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The World Bank

FOR OFFiCIAL USE ONLY

MICROFICHE COPY

Report No. :P- 6065-ALE Type: (PR) Rejot No. P-6-ALSTitle: AGRICULTURE SECTOR ADJUSTMENTAuthor: DETHIER, J.J.Ext. :32510 Room:H11045 Dept. :EC2AW

REPORT AND RECOMMNIDATION

OF TUE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A }PROPOSED

AGRICULTURE SECTOR ADJUSTMNr CREDIT

IN AN AMOUNT EQUIVALENT TO SDR14.2 MILLION

TO

ALBANIA

June 4, 1993

Agriur nd Water Supply Opeatons DivisionCentra Europe DepartmentEurope and CentalAsia Region.

This doment has a rsticed Adstribuon Nd may be used by reiients only in the perfonmae oftheir offial duls Us contets may not otewise be discosed vithout Word Dan authorizakon

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CURRE1CY EQUIVALEIS AND AVERAGE EXC1ANGE RATES

Cuq Unit a Lek

le.. - AD. Sept. D. Jan. - Jnos JX - Do. My

129O m2 1221 ma maLek per US$ 8.00 10.00 25.00 50.00 100.00 110.00

WAGND AN MEASRMEENTS

Metric System

ALBAM A FISCAL YEAR

Ianuary 1 - December 31

ABBREVIATIONS AND ACRONYMS

AB Agricultural Bank IWAD Iterational Fund for Agricultural DeveopmentAl Artifical Inseminadon IFC nterational Finance Corporadon

APO Agricultural Program Office JLU Independent Lding UnitASAC Agricuture Sector Adjustment Credit IM Iternatdonal Monetary FundBAD Bank for Agriculture and Development KfW dttalt r WledeufbauBOA Bank of Albania MIGA Multilateral Investment Guarantee Agey

CC Coordang Committee MlS M ent In ation SystemCEO Chief Executive Officer MOA Mitry of Agrture and FoodC1P Cost Insurance Freight MOP Ministry of Finance and EconomyCIP Critical hIpors Project (IDA) NAP National Agency for PrvaizatonCIS Commonwealth of Independent States NCB National Commerci Bank

CMEA Councl of Mutua Economic Assistance OD Opational Directive (IDA)CPF Coupart Funds OE Overseas Ecowmic Cooperatio FundEC European Community PICU Project Ilemeion and Coordination Uni )

ECU European Currency Unit PFP Policy Frmeork PaperEFSAC Enterprise and Financial Sector PHARE Assistamce Program for Eastem Europe ( C

Adjustment Credit (IDA) RCA Revolvlg Credit AccuntERA Enterprise Restrucring Agency SB Savings Bank

ESAF Extended Structu Adjustment Facility SBA Standby Agreement M)ESU Enteprise Support Unit SDR Special Drawing RightFAO Food and Agriculture Organiaton SFA State Farm Agency

FY Fiscal Year SITC Standard International Trade icatoGDP Gross Domestic Product SME Small and MediumScale EnterpriseG-24 Group of 24 SOE State-Owned EnterpriseIAS Intetio Accouting Stndard SSND Social Saf Net Deveopment Poject (IDA)lCDB Intrnational Competiive Bidding TA Te ical AssistamceIDA Iational Development Association WHO World Health Organization

FOR OFFICL USE ONLY

&GRICML SELCTOR ADJUND= ON=

TABLE OF CONTENTS

CREDIT AND PROGRAM SUMMARY .................................

PART1I. THE MAC&QEC ONOM FRAMEWORK ........................ IA. Recent MacroeconomicDevelopmenu ............................. :B. Entrd Accounts andFinancingRequirement ...................... 4

PARTI. BANK OPERATIONS AND WORKPROGRAM ..................... 4A. LendingandSectorWork .................................... 4B. ASAC Links with Other Operations ..... 9

PART m. THEAGRICULTURAL SECTOR ............................. 10A. Strucure and Performance of the Sector .......................... 10B. Economic Potental and Factors Constraining Gowth .................. 15

PART IV. THE GOVERNMENT'S SECTOR ADJUSTMENT PROGRAMSUPPOR EBY ASAC ................................... 16

A. Introduction .......................................... 16B. Objectives oftePogan ......tI..e............................ 17C. ProgramComponents ..................................... 17

(t) Agricultural Price ad Incentive Fram ork ................ 17(ii) Restructung of the Rural Crdit System .................. 22(iii) Privaization ofStateFams .......................... 26(iv) Development of the Legal and Regulstory Framework

for Land Policy .................................. 28(v) Privadzaton of Stat-wned Marketing and Processing Entrpriss

and Enabling Environrment for Private Sector Development .... ... 31

PART V. TH PROPOSED and U..... 36A. Credit Objectives, Amount andUseofFnds . ..................... 36B. CredikConditions ....................................... 36

(i) Quick-disbursing Component Conditionality ............... 36(ii) InvestmentComponent ...... ....................... 38

C. Procurement, Disbursements, Accounts and Audit ..... .............. 40D. Coordination, lmplementation and Monitoring ................. ..... 42E. Technical AssistanceProgram ....... ......................... 43F. BenefitsandRisks ....................................... 45

PART VI. COLLABOPATION WfTH IME, EUROPEAN COMMUNITY AMDOTHER DONORS ................................................ 46

pARTVI. ECImM ATIQON . . 46

This document has a estricted distdbution and may be used by rcipients oly in the perormaneof thowir offecial duties. Its contents may not otherwise be dbclosed without World Bank authoriation.

ASK

ANNBX 1: Ecownomc i r ...........*47

ANNEX 2: letter of Sector Policy ....................... . .0. .. S t1

ANNEX 3: PolUcyXMates P. . .......... ........ ........ .....teat *44* 63

ANNEX 4: TISeablof eyProjeet?ro P ss1ngEo n.................. 67

ANNEX6: Stas of BankroupX Opi zto a InAlbua ... ***.....

ANNEX7: pnlplen�en oaPan ..................... -; a .. 77

ANNEX8: SupervilonPIa .. .............. . 4 -...SS * a. *..* SS i

ANNEX 9: Organizatn Chart of the WMiistry of Agrilurand FoodandoftheAgtirculuralProgamOfflce a.aS a............ 83

ANNEC 10: Technical Assistan Proga .......... . a

ANNEC 11: Appraisal of the Agricultrd Bani. . a . SS . 87

ME IBRD 24850 (folowIng pag 108) i

.4

ALBANIA

AGRICULTURE SECTOR ADJUSTMENT CREDIT

CREDIT AND PROGRAM SUMMARY

Ieiowrv anBeaefida ~ Albania

Execatla Aesdk: Misty of AgrIcaulre and Food, Mistry of Fiac and Eoo} ,Misy of Tra(e, Bank of Albania, Agicultral Bank, Nadonal A cyfor Prvatiatlon

Amrnt. SDR 14.2 mIllon (US$20 allon eqAvalent)

Terns: Forty years mauity with a ten yea grace period. Crdt prceeds wM belet to the Government at the standard IDA service cage.

FrJcI Okcl Mm Credt is desed (a) to support a sectoral progm of rcalstucturl refom over a period of 18 months, (b) to provide a Min ofedt to th Govenment for onlendiag to rral entrpreneurs thro th

new Agc rald BDank, (c) to provide fd r thnicad atc tosuppot the m of the program.

3escrldou: The sectoral form progm Is based on the strateg frameworkby the Govment collabo with IDA and the Euopean

Community. it addes four by areas of poLcy and itdtutona rform:

(a) Ceatng an appropria agrkculal prfck end hew

( lealizing the priCes of gicur outp andhput, and esin&g t priclng of food aid doesnot constIt a disncentve for domec productonand markeSt;

(I) setig up the enabling environment and aitng Xecondidons for the development of the privae sectorIn Uagcur maketg and processing.

(b) Provide n reneurs with access to reit andretrcun of to ,rzrJJntal sw

(I) lqudating the Bank for Agriculte andDevelomen by wrig down unrecoverable sotenterpre debt, and creadng an adeuely

capiized new Agiculwtral Bank operatg oncomeri baking principles;

(11) revItalizing the proviion of rura fical serviesthrough ompreive ation development ofte Agrultura Bank.

(c) iqidate state frms, distrbue their land and develop tolegd andpolk yfamework In order to acceleraeconsoldation and develop the market for land:

() liq g all stae fams, wih the eacepton ofthos bavin joit ventures wih foreig partners;diseatrbtn their land to workers; and seling theiasst;

(H) enactig lad l legislatn;

Ol) iementg the Land Market Acdon Pla,Includn titling, lnd regiation and caasr, andland poliy.

(d) Improe the perfrman of fte (crerAy state-owned)antepris in die agrcultural mnuuedng andprocesrgsector.

(I) pvtzngsmall and melmsaeenterPrisesquicky and estabHlshig a timetable for thep.rivztln of lar enterprie;

(U) enforcng a budget constraint on furtier subsidies;

Ill prmot prvat sector devlopme trughsupport servies for SMs, busns avsorysrvices and sn ebling enAefor the pivat secr.

Proceeds from e credk wil be used to finance (a) under the aj_umcomponen, the CIP cost of general Import of goods and services (US$11miion equivale), exdWing goods and services financed by otherbila l agencies, luxury goods, military equiment and ote gmodsspecificaly prohibited; (b) ude the Investment compoent, viable

vesan sub-project (US$S miion equivaL) of privae frm andothr rural entrePrneurs; (c) services for technical assistance (US$4mion equivaent).

Disbursements: The fir UTane of th adjustment component woud become avaiblupon crdt effSctdveness, expet in September 1993 and the secondtrnce, expected for June 1994 upon fulfimeta of specific conditons

'IpgIRI II. 't u

1 ffg1 1fiIhigl ~ ~ 0 lI@| X 1§ 'IS ii E

3Z s>t3l3l !15lll'3o s i t o o o M X g t s 8~~~~~I

INTETIONAL DEVELOPbMEN ASSOCITION

REPORT AND REOOMMENDATION OF TIE P DENT OF IDATO TB EXECUTIVE DIRECTORS ON A PIROPOSED

AGRICULTURE SECTOR ADJUSTMENT CREIT TO ALBANIA

INTRODUcION

1. I submi the following eport and recommeaon on a proposed credit to Albania for theequivalent of SDR14.2 mmilon supporting a program of radical refoms In the agcutura sector.The Agiulr Sector Ausbent Credit (ASAC) will have a term of 40 years, including ten yearsof grace, at the standard service charge. The IDA operaton I expected to receive collnwlg fommthe Govenments of Japan (US$15 million equivalent) and the Netherlands (US$2 million equivalt)and parll financing from the Eurpean Community PHARE program (ECU8 million).

2. The Credit would be a hybrid operation desgned to (a) support Implemetaion over a perlodof 18 month of a setral reform progm with a quick-dibursing credit to finance a negative listof imports (US$11 mdlion from IDA and US$17 til1ion fom cofinanciers); (b) provide a credit lto th Government for the resctured Agriclural Bank for onlending to farmers and other rurentrepreneurs (US$5 million from IDA) over a three year period; md (c) finamce key techicalassistn programs nked to the I ntion of the program (US$4 million from IDA and ECU8 milion from EC-PHARE). Five poliqy and intiutional reform areas ta ae of crucial

ortnce to obtain ealy suply response n agriculbre would be supported by the ASAC. Theseae (a) reform of the price and ncentive fiamxnk for agricultue; (b) eoganlton of theAricutural Bank to set up a viable nu fical institon; (c) dibution of stat farm land; (d)deveoment of th lgal framok to reat a makt for land; (e) quick privatza;on of ate-owned agricultral enepiss ad private seor development in agriculture.

3. lhe reform program has its origin In the strategic framework developed as a Jint effort bythe Albanian Government, the World Bank and dt European Commnt. In the Spring aMSnmer of 1992, a short and medium term stra for agriculre was pr ed smulaneously wththe preparation and i mplemetion phase of the Cdtical imports Project, IDA's fist operationIn Albania. A report etitled An4Anubw Sraegyhfor lbanta was published by the World BankIn October 1992. The report's recommenadons were officialy endorsed by the Governme andpresented to donors at a meeting of the -24 In Tlaa In November 1992. The doment Iscurrently serving as tie bass for fomult agricultural polic in Albanhi

PART I. THE MACROECONOMIC FRAMEWORK

A. RDCEwr MAcCRloCONOiwJc DZVEWPmEN

4. Albania, havig sufeed from perhaps the ost cemalzed and re sive regime amwngformer commus coutries, has moved rapidly to participate in the great economic and politicaltransformation sweeping EasternEurope. The demie ofcommunsm over 1991-92 was accompaniedby economic and political chaos after 45 years of an Implacably tWaria regime, no alternativepolitical or economic institudons were in place once the ancien regime crumbled. Public order wasgravely disupted and control over sWe enterprises vitally disappeared. For decades central

.2.

planning had decided, allocted, and distributed eveything In all sectors. When it was abolhed thers was a gnera collapse of production. GDP declined by 27.7 percent In 1991 and 7.8 percet

In 1992 after a fall of 10 percent In 1990. With a 1992 5DP per capita of about US$250 (Atamethodology), Albania -which has a populatlon of 3.3 million- by far the poorest country InlEurope.

5. Wih this dramatic supply coUqpe, Albnia was plunged hito a fiscal crisis of unprecedimensons even In Eastem Europe. State enterpises had constittu ootu a tax base and a axhandle; fiscal revenues therefore decred drastically with the collapse of the state enterpries. Atth same tine, control over most categories of expendurs virally disapputred and the fiscaldeficit exploded to 60 percent of GDP in the first half of 1992. Monetary fiacing of the deficitpushed nonthly in on IUo the 10 to 15 peent range. The high Iflation and th collapse ofproducdon in exporL earng sectors led to the virtual exhausdon of foreign exchange reservesLastly, Albania that used to Le a net exporter of food products, became heavily dependent on foodaid as a result of the collapse of agricultur&I producdon. In 1990-91, agricultural production fell bymore ta 25 percent. The decline resuts from a combination of factors nluding te dismalgof agricuvtal coopeatves, the scarcity of Inputs and lack of foreign exdhamge, a breakdown Inpublic dstrlbton cnls nd work stoppages in the food industry. The supply of farm productsto Govemen collection center fell 60 to 80 percent and public food industties and related sectorswere unale to suly sufficient food fo the population.

6. After the fi fly democratic eleons that took place in March 1992, Albmaia took decstps for the restoradon of public order and macroenomic stability. With a very high rate of

ticipation of 90 percent, the elections reslted In a nearly two thirds parliamentary mority forth Democatc Party a is comnmied to an open, libe market econmy. In April 1992, amIdt

vere economic, social, and admnistatve dislocation, the Governent embarked on acomprehesve program of reforms. Quick mobilization of Intenaional aid supported the progm.By ml 19 t IDA CrW Imports Project, a Stadby angement wih the , and lagextena finning from the EC and other a-24 dons were In place.

7. The Governmens reform program Included drasc stabilizadon measues and sictrreform to initiate the move towd a market economy. ITe budget deficit was cut in half, mainlythough shp Curaent In expeaditu as the scope for raising tax revenues i lmied in the sbortterm Budgetary subsidies to stat enterprie were abolished. Strict monetary targets were enforced,in rate were sharply increased, and the automatic extension of bank credit to state enteprseswas soppe. The first seps toward the devOe!pment of a two tier banking system were tae witthe implementation of laws on cer and commercial bankig operations. All prices wre freed,save for a few basic consumer items, whose prices were sharply increased. The currency wasfloated, private exchange ansactions legalized, and al CUrent accoun transactions libealized.

8. After 6 months of implementaton of fte program, Albania Is In many regards doing welcompared to other counties In dte region although the sition remains fagile (see Table 1).Thlrghout the year, all IMP perorniance criteria have been met: a first' In the Region. hedramatic dcanges imblemented at the stat of the program have visibly taken root, most wtably inthe areas of price reform, the exchange ad trade system, the budget, central bakidng, andagieulurse. Industrial output aea to have bottomed out, agtictal production, followig anearl land reform, has rebounded and tere are strong signs of nascent private sector actvity,althogh formal satistcal data are not available. Infation has fallen from 14 percent a month at thebqeging of the year to less ten 3 percen in the Winer and Spring of 1993. While the financial

.3-

suadon remains fragie In view of the limied domestic tax base, the success in stabiling pricesIs speular, although it bas come at considerable cost Credit from the banking systm to nonvble s enterprises has been stopped, but about 40 percent of the stte enteprise work force havehad to be lid off. Official foreign exchange reserves Incrased from vitually zero to about threeweeks of imports. The lek has appreciated by about 30 percent at the start of tile program and sincethen has remained fairly stable In the freely floating exchRnge market. Equally Wortant, the socalconsen appoar to have held in th critical period. Many obstacles remain, however. before rearecovery can take hold. Policy Implementation is not facilitated by the weak admnistrative capacityof the Govenunent.

9. ,he economic collapse andte Implementation of the adjustmet program have caused highunemployment highlighting the need for a social safety net MTrder the communst regime soialprograms Included generous, and almost universal, work-relatea ocial insurance benefits (pension,disability, sickness), as well as free health care and education, and highly subsidized prices forlargely radoned commodities (food, housing, fuel, utilities, etc). However, there were hardly anyprovions for those faling through the cracks in the system. Democrzaton, the economic crisisand the ensuing econoic reforms unIeashed a process In which mass unemployment emerged, andprice leralizaon along with abolition of subsidies reduced real incomes drastically. At the smetme, the tax base supporting the socid safety net shrank drmatcaly. Responding to this situationte Government devised a policy which alms at restructuring and strengthening fte social saft nettrying to bring it in line with the requirements of a democratized society and a transitional economy.t has abolished the system of sheltered wages for Idle workers, introduced contibutions to supan unemployment bereflt scheme, and replaced part of the price subsidies with wage compn ons.t has taken steps to tghten elipibility conditions for most benefits in order to reduce the overal cost

of th safety net. The reformalans and measures clearly separate contutory social insurance fromnon-contributory social asistance ad merit schemes. While social insurance is Inasingly likedto Individual contribution records, the Government eims to develop a legslative, institutional,adminisive and flnancial fework for a targeted, family based, need-oriented social assisne-stem to mltigae th poverty of those who are most in need. In June 1993, broad-basedwage/compensation increases in line with the current restrictive budgetary conditions will be usedby the Government to mitigate the costs of adjustment At the same time, the Govem t willintroduce a policy which provides mems-tested social assistance benefits (ndfim ekonomlte) in theform of block grants to be distributed by local governments and this will be expanded over the next24 months to provide for a more efficient use of subsidies. A large Increas in th nber of thoseIn poverty, due to price rises, long-term unemployment and expiration of unemployme beneits,requires the redirection of a subsntial part of resources freed by subsidy reductions to support ataged social assIstance scheme. The weak administrative capacity of the Government erlineste need for proper sequencing of the following refonn steps: the abolition of the remainingsubsidies should be closely coordinaed with the development of the targetng capabilities of thecenal and local govermnents. The developmt of these capabilities needs to be supported bysubstaal Iational tecnical assistance such as that proposed under IlDA's FY94 Social SafetyNet Development Project.

