting documentation would be retained in Ecuador forinspection during Bank supervision missions. Procurement would be in accor-dance with standard practice for Bank DFC loans. More specifically, the SSEswould procure most items directly from the local sources of supply, which aregenerally adequate. Whenever justified, items would be procured on thebasis of several quotations. The financial intermediaries and CFN wouldsupervise the SSEs to insure that their procurement decisions were soundlytaken. Reimbursement of sub-project expenditures made up to 180 days priorto receipt by the Bank of reimbursement requests would be permitted to allowthe Borrower to group a number of small subloan documents into a singleapplication to the Bank.

Project Benefits and Risks

69. The proposed project is expected to make a significant contributionto the growth of SSEs by providing the needed capital for increased outputto about 625 sub-projects. Total financing for investment projects to beprovided under the project (US$33.3 million including contributions of partici-pating financial institutions) would add an estimated 15 to 20 percent perannum to available term credit for the SSE sector over the loan commitmentperiod (1981-1983). This incremental credit would contribute significantly tothe sector's anticipated 8 percent annual growth. Given the labor intensivenature of the industries which would receive the major share of projectresources (wood, food, textiles, metal products), it is expected that about4,300 new jobs would be created through the project at an average cost ofUS$8,700 compared to a national average of US$23,000 per job for larger firms.

70. The project has an important institution building aspect. The devel-opment of CFN's Fund, one of this operation's major objectives, would enableit to promote, assist and finance SSEs more aggressively. The capabilityof MICEI and the Small Industry Federation to provide technical assistance toSSEs would also be strengthened. Finally, financial intermediaries would alsoimprove their ability to promote, evaluate and supervise term lending to SSEs.Thus, the proposed project is expected to make a significant contribution togrowth and rational development of the SSE sector and, ultimately, to the em-ployment, income distribution and regional development goals of the Government.

71. This would be a pilot effort for CFN and the Bank in significant SSElending in Ecuador and the administrative arrangements between CFN and theCentral Bank for channelling resources are as yet untested. There is, there-fore, risk of possible disbursement delays and reduced participation amongpotential private financial intermediaries if the administrative mechanismsprove cumbersome. To minimize this risk, as a condition of effectiveness,CFN and the Central Bank would sign a subsidiary loan agreement, satisfactoryto the Bank. As a disbursement condition, each financial intermediary would

- 19 -

sign a satisfactory participation agreement with CFN. Both agreements wouldspell out the project's administrative procedures. Moreover, the CFN-CentralBank arrangements would be reviewed and, if necessary, revised no later thansix months after effectiveness and from time to time thereafter to insure theproject's implementation. Finally, Bank staff would closely supervise theproject, particularly during start-up, to reduce execution risks still further.The importance of the objective of expanding term lending to SEEs justifiestaking the risks mentioned especially in view of the measures taken toinsure successful project implementation.

PART VI - LEGAL INSTRUMENTS AND AUTHORITY

72. The draft Loan Agreement between the Republic of Ecuador and theBank, the draft Project Agreement between CFN and the Bank, and the Report ofthe Committee provided for in Article III, Section 4(iii) of the Articles ofAgreement are being distributed to the Executive Directors separately.

73. The draft agreements conform to the normal pattern for small enter-prise credit loans. The main features of the draft Loan and Project Agreementsare referred to in the text of this report and are listed in Section III ofAnnex III. Special conditions of effectiveness would be: (i) the adoptionby CFN's Board of a satisfactory Policy Statement, operating procedures,organizational and staffing plan and project appraisal and supervision guide-lines for the Fund, satisfactory to the Bank (para. 59); (ii) the making, bythe Government, of a US$3 million capital contribution to the Fund (para. 57);and (iii) the signing of a fiscal agency agreement between the Central Bankand the Government and of a subsidiary loan agreement between the Central Bankand CFN, both satisfactory to the Bank (paras. 57 and 58). A depositing oftwo Government contributions to the Fund of US$1.5 million each by no laterthan June 30, 1981 and October 31, 1981, respectively, would be conditionsof disbursement for more than US$10 million and more than US$15 million of theproposed loan (para. 55). A special condition of disbursement of loan fundsto each participating intermediary would be the signature of a satisfactoryagreement between CFN and that intermediary (para. 59).

PART VI - RECOMMENDATION

74. I recommend that the Executive Directors approve the proposed loan.

Robert S. lIcNamaraPresident

AttachmentsMay 30, 1980Washington, D.C.

Annex I-20 - Page 1 of 6

tCUADOR - SOCIAL INDECATORS DATA SWEET

ECUADOR £ hZFERE7CE GROUPS ~A.3IJSTI D iS.CzSLAND AREA (THOUSAND S0. It.) - .ST RECVT £S7:N.A- -

TOTAL 283.6 SAME SAME NEXT HIaMERAaUIrLTURAL 73.0 NDST RCENT OEOGRAPRIC INCOME INCOME

1960 Lb 1970 /b ESTIMATE /b REGION /c GROUP /d CROUP /a

GNP PER CAPITA (ISS) .. 370.0 910.0 1124.4 1097.7 L942.6

LIERGE CONSL-Y-ICIq P.-R CAPt-A(KILC8.AMS OF COAL _OQUEVALZN`T) 201.C 297.0 655.0 943.1 730.7 1646.7

?07ULAT}ON rN4D VITAL STATIS7=S7CP5LAT.CN, M.lD-YMAa (Mu:c6S) 4.4 6.0 7.3UUAN POPULATION (PERCENT OF -OTAL) 34.4 39.5 41.9 59.3 49.0 51.2

POPULATION PROJECTIONSPOPULATION IN YEAR 2000 (MILLIONS3 14.0STATMONART POPULATION (2ITLLICNS) 26.0TMA STATIONARY POPLL41ION Is 1E.CZD 20J0

POPULATION DENSITYPER SQ. Ci. 16.0 21.0 26.0 23.5 44.6 28.2PER SQ. XOt. ARICULLTURAL LAND 91.0 100.0 100.0 80.5 140.1 100.3

POPULATJ79 AGE STRUCrTJ (PERCENT)0-1 ns. 45.4 46.6 46.1 40.9 41.3 35.4

15-64 YRS. 52.0 50.8 51.2 54.4 53.3 56.365 TRS. A.'(D ABOVE 2.6 2.6 2.7 3.9 3.5 5.1

POPLATION GROhI'H RATE (PERCEUT)TOTAL 2.9 3.0 3.0 2.4 2.4 1.7URBAN 3.0/L 4.4 4.1 3.7 4.5 3.0

CRUDO SIRTS RATE (PER TIOUSA.'D) 47.0 43.0 41.0 32.J 31.L 27.5CRUDE DEATH RATE (PER ThOUSA:.O) 17.0 13.0 10.0 8.5 9.2 9.1GROSS RE?RODUCTION RATE .. 3.3 3.1 2.4 2.2 1.8FAM.LLY PLA/tI.NG

ACCEPTORS, ANbilAL (THOUSANDS) .. 9.0 32.3USERS (PERCENT OF ARIED WOEN) .. .. 6.3 17.7 34.7

FOOD AND NL-RITIONLnDEX OF FOOD PRODUCTICN

PER CAPITA (1969-71-100) 89.8 101.0 98.0 9.4 104.4 102.0

PER CAPITA SUPFLY OFO.IiS (PERCENT OFREQUlREfITS) 81.0 91.0 93.0 107.0 105.0 120.8

PROTEINS (cRAI-S PER DAY) 46.0 49.Q 47.4 60.4 64.4 80.9OF WiHICH ANLOLL AND PULSE 24.0 22.0 21.9 28.3 23.5 31.3

CHILD (ACES 1-4) MORTALITY RAE Z3.0 16.0 10.0 6.7 8.6 5.1

HEALTHLIFE LE?ECTANCY AT BIRTH (TEALS) 51.0 56.0 59.6 83.6 60.2 65.6NFANT MORTALITY RATE (PER

THOUSAND) 140.0 118.0 .. 76.1 46.7 45.5

ACCESS TO SAFE WATER (PERCErN OFPOPULAIION)

TOTAL .. 34.0 40.0 63.4 60.8 69.4UNW .. 76.0 82.0 79.5 75.7 85.1ILXAL .. 7.0 13.0 38.6 40.0 43.0

ACCESS TO EXC1E-A DISPOSAL (PERCENTOF POPULATION)

TOTAL .. 22.4 35.8 58.s 6.0 70.1URBAN .. .. .. 77.8 46.0 98.3RURAL .. .. .. 24.5 22.3 33.2

POPUATION PER ?9YSICLA.4 *600.0 2370.0 1570.0 1841.9 2262.4 1343.2POPULATION PER NURSING ''RSDY Z2S0.0 1605.0 .. 933.7 1195.4 765.0POPU-AOIIC PER H05PITAL B'I

TOTAL 520.0/f 410.0 .. 563.4 453.4 197.6UR!AS *- 190.0 *- 279.4 253.1 260.2W1L4L .. 4740.0 *- 1140.9 2732.4 1055.0

ADKISSICNS PER HOSPITAL 3E3 .. L7.0 .. 25.7 22.; 17.3

SOU'SIN'CAVERACE SIZE OF HNOSENOLD

TOTAL 5.1/f 5.2 5.3 5.0 5.3 4.7URAN .. .. .. 4.8 5.2 S.4RaRAL .. .. .. 5.3 5.4 5.1

ATERACE .LWER OF PERS0NS PER ROOMTOTAL 2.5/f .. .. 1.3 1.9 1.1UR8AN 2.1/f .. .. 1.3 1.6 1.2RL7RAL 2.8/f .. .. 1.5 2.5 1.2

ACCESS T0 -LI-RICITT (P!R!ENTOF DWELLINCS)

TOT rAL 32.0/f ,., 41.2 54.3 50.3 66.0URBANI 73.5-7 . 4..) 40.1 71.7 35.1

RURAL ~~~~~6.0:77 L.1.6 14.2 17..1

- 21 - Annex IPage 2 of 6

ECUADOR - SOCIAL InDICATORS OATA s.E!'

REFER2£YCE GROUPS (AJ5USTED y.YERACZSCCUAiDOB - MOST iECER TSTS."s) T

SAME SA.E NEXT dIGHERMOST RECENT GEOGRAPHIC INCOME INCOKE

1960 /b 1970 /b ESTUIATE /b 9EGCON /C GROUP /d CROUP le

EDUCA'IONADUSTED E ROLLMENT RATIOS

PRIMARY: TOTAL 83.0 97.0 102.0 107.3 102.5 101.7

MALX 87.0 99.0 104.0 109.1 108.6 110.0

PLXALE 79.0 95.0 101.0 107.4 97.1 92.8

SECONDARY: TOTAL 12.0 26.0 42.0 40.5 33.5 31.2

MAI.Z 13.0 28.0 43.0 40.4 38.4 36.4

?DML6 10.0 24.0 40.0 39.0 30.7 43.7

VOCATIONAL CNROL. (Z OF SECONDARY) 29.0 29.0 23.0 18.5 11.5 18.3

P1IL-TEACRER RATIOPRLIMART 39.0 38.0 38.0 37.1 35.8 27.1

SECONDARY 11.0 15.0 17.0 17.9 22.9 25.3

ADULT LITERACY RATE (PERCENT) 67.5/f 68.0 73.9 77.4 64.0 86.1

CONSUMPTION?ASSENGL.R CARS PER THOUSANDPOPULATION 2.0 3.0 6.4 29.1 13.5 53.4

RADIO RECEIVERS PER THOUSANDPOPULATION 41.0 279.0 .. 172.1 122.7 225.9

TV RECEIVERS PER THOUSANDPOPULATION 0.5 25.0 37.0 67.9 38.3 102.6

NEWSPAPER ("DAILY GENERALINTEREST") CIRC.CLATION RTHOUSAND POPULATION 54.0 41.0 49.0 76.1 40.0 78.5

CINEA ANNUAL ATTENDANCE PER CAPITA .. 4.0 5.6 4.2 3.7 3.6

LABOR FORCETOTAL LABOR FORCE (THOUSANDS) 1400.0 1700.0 2172.0

MLMALE (PERCENT) 16.2 L9.1 20.1 21.5 25.0 24.5

AGRICULTURE (PERCENT) 57.4 50.9 47.0 30.2 43.5 28.9

INDUSTRY (PERCENT) 19.4 22.2 24.0 23.8 21.5 30.6

PARTICIPATION RATE (PERCENT)TOTAL 32.5 31.7 31.6 30.9 33.5 33.8

MALE 54.3 51.0 50.2 47.3 48.0 51.3

'EMALE 10.5 12.2 12.8 13.3 16.8 16.3

ECONOMIC DEP6NDENCY RATTO 1.5 1.7 1.6 1.5 1.4 1.3

INCOME DISTRIBUTIONPERCENT OF PRIVATE INCOMERECEIVED BY

HIGlIEST 5 PERCENT OF fOUSEROLDS .. .. .. 23.7 20.8

HIGHEST 20 PERCENT OF ROUSEHOLDS .. .. .. 58.7 52.1 57.6

LOWEST 20 PERCENT OF HOUSEHOLDS .. .. .. 2.9 3.9 3.4

LOWEST 40 PERCENT OF SOUSE1OLfS .. .. .. 9.9 12.6 11.0

POVERTY TARGET GROUPSESTI.MATED ABSOLUTE POVERTY INCOMELEVEL (USS PER CAPITA)URBAN .. .. 269.0 265.6 270.0

RURAL .. .. 183.0 185.1 183.3

ESTIMATED RELATIVE POVERTY INCOMELEVEL (USS PER CAPITA)