10. he medium term (1993-95) nuaoeconomic framework envisages growth of about 3 to 4percen over the period and annual inflation of about 20 percent at the end of fe program period.Grwth is expected to orighint from the agricultural sector and from the development of the servieesector, while the industria sector is to contract fiurter. It Is expected that the ASAC could play acrucial role in helping the economy recover. Towards the end of the prograt period, industry isexpected to pick up as the restructring of the public sector Is completed, and foreign direct

-4.-

will requie a fundamntal reform of puolic fiace: a reliable tax base has to be established tocapture the segments of the economy that will grow in the medium term, and tax dinstion hasto be totally overhaled. Budgetry control and management flmctions have to be developed.

B. EXTERNAL ACCOUNTS AND FNANCiwG R EQMIEENS

11. Despite the potential for a signiflcant improvement of the fiscal position over fte mediumterm, Albania will require significant amounts of concessional external fcing to rebuild isdilapidated infrastructure. Ihe current account deficit excluding official transfers would improvefrom an exrordinary 67 percent of GDP in 1992 to 27 percent of GDP in 1996. Extenad finmcingrequirement over 1994-96 are estinated at US$868 nullion of which US$115 million would beprovided by IDA together with significant bilateral aid and modest amounts of direct investments(Tabk 2). The finacing gap of US$261 million over 1993-94 is expected to be covered by donors.Prospects for the mobilization of such aid are good in view of the track record of the country andof the high level of commitments already made by donors. This is the currenty agreed IMF/WorldBank/EC base case scenaio. As the agricultural sector recovers and its marketed surplus increases,the composition of aid is expected to shift from food and emergency supplies to project finance. Ifweli coordinated, and delivered in a timely mmner, this international assistance could bear fruit anddeliver higher rates of growth by the end of fte decade.

12. The main risk in the scenario outlined above is that of an interruption in the implementationof the reform program. Ibis scenario is predicated on the consolidation of the excellent early resultsof the stabilization program through demand management and strucural reforms. Should theAlbania society fall to mainain the effort of domestic revenue mobilization, public expediesrestraint, and tight monetary policy, growth and viabiLty prospects would be seriously endangered.Thbis would result in higher deficit and inflation path and in a loss of balance of paymet supportfrom the Bank, fte IMF and the EC. Over time this situation would lead to strong decP;ies Inoutput, high inflation, and to a balance of payment crisi that could lead to a reveral of tradeliberalization.

13. The resolve of the Goverment h_ however already been tested under difficultcircumstances. Significant efforts in domestic revenue mobilization have already taken place.Decisive steps in enterprise reform have also been taken, and efforts to cap social safety netexpenditures in a context of rising unemployment have been commendable. Lastly, while theGovernment faces tough questioning on te implementation of the reforms, there is a widespreadconsensus across the polidcal spectrum on the general direction of the reform program.

PART II. BANK OPERATIONS AND WORK PROGRAM

A. LENIDNG AND S3CTOR WoRK

14. Objectives. Albania joined the Bank Group in C .ber 1991. Since then, the Bank hasentered into a close and effective dialogue with the Albanian authorities. There is agreement on mainelements and objectives of economic reform. Specific measures and the tmefran for action arebeing worked out

15. The short- and medium-temr objeive of IDA assisace Is to alleviate the economic andfincial crisis through anavs and advice on the reform program and investnents in critical sectorswhere IDA has a compmratlve advantage. Agriculture, given its domnant role in employment andproductive potendal - demonstrated in the quck supply resporse :o price liberalization - Is a prioritysector. Thus IDA will ain to:

(a) support the proces of economic reform by helping in the design and ilemntatof macroeconomic and sector policies needed to stabilize the economy and stmlproduction, particularly in agriculture;

(b) provide, where needed, quick disburs4nV support to critical sectors of the economysuch as agriclture, and the financil and enterprise sectors;

(c) assist in areas related to poverty reduction, such as the design and implementon ofa social safety net that would protect the most vulnerable groups during the periodof transition, rural employment creation, and upgrading the role of women in lheeconomy.

(d) support inftucu rehabilion;

(e) build ntittional capacity in economic mavagement;

(f) support the development of private sector activkies, and,

(g) accelerme effort to address environmental degadation.

16. Lending Sraey. Asuming good performan and sustned reform, IDA is plaing tosupport Albania with an inital annual lending program level of SDR30 million, projected to declineto SDR1S million In 1996. Thi would allow abou three to four operations a year and would betailored to the implean of reform programs. TM first emphasis has been on relieng thecritical sccity of Inputs. As the economy picks up and expor revenues to fnace critical Importsincrease, IDA resources would gradually be chamelled into invesments aimed at reabilitating thecountry's dilapidated i ctue, and providing long-term investment resources to the emergingprivate sector. The early stabilizaton successes would not be sustainable over the long run in theabsence of a resumption of growth. Albania has significant mineral resources, large water reserves,good prospects for the development of tourism, and above all a strong agricultral pot 'al, asdescAibed in this report However, for this growth potential to materiaHze, sustained inve' .ent Inpublic infrastructure are required to restore public senices to a level consistet wivththe reqiemensof a market economy. At the same time, after tsw years of precipitous fall in outut, te remainsmuch productive potential that can be better udlized, particularly In the stat enterprise sector.Therefore the lending straegy concentrates on the rehabilitation of ifrastructure through projectsin the social sectors, housing, transport, water supply and the promotion of a supply responsethrough the present project, and through an Enterprise and Financial Sector Ad3sntent Credit.

17. Albania has attracted strong support from other foreign donors: aid commi for 1993amount to US$420 million Including food aid. In this context, the comparave advatage of theAssociion is is expertise In project preparation, rather than the scale of its intervention. Thereforethe strategy has consisted in using projects as vehicles for aid coordion and calyst for ihemobilization of funding. Coordination wiffi other donors has been excellent, both formaly duringaid meetngs organized by the G-24 and informally among staff working on Albania (para 170-171).

.6.

Table L Alba adkatosa Ta rgus IM-96

1991 1992 19 1994 1995 1-aPe dW asP*Eowpwid

GDP and priceRed GDP -27.1 -7.8 3.5 3. 4.0 5.0Rt pricm (averg) 36 226 105 2S 23 17(ed-f-peiod 104 237 45 2S 20 is

(In puoat @f GDP)EXt,A curmr accoaot1 -22 47 -57 45 -35 427

Exot 6 10 10 11 12 13impot 25 80 68 60 S1 4S.

Savins and investmenFouulgp savins 462 -52 40 -31 -23

Of wbi: N etbIort of amFS 44 -71 48 -47 -38* PrlvatefVIS fe8s 22 19 18 16 15

Naionl savIns -55 -3S -19 -S 4Of whic: Govenment -24 -10 -2 3 6

Non-government -31 -25 -16 .9 -2Gas doesic I 7 18 22 25 27

Of wlcb: GOvment 4 13 14 15 15 .Non-fovmmua 3 S 8 10 12

ocend gvwmnmRevee 31 25 33 33 33 32

Of whiLc Tax _vm. 27 17 26 29 31 32Expenditures (comitnend Ws) 62 47 S 50 45 41Oeral ba e (casb) -44 -22 -22 -17 -12 -8Domeasic finncinS 44 22 11 7 2 -

Of wdck Pinkh fmnoeng 44 22 11 6 1 -

Btd MIAWY 2 104 1153 37 26 21 17Domestic cit ... 113 67 40 29 24

Of Wi Cuit to mma3 ... 110 41 22 4 -

(in miom if U.& doU.t)Own aunal ewrves.

(oxcludg goild) 11 35 121 138 14 156(va" of impots) 1 3 9 11 13 14

Exted debt 498 610 745 ...

o/w Anuts 414 432 r..

11 B _xddg oficialrses2 Endyer. pperen chn from prio peio.Y C.ngeIn peret of boed omycns kstok atpedof rviouybaL

.7

Tabl 2. AIlban Exlral Fr g R _ 193-96

1992 1993 1994 199S 199(In miio of US Dol.)

RUqwne& 638 805 710 648 meIpmport 524 560 S43 S14 smSvi¢es oxcl. itet 102 105 82 62 53Scheduloed debt srvico 30 68 60 66 St

Of w Aiclu 30 9 9 10dnrest 30 38 54 56 60

DAP Repurlse 1 10Chop in 0i 1 .40 -30 -15Resewr bui- 22 102 40 6 5

Own Reeaoare 228 296 339 371 420Expwb *7( 91 114 136 154Nvae a s 148 160 171 179 18Dire INvestmn 19 30 45 50 60Oer Caia (Net) -9 15 9 6 18

fbacng8 Oap 410 509 371 277 220

_ Jm 8 ilo" lwsft cawaumi410 400 157 64 35Gmts 345 282 47 16 -Losm; 65 118 110 48 35

Of Wizich: Bilteal. 45 68 70 a20 50 40 40 3S

Of ieic IlP 14 5WoddBtk 5 35 40 40 3SEBIID1O 1 10

Ewcf New Comaun_ 11 51 53 48Ddt Redf - - - - -

)(ultilatelal 11 36 33 23Prvate Credo 1S 20 25

Reduad Fwlagp G 0 98 163 160 137

v Nogave ndw demotn inrs in s;res.

-8 -

The good results of this coordination are evidenced by the high leverage of the current project wherthe Association's funding has been more tan matched by bilateral donors.

18. In FY 92 the Cridcal Imports Project has focused on providing essential goods many foragriculture and the power and transport systems. In FY93, in addition to the proposed AgriculureSector Adjustment Credit, a Rural Poverty Alleviation Project, a Technical Assistance Project anda Transport Project have been approved by the Board of Directors. The Transport Project consisof the rehabilitation of main roads, port facilities and technical assistance to the Ministry ofTransport The Technical Assistance Project minly supports urgendy needed institltional reformsin banking and administration. The Rural Poverty Alleviaion Pilot Project. approved in February1993, aims at rehabilitatng rl infra ture and creating enployment opportunities in rural areasthrough rural works programs and at developing a network of Village Credit Funds to provide smallloans to poor farmers. In FY94, the proposed lending program includes two small twin projects forSocial Safety Net Development (SSND) and Labor Market Development, a Housing Project and aWater Supply Project. The SSND project would support the reform of the social insurmce systemand would create a targeted social assistance scheme. The Labor Market Development Project wouldsupport the payment and administraton of unemployment beneft and would provide employmentservices and taining. The Housing Project supports the privatzation of state-owned housing andthe competion of units that were abandoned during the collapse of 1991. Ihe Durres Water SupplyProject would support the rehabilitation of the existing water supply Infastructure and improve thequalty of life for the population of Durres both by incrasing the reliability of water supply andreducing the contaminaton of water. An Enterprise and Financial Sector Adjustment Credit is alsounder consideration, although its preparation requires more time. It will address some of the mostdifficult problems Albania faces, including drastic downsizing of many industiad actvities.

19. Pborf Management. Supervision of ie pjects menon above will be given ideattenion but will require substantial amounts of resources Useful lessons, applicable to fiutueoperations, have been obtained from the Critical Imports Project (CIP), the Bank Group's firstoperaion in Albnia, mainly dth strong instiuonal arngement have to be put into place to ensureadeuate proJeu management in the country. Despite many difficuldes, Implementation of the CIPhas been a success with bidding underway or completed on 100 percent of the credit and contracuawarded for 60 percent less than one year after Board presentaton. Adapting the experince of theCIP should facilitate the management of fumre projects, in palar In terms of procurement anddisbursements, two areas where Government staff have gained valuable experience during the pastyear. Sharing with other donor organizations both the costs and the mangement of fte technicalassistance proams associated with project implementation will also reduce superision requirmentsby Bank staff. Adapting the lessons learned from the CIP to other projects and burden-sang with!other donor- are two principles that wfll be built into the design of the above mentioned projects.under preparation and that should facilitate portfolio management

20. EconomIc and Seaor Wort Planned economdc and sector work would provide the analyticalunderpinnings for IDA's policy discussions with the Government and future lending. In very closecoordinatIn with the IMF, European instiuons, USAID and otier bilateral donors, IDA's workfocuses on the sectoral and structr elements of the reform program, taldng into account the uniquecrcumstances in Albania. The objective Is to help prepare a sequence of reforms for IDA and Biesupport. Ihe Government has already adopted Xt Agricultural Sector Strategy of October 1992 andthe Heal Sector Strategy Paper of February 1992. IDA is also supervising an Italian-fundedEnviroanental Review. Other sector work planned includes an Enterprise and Fiancial SectorStrategy Paper and an Energy Assessment.

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21. Ipa of S&rateg on Poveily Issues. IDA's stateg will addrs poverty Issues and helpmidgate the social costs of adjustment In several ways. Improving agriculture will alleviate nrualpoverty and creae rural employment Ihe proposed social sector projects (FY94) would help refonrthe social safety net, the unemployment compensation merchanism, the education system and thhat care delivery system A Health Project under preparation would improve the health caremarket and ocus on matenal and child health issues. The proposed Water Supply Project wiRreduce water-bor diseases for the poor In the port city of Durres. The ASAC and the RuralPoverty AllevWon Pilot Project address issues of poverty in nur areas by Improving access to land,increasing frm Incomes and employment opportunities.

22. Alough Albim women have access to all levels of educaion and employment (49 percenof th work force are women), women have been concetated in lower paid and less prestigiousoccupations and are under-represented In managerial and higher level positions. It is expected tathe tansition period will inpose added hardships on women: the share of women among fteunemployed may Increase substially as men are rehired and leave the ranks of de unemployed,and that women may eman unmployed for longer periods of tme. IDA will help to protect thewelfare of women through the design of the social safety net, and the provision of enploymentservices and tg. Other projects, such as one under discussion In the energy sector, will alsobe deigned to eanc opportuites for female employment and allviae women's worklo ftroughthe prison of fuels that can serve as ateratves to the wood now used for most cooldng and

baf.

23. IFC and MIGA. IFC fces a particularly difficult challenge in Albania and an Imiediateprogram Is unlikly In industry. Minig and the servic sector, however, could attract early IFCInvestm. So far IFC has foacsed on a joint vente project in chromium and furher opeilonsIn mining and he tourism sector are under onsideration.

24. MIGAs guarante program fly available for Investment In Albania. I has akeadyextended a guarantee for a turism project. MIGA is currently reviwing te egislation on foreignnvtmes t.

B. ASAC LIu wrm Orm0 OpBRTONs

25. lhe prposed ASAC would support the reforms undertan by the Govnmt In agriculreand would thus form part of IDA's overall stregy. The ASAC contiues efforts sarted under theFY92 Crical Import Project (CIP). Half of the CIP funs went to the agriculural sector forrepaiing the Irrigion iructure and adapting It to the new land tenure situation, and proviigurgenty required imported inpt for famr. The CIP also financed a technical assistance programfor the Agricultura Bank to provide credk for h purchase of IDA-financed Inputs md to reorganizethe bank. The ASAC Is complementary to other projects In the agricultural and rural sector, Inpartcular the FY93 Rural Povety Alleviation Project and two FY95 projects under preparation, theIrrigation roject and the Forestry and Natural Reurce Maagement Project which foc onimprovements in the irrigaton ifsructure and on naural resource management.

26. The design of the proposed ASAC, and In pardcular of Is pivatizadon and nurl creditconponents, is also closel lined to the proposed Enterprise and Fmnancial Sector Adjustment Credit(EPSAC) which concentrates on reformig the enabling environme for the financial and enterprisesectors. The EESAC would support restructng and privtzaton in the state enterprise sector,

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including resoludon of Itr-enterprise arrears, through the recently created Enterprise RestructrIngAgency (ERA) and National Agency for privatization (NAP). It would also support the leal andfinancial reorganizton of the banking system, Including coa bamlnk and commercial banki.

27. The proposed ASAC has been prepared In close coordination with the Policy Framework Pae(PFP), prepared by the Goverment jointly with IDA and the IMP, ad with the IMF's prposedExtended Structural Adjustment Facility (ESAP) supporting the reform package.

PART M. TH AGRICULTURAL SECTOR

A. STRUCTUE MAD PB JORMANCE OF TM SECIOR

28. Alaia is predomiantdy a agricultural country. The sector's contribution to GDP, whichwas close to 35 percent during the 1980s, Is epected to reach about 50 percent In 1992 (withlivestock accounng for half of that) due to the sharp decline in industrW and service sectr outpAbou 50 percen of the labor force (705,000 people in prima production and an additional 100,000in related sectors) is employed in agriculure and forestry, and two-thirds of te popuaion Ive Inrural areas. Albania is mountainous, and only about 32 percen (700,000 ha) of its 28,000 kh arearable. Populadon density (4.7 per ha of arable land) is high. Ihe most important field ctops arewheat and maize. Irrigation facilides cover 60 percent of arable land. Some 430.000 ha ae usedas pastrelands.

29. Prior to the recent reforms, the agricultre sector In Albana was one of the most actremeexamples of the application of marxist ideology to be found anywhere. All the land Wa sttewnedor clustered Into stat dominated agricultural cooperatives," IpUt ad ouput marketng was fllycontrolled by the state, labor migration wfihin rural areas or to urban areas was basically priited,and prices and subsidies were set by the ste In a way dudbore no relation to costs so thagreatinefficiencies in production were maintned and nurted. lhe result was self sufficiency at a hJgcosL However the cost of this policy eventualy becam unbearable. his coftbuted greaty to Ihecollapse of Albania's economic system at the end of the eighties.

30. While a somewhat similar pattern was found in other Eastern Europea and CIS coutre, ftetntatve reform efforts that took place in most of these countries during the eighties did not takplace in Albania, so that the country has been faced with the need for a very abrut agrarntranition. Another distinguishing feaure in Albania compared wth its ex socWlst neighbors Is theunusually high man/land ratio in Albania, which has created special problems for the desin of thereform. With 1.5 ha per worker (compared with for example 10.5 In Bulgaria), there is only alimited amount of agricultural land available to support the ra population, but also limitdopporunides outside agricultre because of the wideveloped stae of the nural economy resultngfrom the past economic policies. Thus if workers are displaced from agriculture, the nmor ecnomicsector, there is even less hope for finding gainful employment than in most of the other coutrein the region at least in the near term.

31. Over the last 12 to 18 months, Albania has achieved extraordinary progress towrds retmingthe agricule sector along market economy lines as descrbed below. Indeed, these reforms havealready oupaced most of the other reforming countries in the region. Already 90 percent and 56

-11-

percent, resectively, of the land previously controlled by state-run cooperatives and state famshavebeen fully privatized, and major refoms In price and trade liberalization have been achieved. iaddition a good start has been made planning and prpaing for agricu enterrise prvtatlon.Banking sectr refom are howev lagging so that financig for the new private farmers remisa problem.

32. Land Ron. in the partculr cas of lmd reform, Govenment policy has, in the Interof speed and equity, been to distribute land to all members of cooperatives and state firms ratherthan try to pre ma farm sizes for moden mchanied agicultre for distrbution toa selected fw as is bei proposed in some other countries of the region. This has resulted in thecreaon of a large nmber of sma farms wih a limted Income potential. While controversial, itis likely that, on balam:e, this policy wHil lead to stsfacty efficiency gains In the sector providedland sale or lease arrangements can be put Ino place quickly.

33. Lard distribution in forner av8ikWal Cooperade stated in 1991 and has been radicaLBy Jauary 1993, 90 percent of th land previousy owned by cooperatives 75 percentof arable land) had been distributed to Inidual farmers. Once the distribution process Iscompleted, there will be some 380,000 faly am wih an average size of about 1.4 ha, oftensubdivded into two or three separate plots. In the hort term largse productvity gains can beepected as a result of th switch to family farming. Already In 1992, agricultural production grewby more than 12 percent nthe long term, It is expected that the development of an active landmaket will facilitate consoldan Land priza b an irreversible Process and the sector willbe cd by sma fam for the next deces. The viabilit of these small fam is howevergreay enhmced by the Importance of lvestock, which accouts for more tian half of farm income,ad fthe access of vlges to communal pasrenlad. During the reform period, the new small farmsco wi face serious changes In tems of hp supplies, mating dmnels and access tocredit, especially in isolated ral areas. P em , he al ir cture and tr t systemsneeded to spo the development of privae maret channels a grossly Inadequt.

34. State Fams are situaed mainly in th coplapins ad cover 25 percent of good arble lnd.Until 1989, st fams accounted for 30 perce of he vale of agricultural output, and wee thmain supple of dairy products, fut, and vegetables to the urban population. In 1991 theirmarketed surplus dropped to almst o. The 250 eisting ste fim employed 155,000 worebi July 1992 and farmed 160,000 hecta (24 peLect of arable land. The National Agency for

estructuring and kehabilhtatlon of State Fam (ceabed in July 1992) under the Misty ofAgriculture and Food is legaly in charge of executg th Gove ent's policy regardi sfarms. be Agey has cut dt labor force in half (from 150,000 in July to 75,000 In November1992) but the laWnm ratio Is st very low (about 1.5 hectare per worker). Given ta theGovernment-run am have proven to be inefficient and would requir large amoun of fiscaresources to survive In an undistorted maet edvironment, the Govemment has decided to tur heland over to te private sector through lak bas to family farmers. By May 1993, some 56percent of these state rms ad been prvatized (pra 94).

35. Agricu1wal Price and Trade Policy. Agrclural output prices have been libezed Invadio sta from lat 1991 to ely 1993. Before 1991 the prices of all fbod items were fixed atvery low levels. In Novembr 1991 the GoverMent sred price refom by libalzing the pricesof vegetables, fruits and eggs. In Agust 1992 the rail, wholesale, and producer prices of domesdcmeat nd milk were feed but regulaed pres for bread, sugar, cooking oil and rice weremaintained. However, tes prices wer Increaed about 200 to 400 percent. Ceilings were Imposed

-12-

in September 1992 on reil prices of some privatly Imported products competing wit smlar foodaid ttems but were mved In early 1993. Finaly, since Januay 15, 1993, vIry all Prodcr,wholesale and onumer prices we lealzed. Tlhere are only a few exceptios. On the consumersidl, the only product with an amistred price is bread. On tie producer side, the prices at whichwheat and sugarbeet are purhd by pubic enterpries are still set by decree. All other farmgaeprices, in thory, can be frely demined by the mket. in practice, te level of market prices Isfuenced by fte prices at which food aid imports are sold (para 37) and by th purchasing policy

of m polisic sta enprises which are the only buyers of significa quantities of fam products(pa 40).

36. Reval of cotols on domestc prices has buen accompanied by external tradeThe floating of the lek has been acomp d by a fuil libealiaon of imports. Export by privatetraders is alwed, but exort licening m In effe for some agcultu d toavoid diversion of food aid and expor taxes are in effect for a few selected commodities (para 75).

37. in 1992 Albania becae heavily dependent onJbod id Md food aid price polIcy ha bada critical influence on te level of domestic prices. The domestic production of wheat fell from613,000 tons in 1989 to 270,000 tons in 1992 and iheat imports from food aid have made up thebalance of needs. Food aid stments include not only wheat and flour but also sugar, rice, cookingoil, meat, mil powder, butter, ee and eggs donated by the EC, Italy and otier counto.Domesdc production of vegetable oil and sugar are estimatd by he Govement to cover only 6 to15 pect of domestc needs. Statwned trading etepse are in charge of ditriutng donor-spplied food aid. An estimated 62 percent of concessional wheat was delivered In 1992 tD state-owned mills and the rest was distuted by the Italian Army to rural areas. Around 70 percent offood aid flour is sold to ed bakeries and the remainder to the state-owned pas industry.Wbeat is sold to ste-owned entrse at 1.3 lekJk compared with an Import parity price of about18 lekkg. This greatly diorts e wbheat marloet and reduces the amount of counterpart renesgoing to th budget

38. Foreign tade was conducted by a few foreign trade state enterprises until 1990. Domestcpnces wer decoupled from foreign prices by a system of Implicit subsides and varable levis Alse enterprises were authized to conduct foreign trade in August 1990 and private eemprises andperson In Aprl 1991. In 1991 customs duties ranging from 10 percen for food to 30 percent fornew machinery and equipm were enacted. The Commrcial Bank, founded in December 1991,took over the commercial foreig exchange transactions of the State Bank. Enterprises werepermited to retain foreign echange from trade.

39. Albaat agrua expots over 198-90, maylvestkbeveragesand tobacco, avgedabout US$24 mitlion to non-socialist counries and about US$81 million to socialist countries. Tbisrepresented about 37 percent of the value of exports. Trade with fonner socialist countries hasdeclined sharply since the CMEA colapse and small quati of melons and other iems areexported to convertible currency markes. Since 1990, (often illegal) export of sheep, goats andcattle to Greece is playing an Ieasing role.

40. State-owned Agrcudar Ma*edng and Processing L)erprlse include some 265 mostlymediumsize procesn Plants (mills; bas; slaughteruses and meat plus; daires; oil pressingplan; canmries; wieies; cotton gins and tobacco processig plan) and some 160 marketing andservice enerpises for te agricltural sector. The most important are: NFIU (Nd&rmarrJe F trn1bIndstL Ushqmre) which imports and ditrbutes food aid wheat (para 62), the 35 large gndn

*13 -

eterprses (Orbiswm which ae purhasing centers coupled wifth lage milling and storagefacilties, the sugar mill in Korge, some large dairy plan and bakeries In urban merters, and the 27dict-based enteprs (Agtregwre) disrbutg frtilizer ad othr agricultural Input. All theagrculital enterprises ae under the control of the Ministry of Agriculue. Some trade enrpriesunder the contol of the Ministry of Trade (e.g. cold storage enterprises) are responsible forInportng and distributig food aid.

41. The endr stt-ownd agricultural marketing and processig secr Isin a ditressed situation.In 1989 there were about 50,000 employees in agmindustry. About half of the work fore are nowunder a soci assis e shem and enterprs we unil recenly borrowg from the AgricubralBakn to pay wages. Facries work at 5-20 percent of their 1989 capacity. Thek operations arehighly inefficient, they are ncing large losses and have a large stock of debt. The declie Inout and increasing subsistence orienion of hrmers have cut delveries to these emterprs.Whea, flour, meat and mik flows trough public processing and distnbution chameis were 70-80percent lower In 1991 compared to 1990. Sinmlarly, in 1992 only S percen of privat farmerdelvered part of their whe to the grwnbzu and kept mt of the harvest for household breadproduction ivate farmers provided only 20 percent of he total tweat deliveries to the grmbmidespite accounting for 70 percent of the wheat producdon In 1992.

42. Prvate sector activty is developing at a rapid pace In agriculture-related actives such asoutput market, food processing, rental of tracor services, input supply, workshops, etc.However, privae busiess comtes on an uneqWal footi with state-owned enterprss whih, untilren, had a privileged access to ste guaranteed credi and continue to receive the bulk of foodaid sipme and donor-financed agriulural Inputs. Lak of capital and of managemen sk alsoput pdvat firms at a disadvantge and is slowing down the development of the private sector in nruareas.

43. Rral CSedU. The provison of financil services In Albania b severely cntained by theinabiliy of the tree existing sbte banks to respond to the growing credit demad by the new privatesecor. Bankers in the centrly-planned economy were mere bookkeepe, trsfering budget fundsto ste entrpries without hard budget constaints nor any need to assess borwers'creditworthiss. Banks now face the challenge of radical tnforionInto independen decion-makers operatng on commecl banking principles. With most interest rates at positive red levels(see Annex 11 for the ret sucture of interest rates) and key banking regulion beingintroduced, the banking sector s undergoing major reforms. The overall reform of the financialsecor, including resoluion of the issue of non-performing assets, recapitalization of the banks,setting up of a payments system, and development of a suitable lega and regulatory fram rk, isa prirt issue bein addressed by the Govermet

44. Rural credit demand by private farmers in order to finace urgendy needed inputs (rtiizer,seeds, ad pesdcides) and niaon equipment is strong and inrsing. Most of this demandIs cumndy satsfied by te informal sectr: traders, farme and small eprenes receive short-tenn credit from relatives, neighbors, and friends, generaliy without Interest charges. Due to Isnetwork of 27 branhe and 160 rural agencies and its experience with agriculturd credit, the Bankfor Agrulture and Development (BAD) is, after lifting of the burden of non-pformig assets andconversion into a new Agricultural Bank, expected to become the predominant nal banl TXhebans clientele will comprise medium- and large scale enterprises In variour sectors of the ruraleconomy, iudig trade and transport services, commercially oriened farms, emerging privatefame' associations, millers and other agroprocessing entrpris. Small loans to Idividual farmers

-14-

and ma eneprneurs will be extended through a dd nerk of Village Credi Fundscurren beeng set up under the mDA-financed Rura Povet Alleaon Pilot Project (Y93), withan epected total lending of bout US$ 10 miion over fur years

45. An Impoant sh of agiculturil crdt Is expected to be nud alable by I naldonors. Under te IDA-finnced Critical Imports Project (CIP), an agreemet wi Govement habeen reached to commit Lak 1 billion (about US$ 8.8 millIon) of budge funs trough the BADnetwork for credb to fames and tads purching CIP-laced Imorted ag l inputs.Agricura lenig under the Revolving Credit Account (RCA) of th EC-PHApE program, set upwihin BAD, Is excted to eq about ECU 3.5 mllion during the three yean. Bilateral liof credit for aiculural impot, hneld through th Ntonal Cmmercd Bak (NCB) mdfinaced by the Govnmen of Greece d Gem wil potally add fh US$ 30 mil=lonIn loans to the agricultural sector sting in lft 1993. However, since most of te intraonallines of credit involve short-term financing, there wili be a considerable lack of medium- and long-term credit for invesment projects In agriculte ove the nex ath to five yea.

46. Together with two ote state bnsb, BAD has been sn off fo the fnrner Sa Bank ofAlbania in 1991, wit an authored cptal of LXk 450 mlon held by the Stat. Howeve, BADhas to dat been exempted from te provions of the Apr 1992 BaniIng Law, pend aGovernment geermt wh Parliamen to enable the bak to contne ditbutig subsidized reditto state en rses Ie agricltual sectow. After the dSm tng of he forme agrultadcooperate, Governen stepped in and relieved BAD fom Lek 1.95 bion of non-perfrmingloasS to these cooeaves as of mid-1992. When Government decided to asume dionalreonsib for anoter Lek 2.87 biMlion of unr bl debt by stat fam and other statenterise as of June 30, 1992, BAD stared to tak a pro role in lending to the privatearicral sector and In colbectg rural sav deposi. Nevertheles, BAD Is still oblied toONne leng to raning st fam, backed by a guar e from the State Farm Ageny wihinMOA. After the distribution of all st fam land, this lendig wil come to an end.

47. The skl stucr of BAD*s curent staff of 400 renec the compleXt Isolation frm anywestern baking practdes un-der the communis rl. Whie staff at the brah and agenc levelappea well acquainted wth lechial Is of ailtural production, t little knowledge ofappraising procts on lfia l and commercW goud. Staff in the Tra head office alo lackbasic exper in the areas of credit review, ffnancl ma, and accrual-based accountingSince Feuary 1993, BAD has received tecncal a In these fields financed under he CIP.Data proessing systm and ter-branch communicaons are In obvious need of massve upgradig,and most of BAD's branche and agencies, includin the ead office, have no adquate facilities oroffice Space.

48. BAD's net loas outandng as of December 31, 1992 Inchlde Lek 3.34 billIon of short-rtrmcredit extended to 270 stat enterprises (95 perct of which are farM s) of which Lek 500million has been appoved since July 1992. New lending to state entprises has slowed downconieably durng the fkst quart of 1993 to about Lek 25 million per month, with BAD largelyresing occasina ps to contin s support for state trrse. Lan to the privt sectorcompie Lek 25 million to 60nw fmers' asociatons, lk, 500 mmion to about 36,000 individualborrowers, and Lek 120 million of housing lons aovWed and disbursed in t past by the formerStabt Bank. Loans to the privaf sector aveage US$450 for indis farmers and US$9,000 forfarers's associations, with a maximum matuty of three years. BAD I aigly requires thprovsion of collae such as buildings, many and equpent, livesck, worig capital, and

. ISO.

personal guarates. Inforal morgaes on land are raely acoepted due to t'he lack of landregstraion and tling, thus consining the acoe to crdik for many armers.

49. Loans to the state sectr have been flnanced though bonwin from NCB, on order of thBank of Albania and at an aAve cost of It percet. BAD ha been remakably successfiil Inaract some Lsk 400 milion im deposits from private deposio by end-1992, and deposi growthhas remined strng in early 19M with a net Increase of about Lek 20 mlion per month. However,fte bank's new lending to th priwte ecor stiU severely constaid by acking liquidity Ooansto deposit rato of 6:1). Ihe spread between deposk interest rates (whic reach up to 32 percet)and th bank's itest revenes from loans b nrowing. Altugh lss tha 20 percent of BAD'sprivae sector loa ae reported to be affected by ar s, there i a clea need for an improved loancoltion performance. A comprehonsiv picturo of BAD's loan portfolb quality, te need for loloss proviions, and the bank's profitability wi become avaiale after completion of the on-goingcredit audit undertaken in preparation for the facial liquidon of BAD and the legal establishmentof the new Agriculta Bank (see para 77-90).

B. ECONOM[C POrENIAL Am FACrORS CONSIBARMG GRtowx

5. Supply respone In agriuue, both in the short and medium term, will come from smallfamily farms. In 1992 agrcitral producon grew by a healty 12.7 perce (after a declne of 4.4peret In 1990 and 20.9 percent i 1991) but the copping patterm waU oriented toward satsfyingfamily needs as the newy established priae farmers sought to pr their food securty. Mostfarmers have become subsisce odented and markted surplus Is limited. Refaoms are urgentlyrequired In order to encourage smal frmers to Incres production and mat tir surplus. In themedium term, there is potnti for growth in th best agriulura area. Agricual growh Is thenikely to come from the most profitabl and cor cdaly-oriented farms operat on the goodlowland sois. Sbe rur popultson will diversify out of agrulure; while th lan id livetcthey posess wil provide some Income, most rua Inome will come from off-fan eanployment intrade, serces, handicraft and mall-scale hdusty.

51. Agricultur production patterns In the medium term ae unlikely to return to the pattr ofthe 1980s and will be att by an open trde poli and by the abilty of put and processingIndustries to rebound fom ir present daotic st. Over the longer tm, compaive advatagewill dictate cropping mixs. Whe will not retun to Is ibrmer dominne wheat area is likely tostabilize at about 40 percent low ta In the 1980s dwugh yield ineas may mean a smallerreduction in output. Given Albaia's itis for producing higr-value crops, it iis likely thatwheat, vegetable oil and oilcakes will be impored in larg quties in the fture. Producers offruits, vegetables and tobacco will cover domestic weeds and are expected to be able to developsignifiant ers. The nadonal r deficit is expected to pers, as Albania aot economicallyproduce sufflcient sugar to meet domesdtc need. Te inreasing demand for feedstuffs, espcallyfor producing eggs, poulry meat, and pork is ikely to keep demand for maie above production.

e livestock sector wiU be in a positon to meet tbe main r of the pop n in themedbm term, although weaknesses in dte retd prceing idusties and the availability of feedconcentrates may be constrai

52. Given their dominant role in the economy, agriculure and the ural economy are the key torecovery In Albana. I expected t a significant suply response could come frm the

- 16

smallholder secr if major contraints to its development are urgently addressed. W, t physicainfrasructe in rural areas needs to be rehabilitaed including repairing the Irrigation networsbuilding roads and the market r. Ihis will creae employment and It=o opportunitiesin construction and services in ural areas. These issues are being addressed by sevea projectsfinanced by IDA and other donor. Second, the agricultural knowledge system (educatIn, rech)needs to be thoomughly reformed and gicultural extension md support services noed to be adaptedto the noeds of the snall fanr sector. These issues are being paruly addressed by projects underpreparion financed by several donors Including USAID, IPAD and the Goemet of thNetherlands but there is a lack of coordnaton of fte approaches being adopted. 7hid, policy andinshtiuonal refoms inidated In 1991 need to be puse with priort given to the price and tradepolicy fnework, esuring tha prices give correct market signas to producs, toat fod aid doesnot act as a disincentve for doniestic production, that marketing channels for agriculu inputs adoutputs are functioning, and that the enabling enviroment Is condudve to the development of theprivate sctor. Fow*, the Bank for Agriculture and Development must be liqul@bed and a stUngnew Agricultural Bank be creted hi1ch, after completon of a comprehensive program ofistiuonal development, wil provide credit to mral entpreneurs. PFlaly, state-wd enterprisesmust be ptivat ed quickly, unviable units must be closed down and the capacity uilizati of thenewly privatzed enterprises in agricultural marketing and procesing must be Inceased.

PART IV. THE GOVERNMENTS SECTOR ADJUSTMENT PROGRAMSUPPORTED BY ASAC

A. INTtODUCIION

53. The Govenment has prepared and Is ipleeng a medium-term program of refrms in theagriculture sector based on the stegic framework presented In the Agrurald SraeVyforAlba,report (October 19) prepared by the World Bank and the EC with the Governmen Mm repor'srecommendations were extensively discussed with Albania policy-maker and officialy endorsedby the Goverment in November 1992.

54. The medium-term adjustum program is being operaionalized by defining time-bound actionswhich IDA proposes to support ftough the ASAC. This radical program of change addresses thesevere scraL Isbutional and policy constrails (para 52) which are limAg producton andmarketed suplus increases In the smialholder sector and preventing the development a competkive,market-oriented econonm in nuWal areas. Other key constaints are being addressed, in paral, byprojects financed by IDA or odter donors.

55. The design of the ASAC alms at achieving irreversible results in these areas over the periodof 18 months while streng ing the insdtutional capability of the bey institutions involved in theprogram's implendion through technt asssance (para 153-165). Significant amounts of TAare required in order to implement fte Government's program. Some Initial TA programs finacedby USAID, EC-PHARE and IDA are already underway. The TA program under fte ASAC almsat complementhing first efforL

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D. OBJIEC OF TIM PROGRAM

56. The obJectives, mean agnd actions of the Governme's medium merm sector adjustmentptogramn are described in the Lever of Sector Poliy (Annex 2) and in the related Poity Matries(AnMnx 3). The prog has five main compnent, with readed set of policy objectives adactions. lhe specific obJectives of the program are:

(a) to reform tfie agrlc ral price and Incentivefamwrk In order to increase the marketedsurplus from farms and to ensure tht pricng of food aid does not act as a dincendve fordomestic production and marketig;

(b) to cay out the liquidation of the Bank for Agricute and Development AD) and tocae a new sustinable Agricultur Bank providing credit wider maret condtons tofizimers and other rural enerprenaus;

(c) to fialize the disdtr on of fonmer cooperative and state-fam land; to privatize statefarms, and to sell off their asset;

(d) to implment a Land Market Action Plan on tfting, land regisraton amnd developmen ofland policy; to develop the lease market fbr agrcutra land and to filitate landconsolidation;

(e) to priva state-owned enterprie la the agrtuk maetlng andprocessngsecor andto support private secto development in nru areas.