URBAN .. .. 307.0 396.3 282.5 550.0

RURAL .. .. 77.0 308.1 248.9 403.4

ESTIMATED POPULATtON BELOW ABSOLUTEPOVERTY ;NCOME LEVEL (PERCENT)

URRAN .. .. 40.0 35.2 20.5

&URAL .. .. 65.0 46.6 35.3

Sot available.oc applicable.

NOTES

/a 'he adjusted group averages for each *ndicetor are oopulacion-aeLghced geouet-ic %eans, excluding che extreme

valueg of che indLcacor and che zost populated counc-y in each group. Coverage or countrtes arong che

Lndicators depends on vailabilic7 of data and is noc un±*orz.

/b Unless otherwise noced, daca for !960 refer to any year between 1959 and 1961; for 1970, betreen 1969

and 1971; and for most Recent Estlzate. between 1974 and 1977.

/c Latin America & Caribboan; /d tnCermediate Mi!dle Income (S551-1135 oar capoca. 1976); 'e Upper

XLddle Income (31136-2500 per :apoca, 1976); -if 1962; a 1950-62.

Xost Recenc Estimace of CX? per capica is for 197b.

August. 1979

- 22 - Annex I

DEFINITIONS 0? hCIAL. INDZCATORS P g o

Sold: "he ad!ueced group averages for each indicator are populatlon-neighted geometric mans. excluding the extreve -alues of rhe ioOlitor~ 50 th* 000tpopulated country to e&Ac group. Coverage of countries among the indicatere depends on availability of date aod Is mot uniform. Due to lock of data.groUP evarage. for Capital Surplus Oii. Exporterx &ad indicators of acceas to staer aod sectrst disposal, hou..siog. 1nc0me distribution and po-rty are.ia,!. populatlon-waighted gaeomtric seana vichout the enclesion of extreme valuas.

laiD AREA (thecesod sq. km) Population oar hospital bed - total, urban. and rural - Population (total,Iotl~ Total surface ares comprising land area and icluad water.. ..- Dn, an. rural) divined by their respective ouoer of hospital bessAarucult.r&a -M.os renc en etlesco of agricuiltural area used temporarily aeial o ulccd Private genra sz~ opecia-od hospital and ra-or permnety for ..cpe, pastures, earkzatnd kitchen Sardena or to hehi1altto tetes Soepitle ar esellsents praetysafdbli allolw, at least one physician. Establishments providing principally custodial

care, are net Intluded. Rural hospitala, however, include he,alth and sedi-iN? PER WPITA (ISO) - CO? per capita estist..at cc orrent worket prices. cal centesr sot perasenswtly staffed by a phyviclian (but by a sedical a-tabulat;ed by saees onvmersion watned as W'orld Lank Atlas (1975-77 beets): slsteat. nurse. midwife. eto.) ihich offer in-patient accommodation end1960. 1970. and 197 date, provide a limited range of medical facilities.Admissions per boepital bed - Total w.mber of admissions to or diechargeeENEx COOfE1JQ'TID PER CAPITA - Annual cesawmption of commercial energy free hoepitals divided by the ameber of beda.

(coal sod lignite. potroleum. naturial gas and hydro-. nulear and ge-thermal electricity) in kilogram of coal equiailent per capita. 900SIc

A.eraze size of household (parson. per hiousehold) - total, urban, And rural -POPLtIATIO9 AND VITAL STAT2S`TICS A bousehold consiecs of a group of individuals she ehare living quartersutlosouIlation. eld-eT (ailins -As of July 1: if bat availabl. and thall mis male. A boarder or lodger may or may moc be isclded inavrgeo t4 o-et e ae;1.90. 170. And 1977 JIata. the household for statiatical purposese. Statistical dadfinitioas hof oe-

Orban population (percent of total) - Ratio of urban to totial popeala- held vary.rise: different def initions of urbanm ares. soy effect comarability Averaee namber of persons Par ro-. - total. urban, and rural - Aversge am-of dasta Ameng countries. bar of persons por rose in all, arban, e nd rural occupied convgntional

Population density dwellings. respectively. Dwellings exclude onom-parmenent str,ucturee andPer s. km.- Midpsarpopulation por square kileestar (100 hctLares) eomegupied perts..of total ares. ~~~~~~~~~~~~Actees to electricity (percent of dwellines) - total, urban. and rural-Pot sq. km. agriculture land - Coeu"ted ass abov, for agricultural Land Conventional dwellings with elactricity tn living quarters as percentageonly. of total, urban, And mrarl dwellings respectively.

population see scruccture (Percent) - Children (0-li years). working-asee(l5-6i years), * d retired (65 yeere and "ovr) as perceatagee of aid- EVUCATIONyear population.' Adjusted entoilsiont ratiosPopulation orreth rats (mecant) - mcci1. end urban - C~ouped anual Primary school - total, sod femasle - Inorl and femsale enrollment of all agesgrowth rates of total and urba mid-year poputlations for 1950-60. et the primary level ase percentages of respectively primary sc:6ool-age1060-70. and 1970-75. -population.; normailly includee children agd h-1l years but adjusted forCr.do birth rece (per thousand) - Annual live birthe por thousand of different lengths of primary education.: for countries with univereal edu-odd-peer population; ten-year Arithmetic everags ending in 1.960 san catimn enrollment may anteed 100 percent sing. so pupils aire belom or1970 aod five-year average endling to 1975 fo orreetec=as bv the o,ffilcial school &se..