C. PROGRA CO1ADONENu

57. The objectves, Insumen, and specific measu developed by Govemment under the fivecomponen of the sector adjustment program are described in detil in the following pararaphs.

1. Ari l Price and Incentive Framework

58. The medium term objective of agricultural price policy Is to enure an efficent allocation ofresour awhieved by progessively adjusting Albanian agrictue to world market conditos,increaing the competiiveness in domenic agricultural markes and inproving the peformance ofmarketng and processn entprises. The main objecdves of the policy to be put in place beforethe 1993 harves are to inre farmgate prices close to world market levels as an icentive toincrease marketed quantites, to improve the management of the food aid program, to reform thepricing policy for food aid products and to malme k conatible with budgety contraim. hisrequires reforms In the pricing of food aid and strong meaues to enurage St enerpri topurchase from farmer. For the medium term, the policy objecdves for the gain sector are to setup the enabling envioment for the development of a folly operaional network of prive traders(collec at farm level, storage, nport, etc), to prvte all s-owned enrpris and toestblish competitive conditions in the marking, milling and baking subsectors.

18 w

Food Ald Pricag

S9. Food aid, while providing th urban popaon wih food, canh a e rong discentive effecton domestic agculural production and prices. Pficing policy reforms to be introduced have thobjectie of bringing prices to levels consistent wih economic icendtves and budgetary resourewhile paralel measures are taken to mitgat the reduction In real Incomes so as to moderat thesoci coss of adjusmen The objectve of naining the compeItiveness of local products woudbe achieved by settng the prices at wihIh food aid sipme are sold marginly higher th hoprice of the domestic products with which they compete. In parallel, reftoms In fte management ofthe food aid program are called for: Ievls of food aid need to be more carefully brought in lN withactal needs; at the regional level, food aid wheat should be dbuod in diricts where local wheais not available at affordable prices, ad disrution shud not ac as a disincent for prvte grainmarketing and processing and depres prices received by farmers.

60. Prking of Wheat and Bread. Bread s the mai stple of Albanan households. At presetthere is a dual pricing system for wheat: fariers receve 8.5 Lek/kg for domestic wheat and wheatgiven by donors is credited to ctrpat fmds at 1.3 Lek1k. There is a flied consumer price of12.5 Lek/k for stnard quality bread (aver extraction rate of 80 percen) called bue maslve.Under the acrrent system, wheat from food aid i to be used for all tp of standard quality bread.The quality of the bread depends on the ecology avaibl in publicly-owued mils in th majorcities (te extcion rate varies from 75 to 90 percen). Leaks are bard to control in practe andthey result in implicit consumer subsidia becoming explicit profits for some mills or bakeiesproducing higher qualit flur or bread. Futhe m , under such a systm, counterpar fundsrceipts are low bece concesional wheat h sold at a low price, Irspectve of Its use

61. Over the July 1992/June 1993 period, donos will bhae supplied Albania with 460,000tons of wheat compared to a harves estmated at 270,000 to. Total needs are etmad at730,000 tons by Albandan officis (luding household conution and losses) but they are basedon a geneos figue of 220 kg of wheat per capta Actul pme for July 1992/June 1993 wiexceed coitents made by food aid donors by 130,000 tons.

62. The urrent retail price of bread includes an Inplt sbsidy equa to the diffeence betweenthe world price and the counepart funds (CPF) price of weat The price at which donor-suppliedwhe b credited to CPF In th budget is detemed by tractn from the fixed consuer priceof bread (12.5 Lekkg) the margins chged by public entpris to cover tort, storage, millingand bead bakig taking into account he appate uheaflour and flourbread conversion ratio.

he stat-owned company in dharge of storae, twport anddistrbn, NFI, which is controlledby the MOA and employs about 100 workers, has larg Inter-enterprise debts and tax arrears. Mmtransport/storage/procesing margins are lly demined d adjusted periodically. InAupst 1992, the sum of all margins amounted to 4 Lek/kg so tht food aid wbeat was priced at 8.5LCk/kg for counterpart fund puroe. By January 1993, indutial ard trade margins had inasedto 11.2 ILek/k and, as a result -in order to keep th price of bread at 12.5 Io/g- wheat waspriced at only 1.3 I..kg for counterpart fid puposes. Magins for distribudon, nilling andbaking have therefore tripled in 7 monts.

63. Under the dual pricing system, sa-owndills bave an inetve to purdhase food aid ratherthan domes ly produced wheat becase of the low food aid price. About two third ofconcessional wheat was delivered In 1992/93 to stae-owned mis and the remainder directy to poorrural ae through the Pelican operaton' (distrution by thoe lan Army). Ptivate milers are

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of two tp: on the one hand, meo s loc mllers nstlled at the village el d ppied byneighboring mrs; on the ohr hand, priva entrepreneurs who have bougt mms from fmrcoopetves and who are In a poshlon to work moe ntenivey, un lrger capaciti. A boworpicin and distribution poly woUld help eliminate th discrImInaIoI agaist t pivae milisor, whdch has very lmited accoss to food aid whet by allwng t entry and expansin of thmore efficit privatemi In t he mar for Imported vheat

64. The Governen as dided tD Wtoduce subnta refoms in s prcing poicy for etand bread. As a first stp, in order to proide incves for frmer to n hir maredproductk of wt 1993, the Governmn has decided to re the farite price to 14 eklk(whic amous to aoimely 75 peroent of theo im part price). Mm new producew pricwas not annunced in time for die October 1992 plang seaon, howsev. The officialydproducer price consut a floor price atl w Government4 ed purcing enters (pwn )agree to pur e the wheat. Privat buyers a fre to purchase at a higher prce. Pva grainmarket are sdtl undeveloped but k can be expected dua whea pries wll rs above 14 Lekl Inwheat defcit areas.

65. As a second mnor step,, th Govenmet wil Inrduce In June 1993 a new pricn polcy forfood aid wheat and bread. This prcn refom has two objectves: as orpat wAreceit and make a major step towd bringi the bread price closer to cost Wih a faoga prioof 14 Lekfk, te cost of bread producdon (wh mket, four mg and broad bakn)including profit margins under competitie codition, s ao 25 LekIkg. The price of food aidwea cedited to uterpart fids wil be raised to 16 Iakg, I.e. hghrthn the proe ofdomesial produced wheat and close to te CIP Import ice. The Governmts medium tmpolicy is to mantn th CPF prce of wha, In al tm, bove 16 Leklkg ad above te dometiproducer price. At the sme ime, the Goernment wi hcease the consur pdce of bread kom12.5 L1kk to 25 Lei. The margin for domedc distiut reied by the state denteie NFU will be lmied to 3.4 Lekg ad th efficie of NFU wil be enhne by

ubig k to he fsand ontroloftentrprs e uc Agc (pa 116). Any subsidytate may be requid for NFIU will ome ut of h ERA budget alocato Any wndf proftardsng from wheat tade or flour milg wil be taxed.

66. Wage ve remained appimaey osta In a n over th Augs 1992 to My 1993period. Ihe nomnal iincrease in the consum price of bmd would trlat hno a 20 percet

ee In real s. n order to mod the sodal cost of * price adjusuet, d budgetwicompensate the d sgments of the populaton by ceasing wagIes In te public sector

d In stae enerpriss, psions ad social aste beeft. Concurenty, he tp of sociprogrms ta are most ap to Albanian conditionswill be examned on the ba of a revlwof household expenditres and mntdonal status, and of the cacity of the I to Imptgetting trugh Its social asstac prgram (ndgure ekomlke) In connecon with ot propostdIDA Social Saety Net Delopmen Projec (am 18).

67. Pring of 0*te Food Aid Commdies Oder food products provided by donos incudvegetable oil, sugar, rice, meat, powdered mik, butter, deese and eggs. July 1992June 1993 don

rato (110 Ldc Per M3. addin a q=Uall puuium for impoutad wbeat (o *over bowte moawiu%s gIuWn Gmatmatdria nm d bagglas, thi wadd pt doe impos PsW1~ Pe In Oi I1-20 Iaklk =sp.

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impr are also epected to exceed the needs of the populaton so that carry-over sock will beavailable In the latter half of 1993. In addidon, since Janay 1993, priva Imports are availaleon the market, and retal prices of sugar and rice have been decreasing. The prices at which thosedonor-supplied food commodkies are credited to counterpart Amds (CPM) and the margin ofdistrbtion entrprises have been set in January 1993 in such a way that consumer prices are closeto import parity levels. While consumer prices of food id sugar and rice were set htgher thanimport parity levels, prices of meat and dairy products (which account for bss hn 10 percent ofthe value of food aid) are about 10-20 percent lower. Mhe Govemment alms at achieving eobjective of setting food aid prices at import parity levels so as not to discourage private impor butwant to reach this objective gradually over a period of two to three years for health and nutrion

reasons. Over the medium term, the Governent is committed not to let the CPF price of food aiddeclie in real tm below their Januy 1993 level.

68. Auctoning of Food Aid. In order to obtain efficiency gain In food aid proceme anddistribution, the Governent will introduce private participation at al levels of distribution adprocessing of whe and other food aid commodities. The nmnopoly position In orge, bulkhandling and tasport of food commodities that NPU Lid other sta-owned entaprises hold wMbe abolihed, and auctions wil be orgaizd for the sale of food aid. State eteprises wi contawith private tran ters and distrbuton, with contas awarded through open nders. In practice,the system wil work as follows: food aid will be Imported by state-owned foreign trde entises,as under the current system, or by private Importers acdng as agents for the Goverment TheGovernen will ensure that food aid is channeled to each disrct according to needs. Food aidcommodities will be auctioned to distributors or millers with a mnmim auction price (e.g., 16Lek/lg for wheat) and bulc handling, storage and tasport will be contracted out to the privaesector with contrac awarded rouMgh bidding procedures. he Goverment will need to ene tatthe quantities allocatd to each dierict's popWulation reach the beneficiaries.

Farmgxe Price Poll

69. Opqut Priig. As mentoned above (pam 35), all agriculura output pices hae beenliberalized with the exception of wheat and sugarbeet Ihe price at which wheat wi be bought fomfimers by public purcaing enteprises is fixed but has been increased for the 1993 harvest from8.5 to 14 Lek/kg. Private purchaser are fee to buy at higher prices. The price at which sugarbeet(produced only in the region of ICore) is bought from farmers by the only existing sugar mill is alsofixed and has been increased for the 1993 camwaign from 1.8 to 2.7 LebkKg. All other farmgateprices wifl be freely determcied by the markle In practice, the level of market prices is influencedby the prices at which food aid imports are sold and by the purchasing policy of monopolstic staenterpries which are the only buyers of significant quanties of farm products.

70. In the medium term, purchase prices paid by processing enterprises for tradeables wMulftmately depend on the competiiveness of the domestic Industry vis-avia imports. If theprocessing industies are viable, farners should receive prices that are close to te world marketprices of corresponding tradeable goods in domestic currency, minm domestic processing andtanport costs.

71. Iizing ate prices per se Is not likely to result In marked ineas in prices paidby stat nd nterprises given their lack of resources and low level of efficiency. Priceberalization will therefore be supplmented by meaues to encourage enterprises to purche from

farmers including privatizaton of public enterprises (para 115-120) and private sector development

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(para 121-123). In order to creat de conditions for the acceerd development of a prvae cerealsmarking etwork Wgn collecn from famer, storage, bulk hanlg and wholesai, theGovenmen is cuely assesing (with tecnical assitc from EC.PHARE) the credk and othrnreds of private grin market perors. Priva persos interested in partipatng In graln tradewould be screened ad licensed on the basis of professional experien and fiancIal standing, duringthe period of Implemntaon of ASAC.

72. Ipt Prkcng. Almost all agiultra Inp have been imported under vaious aid finacedprognms. he ar also larg stoc of Inputs (especialy pesicides) still available in the country.Ihere are viualy no private impotu of agricuturl hps (with the exception of tractors) and tIs unlibely that significant quantities of inputs will be imported on commercial erms in the nemt fewyears. There Is a sk that ipts could be smuggled to nighboing counties If domesc prces arsignificantly below world lvels. Curreny, agricultural inputs are sold to farmrs through differenschemes. These supplies (conmmtted in 1992) wil increaw considerably In 1993. Some donors (EC,lDA) fnance pstdcides, seeds, spare parts and other Inpt sold through exist state-ownedcels at their lek cost at the prvaling exchang rate. mported ftlu has been sold In 1992by USAID, through auctions, at prices which were below world market prices. Imported frtilizrstil available In the country Is now compeing with dotnest production which has restaed inOctober 1992. As far as mechanzrd equipmret I concerned, several donor have plans to hIportttrs and inplements. Some 170 trors wer rect sold by KfW (Germany) and more donar-financed imports are planned.

73. Ihe policy of the Goverme Is to sell donor supplied inputs to privte traders using auctIonswih a minimm price equal to the CIF cost of Imports at the prevailng exchag rate, Includingtransport and handling charges. A ltur I are exempt from axes and tariffs. However,duing the asitio period, some flxibibity In applying Im priy prici rule for lputs wMbe required so as to salw fam to purchae and use modern Inputs. Pilot aucdtons wi beorganied by the Governmt with te a aance from don.

74. The emergenc of prive trades sUing Inputs to famer and compedig with the a edAgroregtare network will depend on progress in privalzing ta network, on availabit of crediand on setting up the enabling environment for private comme. Once competie condltions exihI market for ricultural Inpus, it Is exet that domesidc prces will sabilze around Importparity prices. Trade margins uld graadaly be reduced as conmetiive condition develop.

AgricituliTrade Polky

75. Trade policy meaures wil complement the measus desribed above. In some importntsubsectors, such as meat and dairy, In which retall, wholesale and producer prie have beeniberlized and competiive condtons could develop rapidly, recowvery will be geaty faciliated by

trade measures. Tariffs will be set so as to generate Government revenues and proct domesdcproducer again unfair compedtion (dumping) from abroad In order to increase revenues, theGoverment has deCI to Impos a 5 percent surhag on private Imports, Including food,beginng in June 1993. Price ceflings on priaely Imported goods which have been removed InJamnury 1993 would not be itced Export licensg or related restrictons wili be phased outonce the risk of ilegal export of food imponed under concsonal tem is elmnaed. Exporttaxes, currendy in force for tobacc, wood, fish, Uve anmals, hides and medicinal pla will notbe exuended to other products.

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76. Mih pecc neuaes to be Implemented by the Government unde th AgricusuuralP andncentve Framework are tie following.

* LberalzatIon of al famgate, whoesale and retl pdor of agricultural snd food producsexcept what and bread.

* By June 1993, Increase official purchase price of locally produced wheat to 14 L.kAkgCabinet deciion to increase the countpart fund (CPF) pice of food aid whe to 16 LekAkgand the consumer price of bread to 25 Leklckg. Mainan tto CPF pdce of wheat, In raem, above 16 Lek/kg and above the domestic producer pdce. Limt NFU margin to 3.4Lek/kg ad subject NFIU to the financial control of hA Any stusd for NFIU to comeout of the ERA budget allocation. Any windfall pofits aising ftom wheat trade or floumilling to be taxed. Control marshs of sta-owned mlling and breasaking enterpises.

* By IJe 1993, Introduce auctions and conve biddib g procedures for tranport w holealeand distibution of food aid commodities.

* Car out by March 1994 a household expendiue survey and a reiew of the nuttional statusof the poplation and improve targeng mecasms for vurable population growpsfolowing stting up of the social safety net (ndftm eoWnoite).

* Develop finandal and logistical arangementsto enable grw?bulln to rase cers fromprivaefarms. Set up the enabling envionment and crate th conditos for te developmentof a privat cereals marketng network (grain collection from farmes stog, buk handlWby SpIg 1994.

* Govnme agencies to sell agricu Is imOrte izer, pesticdes, maines, tec)throgh auctions and other compete procedures.

* Rewogn the Stastical Deparment of fte Miniy of Agric

* Set up and staff Price and Markets Monitoring Unit in the M sy of Agriclue

* Creat and staff Policy Analysis Uni In the Mini of Agricltd

2. Ret r f the Rural Cedit Sstem

77. Mhe Govermen, recognizing that the development of a ral fh i sytgem adaped to amarket economy and the provision of credit for farmers andt pivat entrepreneurs ib a keypdority, as decided to follow two parallel approaches. Frst, liquidation of te isovet Bank forAgdrcute and Development (BAD) and creation on July 1, 1993 of a new, finacally soundAg4ricwl Bank (AB) dta will provide loans under market to private ames ndfmer' associtons, agrprocessing and tnsportenpises, tades and oierrra enteprnurs,tupgh the Bank's network of branhes and agencies. Second, craion of Idedet anddeetralied vil based credit unds which offer smll loa to Indlvidual frm and otr small-scal entris in rural areas. Village Credit Funds are cuety bein set up under theGo vmnts Rural Poe Alleviaton Program, suppored by IDA. With epect to BAD,

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Govenmen and the Bank of Abaa (BOA) are commied to actvely support te liquiaton ofBAD andthe creaton of the new AB a a commercially operatng ra ficial nermediary.

lquldon .f BAD

78. BOA and th MOP bave fnld a comprehensive plan for the Uquidadon of th exingBAD. Th plan provides In on on the methods and tming to be used for writing-down alunrecoverable debt by stat enterprie, and of housing loan, as of June 30, 1993 (se Anex 11).Govemet wi prov the rWired fncial support to the bank In order to carry out thi plan.Hower, sne is unctain whethr sufficient budget funds - namely proceeds from lqidatingat f and from rivatiins pubic asset- will have been made avalable to BAD by June 30,1993, it Is the Govenmens intento to separate these bad assets, together wit the bansco ponding liabiies with NCR, from the remainder of the bank's assets and liailmes. BAD'sperformng loans the private sectr, all deposits, capital, and physical assets will be tnsferredto a new Agrultud Bank, Including some savings deposits In rural branches of the Savings Ban(SB) to be shifed to the new AD. This creaion of two legaly Independet banks alows for atransoy perod to reolve th bW debt ptoblem of the BAD In liquition while enablig the newAD to start opet with a clean balance sheet. Once al bad loans in BAD's portfolio wil havebeen replaed ith ew valuable assets, t latter will Immeditly be utlzed to repay BAD's debtwith NCB, and Overnment wl liqu te f er B AD as soon as posible.

79. BAD In Lidion. The DAD In liquidation wid inherit all outs debt of seenepris as of un 30, 1993, xpected to equa about Lek 3.5 billion, cluding some Lek 2.9biion pdor to June 30, 1992, and some Lek 110 million of housing loans. BAD's tWal assets ofLek 3.6 bion will be balaced by some Lek 350 million in state sector deposs and Lek 3.25bili of liabilities wit NCB.

80. Loas to Ste BEnprises as of June 30, 1992. As a fhrst step, the Counil of Mibtersdcided to reJieve BAD and NCBR m aU outs ing debt by stae entrprs as of June 30, 199

(Decision No. 1033 of Apdl 8, 1993). The amount conceng BAD is equa to Ldk 2.87 bMon.Currenty, MOP is working out detais wit BO.4 on the mechanism to be used for writ dow

ee unveabl debt, to be completed by the end of June 1993. Govrnment envsages tO frstclear herbk debt betwn BAD, NCB, SB and BOA, and to issue Govrnment bonds covernthe net loss. Ihe orm and md_sm for issing bonds will be addressed under t proposedEFSAC (Pra ;6).

81. Lons to Sta Eiueprles since Ju& 1, 1992. Loans extended to state entrpri since id-1992 are mainly loans to ste farms, made at the request of the Stme Farm Agecy with MOA.Govem t ntends to cover all of hes bad loans by June 30, 1993, through proceeds from sellngassets during te process of lquidatg state frms. As of March 31, 1993, BAD had extended atotal of Le 850 miio In new whort-term loan to state fam. Repaymen by the Stt ParmAgenc as of ta same date equa Lek 500 million, leaving a net outstanding baance of Lek 350million. Based on projecdons by th Stae Farm Agenicy, Goverment expects that addomnl short-term oas to rmng state fam bwe April and June of 1993 will equal about Lek 400million. Durig se me months, repayments by tat Agency to BAD will offs some of thsadditonal lending. Hovr, as a conservative assumption, Goverment estimas the netou_tsta balance of loans to st enterprlses.made since July 1, 1992, including stat farm loansand los to ste-owed trers and some agroprocessing entprises, will increase to about Lek 630milli by the end of June, 1993. Together with ste sector loans of Lek 2.87 billion as of June

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30, 1992, these loans will be transfrred to the BAD In liquidaion as of July 1, 1993, andGovenment will cover tornm through the state budge

82. Houasg Lan Before the creaon of BAD, the agricult darment within the formerStt Baak of Albania tnded long-term housing loans to private Individs, which weretransferred to the loa portfolios of BAD and NCR upon thir caton in 1991. Outsandingamounts as of Decemr 31. 1992, are Lek 118 millon fr BAD and Lek 55 millon for NCB. ByArticle 15 of dte Privatzon Law on Stt-owned Houses (LAw No. 7652 of December 23, 1992),Governmet dcided ta borrowers are empted from repaying their ouading debt as of June30, 1991, up to an awunt of Lek 15,000 per loan which, In the cae of BAD, covers the entioutstanding amount of housig loans. Gover nent nnds to repay thee loanm through proceedsfrom privatiig sae-owned apartm and other rea est. In cae the repayment does not occurby June 30, 1993, Govenment will tae over the expcted resetiv ouS_t debt of Lek 110milHlon as of July 1, 1993, which wil remain In te BAD In liqudaon for subsequent coveragethrough th se budgeL

83. Tnvner f Depsom Svings Bank During h diw lution of he vaous departmentsof the former Stae Bank of Albania, SB has received all saving deposi whfle BAD and NCBInherd he respectie loan portfDolis. Govermnt Is awar ta t Imbalae beween soucesnd uses of fmds In th ftree bank can eithe be orected throgh developmet of an Intbankmarket or through a merger of SB brnlches with BAD nd NCB. Based on the reconationsof a recent cosul study, it is GovermWet's Intion to pres the e of the threebank nd not to enge In trer bak merge. Th wld enhanc compettion Int bankingscor and avoid placing additional ional caenges on the ban during the prese phaseof bank r However, the finacl benefts of cosolidatng some ural braches andagences of SB with those of th nw AB have been evauated by the maOgement of both SB a-ndBAD. hn cprtn vith consln finaced under the CIP, both bansh reached areement,in May 1993, on a short-ls of 28 branches and agences of SB whih wil be merged hito the newAB. A total of Lek 500 mllion of deposits wi be ansfrred, and Impe itto wil becompleted by the end of 1993. Ihe plamed branch consolidatons were confirmed by Governmentand BOA durig negotiations.

84. FinandI Strce ofthe New AB. Iheoe balbce sheet for AB as of July 1, 1993, wMcontain somse Lek 960 millon In private sector lans and about Lek 800 mllon in depositsGovennt will ereh there will be adeqate provsous agaist possible loan losses andsufficient capita to fulhl a conservative caphil adequcy rado of 20 percent of risk-weightd assets

Legal Esab ofde new AB

85. Bank License. Tne new AB wIll come under Ol provisions of the April 1992 Bankng Law,and BOA will Issue a license to the new banlk Accord to Article 8 of the Baning Law, anapplication forlicensing needs to include the Charterof the new bark. Granting of a license is alsoconditional, liter aln, on evidence of adequate capital and quahled bank Duingnegodaon, BOA has confimed se conditis wi be flfied and a license Isued in July1993.

86. Ba* Caifr. AD's By-Laws will specify he type of banking aions that AB can engagein, and will set out that the new bank will focus its lendg on the priate sector. Governertrecognizes hat the f cial safety and soundness of t new bank hinges upon the Bank's autonomy

.25-

In day-to-day credit decisions. If AB judges a prospective borrower not to be creditworthy, andGovement nonetheless wishes credit to be exteded to tt borrower, the Bank can provide credit,but only as an agen of Government, which will provide the required facial resouces, assume Xtfull credit risk, and reimburse the bank for Its adniestrative expenses.

87. Captk and Bank Ownership. The bank will be set up as a joint stock enterprise, andGovenent Is committed to itdally hold all of the Bank's equity and to provide additional fiuds,as needed, to sadt exn capital adequacy requirements, which are based on BIS standards andar st forth by BOA. Accordingly, the bank's Board of Supervisors will be composed ofrerntatives desed by the Ministry of Finnce, which will hold effective ownership of thebank and will ense strong govemamce ftrough fte Board of Supeisors. These designatedrepresenttives would be chosen based on their technical qficatons In the area of baking andfinance, ith an emphasis on specfic expertie of agricultu and oter rura finandal servIces. ItIs ultaely the Intention of Government to privatize the bank, possibly wih a cooperativeow p sucure.

88. Q Manag Govermnt Is wel aware that, accrdig to the Banking Law, atleast two niDvduals, wilh qualifications and experience required for the maagemet of the bank,mst be appointed members of the Board of Directrs. Governint will ensure that the requhredfundamental change of the new AB towa commercial bandkng principles Is impnlemented byqulified personeL

InsAtdloana Devdopmn of AD

89. Inldevepent of the new bank will req long-term suppot trouh ext lasstanc, Intee traning of bank staff, and iallation of urgently required offlce equipmentGoverntm will actively support the requed histional devebpmen program for the bankhrough provion of donor-fined tecical assistance, eqWpment and exensve trang. Dudngte first two years after AD's creation, starting in Agust 1993, Goverment Intends to concentrttecdufal assistance for AB In ihe following key areas: credit policy and procedue, loan portfoliosupervision and credit review, finanial management, accounting and MIS, branch magement andrehabiliation, resource moblzaton, human resources development, and tenaional baking.Govenment wil constantly monitor the progress of this instional development program for ABin order to ensre high efficiency and speed in Improving the quay of AB's fiacialInterediation. (For details on AB's intttional development refer to Annex 11). Govermnmet balso aware of the need to guarntee the transparency of AD's operations and to stengthen depositorconfidence in the new bank. The bank's annual cial stateme will be audited by inendentextal auditors.

90. Ihe speci meres to be Implemented by the Government under the Restrucuring of theRural Credit System Component are the following.

The Govenment and te Bank of Albmana (BOA) will liquidate the Bank for Agriculte andDevelopment (BAD). A new Agricultual Bank (AD) will be created as of July 1,1 993,contaning BAD's privue sector loans, physical assets, savings deposits, and capital. AB will

ate on commercial principles and will provide services to individud frnmers, pnvatefwms associations, the agroprocessing sector, traders and tansporters, and other enterpriseswithin he rural economy. A Technical Assistance Program for tasformig BAD into ABhas strted In Febray 1993.

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* BOA and the Ministry of Fnance and Economy (MOF ae fialnid a plan fDr thf quwadoa 4lfAD. his plan incles: (a) w rte-w of unrveablestate enterprise debt

as of June 30, 1992, equa to Lek 2.87 billio. On April 8, 1993, Governent decided toplae these loas thuh fresh asses Non-covered bad debt by July 1993 wM remain with

BAD for subsequn resolution by Goverment; (b) wredown of ste enterpre loansoeended between July l,1992 ad Juno 30,1993. Inthe event that proceeds from liquidaXtst farm assets will not cover the out balance, tese loam will remain wkih BAD,after July 1, 1993, for subsequt resolution by Govenent; (c) wre-down of housing loansmade by the former State Bank of Aban The outstandig balance wlll remain with BAD,after July 1, 1993, for subsequent coveage by Goverm tougb proceeds from to sabof statowned rea este.

* Legal ernb of the new AB hIvolves to baks placement under t Aprl 199Baddng Law. Ths will be acheved through Issuamce of a license by BOA, which sconditonl on falfllnen of three cey conditions: (a) drafting of bank Charte fr te newAB, agreed beteen Goverment, BOA, and IDA, provding for th bank's autonomy In day-to-da credit decisons, and r ing budgeta fancig and Governm guarantees whenlendig to boffowe at the reque of Govement; (b) proof of aequae initial capital forA). Govenment I commitd to Intaly hold al equt ad to put e bank on a solid capitabais, as requiret by existing capital adoquacy standards. An assment of provisionsrequred an AB's privwe sector loans, and tir Impact an AB's I capital, is curenybing curied out by expaiate experts. Mme pening balancesheet of AD as of July 1, 1993wfll be approved by AB's Board of Supervios; (c) appointment of experiened bankmanagement by Governe, qualfied to mpleent the chag of AD towards a commerlloperati bak

* Imtzatonal Developmen of AB wil be Initiated through a two-year program for insutionreform, stardng in Augut 1993. Govment Is committed to support ths program thoughfinacn of teical asssta, equimen and extwve tg In key ara, ncudingcredt policy and proceres, loan portfoHo supervision and credi rview, tfan

acountg and MIS, brch manageet and bil resourcemobilizadon, human resources develpmt, an intrnona bankig. Gove t willconstantly monitor the progress achieved in peig this program. To enuretaspa-grency of the Bank's operations ad o steen depositor confidence, the Bank's

anal financials em will be audied by idendent exral audtor

3. Pdvad d of State Farms

91. By Decbon No. 452 dated October 17, 1992, the Govment has dcded to lquidate allstatR fIrms and to proceed as quikly as possibl to disibut e hld and sell the assets of thesfams The Nadonal Agency for Reructuring and PAivatzaton of State Fam (hereafte, 'SFam Agenc') has prepared an impleentation timetable for the liquidon of the existing stefam, sal of tir assets ad setee of their clams, and ditrbtion of their load to workerand ter famiies.

92. Dlhabon of Lad Ie total at fam area (147,517 ha) Is composed of lnd origallyacured from cooperatves (6,232 ha and of stae farm builton reclmed land (111,285 ba). IheGoverment wi dstut de land of ex-coopeatve sae fam by givn propety rights to foner

workers. Most of the non-cooperative stae tuna lnd (92,165 ha or 63 percent of tot land) wiMbe dstibuted to worrs through assignment of rghs to use of the land. The remaing land (37percent of total land) will remain stat property and be maaged by eng joint-ventures wfiforeip companies (10 percent) or by aiula specialt o proviously worked on te state

93. Mie State Farm Agemn has omtd Wdators foral tato farims. Entied for receilandre all workers registered on pay-rolls as of Augt 1992 and members of their family, andslected other persons that contributed to the ceon of st fam at ter founding. Land wil bedisuted on an egaian basis to aed peron. She average Ild holding per capita wil bebetween 0.2 and 0.3 ha. As In te ca of distributing fore cooperate land, a local commisionwill be ormed for each state fm with a cman elected by workers. This commission wil submita proposal for land dibuton to comnissios at the commune level, to be approved by th landcommission at the district level.

94. As of 14 May 1993, 6 percent (63,840 ha) of all land to be distuted to wke has beenreleased through ismce of a preliinay land title (tq. Government expe tha the renaidwi be distributed by the end of June 1993. The fact tha the klw on the compon of formerland owne has been passed by Parliament an 21 Apri 1993 should accel te process of landditribution sie restuti clahms wil no be allowed.

95. Sake ofAsset. Fixd assets and workin capial of stae farms ae being sold, with salesrevenues being uzed to repay loa exended by the Bak for Agricultu and Development (BAD)to st fam since July 1, 92. Assets ncxlue mainly (mosty cows, she and goas),t-oors andher o agrlcUaW gumt, stables and other buiing, and he smmer 1993 wheathare on e fields. Thre are also 30 state farm which own no agricull land, but withsifcant vales of macine and is,tlon, ncldn pouity fas, me pxocessig fm andgeenhouses, which wil be treated and privatzed as a enterprises.

96. Asset wM be sold by ian of a pubfic auco ope to those persons t are eligible forreceiving state fam land. Tv week before dte aucdon, SPA will amunce minimum priceof assets, based on he hisic book vale at the dme of consucton, orted by the increase ofthe price index and takng ino account 2.5 pacent of on. It necessay, a secoidauction wil be held, allowing ote domestc indkidual plto e bids. In the event of a thirdauction, foreiges wl als be admttd to pardcpate In aucdton If no buyer can be fund afterihe trd round of suctions, SPA ihtns to give away asse crd a nkind to agricuturalspecialists, who would be requied to repay ter lons wtin one to the years, wih a positve realInerest rate on th outstadn portion of the credit.

97. SFA has estabhed branches In each district to supervise asset sale auctions and to providenenries of ste farm asets. As of end-March 1993, th aset of 160 out of 270 st fam

have been evalted. The value of aes of the renaing ste fam will.have been estmated byJuly 1993. SPA esmiates the combined tot valus of ste fam asset equals about Lek 2billion, of whih only up to Lek 1 bilion I exectd to be treived from auctions to iterstedbuyers. As of ead-March 1993, state farm asset worth Lek 400 million have been sold, of whihLek 385 million have been collected In cash by SPA and tanferred to BAD to cover losses fromuncoverable se farm loans. The sale of another Ldk 300 of assets i expcted by July of 1993,with the rmng aset worth Lek 300 miMion to be sold by the end of 1993. Actual paments

. 28 w

from these sales will be received folly only aftr about he years due to credit in-kind arrangemensfor some sales of assets.

98. The speecc measures to be taken by Government under the Stae Farm PrivaLtIonComponent of the programn are the followmig.

* Tbe National Agency for State Farms wil continue Its program of land ditribution and saloof assets of all state ms iniated In October 1992. A detailed plan and an implementaontmetable for the liquidation of al existing state fanns, for the distrbution of user rights onland to beneficiaries and for the sale of assets will be adopted before June 1993.

* The liquidation of all stae farms, distribution of land rights and sale of assets wil becompleted by March 1994.

* Stae fam having already signed a joint vente agremt with foreign partn wil beexcluded from te liquidadon and land distibution scheme. Joint ventur will not receivesubsies or credit gaantee from the Governmet but will be eligible for credit fromcommercial banks.

4. Developmt of the Legal and Regultory Framework for Land Policy

99. The Legal Framework for Land Privatzon. Article 11 of Law No. 7491 of April 29,1991 provides the constitional basis for natural and legal persons to own property. The two mailand prlvaizaton laws, namely Law No. 7501 of July 19, 1991 and Law No. 7512 of August 10,1991, are derived therefrom.

100. Law No. 7501 dlvds land Into tee categories: agriculual land (including orhards andvinyards); frest and pasture lnd; and non-agricultal lad, such as urban areas, parks, roads andbeaces. his law gran weship rghts without payment to former members of agriculuralcooperave mad their households. Use rigbh are granted to ot'her qualifyig residents of formercooperative vilaes. The law makes no provision for rights on the grounds of ownership prior to1946, nor provides for privaization of state fas, pasture and forest. By Article 2 of this Law,the purchase and sale of agric al land is prohibited, although the voluntary exchange ofagricultural lad auong new owners is pemied. Othrwis, the law is unclear on the rights andobligations of owner" and *users".

101. By the ten of Law No. 7512, agriculue is a sector of the economy open to privateactivity. However, foresty and water resources generaly remain state activities although joitventues with fign capital are possible. Legal and natal persons who own buildings own theland onwhich th buildings stand. Land with buildings can be purchased from the ste and bui-upura land can be purchased and sold privately, but not by foreigners, who can meely hold leasesfor up to 99 years. (The original term of 49 years was extended to 99 years by amendment to Law7512 in January 1993. The law does not yet fidly define the rights and obligations of such urbanleasehold interess). When an enterprise or business is sold to a foreigner, the latr acquiresownership of the entrpre and its buildings, but not the land.

102. Decision No. 255 of the Council of Ministers In August 1991 detailed the process ofdis4tit cooperative land. When a cooperative was composed of severa villages, the land was

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first divided among the villages, baud on population. Within each village land was ditbutedproportionally on a per-aita basis. AU household members courted equally except for those withpermanet jobs in the public or private sector, who received only a half Ae of land, the total ofwhich has not exceeded 0.1 hectare. Rural residents who were not cooperatve mems recelvedhalf the per-cita de of former cooperative members, the total of which has not exceeded 0.4hecte per household. Furthermore, these non cooperative members have only received use rights -not ownership - for an undefined period. Again, agricultural land within village residential area

boundaries has becn assigned for use" only. Where land Is of limited producdvity and a recipientfmily has So requtested, distributions which would otherw have resulted in ownerip have beenmade "in use' only. Orchards and vWineyards, Including the trees, have been distnbuted like anyother land.

103. Some 160,000 certificates of allotmnent (tap) have been issued under the coopertve farmprivataton program. ITese are made out to heads of households and each describes two or moreparcels. As stated above, the fmili receiving such certificates have acquired possession in allcases and legal ownershp In most.

104. Ifnte terms of Decision No. 45A ctber 17, 1992) regarding stae fms, former membersof stae fam are receiving their allotments exclusively "in use". The lgi meaning andImplications of the word 'in use' are, once again, unclear. All recognize dth the State retainsownership of former state farm land (unlike most forner cooperative land) but the rights andobligaions of each 'user' remain unspecified. Possession is for an undefined period, withouteasehold or other contractual rights and obligations on te part of te State and the 'user". The listof those entted was fixed as of October 1, 1992. No more than the amount of land distributed perperson under the cooperative fanr distribution programn (being, on average, a maximm of 1.4hes) my be distributed per personL Where state farm land remains undistiuted as a result,kt is divided equally 'in use' to 'agronomist specalists', with up to 8 hectar each per specialist.Certificates of allotme are being issued to heads of households, wih eac certifiate describing twoor more parcels.

105. Compenradon of FormrAgrlckaLand Owners. The Parliament hsvoted on21 April1993 law No. 7699 ng land owne who have received none or onDy part of theagricultural land that was in their possession prior to 1946. Restion, as such, is not beingcontemplate for agriculural land. Rather, in the dft law currently being discussed by Parment,previous owners of up to 1,000 hectes are to be conpensated by vouhers dewminated both in lekad value units, tradeable for cash or, at face value, in sales of t-be-privatized stae-ownedenterprises (SOEs). The former owner (or his heirs) of any parcel of 15 hectr or less is to receive'full comn for these .ectem. Prior owners of additional hectares, up to a maxmm of1000, ae to receive compnation on a decreasing scale basis, so tdat no prior owner or his heismay receive ful compensadon on more than 46 hectes. The value of each voucher is to be fixedby fte Council of Ministers at some fure date. A Stat Council of Compensation wh dsrictoffices is to Implement the compensation process.

106. Th Reegdaory FVmewo* for the Iplemation of Lod Refoin For roses ofdistributg agriutua land, the Govemment has established: (a) a National Land Comnmissionchaired by the Miter of AgriculNre and repordng to the Council of Minist; O) Distrct LandCommissions to organize and supervise the process of distrting the new rihts; and (c) a hirdtier of elected village level commissions. The actual distribution process is caried out by the villageland omsion, consisdng of village notables, a topographer, a srveyor, and a state agronomst

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The viage commision Is assisted by die D is Commission, which also has togphers andagronomiss, and a cadastral officer. ThM disticts help prepae and implement vll.ge distrbudonplans and provide cadastal mp.