Crude death rste (Per thousand) - Annual desthe per thousand of mid- Seconar hscho _ total, And female - Computed as above: secondary educa-year population; ten-year aritheecic Aeyerges, ending In 1960 and 1970 tims requires at laest four years of appro...d primary instruonlen pro-end five-year average ending in 1975 f or met recent estimete. videa general vocational. or teacher training instructions for pupilsGros rerdcinrc vrg ee fdsbeeawmnwl erusually of 12 to 17 yeare of age; correspondenc*e orses are gemerallyinbr noma oproductive period If sbe seperienctes pr"esen age- scldded.

specif ic fertility rates; aesally live-year evergat"maening in 1960. Vocational enrollumet (percent of secondary) - vocational institutions in-1970. end 1975. clads technical, industrial, or other~ Programe which operat* independentlyFamily nlaianis - acceptors. annual (thousands) - Amenal ember of or AS departemenateo secondary institutions.ecceptors of birth-toatrol devices under enspicas cf national. fondtly Putil-teacher ratio - pricear,, And secondery - Total students enrolled inplanning prosren. primary and secondary, levele divided by numbers of teacthers is the corre-Family Planning - users (ecnt of mairried .eeeen - ?ercntage, of speeding levels.earneod w*me of child-bearig age (15-iA yesre) who use birth-control Adult literacy rate (percen -Literate adults fable to re"ad nd write) aedevices to aLL, married woe in same age group. e percentege of tota adul population aged 13 years sod "ovr.

P000 ANDO NTRITION CNUTOIndex of food prodeccio perfc sntf (1970-100) - eDM= wmber of per Pasene rscr (per thoueand populaciool - Paseangar care compris enter carecapita annual produCtion oa alfo commdtlte. seating loss than eight persons: ancludes embulancas, hearse. and mIlitaryPer capita anpil, of calories (percent of recuiremets) - Geepoted free vehicles.

energy equivalent of nec food supplise available In country per capita Sadio receivers (per rhousend oovulstio) - All types of receiver. fOr radioper fey. Available supplies cemprime domestic predection. Impete lean, brodcasts to guneral public per thousand of population: exicludes unlIcemsedexprts. and chenges in etock. Not supplies migclude amimal feed. osad. - receivers is countries and in years whins registration of radio eats se inquantities sed in feed proc-seing. sod lessee is distribustion. Ria- effect; data for recet ypare map nt be coamparble since -ast cowetrie.qulr~ts were eticmated by FAO henn on physiologinal soeds for nor- abolished liceneing.eel activity and health considwrniG enviroenstal toeratura, body TV recaivers (sec thousand oeuj.agionl - TV receiver. for broadcast to generd.weights, ape Mid sen distributions of pepealaien. end allowing 10 per- public per thousnd population; sxcludee unlicmensd TV receivers in toun,cent far wastat houehold Leval. trise And in years shen registration of TV sets wa in affect,Par caita cooyo rti re e a)-Poenceeof f e esae iclto huadPeo" aton) Shewe the average circnla-

capit sotsuppl of oed pr da. se suppy effeed s da imedus tO~ o dly eealitrecnwsae defined an a periodical publi-above. Requirements for all coentrios established by USDA provide for cation devotd primarily to recording gwensral maws. It is considered t.oa mi.nim,i allewang" of 80 gram Of total protein per day ad 20 grow ha 'daily' if it appease At least four tufts a week.of animal and pulse Protein, of which 10 grom -- culd be antual protein. Cinem senxual attenidaince per capita per year - aseed on the number of ticketsThese standards are, lower ta chose te of 75 grin of total proesin sod "Id during the pear. Including admissions to drive-is cioens eaid mobile,23 gremn of sanimal protein As as average for the world. propsue" by unite.?At in rho ThiLrd Wforld Food Survey.

Per capita procaln ounslv fre animal and sales - Prtetin supply of food DQLO.ThDVderived free animals &An pulis : in gre per day. Total labor force (thousands) - Economically active persoma. locluoding armedChild (.zes 1-f.) mortality rate fper thousand') - Aemal deathe per thouse- forces and unployed but excluding housewives. students. etc. Deini-seed in age group 1-i years. to children in chic age group. tlions in venousw countriessear not comparable.

Femle nerent - exale labor force as percentage of total labor forte.REmiT! giutr (ou trec) - Labor forces to farming, forestry, hunting and fishingLife expecctancl at birth fYsar.) - Average sensor of years of life to percentage of total labor force.remneinig at birth; usually five-year syering ending in 1960. 1970. industry (percent) - Labor force in mining, construction, manufacturIng aed

end 1973. electricity. voter and gas se pe~~~~~~~~rcentge of total labor force.isf.n wartalcrats (per thousand) - Anneal deethe of infunts under Part Icip.ion rer pearcent) -ttlml, dfeae-Total, male. ando.a pear of age per thousand live birbts. lemale labor forts as parc-ents.s of theif respective populations.Access to safe uscer (percent of Population) - total, urban. end rural -These are MLOes adjuted participation raese reflecting a ......q,mber of paopia (total, urban. a"d.rural) with reseenble acaose to structure of the population, end ilor tins trend.nafe s&agr supply (includes treated eurface utsrer or untreated bug fccnoaic dpoundeocy rari. - Ratio of popu.lmation der II end hi .. d ov.erturc:onzetiatised water such as that from protected borebhole. springe. the labor force io age group ot 13-h'6 vests.and sanitary wells) us percentaga. of their respetive populations.to an urban area a public fountain or scsaidpost lecaced not sore INCOME IISIRIBLnIToNtitan 200 meters from a house may be considered as being within rea- P-rcent-g of Metvac incom (both 10 cash and kind) received hy richost Ssonable acceass of that house, In rural areis ressomble aeccess would percent. richest 2i percent. poorest 20 percent. end poorest A0 percentmply chat the, houseelfa or amebere of the household do sate have to of households.upend . disproportionate, part of the day in fetching the fnily '.wster ned.PovETy TARE RLP

Access to esrts disosoal (percent of population) - total, urban. and ivsrimted abZs.jolut ovrty income level (USS par capita) - urban, and rura.. rural - Number of people (total. urban. sod rural) served by ancrsta Absolute poverty income level to that Income lvel oslos whico . etnimaldispoasl as percentages of their respective populations. Excrete outritionally adqueite diet plus eseantial non-f eod requiremiscs is notdisposal soy include the collection end disposal, with or without Affordable.:reatoenit, of human excrete 4ad waste-ust-c by wintr-borne systems Etcimaced rltvepvertY incom leve (US0 p-r capita) - urban *0 rurl1or chs use of pit privise sod salalar instal1lations. Relative poverty income level is that Income leval lees tham one-thirdPopulation par ph-ysicia - Population divided by n.ber of practicing per c.pigs personal income of the, country.physicians qualified from a medical ecbocl at university level. ' Estimated Popuagtion below, poverty intone level (Percept) - urban and rural-Population par nursing person - PopulatIon divided by number of Percent of population (urban and rural) whsoer. either "absolute poor"opracticing eels And feomale graduate nurses. practical nurses. and "relative poor" whichever is greater.useintantc nurses.