107. no parcel distrbuted to each household, whether In ownershp or use, I calculted byreferenceo tD de total arable area In queson and the number of fily members. Tho vlagecommissios then demarcate the land In the presence of all concerned. A record I prpared, cross-refernced wherev possibl to fte pre-1946 parcel-based cadate, acconied by a sketch plan(although not always). Ihis record, wbich ists th various parcels allotted to each fmUy, the aeaof the parcels and etpe of land, is then signed by the household and the commission. Ceficabes(tao of ownerhip or use are granted, wih copies retned In th distct cadastrad officeL

108. Each of th laws refred to above has been prepared hasty In a rpidy changing policen*iro_ment. Witout excepon, they are sketchy and rudhmenta, often only proviig stamentsof polcy lnent They do a as yet provlde a body of reaproperty law, definlng ther rhtandobligaons of owners and those having other rights I land, such as leasehold and mWrtge rights,as well as luser rits. Th legal stu of *user right i obscure. Without th dright to transfer.lea or inheri thes rihts, user are unley to have sufficin Incenives to improwve &e ldA real pro law sdll needs to developed.

109. Restctons on user dghts and land ransfers also precude the use of land as a ganty forcredt Farm credt to users Is difflcult to secure on file, possesory Iterst As a result,unless ote adequate collaeral can be made avablo by the user, no such cred will * or ought to -be provided. In the case of privately owned agiculural land, no fnanci hituto would - orought to - provide credit on th stength of such land as guaty sie mortgage foreclosrprocedus, whih ena th transfer of owmesp rihts, are, In the present conteax, not yetpossible. Ihe pradct of financial instiions, so far, when lending to privat persons, has been touse dwellings, bidi or ote asses colaral

110. As yet, no tde docments, as such, exist and o system of land registraon Is In effect,althoug, in dme, the inmaon on eah tap will form the basis of regisred titles. To dat, ereeds no local eperts I reoording, displaying and protetng propet gt. The creaion ofan ordedy land market depends on effectve Ind regiation and, at the teiy leas, leasing laws.apprpriat development wtrols and the esblent of a land regtry where rt in land canbe u ly and a recorded.

111. Sls of agricultural land will be lowed when fe system of lmd re8bovlon ls In placeandaU camsor consalon byjbfnner owners have been resolved. The reasoning for the ltteis duat the market price of land may well be higher ta the level of compensation the GovenmentIs prepared to pay. As land registry sysm are bleand land tl documents prperyrecorded, the Govenmneutplans to sancdon sales on an everwideing basis, ditict by district, untiltafers of agricultal l throughout the entire couny are pemitted. To do otherwie wouldresult In a chaodc, unregulaed market which would be open to abuse and unending confoli overwho realy owns what.

112. Me situon Is diffrent, howev, concering the iming of permissible kasehold intereston forme st farm and agricultural cooperative land. Pending ttal feedom to sell and lease allland, Iterim legisaon will tum all in use holdings of certain defined types ino Govermentleases of reasonable, fixed duraion (3 years). All of the terms ad condiion of such leases would

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be defined In the law (thus obvating th need, durn hs traniidonal ste, for individual leasecons). Th forner users (henceforth a lessee) would pay a nomnal ren to the Govment,as leor, In accordace with a simle statory formua bsed on tho area (and perhaps locadon) ofhis or her plo. The right to ub-lea would likewise be proided by law with the ftem adcondions of all such sub-leas set fth In the law. Mhm org and opy of eah relea .$might then sinply be stmped appr ely, w words *Lessee* (and possibly *Sub-lessor" or"Sub-lessee") ater the "user's nam to Indica the formal ange of statu sad rights. If the "userIs to becom a lessee, sn additonal refewnce to the descrdpon of the land In queton wouldbe required as well.

113. LegIatIon equiveat to a Landlord ad Tenant Act will also be enacted to provide the basison which the leasing of former cooperative land by existig owners may be raizd. In both cases,consideraon must be given to providing ndes concin the auomatc wansmission of rts onthe ocenc of an even, such as the dea or bankruptcy of the lessee or lessee. Addionaly,tee hold be provisions dealing with valuation of lad and the mortagig of leshld Inte

114. The spec#* kneares taken by Government under tie Legal and Regulaory Fmework forLad Polcy Componen ar the follwing.

- A Land Mae Acdon Pla providng the basis for a modem land registion system hasbmn adopted. It ahms at developing over a period of 4-5 years suveyig and mappingcapabilities; developing a land register and land registry offices In all 36 discts of thecounry; and provig oes to all owners of land.

- A Law on Land Regisation containing deiled provisons regardng t fer, le andmortgagin of land has bee drfted and b being reviewed by the Mistries of Jusdoe andAgrcultr. A Civil Code (Volume I, Book 2) has lo been dfted. The proWisions ofboth legisae bodies wi be hmonized and presed to Parliamen

* The sale and purchase of agriulra land will be atorized whie te stem of ladregistraon Is In place and ties are pperly reorded. Pen the actmt of legisladonallowing for the sale, lease and mortgaging of land, nm leglaion will be adopted nolater dtan Decmber 1993: (a) to allow for the leasing and subleasing of land by existingownes on fom cooperative land, and (b) on former state farm lod owned by the State,to tam 'in use" holdings Into Govement leases of reasonable, fixed duan and allow forsub-eases

5. vat ifioA of Staeoed Mrketi and Prcessing Enterprimes and EAbingEvhonment for Privt Sector Detdopment

11S. Privadzaon. Stae-owned entpises involved in agricutural mrket ad processing aremosly small and medium scale enterprise (M of less thn50 empyes. There are 442entrpris under fte Mnist of Agriculture and seveal inport domic or foreign tradeentuprises under fte Ministry of Trade (para 4). Trade enterprises are maiy Invlve InImort, storing, wholesali nd dutin fod aid. Other importan Industrial assets t haa strtgic Importance for urba fod supply ar the dirict-based grnb l (grain milng andse), a few modern bakeries, daries and cming fiories located in large cties.

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116. The Government will fnaliz fthe formlation of Its privatzaton saegy for the stateentepdrs sector as a whole in the next few months but is commiWed to quick privatizadon. It hasalready anounced the folowing elements of ht strategy: (a) resolution of inter-enprise ear wilbe carried out first; (b) piivazation wil be carried out by the Nadonal Agency for Privaizavon(NAP) with the help of line Ministdes and acceleraed procedures wil be used; (c) techical adfinancial support for resucuig of a selected number of large loss-making enterprises will becarried out by the soon to be created Enterprise Restructuring Agency (MRA).2 Control,restructuring and privazaton deciions concerning the stae enterprise ectr will be thresponsibility of the NAP. ine ministries will have the responsibility to cary out the preparatotywork for privatizatlon of small and medium scale enteprises (including evaluation of asset) and toformulate soral policies to faciitae privatzaon.

117. The Government is committed to improve corporate govemance In ste-owned entepises,to achieve rapid Increases In cpacity udlization and production in viable enteprie, and to closedown unviable enterpdses and sell off their assets. A signlficat step was kn In July 1992 whenthe Government elimnated a program of paying 80 percen of their former wages to wuemployedworkers in favor of an unemployment insurace system. Other Government _me s, which should

prove corporae governance, will be taken in the next few months Including (a) Improving thelega framework (a Law on State Enteprises permitting effective management d reebishingeffective ownhip and control of the enterpries by the state is In prepaion); (b) Improving thefinancial sitation of the public sector, including writing off fte stock of accumulated debt of ste-ownd enterpriss (as was done In state farms, see para 78); (c) helping prhvzed SM to prparebusiness plans and providing imported input together with technical assistae services to promotebusiness-oriented management in fte private sector.

118. Many st enterprl are In a very weak f cial position, especily as a result of threcent explosive growth in inter-enterprise arrears. In order to fid ways to top this growth and,subsequently, to reduce the stock of arre, two options are disused: ether a geeral work-outbetween Government, banking sector and eterpse sector or measures to move aggressively tosettle, largely through the baniruptcy mechanism, the facil posiion of SOEs as reqired for theirprivazation. As privatizaton of a large number of entrprses places a considerabl burden on fteNAP, in order to pritize quickly a large number of SOEs, a signfican decentralzation wi berequired.

119. For the agrfcuAural . r (mruleting and processing entrpries), fte Governm basdecided to cay out prvaizaton using accelerated procedures. Under current procedures,privazation commissions are set up In enrprises and at the district level. Ihe Depatme ofPrivaization of the line mistrie then review the proposals, togeher with the Commission onprivatfizin in the Ministry of Finance and Economy, which are then tansmitted to the NAP. Outof the 442 enterprises under the control of the Ministry of Agriculure, thie valuation of 10enterprises and negotiatons with managers and employees has already been completed. TheGovernment has also moved quickly to separate some units previously belonging to large kombinsand to privatize them. Some 125 such units have been sold In 1992 and 65 so far in 1993. Quick

Z/ A lhmitd umube of WAgzolura muarktig and prowesng e*ntemie hav lkWg Iter-axterpris dbt and ax am=aand are expetd to be submitted to tho colal of MRA for .auoring. Tey aoleud.Nenneajd FsuaI*m In&WPUslaW (Duns), Ndeawanfe IaWd Uhqo (Pir), dawwrje Gnmtbai Ddr Pames) anA NdmnftGwmP P.p. D*/ (Shbode).

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privzatlon of the rmainng state enterprises will be carried out hrough a deetalizedprvatizaton process. Enterprises would be Invited to present their own privaizaton plans, widtconsiderable incendves to mager and employees to pardcipae, wh the purpose of transferringenterprises rapidly to prvate ownership.

120. For the state enrprises belonging to the gicuur scor tht ae under the conrol of theMinistry of Agriculture and of the Ministy of Trade, the Governet i committed to cay out thefollowing actions. First, privatizatlon or liquidaion of al small and medium (i.e., employing Iethan 50 workers) agicltur marketing and processing enpi by March 1994. Second,adoption by March 1994 of a tnetable for the privtizadon or liquMation of lare stat-ownedagriculural maretg and processing enterprises (Including trade enterprises under the Minstry ofTrade). Third, during 1993 and 1994, ste entpises in the agriculudr sector wi not receive aysubsidies except for those included In the overall budget allocadon budgeted for state enterpsrestructuring (Lek 4.5 billion In 1993). Stabt-owned distrbution etpri such as NMU(Nd rmmre PuiwW i ndwWal Ushkqmore) which have larg Inter-enterprise debts and tax armwill be subjected to the finial contol of ERA. Fourt, the Ministry of Agricultu and theEnterpse Support Unit (ESU) wi prepare a propgrm to prvide bu advisory services(accouni.ng and financial managemepreparation of business plas, etc) to smand mediusceagrcultral entepises after their privatiton. Fmally, the Mistry of Agriculte will also prepaa framwork for commeciW negotations between growers/suppliers and food industes, wit thecontet of the price/trade l iation ad the private market economy.

121. Prvate Sector Development. The Minstry of Agriculture and Food will be responsible forfaciliting the development of the pdvate sector In agricultume. In order to piordd the legal dregulatory acdons that the Gov ert would need to take In matters of prvazaton and suportto the privae sector, technical and economic assessments will be caried out in each susctorincluding, as mendoned above, help In pwang businss pla, advice on economic nd financialsse, ad technology training for mketing and procesing enterprses). Given th Imortac

In terms of farm income and production, die priority sectors are cereals, ollseeds and feed, andlivestock (dairy, meat).

122. In addiion, the Minstry will prepare measures to hnprove the enabling enviromnent forprivate activity in agricultural production, maketng and prcig. The piories are In thteeareas:

(a) Public Invesmnte Program for A4 uctw"al Marketdg. lhe deeJlomt of agriculturalwholesale markets in the districts Is an urgent priority to enable firmen to sell teirproducts and reduce marketing costs. A public Inestmet program for mketinfrastucture for fresh produce, livestock. and grains will be developed.

(b) EnvIronmental S ads. The Government will prepae actions to ensur envsafe use of Inputs in agroidustdal plan -s .d measures to certify compliance wihenvironmental stadards. Water, soil and air pollution by the food industry results fromoutdated technological processes-mail in th e sugar, meat and dairy prcssnidustry-ancd from the iU-adapation of the enviromn reguory frawrk to thechanges taking place In the economic structwe. This pollution represents a thr both tothe environment and to dte health of consumers.

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(c) Food Inspecdon, Qudly Control and CownrPr*oecdon An acton program to dedoplegiaton proteting consmers of food and to adapt the untons of the st organizationssupervising food safety ard inspeci, -If andlaborat alyzing food products w be required. t wi be necessary to crfy tescope of atvhy, product coveage and Ip eon IInsruments of th Isiutin adprepare th necesy legislation and Imro euipme labotories.

123. hnrovlng Sapoa Ser'ce* Jbr Farmen Support servnis for prate rn mu beprogresvely adapt to t new maket eonom to Increase on-farm producivity. Agcultraresearch must be reponive to the needs of farms and consum and develop market-orineprograms and itr prgrm for Its staft. Ihe rearch system mus be progmrsily ted.but a coordiuatd reorganizatIon of th system should not be Implemed until a few years fomnow, when the areas In which Almb will develop a comparative advana In the medium tmemerge. AdvisoLy services for crop a animal producdon, Including extenon and business advie,urgently need to be adapted to provid fmers infoaon on new research results, tehology, andmarketing and bushiness praices. Such sevis hld be based on cost-recovety medms forservices provided by the public sctor. Some of these svices could, however, be party providedby the privae seor. Support services for te livestock setr (vetny sevices and artificial

seinaton) wMI also need to be restructured along the lies idiated above. Artifinseminaon (Al) services should be pratzed, and privat insemnr should be allowed to charpfamrs the fun cost of Al servi. The restruct of vet y servies wi need to beapproached In a projet coet toget with other ImproveMet tn lvestock puction.

124. An urgent s Isto review th possbity of remorieft th exiti exesi system In telight of the new conte created by land diributon and th emerence of privat farmer"as ons. Once the baic arienton as been ageed, taing ad nica assiste prgramfor extnsion emloyees should be developed and tsted In pilot programs with demfariem Land dhitibution has created np10 for may a ultura scldagronomists, agrdcu ecomists, and accountan. Technical assia and utinig programfor ese former coopeatve employees sbould be developed to adapt their skils to the techolog,mrketng and busis prcties of dhe new economic order. In order to ia th reform of the

rcultual extension systn and support sevices for prve famrs, the Government wi preparea study ad rm ons for the Reform of Agculturd Etesion Servies. Detailedrecommendations would be presented by March 1994.

125. he Govment will soon be fnalizng its pdvatizaton sra and adopt the polcies andprocedures necesary fof beter goverc in the st entrprise ser and for the transfer ofownehip of state ase In private hands. hese include Imp g a plan to deal wih Inter-enterpris arrears, eitier dtough a general work-out bewen Government, baking sector andenterprise sector or tough measures tO setle through banruptcy mehnims or othermeans; clarifing ow ip responsib for lcal ente_prises; ovement iIn the state entprislaw; policies for apponting boad members ichuig exta drectn; reorganio of theownerip responsibiies witin te parent mistries; dividend policy for prftable stteeeprises; fiancial mnitoring system for all st nd locl entwep by the Already existEnteprise Support Unit (ESU); sete monitor system byhe lme mnisties; program for te

sforinnof ate: entepdses companies udr te Company La and liquidaon of non-viabb state enterpris.

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126. n smmay, th spe meaw'nto be mpliemented by Government nd AgIltraMarketing and Processing Sector Statowred Entrpse Pivatizaon Comoe e th followig

Prvaitlon or quildaon of all smal and medium (empoyig less ta SO wores)agiculura marketg an pro i stat entepis by Marh 1994;

* Adoptio by March 1994 of a tieabl for th privat o or quidton of larsemowned agrcultutal marketg and procesgtis (Incudig trade ent errenderthe Mistry of rade);

* Any subsidis eamred in ft 1993 and 1994 budgets for st enteprises ently iMwthe purview of the Mnstry of Agricultu sall be dmra exclusiely fom th ovrabudget allocation budgeted for staw enteawis restruatg (Lek 4.5 bilon i 1993). Stoowned entrprises which have lge er iso debts and tax arrears to be ubed tothe financil control of ERA.

* TheMinistry of Agriculture and Food, I oabolion witthe s t a*(ESU) to prae mees to support pdratzd small gnd to :atural proesn and market sector ltouh busis advlce, a ai dfnancial m g traing and preparation of bus plans.

The M nstry of Agiculue and Food to prpare befo March 1994 a stu ndrecommendions or the Refom of A 1grulr Ension and Suo Servis frFarm.

- The Ministry of Agiltue and Food to prpar befre Marc 1994 a smmoc fiorcommrca negotatons between gr rlppri and roi e d a prkicbrpolicy frmework to f tt pfvon fot cereas d dairy, muat clee_stobacco and sugar subsecors.

* Tbe Mistry of Agriculure and Food to develop befe March 1994 ikeenabling evironmen for prvat sctor deovapment In agdrc dludi heftinpection, food quality control consumer protcon and e o l standa

* TIn Ministry of Agriculte and Food t develop before Mach 1994, in cwodnn witthe preparation of do Public Investment Program, an acton plan for agricultural and fodmarket Infucture dveopmet

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PARr V. TIlE PROPOSED CREDlT

A. CR I OUBCTJVS, AMOUNr AM USE OF FUDS

127. The ASAC prooses to sppt the radW acto progm developed by he Govmentde3cribed In part IV. The actions contabied In the 18-month action progm will be monitored byIDA and release of quick-dibursing fds will be condional on thir timely Iplm on iaddition, IDA and cofinacldems would provide tnds for cre and for tehical aistance.

128. The proposed operaion Is a hybrid project with tr componts.

(a) a ba1we-fpaqme sWou cownwonem In two equal tranes, which would fne anegative Ist of Imports. Tnh fist tranche would be available upon Satfactory compliancewih the agreed conditions by Board presentton and the second ranche followin a reviewof the program about nhie months aftr first tranche release.

(b) an hveme cnent consisting of a credit lin to the Govenmnt fbr onledilng tofarmers, taders and otr mral entreprensthrough the new Agrculural Banlk;

(c) a tecuncal assitance capone aid ea strengtenng e capabilt of he W IstitionsInvolved in the program's Implemation sh u the Ministry of Agricue ad t newlyreructued Agricutra Bank.

129. MDA &edit. The proposed IDA Crdt would be SDR14.2 million equivalet proceedsof the credit would be used for finang (a) a negaive lst of Imports (US$11 milion equC ile,to be supplmentd by US$17 million from cofiacles, over an 18-mont period disbueded in twoequal tranches); (b) a credit line for onlendbg to rural erener (US$5 milion over a thee-yearped), (c) tcnical asstce for the Institutions involved in the I of the secorreform program (US$4 mill equvalen over a thre-year peiod).

130. Coftnancig and Parall Finang. Two baeral donors have pressed herest inco acing this proposed operation Te Ovea Economic Cooperaon Fund (OECM of Japabas exprssed itre in proviUng US$15 million equivalkt, md te GoVerment of the Neerlandshas expressed interest in providing a contribudon of Dutch Guilders 3.5 million (US$2 millionequivalent) to the project Both cofianc will fance the balance of paymen support componentof the ASAC. In addion, EC-PHARE wil provide approximately ECU 8 million in parallelfinacing In support of the ASAC technical assistmce program

B. CUzrM CONDTONS

1. QuicdIs-bursing Component: Condon

131. Mhe quick disbursing componen of the ASAC would spport the 18-monh acdon programdescribed in part IV. The deiled lst of actions to be monitored uider the ASAC is presented inthe PolY Matices (Annex 3). Import polcy reforms have already been acheved. Te AACwould be brought to the Board for approval on the basis of tse achievements, plus the key actinslisted below.

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132. Condlons of Board Presenaton

* Satacy prossw the lMenI of the ovall medium term reformp(Policy Framework Pape) reed with IDA and IMF demonsd by adhrence to theconditons established under the DMF program.

* Cabin decision to price donor-suppUed wheat at 16 lellkg (with cespondig sIn die price of donor-supplied flour).

* Inroduct of auctions and competve bidding procedures acceptable to IDA fortranspor,wholesae and dsribution of food aid.

* Pla for h liquion of BAD and cation of the new AB fnaUized by Govenmet, BOAand bank m, under conditions satisfactory to IDA.

* MIe condiins for Isue of a lien by BOA to the new AD have been flWMd byGovernment and bank management, under condiions satisfactory to IDA.

* A plan and an plemention timetable, acceptable to IDA, have been adopted byGoverment for te liqukdaon of all state fans, ditibution of lease ig o bene,sale of assets and settlement of all claims.

- Subsidies eamarkd In the 1993 budget for staenepri under the puview of theMinit of Agriculbte are being drawn exclusively from the overal budget allocatio ofLek 4.S billion bueted In 1993 for reshucuring se enteie.'

* The Agriculral Program Office (policy monitDrig and aid oun for e rfmprogw in ature) is staffed and operating; and operaia prom gudei forthe project have been fnzed.

133. CondWons it Second 7c Release

* Sadsfctory progre with the implemeion fthe ovall medm term reform progm(Policy Framerk Paper) agWeed with IDA and IMP demond by ence to theconditions established under the IMP program

* Price of food aid wheat credited to counterpart finds not to decline, in rea tm, below16 Lek/g or below domestic producer price.

* Price of other food aid commdities credited to counerat mnds not to decline, in reaterms, below their Janary 1993 level.

* Agremet with DA on apprpriate margins for dibution, storage and milng of weatand for bread producto In state-owned entrpries.

yCMm asug refA u in GAe finani and etqri. maim Mw been Iu=Wd udo poq=NMupui ad Ilash Soft A4uanat Cret CPSA).

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* Adopion and imple ti of te frt phas of a comprehensv nu developmnplan for AD, acceale to IWA.

* Complete liquidadon of all st fau, ditribton of land rights and sale of asso adslemen of clam.

* Passage by Parliment of a law, acceptable to IDA, allowing leaing ad sibleasing ofaricua land ad convertng fte user stam to Omt of lsse In repect of forme stfarm lnd.

• Ptivatizatlon or liquidaton of all smal and medlum (Oes hn 50 employees) asEultud_marketng nd processing s enterpriss and adoption of a timetable agred wt IDA for

prha on or liquiation of large stat-owned entepss.

* Any sbsidies earmked In th 1994 budget for state entprises under the purview of thMiny of Agriculture mt be drm exclusively fom the ovral budget alaonbudgeted in 1994 for rtructig st enterpr.

2. estment

134. TheonewAgricuturalBankwiiundergo a e s utonal developmtprorm,with a paricula focus on nncent, credit policies, and on lon araisal andsupervision tehnques. However, the bank's skldl base and financial sength will oly delopgadualy, and i i expected dt AB wl not qualify for direct borowing and onledn of IDAfinds durn the next swveral ys. ebfore, under this operation, AB's role wil be srictlylimbed to that of a service-provig agent to Govermt, passing on proceeds under the Investmeco_mpoent to fin benefciaries, with Goverment carrying th entirecit risk lt cm beesaed that, afer a period of svera years of instutinal development, AB will evenuly quafyfor on-lending under IDA-C and will then borrow from Govament der sh subAoperatn In order to lend to beneficiaries in the rural sector at ts own ris

135. Inep eneLenbg Unt. Iially, and fordtie nearfiuture, AB I notexpectedtobavenymedium- and long term resources for investmet lending at is disposal, and ths type of lending willbe a new acdviy to AB's staff. To ensure soundnes of lending decisions under the investmecomponen of the ASAC, f sub-loan appraisal and approval will, therefore, be caied out by anIndependnt Lending Unit (ILU). LU wil icle selected AB staff under the supervision andresonsiility of qualified expatie experts that are part of the team of consulan finaned underthe MSAC ILU will be placed wWitn AD's head office and wi use the pbysical iuctu andstaff In the banks braches ad agencies. AB will act as an agent to ILU and the Goven.receiving sub-loan applicatons, po-appraisig projects, disbursing fuds, collecing u , andkeeping al sub-loan records. There will be no visible difference for borrowers between sub-loanfinned under the ASAC or out of AB's own resouces.

136. Cedft Giddellnes. For shrt-term lending at s own risk, AB wi have accwe to vaiosfnancial resurces Inclng term deposits, rediscount faciies provided by the Bank of Albani,and ies of credk made available by Inenaional donors. In order to enre sound tendindecisions by AD and to protect the strength of the new bank, Government wllt cae ADto prepae detailed credit guidelines, to be appled to all nding involving a ret risk to the bk,readless of fte sowurce of hids. These credt guidel, acceptable to IDA, must be preped by

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December 31, 1993. DuIng ngodatons, Govenment and MIA agreed an th conte of theseGuidelinse. AD's staff will graduslly gain experience In applyig the credi guelines to its lendingoperations. Once AD wilU be able to demonstrate Its expertise In makin consistently sound lendingdecisions in conformity with these guidelines, IDA wi be prepared to consider transferring theauthority for sub-loan appraisal and apprva wnder the Investment component from ILU to AB

137. Subsidlay A8rcment. Govement will pass on proceeds from the investnt componentto fna beneflciaries by engaging AD as a fiscal agent on the bash of a Subsidiary Agreement,specifying that ILU wil sign off on all respective sub-loans. re Subsidiary Agreement wi be fora period not exceeding ten years. AD wil receive a servce fee to cover its adminisative costs.his fee wil be set at a level such as to cover he bankc's act cost of prcesslg and administering

sub-loans, but will not be less a 2 percentage poit per am. Revisions of the fee will bemade following extena audits of the bank's annual fancial stments which wil revealinfomaton on the bank's act cost structure. The credit risk and the freign urreny risk forsub-loan will be entirly born by Governmen Hwever, in order to provide an incendve for ABto actiel engage in the colecdon of overdue amounts, the bank's cumulaive administrative costmargin will be cancelled for each sub-loan that b classified as non-collectible. Sub-loans will be

nsidered non-collectible il case of areas in princal or iterest dating back more than 12 months.Since AD serv as an agen with carying any credit risk, outsti sub-la wi be off-bane sheet Items to AB, erefore not afecting the bank's provisions for loan losses. Sub-loanswi be made in local currency.

138. The Subskiday Aemt will specify eliblty ca, eauaton standards, and principalerms and conditions for sub-ans. Eligible beficaries wi be pivate ectotcusoe of AJseeking credit financing for Inestment projects Includg Incremental working capital. Private sectorenterpris will be defined as those enterprises where the mjoriy of capital is held by Individuasior other no-public legal etits. Benefes must demonsta thdir crdIO s based onthei capaciy to repay sub-loans out of projected cah generaon or eity Increases. They mutbe able to corntne to maintain a debt to equt rato of not more than 70:30, a debt service coverageratio of not less ta 1.5:1, and a ratio of current assets to curent liabilities of not less man 1.3:1.Eligible sub-projects shall have a finncial rate of return In real ems of at least 12 percent

139. Sub-projects will be eated on ihe basis of their financial, commercial and economicviability, supported by a business plan. Further evahation criteria are available collateral and theenvironmena Pm of sb-projec. The nmaium term of sub-loans wi be limied to senyears with no more than one year of grace. Inerest rates on sub-loans will be In line with generalconditions applicable for AB's investment loans, but will In y event be posidve in real terms.Beneficiaries must finmce at least 20 percent of total sub-project costs out of their own resources.Individual sub-loans will be limited to US$ 150,000 equivalent, the sum of sub-loans outaing toone single borrower hall not exceed USS 300,000 equivalent at any time. Proceeds from sub-loanrepayments may be reallocated for new sub-loans withn the 10 year term of the SubsidiayAgreement between Goverment and AB, fol1owsg the same criteria nd conditions for sub-loans.

140. The condidons of dsbursement of the investment component are: (a) AD mus have beenduly established under the laws of Albana; (b) a legal apinion of counel acceptable to IDAconfirming such establishment shall have been provided to IDA; (c) the Subsidiary Agreement nusthave been cAted an behalf of the Borrower and AB in terms and codions stfactory to IDA;

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ad (d) te depdt Lnding Untl must he be establied wih fom and saffing acceptableto 1DA.

C. PRoculEMENT, DqmiM& M, Accowun AM AUNT

141. Procmn . For the quk-disbursng coœponent, th proposed Credit of US$11 millionwould finance 100 percent of the CIF costs of general imports, excluding luxuy goods, militaryequipment, tobacco and tobacco production machiny, and envionmentally hazardous produictsdefined under the Stadad Inteatonal Trade Cassification (SIC. An initial oountry procurementassessment has revealed hat the curent prowurement pracices In Albaia, both in the public and inthe private sector, are not in conformity with the World Bank Procurement Guidele so that theseprourement proceres will not be used. Imports for both the private and public sectors would beprocured In accordance with simplifled International Cometitive Bidding (ICB) for contas inexcess of US$1 million equival each. IDA's simpfed Standard Bidding Documen applicableto policybased lending would be used. For conacts below US$1 million each, internationalshopping procedure would be used based on three quotatons obtained from two different countries.Direct contrct (single source purchase) would be albwed only for proprietary items or wherethe need for compatibility with existing items calls for dizaion. The purchase of commoditieswould be carried out through inteational conmmodity markets in accordance with proceduresaccepble to IDA. For the quick-disbursing component as well as other goods finmced by theCredt, any goods purchased under ICB which are ma ed in Alnia may be granted a marginof preference of 15 percent or the customs duty in force whichever is less, consitent with IDAprocur udelines. A General Procemen Notice would be published in DevelopmentBushiess' to alert exporters from World Bank-member cowntries to export opportunies offered bythis operation.

142. For the Iesme component, the average investmnt cost of sub-projec s expected to beabout US$ 30,000 equivalent. Individual consac for prou nt of goods and services throughfamers and traders, finaced under the investment component, will not exceed US$ 150,000. Goodsesdmated to cost under US$30,000 per contract may be procured under local shopping proceduresbased on comparison of price quotaions obtained from at less three local suppliers. Goodsestimated to cost over US$30,000 per contract but under US$150,000 per contract may be procuredtrugh Inernational Shopping based on comparison of price quotos obtaied from at least threeeligible suppliers from three different countries. Contracts above US$150,000 per contract wil beprocured through ICB, ushig BankDA stadard biddin docme. All ICB contracts will besubject to IDA's prior review and all other contracts will be reviewed ex post.

143. PR rement for tecncl assitance conrat would follow IDA guidelines for contctconsultant services. The total amount allocated to this component is US$4 million equivalent whichis broken down as follows: consultant services for approximately US$3 million, and office equipmentand other goods for about US$1 million. Ihe provisio of he IDA Consultant Guidelines requiringprior IDA review or approval of budgets, short lists, selection procedures, letters of invitation,proposals, evaluation reports and contacu shll apply to contracts esdmated to cost more thanUS$50,000. Moreover, such prior IDA review shall also apply to the terms of reference for suchcontracs, to the emplomt of individuals, to single suce selection of firms, to assigmnents ofa critical nue as reasonably determied by IDA and to amendmen of contracts rasing theconract value above US$50,000. Procurement of goods wil be carie out, in accordance with IDAprocuremet guidelines. Goods estmated tD cost under US$30,000 per contract may be procured

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under locl shopping procedu based on compaison of prce quotations obtaind from at leas theetocal supplirs. Goods estimad to cost over US$30,000 per contract but under US$150,000 perco t may be procured through bn aional Shoppin basedon comparison of pric quotationsobtained fom at las thre eigibl suppls from hee differen countries. Contracts abovUS$150,000 per conact will be procured tough ICB, using BankA sndad biddigdoc_um. AUl ICB contat will be subject to IDA's prior review and all other contracts w bervkwed ex post

144. Paremm CoordWon. Supvsion and Reiew Process. The Project hmplenUnit fr the CrW orts Project, currty locaed in the MinWstry of Finance d Economy,would be responsible for coordinatg pocuem ativities under *e quick disbursing componea,for prvid, on request, pcment advisory sevices under te invetmet component ad forhandling dibsements for both component. Tbis Unit, which has gaied considerable experiencehi prcem and diseme would provide the necessary assismce to project-related entitlesand would ure dt agreed procuremnt procedur are followed by them. I would be necessyto the }PIU to undertake these addidonal reonsibilties. Furthermore, to safuardprpret in procment and to fcilthe the procuremen process, procawrm procedures agreedwit IIDA would be included in Operational Guidelnes for all project-reled enties. Theprepratio of these Guidelines, which was a condition of Board presentation, has ben cobmd.Any sbseque changes in these Guidelns woule oe subject to IDA approval. Trang would beprovi to staff in procaur , disbursement, pioject management and supevion, a necsay.IDA staff, durig supersion missions, would review procaemen actions to ensure a thy arecied out In acace with the aetd procedures.

145, ?lnsdng Plan. For the quick-disbursing component, the proposed Credit of US$1 mnillionwod finance 100 percen of the CIF costs of genr Impo excluding luxry goods, militaryeqppmnt, tobacco and tobacco production machinery, and enviromentally hazardous productsdefned under STIC. For the Inestmet component, the proposed Credit would finamce 100 percentof goods nd services, including local costs except taxes and customs duties.

146. 4lshneme. To facilitate disburments, separate specal account would be opend foreach component and Iital deposi of US$I million (quick-disburing component) and US$0.5mnllon (credi component) would be made. These accounts would be opened in bank(s) acceptableto IA. The speci accounts would be managed by the PIU. Mhe Government would receiveintert wd bear Ihe foreign exchange risk on the accounts. The repeim t would be made onthe basis of docmented dimnt applications except for entures, below US$500,000 underthe quIck-disbursing component and US$150,000 under the credit component, which would be madeon tho basis of stame of ependitures. ITe ste of expendiures would indicate the originof goods, mvoices, customs, declrations and evidence of payment, and would be available forreview by IDA supervision missions and eenal auditors upon request. Disburement forexpendtues under the credit line and for consultant contracts would also be made on the basis ofsemen of expendiures. The specia account may be opened in the Bank of Albia but not bydte Bank of Albania.

147. TAcu. lhe Government would keep the accounts on the operations under ths creditcompising (i) a record of drawin on the cedi with copies of all db requests andunderling d cumenti, including detile lists of sub-loans made by AB (type and totinm cost for each sub-project, loan amount, maturity, outsnding debt, disbu andrepay1me); and (i) a record of transactions on the specia acount and copies of te State Bank of

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Albnia stae of hO accoun. Ths rewords would be updated weeMy, ad monthlysaemet of tasctions ad balam togeher wilh thie necssart reco fordisburset, and n nfmatio on claIms in proes would be fo rded to DA.

148. Ad&. Ihe Governmet would arrag fr an extn anna audi by auditor acceptablto IDA. The audto report would Include an opnio on the operaton of the Specill Account andthe use of stament of expendi. Mhe accots and audio report would be submied to IDAwithin six months of the ed of the fnncIal year. Th annual financial stements of theAgricuual Bank would as be audtd by Independent, e al audito, acceptabb to IDA andaccordig to twms of rerenc acceptbl to IDA, strng facIal yea 1993. This aui reportwould be submitted to IDA wit six months of the end of AB's financlal year. Assuranc on theabove arran for accounts and audit hav been obed during Negottons.

D. CoORDlNA¶llow &Wm N AND MNING

149. a of do progm would be nitored by a project montoring andImpleIenpatIon uni called Agrfcuul Progmm OfW (APO) bctd In the Mnstry of Agture(see Annem 9). The APO would not duplicate th func of the Ministry of Agriculure. Thespecific task of APO are (1) policy coordnation and monitring of the program's performace and(2) coordintion of all foreig aistn progms. While projects and programs financed by donors(IDA, EC-PMAE UVSAID, PAO, IFAD and bilater progrms) are managd by ni operatingIn the Diectrates of the Mistry, the APO Diector, with the astn of Is Albaian and foreignstaff, b responsible for th executi supervision and coonaton of all foreign-fnamced assnceprogrm. Mbe deils of the APO funcons, coordnation wilh the Genal Dedoates, staffing

* AV-- M- 1, shortilong tem consulant reqirements, tg needs for Albanian staf, operatcosts and equipment needs would be described In the APO business plan to be prepared by July1993.

150. The APO would be headed by a Director having th rnk of Vice Mnister and reporingdirectly to the Mnte. U AJPO locatd In the Mistry of Agrutue, would operae withAlbaia and foreign staff Incbldn a Chif Advie and an Aid Coordinon Advr (boh fignconsultat). Upon approval of the Minister, additonal foreig advise, fiaced by donon, willbe recutd for short term or long tem assignments a pat of the APO but located In the GeneralD lewrates of-ft he it (cbmfo land policy; privatnzaton; pring for agricul andagroindsty; credit policy; etc). Additiona staf Albani or forelgn will be recnied as and whOneed to accomlsh specific s. Th extg Project Impl naton and Coordan Unk(PICU) I heo Minstry of Agiuur would form the basis forthe APO. Setftng up fte APO andappointng Its Director are condito of Board presenatio.

151. Me APO would has a loodin Committe (CC) composed of repretves of theMisty of Finace. Ministry of Agriculr, Mistry of Trade, Mistry of Justice, NationaAgency for PrVt an d odher agencies ta a e for the ImplementIon of thesectoral progra. The CC would meet, at te working group level, at regu t as and whenneded for the purposes of progrm coordoin I CC would also meet at lea twice a year atth Ied of Mise to assss progres made In te pl Intton of the agcual refmprogrm and recommend remedial actdonL secreta of e CC would b ensured by dte APO.

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152. Key sctr peformace Idicators will be developed by the Govenment joindy with IDAdsff to monitor the Ipac of the ASAC-supported program. Te Indicators will focus on (a) theformal acdons agreed under he ASAC program; (b) paraltel actons contabied In the Letter of SectorDevelopment Policy; and (c) sector! idicators of economic performance such as inu supply;output; commodity trade and food aid flows; agricultur credit; aiculural prices; purchases andsales by st tg entepises; as well as the pace of the privation of st farm andagroindties. Reports would be submdtted to IDA and to EC-PHARE by fte APO on a quarterlybasis.