Economic end Social Data Divisiontconoeic Anelysis And Projections Department

- 23 - Annex IPage 4 of 6

ZCUADOI - ECONOMIC DIDICATORS

Population 7,600 (mid-1978. thouands)GIP Per Capita, US$ 910 (1978)

Ameunt Anmnul groeth rate (2) At conetant prices

(million US3Indicator at current priees) Actual Projected

19781974 1975 1976 1977 1978(e) 1979 1980 1981 1982 1963

NATIONAL ACCOUNTS

Gross domestic product (a) 7482 7.1 5.6 '7.1 6.1 5.3 5.0 5.0 6.0 6.0 6.0Agriculture 1531 6.1 6.4 4.1 1.1 1.1 3.5 3.5 3.5 3.5 3.5Industry 2622 4.3 3.2 9.4 5.1 9.5 9.5 9.5 9.5 9.5 9.5Services 3329 8.4 7.1 6.9 9.4 4.2 -13.1 1.8 4.1 3.9 3.7

Consumption 5593 17.4 6.6 5.2 11.7 3.3 13.0 4.3 7.4 6.7 6.6Gross investmnt 1970 33.5 14.2 -0.2 9.5 -3.3 -10.7 6.1 6.0 11.3 11.0Exports of CGS 1764 1.8 -6.8 10.2 -9.2 13.5 7.7 3.7 3.6 3.9 2.8Imports of GNFS 1844 68.0 4.3 -2.8 10.6 -3.0 15.0 2.6 8.1 10.7 9.5

Groes etieoml savings 1716 26.3 2.2 4.1 15.4 0.3

.ICKs

G? deflator 100 63.2 69.2 77.7 90.9 100.0Iuezasge ret. 25 25.0 25.0 25.0 25.0 25.0

Share of GOP at Market Prices (S) Average Amual Increase (S)(at current prices) (b) (at constant Orices)

1960 1970 1975 1980 1985 1960-70 1970-75 1975-80 1960-85

Gross domestic product (a) 100.0 100.0 100.0 100.0 100.0 5.8 11.1 5.6 6.0Agriculture 33.3 27.6 22.8 19.9 17.6 4.0 5.4 2.4 3.5Industry 19.3 23.0 34.8 38.1 44.8 7.3 20.7 8.5 9.5Services 47.4 49.4 42.4 35.7 31.9 6.6 8.0 1.1 3.7

Consumption 84.6 82.0 75.2 79.9 82.4 5.0 9.8 7.8 6.6Gross investment 14.0 22.5 28.4 22.6 24.9 18.7 12.2 -0.6 8.5Exports CGUS 17.2 14.9 26.0 23.9 20.7 2.7 15.8 4.8 2.9Imports GNFS 15.7 19.4 29.7 26.4 28.0 10.9 12.6 4.8 7.3

Gross natiLeal savings 12.9 16.2 23.3 - - - -

An Z of GDP

1960 1970 1975

PUBLIC FINANCE (f)

Current revenues 11.4Current expenditures n, 6.6Surplus (+) or deficit (-) 4.8Capital expenditure 2.5Foreign financing

1965-70 1970-75 1975-80 1980-85

OlTHER INDICATORS

GMN growth rate (S) 5.8 9.3 5.2 6.2GNP per capita growth rate (S) 2.5 6.3 2.2 3.2Energy consumption growth rate (2) - - 11.7 7.8

ICOR 2.8 2.6 4.8 4.0Marginal savings rate -0.4 0.3 0.1 negi. (g)Import elasticity 1.9 1.1 0.8 1.2

(a) At market prices; cowponents are empr eed at factor cost end wll not add due to exclusion of net indirect taxes end moboidi_e.(b) Projected yearn at ceentaat pricee.() sti_mte.(f) Central govermet only.

(g) Because of the declining contribution of petroleum to savings, from a very high level,the marginal savings rate vould be negative in these years.

Annex I- 24 - Page 5 of 6

ECUADO! - EXTERNAL TRADE

Pmpmistion : 7 600 (mid-1978. t iounds)GNP Per Capita US$910 (1978)

Aimual Growth Rat" (X)(at constant 1978 prices)

Amount --Indicator (million US$ t Actual Projected a/

current prices)197S 1974 1975 1976 1977 1978 e/ 1979 1980 1981 1982 1983

EmIRIAL TRhADE

Merchandise *xports 1532 -1.2 -13.7 14.0 -10.4 13.3 5.4 3.5 3.3 3.6 2.4Primry 1532 -1.2 -13.7 14.0 -10.4 13.3 3.9 2.6 2.3 2.6 0.9Manufactures - - - - - - - 6.5 6.7 6.8 7.0

Merchandis, imports 1512 34.1 3.5 5.5 47.1 4.6 9.1 7.5 7.4 10.2 9.5Food 28 62.9 125.7 -54.4 220.6 77.3 9.9 5.5 9.5 8.7 8.7Petroleum 11 131.9 -66.0 -92.5 17.7 14.2 -10.9 177.6 41.9 40.9 14.0Machinery and quipment 767 -6.1 42.7 4.6 73.5 9.2 10.0 6.0 5.9 11.4 11.0Others 706 27.2 34.6 35.6 28.7 2.1 8.4 7.1 7.7 7.6 7.6

PRICES

Export price index 100 100.2 86.5 98.6 U8.3 100.0 135.9 181.4 189.9 202.1 205.2Import price index 100 60.1 61.6 65.0 95.6 100.0 98.2 118.0 133.2 151.3 164.8Term of trad indx 100 16.7 140.4 151.7 92.4 100.0 136.4 153.7 142.6 133.6 124.5

Composition of Merchandise Trade (X) Average Annual Increase (Z)(at current prices) (at constant 1978 prices)

1965 1970 1975 1980 (985 1965-70 1970-75 1975-80 1980-85

fxports L30.0 100.0 100.0 100.0 100.0 4.9 33.2 -4.2 2.5Primary 100.0 100.0 100.0 76.6 71.1 4.9 33.2 -4.2 1.0Kanufactures - - - 23.4 28.9 - b/ 7.0

Laports 100.0 100.0 100.0 100.0 100.0 8.3 14.9 14.2 7.7Food 2.3 1.3 1.8 1.8 1.9 0.2 22.7 39.0 8.5Petroleum 8.2 6.2 1.5 1.5 0.3 18.4 -15.8 -16.4 -27.2Machinery end equipmnt 28.3 29.9 46.0 50.3 51.2 9.9 22.2 20.4 8.4Others 61.2 62.6 50.7 46.4 46.5 5.0 13.5 12.7 7.6

a/ Projected years: 1970=100.b/ Processed food exports were reclassified as manufactures in 1980;

therei'ore 1975-1980 grouth rate would not accurately reflect changes inexport volume of these goods.

e/ Estimate.

- 25 - Annex IPage 6 of 6

ECUADOi - LAINCZ OF PAKIT5, REXRAL CAPITAL MID DEBT

(dllio_ USS at current prices)

Population: 7,600 (did-1978, thousands)GNP per Capita: US$910 (1978)

Actual Projected

Indicator 1970 1974 1975 1976 1977 1978(e) 1979 1980 1961 1962 1963 1965

BALANCE OF PAYIENTS

Exports of goods and services 259 1333 1127 1432 1628 1769 2496 3374 3665 4041 4209 41.71

Of which: Merchandiee f.o.b. 235 1225 1013 1307 1401 1532 2194- 3031 3279 3614 3758 3664

rmports of goode and services 389 1327 1379 1469 2006 1976 2601 2968 3512 4257 4977 5432

Of which: Merchandie f.o.b. 250 875 1006 1048 1361 1315 1626 2101 2545 3185 3798 3949

Not transfers 17 31 32 31 36 44 40 40 40 40 40 40

Current account balance -113 38 -220 -6 -341 .163 -65 426 193 -176 -728 -1331

Private direct invetunt 89 77 95 -20 34 40 50 60 60 60 60 60

MT lo ns (net 26 -7 133 161 513 267 552 -63 -18 -29 562 1315

Official 8 17 49 70 51 77 s0 103 161 195 214 195

Private is -24 U 91 461 190 472 -167 -179 -224 347 1120

Other capital 9 2 -72 39 44 -107 466 20 20 20 20 20

Change in reserves -10 -110 64 -174 -121 -37 -71 -443 -255. 125 87 -174

Internatioeel reserves 179 428 364 536 650 687 758 1201 1456 1331 1244 1358

of icbe old 16 16 16 17 17

Iaarees *ae tlh irto 4 4 3 4 4 4 3 5 5 4 3 3

KIURAL CAPITAL AM DIST

Gross DisbursswntsOfficial grants - - _ _ _ _

Concessional loans 12 17 40 45 31 21

DAC 9 12 IS 25 12 9

OPEC -IDA 2 4 7 3 5 1

Other 1 2 18 17 14 11

Non-concessional loans 30 54 125 173 554 482

Official exports credits I 1 7 18 23 49

IBRD 2 5 10 4 a 22

other multilateral 0 6 4 18 10 8

Private 26 41 104 133 514 403

External Debt (a)Debt outstanding and

disbursed 213 327 457 619 1146 1563

Official 151 207 253 324 384 474

Private 62 120 204 295 762 1089

Ulndisbursed debt 139 272 322 449 623 687

Debt serviceTotal service paYments 24 94 50 82 117 204

Interest 7 17 17 25 45 96

Payments as 1 exports 9.1 7.1 4.5 5.7 7.2 11.7

Average interest rate on new loane (S) 6.2 5.8 7.4 7.9 7.9 8.2

Official 3.0 4.8 6.6 7.7 7.0 4.4

Private 7.6 11.5 8.2 8.0 8.1 9.3

Average uturity of naw loans (yeare) 19.7 25.3 10.6 11.2 10.2 12.1

Official 37.9 28.1 15.9 19.3 18.7 27.9

Private 12.0 9.2 6.4 7.3 7.6 7.2

As 2 of Debt Outstandingat End of Most Recent

Year (1978)

Maturity structure of debt outstandingPrincipal due within 5 years 60.7

Principal due vithin 10 years 106.0

Interest structure of debt outstandingInterest due within first year 7.6

(a) This table includes non-guaranteed private debt starting in 19 7

i*

(e) Eatinate.

- 26 -ANNEX IIPage 1 of 6

THE STATUS OF BANK GROUP OPERATIONS IN ECUADOR

A. STATEMENT OF BANK LOANS AND IDA CREDITS* (as of April 30, 1980)

--- US$ million---------Loan or (less cancellations)Credit Fiscal AmountNumber Year Borrower Purpose Bank IDA Undisbursed

10 loans and 4 credits fully disbursed 85.5 28.0

124 1968 (IDA) Ecuador Education - 5.2 .5555 1969 Ecuador Fisheries 4.3 - .5425 1974 (IDA) Ecuador Irrigation - 5.5 1.11030 1974 Empresa Water Supply 23.2 - 7.2

Municipal deAgua Potablede Guayaquil

1157 1975 Ecuador Education 4.0 - 3.81229 1976 Ecuador Seeds 3.0 - 2.31230 1976 Ecuador Technical 4.0 - 3.6

As si stance1231 1976 Ecuador Highways 10.5 - 4.11255 1976 Guayaquil Ports 33.5 - 16.0

Port Authority1359 1977 Ecuador DFC 26.0 - 3.21429 1977 Ecuador Highways 17.5 - 12.01459 1977 Ecuador Agriculture 15.5 - 14.2S006 1978 Ecuador Technical 11.0 - 10.8

Assistance1644 1978 Ecuador Rural Development 18.0 - 18.01731 1979 Ecuador DFC 40.0 - 40.01776 1980 Ecuador Guayaquil Urban

Development 31.0 - 31.0

Total 327.0 38.7 168.3of which has been repaid 64.8 0.7

Total now outstanding 262.2 38.0

Amount sold 4.1of which has been repaid 2.1 2.0 _

Total now held by Bank and IDA 260.2 38.0

Total undisbursed 166.7 1.6 168.3

*Includes exchange adjustments.

- 27 -ANNEX IIPage 2 of 6

B. STATEMENT OF IFC INVESTMENTS (as of April 30, 1980)

Type of -Amount in US$ Million-Fiscal Year Business Loan Equity Total

1966 & 1972 La Internacional, S.A. Textiles 3.7 0.2 3.9

1969, 1973, Compania Financiera1975 & 1977 Ecuatoriana de Desarrollo,

S.A. (COFIEC) DFC - 0.4 0.4

1976 Sociedad Agricola e Industrial Sugar Mill 5.0 - 5.0San Carlos, S.A.

1978 La Cemento Nacional CEM Cement 12.0 1.0 13.0

1980 Adamas Andina S.A. Pulp andPaper 3.3 1.0 4.3

Total gross commitments 24.0 2.6 26.6Less cancellations, terminationsrepayments and sales 3.8 0.4 4.2

Total commitments now held by IFC 20.2 2.2 22.4

Total undisbursed 10.7 1.2 11.9

- 28 -

ANNEX IIPage 3 of 6

C. PROJECTS IN EXECUTION I/

Credit 124-F' - Education Project: US$5.1 million Credit of June 27. 1968;Effective Date: August 30, 1968; Closing Date: December 31,1980.

The project has faced difficulties from the start and is nowabout seven years behind schedule. Many of the 28 schools involved stillrequire some work, consisting primarily in the completion of laboratoriesand workshops and in the installation or completion of electricity, waterand sewerage connections. The present Government has indicated its willing-ness to complete the project and an inventory of the work remaining to be donehas been prepared. The construction/rectification process is progressingsatisfactorily with the Government's support and should be completed by end1980.

Credit 425-EC - Milagro Irrigation Project; US$5.5 million Credit of August 17,1973; Effective Date: January 17, 1974; Closing Date:December 31, 1980.

The project aims at increasing agricultural production in an areacovering about 7,000 ha. More than 80 percent of the Credit for irrigationand road infrastructure, equipment and vehicles has been disbursed. However,there is need to plan and implement on-farm development, including provisionof production-support;ng services such as applied research, agriculturalextension and credit. Land titling should be completed by mid-1980. Aproposal for reprogramming of project activities by the Ecuadorian WaterResources Institute--in consultation with the Ministry of Agriculture and theNational Research Institute and assisted by outside consultants--was presentedto the Association in early 1980, and is directed at supporting on-farmdevelopment. The proposal, however, does not fully resolve issues relatedto completion of the irrigation system, on-farm development and credit.The balance of the Credit may, therefore, be cancelled.

Loan 1030-EC - Guayaquil and Guayas Province Water Supply Project; US$23.2million Loan of July 23, 1974; Effective Date: January 29,1975; Closing Date: June 30, 1981.

Project execution has been delayed by frequent managerial changes,lack of counterpart funds and slippages in the hiring of consultants. As aresult, the project is now about three years behind schedule. Recently, projectexecution has improved and construction is now underway on 90 percent of theproject components. Because of the delays, however, the project faces severe

1/ These notes are a? igned to inform the Executive Directors regarding theprogress of projects in execution, and in particular to report any prob-lems which are being eucountered, and the action being taken to remedythem. They should be read in this sense, and with the understanding thatthey do not purport to present a balanced evaluation of strengths andweaknesses in project execution.

- 29 -ANNEX II

Pope 4 9 6

cost over-runs and a serious problem of counterpart funds. 2Iore specifically,the Guayaquil Water Company requires about US$40 million through 1982 from theGovernment or from increased water tariffs to complete the project. In March1980, the new Government provided a US$17 million loan to the Water Company.An extension of the closing date will be necessary to permit completion ofcivil works.

Loan 1157-EC - Vocational Training Project; US$4.0 million Loan of September 3,1975; Effective Date: November 24, 1975; Closing Date:June 30, 1982.

Project implementation is 2-1/2 years behind appraisal scheduledue to frequent managerial changes, serious financial problems and technicaldifficulties with the design and space standards of the Quito and Guayaquiltraining centers. A Vocational Training Law was enacted in October 1978which is helping to resolve many of the financial and management problemsand the present Government has shown strong support. Bidding for equipmentpurchase and construction of the training centers is expected to take placeshortly. The closing date was extended by two years to permit the project'sconclusion.

Loan 1229-EC - Seeds Project; US$3 million Loan of May 24, 1976; EffectiveDate: October 20, 1976; Closing Date: June 30, 1980.

Project execution and loan disbursement have proceeded more slowlythan anticipated, but recent Government actions have reactivated the project.The implementing institutions (National Seeds Council, Improved Seeds Company,Department of Seed Certification and the Project Unit) have been establishedand staffed. The Improved Seeds Company, however, is not yet operating atfull capacity and thus is unable to cover its expenses or amortize its portionof the loan. Procurement for works and equipment of the seed plants isunderway, and the National Development Bank has indicated it will provideinterim financial support to the Seeds Company. An extension of the closingdate by 18 months will be necessary to pernit completion of construction.

Loan 1230-EC - Technical Assistance Project; US$4.0 million Loan of May 24,1976; Effective Date: October 20, 1976; Closing Date:December 31, 1980.

This project financed preparation of the Bank's first rural devel-opment project in Tungurahua Province and will support final studies foranother in Esmeraldas Province. Recent amendments proposed would permitEcuador's military mapping institute to undertake the aerial studies of theGuayas Basin, on the basis of which topographic and prefeasibility studies canbe done for the region. This study would absorb over half of the loan resources.Road and land use studies for a site in Esmeraldas Province are in contractingstages. Selection of experts to work with the Rural Development PlanningUnit is expected to take place by late 1980. These recent Government movesshould help to accelerate this long-delayed project. The closing date wouldhave to be extended to permit completion of the extensive topographical workin the Guayas Basin.

- 30 -ANNEX IIPage 5 of 6

Loan 1231-EC - Fourth Highway Project; US$10.5 million Loan of May 24, 1976;Effective Date: October 13, 1976; Closing Date: December 31,1981.

After an initial delay of twelve months in the contracting process,all civil works and technical assistance elements under the project are inexecution and advancing satisfactorily, although civil works are about sixmonths behind contract schedule. The technical assistance programs arealready showing their positive effects on highway planning, engineering andmaintenance. The project closing date has been extended to permit completionof the preparation studies for a rural development project in the PuertoIla-Chone area, as well as civil works.

Loan 1255-EC - Second Guayaquil Port Project; US$33.5 million Loan of May 24,1976; Effective Date: March 11, 1977; Closing Date:December 31, 1981.

Although design and price disputes initially hindered the project'sexecution, works are now progressing satisfactorily and project problemsare minor. Dredging and reclamation have been completed, piling and deckingof the wharfs have advanced to about 30 percent, and buildings and otherstructures on land are 20 percent complete. By April 30, 1980, 48 percentof the loan amount (or US$16.0 million) had been disbursed. Civil works areexpected to be completed by end 1980 and the entire project by June 1982. Anextension of the closing date will be necessary.

Loan 1359-EC - Third Development Banking Project: US$26.0 million Loanof February 18, 1977; Effective Date: August 9, 1977;Closing Date: June 30, 1981.

This project is one of the Bank's success stories in Ecuador.Project commitments have proceeded faster than anticipated and now standat UJS$23 million. Since new financieras that were expected to receive theremaining US$3 million under this loan were unable to meet the criteriarequired for participation, at the Government's request the project wasmodified to permit these financieras to have access to Bank funds throughCFN, Ecuador's largest finance company.

Loan 1429-EC - Fifth Highway Project; US$17.5 million Loan of September 22,1977; Effective Date: January 10, 1978; Closing Date:June 30, 1981.

Construction of the Duran-Boliche road, which represents 60 percentof total project costs, is proceeding on schedule. Design changes on thisroad have, however, generated an increase in costs. Construction of thePuerto Ila-Doblones road is a year behind schedule and construction of itslateral feeder roads has not yet begun, which could further delay projectexecution. The study of regional secondary and feeder roads in three provinceshas been completed and is serving as the basis for the proposed Sixth HighwayProject.

- 31 -ANNEX IIPage 6 of 6

Loan 1459-EC - Agricultural Credit I Project; US$15.5 million Loan ofNovember 3, 1977; Effective Date: June 14, 1978:Closing Date: December 31, 1982.

The loan continues a program of credit for livestock developmentfinanced under three previous loans and credits, but has been broadenedto cover crop farms, small rural industries and local consulting services.In addition, there are applied research and technical assistance componentsas well. The National Development Bank (BNF), the largest lender in theagriculture sector, delayed participation in the project to allow time totrain staff but recently began to make commitments. Thirteen banks andfinancieras now have signed participation agreements. Arrangements have beenmade with the Ministry of Agriculture and Livestock and CREA, a regionaldevelopment agency, to coordinate the provision of extension services withdevelopment credit to small farmers. Disbursements are accelerating.

Loan S-006-EC - Second Technical Assistance Project; US$11.0 million Loan ofNovember 3, 1977; Effective Date: March 1, 1978;Closing Date: January 31, 1982.

This project has moved ahead at a disappointingly slow pace andtwo years after effectiveness, only about US$200,000 has been disbursed.Contracts have been signed for three of ten selected studies and work isprogressing on drafting satisfactory terms of reference and on bidding andcontracting for most of the others. The project list has undergone revisionand a final list is being prepared with the present Government. A changeof status of the experts to be hired under the project is being negotiatedwith UNDP, so that experts' services would be financed with loan resources.

Loan 1644-EC - Tungurahua Rural Development Project; US$18 million Loanof May 11, 1979; Effective Date: September 28, 1979;Closing Date: June 30, 1985.

This integrated rural development project is just getting underway.A Project Unit has been established and experts have been recruited.

Loan 1731-EC - Fourth Development Finance Project; US$40 million Loan ofDecember 17, 1979; Effective Date: July 15, 1980; ClosingDate: June 30, 1983.

This project, a follow-up to earlier successful loans, is expectedto disburse quickly as participating DFCs have a backlog of industrial sub-projects under review.

Loan 1776-EC - Guavaquil Urban Development Project; US$31 million Loanof May 9, 1980; Effective Date: August 12, 1980; ClosingDate: June 30, 1985.

This project was approved December 11, 1979 and was recently signed.

- 32 -ANNEX IIIPage 1 of 2

ECUADOR

SMALL SCALE ENTERPRISE CREDIT PROJECT

SUPPLEMENTARY PROJECT DATA SHEET

Section I - Timetable of Key Events

(a) Time taken by Country to prepare project: 7 months

(b) Project prepared by: CFN with assistance from Bank staff

(c) First presentation to the Bank: June 1978

(d) Identification of Project: September 1979

(e) Departure of Appraisal Mission: November 1979

(f) Planned Date of Effectiveness: January 1981

Section II - Special Bank Implementation Actions

None

Section III - Special Conditions:

(a) All subprojects would be reviewed by Fund staff and thosereceiving subloans above US$150,000 would require prior Fundapproval. This limit would be adjusted from time to timeas needed. The Bank would review and comment on the first sub-loan over US$50,000 from each financial intermediary and wouldapprove all subloans over US$250,000. Subject to review 6 monthsafter the project begins, an economic return would be calculatedfor subprojects requiring subloans of US$150,000 or more.Subject to review no later than 18 months after loan signature,no single financial intermediary could commit more than US$12.0million in project funds (para. 64). The maximum amount inproject funds which could be onlent to a single SSE would beUS$300,000 (para. 63);

(b) CFN would take all action necessary to change the Corporation'sfee and commission structure by June 30, 1981 to permit maximumallowable charges (para. 61);

(c) CFN would adopt a policy statement, operating procedures,an organizational and staffing plan and project appraisaland supervision guidelines satisfactory to the Bank forthe Fund (condition of loan effectiveness, para. 57);

- 33 -ANNEX- IIIPage 2 of 2

(d) the Government and Central Bank would enter into a fiscalagency contract satisfactory to the Bank. The Governmentwould also make a US$6 million capital contribution tothe Fund in three installments. The first US$3,000,000would be a condition of loan affectiveness. The depositingof installments of US$1.5 million each by no later thanJune 30, 1981 and October 31, 1981 would be conditions ofdisbursement for the final US$10 million and US$5 million ofthe proposed loan (para. 55);

(e) the Central Bank and CFN would enter into a subsidiaryloan agreement, satisfactory to the Bank (condition ofloan effectiveness, para. 56);

(f) CFN and each financial intermediary would enter into aparticipation agreement, satisfactory to the Bank, asa condition of disbursement of loan proceeds to thatfinancial intermediary (para. 57);

(g) a Technical Cooperation Committee--including representativesof CFN, MICEI and the National Federation of Chambers ofSmall Industry--would be established. Agreements, satis-factory to the Bank, would be entered into by CFN, MICEIand the Federation to govern the provision of CFN grantsfor technical assistance to SSEs (para. 59).