E. TEcmacAL AsrSSrAwC ftOGRM

153. In order to ense ft successful Ilemenion of the Medium Term A4jusment Progrmwhie s the Institutional capability of the key instiautions Involved in he program'sImple tion, large amounts of tehncal asistace (TA) vill be requkied. Some TA programsfinanced by IDA (Critical Imports Project), EC-PHARE and other donors are aheady underway inthe Mistry of Agiulre in the Bank for AgdrIulue and Development and In other I o

154. Fegn conuants will be required for the position of Chief Advie and Aid CoordinaonAdviser In the APO (para 150). AdditIonal short term or long term consultants will be required forthe APO or for the General Dierates of the Ministry to ensure the timely imlematio;i of theprogram. Th consulat will be recruited as and when needed to accomplih spefic tasks. ]DAwould share the costs for odter consultants with EC-PHARE and other donors. Terms of referencewould be prepared and ageed jodntly by IDA, PHARE (or other facie). It is expected that theposion of Chief Adviser would be fnaced by EC-PHARE; dtat of Adviser on Privatzation forstae entprises In the agricula sctr by IDA from ASAC funds; and tha of adviser on AidCoordinaion by FAO under financing from an Italian Trust Fund.

155. Tree major tecnal stance progrms would be finnced under ASAC.

156. hfm wa ofAVculftro Eae7prises. Under ASAC, consultant services and equipmentwould be provided to dt Direcras of Privadzation In he Mnistry of Agriculture and in theMinistry of Trade and to the Nationa Agency for Privatizaon to support the privatzation programfor agrculura marketng, trade and processing enterprises. lle consulta would help In caryinout all actiom neceary to ensure the quickprivatization or liquidadon of al small and medium-scabagdcultal enterpises (such as aepri valuadon; organaon of auctions for the sale of assets;financial negtions; etw) and to peare a timetable for the prvaization or liqudation of largeagculural eerpri. The tot cost i estmated at US$420,000 for consultant services (24man/monthw and US$80,000 for office equipment, computers and vehicles.

157. Land PolIy. The Govemnt will hire an expert (3 mnm) to prepare both drafts of therelevt land lease legslabon. The commencement of the necessary work is expected soon afteref ctivenes of the ASAC Agreemet with the iitial review of the prelIminary drafts scheduled fornot later than September 1993. Such legislation, sadsfactory to IDA, b to be enacted by secondtranche release (expected nine months after effectiveness). In addition, support would be given tothe Land Markt Action Plan (project executed by the Land Tenure Cenr of the University ofWisioni and financed by USAID and PHARE). The total costs for consult servies underASAC (20 Win for Albanians and 20 mlm for outside experts), including training and some smalleuipment, is esdmated at about US$0.6 million. The TA program would support the Directrate

*44-

of Laud In the Ministry of Agriculture to Improve the bgal and regatory ramework regagpivate and public land manam (meadows mad pastures. fort, natural resource m

d use plnnng, et). Ts program would be closy linked to th eistng Land Market AcdonPla (executed by th Universiy of WisconsinLand Tene Center wih fTncin from EC-PHAR.,USAID, UK Governnt, etc) and supervised by the APO.

158. Intkuiaz Delpmenot of th Agrlzao. Bant Insttond development of the newAB wlll require compehense and long-term support of AB's management through a tem of

patrit advors; usfe of banking know-how through study trips of bank staff abroad; mdprovision of ugl needed equmentr The to allocation for consultant services, equipment andoter technical asisace for AB is estdmatd at US$ 3 mlon. Thib progam would be finacedin two phaes, each est_iad at US$ 1.5 million per phase, with a reviw of progress made aftrfthe fit phase. Te fir phase of the chnical assitac progrn would Inchude: (a) an estatedUS$ 0.7 million of consutant sevices (total of 36 mn/mont) I ort of the ir 6 months ofbiution deelopnmnt of the Bank In the areas of fianial manam (6 m/m), cri policsand procedures (6 mlm), credi review and portfolo qualiy (6 mhn), ac tig and MIS (6 mnm),human re s develoment (6 m/m) and eional banking (6 mn/). Terms of referen forese consultant services have been drafd and wi be finalized, for review by JDA, by June 1993.

In order to ense contn of the ongoing tehnical assistance progm In BAD, procement forthese rvies wll be itiaed by the PIU within the Ministry of Face and Economy In ealy June

1993; (b) an estmated US$ 0.8 millon for offio equipment, fie and vhcles for the BBanshead ofice and branes (USS 650,000 equIvalt), study trips abroad (USS 100,000 equivalen),and he cost of te 1993 extra audit of the Bank's financial atm n (USS 50,000 e alent).Me secnd phams would Ilude an estmated USS 1.5 mIion for consulnt servis (tots of 84mim), to suort dt flowng 18 mondt of istional development of te Agriactural Bank, Inh areas of financil management (18 mlm), credit policies and proedu (12 mm), credit reviewand potolo quaity (18 mlm), mource mobIlizaon (12 m/m), accout and MIS (12 Wn/) andhuma resources delopment (12 m/m).

159. Other technical asstce progrm will be required to ere the succefull and tmeyImplementation of the progra and to strengthen the Institutiona capabity of the GovementThes progms wi be finaced by EC-PRARE, USAID or othe bilaterad or mutilal donors.If 'necessary, DA fids could be made available for finaing of cical assistance if reourcscamnot be mobied quickly from other sources.

160. SrN8*enbng ofhe Mlnsy of4grdcdubre. A five-year USAID program will finance TAfor the Mistry of Agricue and related instions in order to sheir capabiites In theareas of agricultural stastc, policy analys, price and markt formaton system and agriculturalresah. An In-depth Lvestock Sector Review and the preparation of bseurao policy frmeworkswill be supptd by TA prom from PAO, EC-PARE and odter donors.

161. whie Advsozy Series for the Private Sector. EC-PHARE will fiance a TA programto support private small and medium-scale etrpris In th agdcural sector ough the provisonof bne advsory services, taining in accounting and fina l t); (c) preparion ofbusin pas for selected enteprie;

162. AIgrfuW raEnion. Consulnts (12 man/nutths) will be required to prepare a sudyfor te Reform of Agricultural Extenion Services which will formulate ens fbr thereform of the agricul extension system and support seVIces for private &rmers ( 124).

di~~~~~~~~ iI1

~~0 ~~~ j~~~~LiI!I~~~

.46-

169. Giet i mited capcy of dho Mlsty of Agriculure, of th new ABaN of or key inszitut Involed in *e prorms Ip ntion, delays could ocu.HoweverI the technical prorms rovie to tas itutions under ASAC huldImprove prospects of succosful Imp n.

PART VI. COLLABORATION IMFI EUOPEAN COMMtUNITYAND OTHE DONORS

170. Th preptonof hsopertinha been carried out Id icos coiatdon and collabwih tde IM,P the Euop Commnty PHARE Program, USAID and other donors. >hefamework for the proposed opertion s report entitled An Ag4rkll SreVfor Albaiawhich was prepared In 1992 by v jointy with IDA and PHARE fnancd stff andconsunsn ad subsequentl publihed by ihe World Bank In Octber 1992. M report prted to donors at a G-24 meti In ana In uly 1992 and dise mnore extebnvy atather 0-24 dmetg on aiulu in lra In November 1992. In paralel, al donor, sice1991, bao cbsely coordiatd their agricutur prorms, In patcular tmport of criicallneeded inpt for he sect. The close ood wih EC-PHARE on policies and program,which has bn etemely ut , has ban formalized In a recnt agome to opea accordnto a jointy agreed policy firmwork, to joiny staff tho project unit for the ASAC, to coordinaeand share the costs of astma programs, and to jointy pre tem of referen and sekconsultt for ASAC tehcal asstce program.

171. he IMP and DA h worebd cloey together an the prparation of a Policy FrameworkPape (PMP. The propsed ASAC has been preared In close coordbinaio with the PFP andconultatiowith ah IM durg the disusons on th Proposed Eveded Struct AdjstentFacility (ESAP) supportig e PPP reorm packe bave been freqn

PART VRECOMM ATON

172. I lm satfied ta the proposed credit would comply wit he Arles of Agrment of IDAand recommnd that tho Elecutve Direco approve the pposed creit.

Lewis T. PrestonPresidest

AttahetsJune 4, 1993Washingo )D.C.

-47- Pape Io 3t

AGRICULTURE SECTOR ADJUSTMENT CREDIr

a9*mi t.alo¶ V 1s4 3.34 ECONOMIC IDMICATORS

A. ShNm of -we" 01amoi mda 6. PeAth bulSpuavCftm cm. o PMbs &ta) cf'm svwen pu', et

i~~ ¶m igst sew i"D im" ig1m "Weu Ion-" "It io un i0000 000 .00. ft'so, o

0oft *so 000s se.oo',saft no o's soo a.. .

Pm bus~Io pro4gt so. 100. 10.0 l00* 100.0 100.0 10.0 100.0 2.0 24 VA -12A -. ?7. -7.4Ptbt.tTAM o so .04.0 00 *0 . .0 as .o

AWqAtw*ur 3L6 34A6 31.3 333 35.9 41.1 .o 26 6.3 14.31 .C4 3.9 12.kmav 45. a3. 42. 444 414 37.5 . 14 44 6. -1.6 -3L0 .41.9

COO SCud IbftlF~~tbW) 0s 00 0 o . * ** es we= bvlm 21.4~~~~~~~M IL1 34 22.9 22. 21A .. Li 0.1 1515.1111 -211. 3.6

b~~se UaIa.e 0.1~~L .0L? -1.7 -1IJ -?A -20.6 46.3 *o o 0.0 .1 44-3.4 39

fTGWalpsw1tww V1 99.9 100. 10.? 101J 107 WA 186 23 IL? 9.7 -44 -V- 11114

4Tois m S1 OA4 a.9 1M. 69. 74. 115 11. . 40 I 3. . .friwee bwagtm. 5~~6A 3.6 63 £1.0 64A 94. 152.A 5.? 43 fiA -4.7 -0 92burnt bu'mW 9.0~~V 9.3 93 811l* 10A 3. 3.A 24 2L0 33 4.2 41.0 16.6

Pu SofemI. uesu 34.5 3L8 21169 31.7 32.6 6.1 10.1 1.3 -4A 31.31 -7.6 4411.4 I.1F1 Oweemus 33.9~~iL 33 31.5 31 34. 6.1 10.1 IA4 LO 9.4 4* -N2 35.1

@a.ue fSto 0.6 OS -2.A 0. 4 .20 . LO as,. ** *. *. .. -

arm Demlo ulltm 34. 12.1 VA. 30 17.1 0OA@ -10A 2VA -49.1 Not Pe0005 hwy 0 0. Li 0.0 0.0 40.1 0 *a o a o 0

Poemt NedaAowI t 35.3 32. 27. 30.6 17.7 .. .. 2 -10.3 231. -43:1o

in blittaww of 150l 1"B5 "a 150 113 199 19M 19MCat oa'0 iaw M t4) a.. .o ... .- -- . 0

Orose uemOOtbo Pofu 14.9 14. 17.0 16.? 16. 12 112 2.0 @4 9.9 -10. -NJr -7C"wt to 199wt .00 0 0 0 0 0 0 0 0 0 0 0

TOM et ?V MSr . to o 0b0 0 Ad *o . . * . o&WinitI IS so00 0 0 0 00 0 0 00 : .

moss vibW.1 pr.mt 14.9 163 17.0 16.7 116.9 La*9.it aPm SetismI hWy 00 00 00 00 00 00 00 00 00~~~~~~~~~~~~~~~~~~s 00o,0

iblloset "utu M"w 1100.0 00.0U- 10 I 100.0 lN*_ 44Z a- o

* mpict MP Deao"~ 1O.4 105. 108. 100.0 100.0 13.5i 442.0 o*111o o 55 4.implict 1Uwseu Deft. 101.3 1W2. 100" 100. 1W.u . 0 0 0 0 0 0

fliam PetagS p.a.)s V13Om f. 1M9 ad 19M vs pr.U*wy2.2 Li1 2.0 ad as Su hiVty avimlial3.9 3.1 2.7 V. 3wArfblc6t wo6.

Pegs 3.21. bteam p.s. 0 04.1 -135S 3AlIS ieehnfteil ePrcMt caeeApttmn pa. LS0. 2.O

bouto ("M IF UOPO) IN . . w OAstutv wdsfao MOW S aea .

swim ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ mtmS tb~iEamiW- -Mf swo , -s

I=. Ipirad avarparn:. 17.2 734

ii.'. at Tautal10 W 1 1999 191 11

ASHOAlture 49.0 49.7 494 47.3 *

1a~~~~suy ~~~~112 21.6 13.7 23.3 smvtam ~~~~~~~29. 28.7 V79 29.4 Total 100.0~~~~la 160.0 102.0 10 .________

ANIULI .48-Pape 2 of 3

ECONOMIC IDWICATORS (coa&hAued

P. xwdwwise IV"99.f..

5. Nwdindh. pwta 195 liP 193 193 1990 13 1 1390 1W? 193 1 196 99 1

fl....999.9 9.99 999 99 * ... 9.99.. 99*99 99*99 *.9.q9999*99 9999 *99.'. 499999 9999. 9..9 .99.99 .9

4Lfot ** 99 T9m*at*web*in* * I99 *9 **"Pt 9

laldal *.~~laidttm o 99m 99 9 *9 99 9 9

To~~1 Spits 190.0 111.6 91.6 80.0 0.-6 *,V o 311.(31 d. ad8. UL ?3, Li'P. Raidmindas I ~ ~ ~ ~ ~ ~ ~ ~~~,eo c atI"I.

of s. mb a w 399.9 3A9- - 3. 3 7J 1

Its 3M.1~~9 399. 399 997 99L Ml AM 99 99dw"m 9t of .9 .

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bwt tso aWs XL U?? 0 1104a 99 14 699 avldo dM

3. Mu s of LaV N 6.P 7WI0 .191 "A 9 1WtIsOl tMAa1a

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UseSuwO Treofe 6.4 W. 704 9.1 15A eff1 1M9

CuwAo 3.1 sfesff.m Sot -3 1.7 MA .5. .55 6 13 MG19 -1457.ase *ofltu *Wufe to M. .. .. *. 512 1.

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-51 - - ANI 2Pae 1 of 12

ALBANI

AGRICULTURE SECTOR ADJUS1r3SMT CREDIT

LEITER FROM THE GOVERNMENT OF ALBANIA ON TSMEDIUM-TERM POLICY FOR THE AGRICULTURAL SETR

May 24, 1993

Mr. Lewis T. PrestonPresidentThe World BankWashington, D.C.

Dear Mr. Preston,

Folowing the democaic elecdons of March 1992, our Govenment has takedecisive steps to restore economic and soca stability and has enbarked an a comprehenveproam of reforms cuding drasc salizaton measures and struct f to initiathe move towd a market economy.

Our budget deficit was reduced to 20 percent of GDP, mainly through sbarpcurilment in etures as the swope for aising tax revues is lmited in te short tmBudgetay subsidies to state enteprs wer abolished. Stdct monetary argets wereenforced, itere aftes were sharply increased, and the auomac extension of bank credit tostate enteris was stopped. Laws on central and commrial banling operations werimplemented. All prces have been liberalized, with the excepton of wheat and bread, temain staple of our popaion, whose prices were sharply inased. The curency wasfloated, private change tauctions legaized, and all cuent account trsctionslalized. The progmn has received the support of the IMF through a sqtn ageementsiged In August 1992 and of the in al communit.

We are pleased to inm you that, after nine months of mplementation, theprogm is on track altbough the tuaion remains fragile. All IMP performance crteriahave been meL e dmac cages impl ed at the start of the proam have visiblytaken root, most notably in the areas of pdce reform, the exchange and trde system, thebudget, cental baning, and agriculue. Industial output appears to have botomed ouLAgricultural productin has rebounded and there are strng signs of nascent private sectoractvity. Inflaion bas fillen from 14 percent a month at the beginning of 1992 to thamzero percent in April 1993. Our curren has appreciated by about 30 peet at the start ofthe program and since then has remained stable. Equally important, the social conseusappears to have held in this critical period, although the economic and socl situationremains very difficult

A11X -52-Page 2 of 12

Our medium team program for 1993-95 alms at a susained economic recover ndfurther progress tward etal viabilt. We Intend to achieve ti tough rapidIttutioal change and a lastig reduction of maceconomicmba es while, at the saete, protcting the most vulneble income groups dung the t tansit. Ourmacroeconomic famework envisages growth of about 3 to S percent onan annual bai oerthe period and annual Iflation of about 20 percen at the end of te program pedod.Growth is epected to odginate from the agiculturda sectr and from the delopm of theserice sector, while the indu sector is to contract fther. It is exected that the ASACcoud play a cucia role in helping the economy recov. Attning the infltion obcdvewill reqir a fundamental refm of public finance: a eliable tax base has to be estabishedto cature the segments of the ecnomy that wil grow in the medium term, and taxadminiration has to be totly overhauled. At the same ime, the level of public westmenthas to be aied to susinable level to allow for the bung up of Inascte and thde p of human capital. Budgetay contol and ma t fnons hae to bedevoped. Given the dficult ini conditions, our sategy must also rely on lrge andexceptiona amounts of foreig asstance Towards the end of the program period we expectfeign direct investment to increase substantally. As the agicuml setor recoves and itsmaketed suplus ineases, the composto of aid is expted to shift from food andemergency supples to preject finance. If well coordinated, and delivered in a timetymanns, this intonal asositce could bear fuit and deliver igh ates of growth bythe end of the decade.

Our count is predominany rural About 50 perent of the labor force isempyed in rc and rdated sectors, and two-thrds of the populatin ie In rudareas. Agriultur and the ual coonomy play a dominant role in Albania and ar the lay toeconomic y. Over the last 18 months, a true rvoludo has tn ce in rurAlbaia: a major land refom has been caied out and we hmae achieved enonnous progtowrds reformig the agcult secto along market economy line Our farmes haveresponded swiftly to the new incentive structure. In 1992 agilual producton grew by anasniing 12 percent. However the craing pattn si oriented towd satsfyingfmly needs as the newly established private farmers sought to pect their food secudty.Most farmers have become subsistence oriented and marketed surplus is limited. OurOvernment theef intends topu relentessy the rerm edffrts

To that effict, our Government has prepared and is imenting a medium-termprogram of reforms in agriculure. Our progm Is based on the sategic framworkpre ted in the report eadded An Agdcukrda SrVjegyfor Aana that we prepared jointlywith the World Bank and the European Commumity and that was endorsed by G-24 donorsIt addres the main strucul, instutdonal and policy constainu which are lmingprwducton and mareted suplus incmases in the smallolder sector and are preventing thedevelopnd a compettive, market-orented economy in rural areas. Our program will bemade operational by pecfying a tmetable of imeion for the actions it containsSuch a timetable for bey actions is in the at nt matrices.

Pagp3oat Z

The prioity aeats of our medium tm agricultur reform program are the

* F, ensrng at he pice and ade policy framework in agriculture iadeq for the depment of comeitive coxdions and tht the enabingenviro Is conducie to the devepment of the pivat sector. We havemade grat prog already by feeing almost all prices but we want to enuethat prices give corrct mmt sga to producers and that food aid does not actas a diincentive for domesdc production. We also want to ensure that markedigcaels for agdrctural inputs and outputs ae finctioning and that prvateacdvity can dewf rpdly In marketing, proessing and distributin of

agrcutualproducts.

* Second, we wl give pority to the caton of a rualfincal system adaptto the needs of a pfivate maket eoonomy. We are carrying out a fudaientalrestructurin of the rural credit system through liquidation of the Bank forAiculWe and Development and ceation of a new Agicltural Bank, terebydevelopg mechanisms to ensure that private rural entepeeurs at all incomeleves, whether farmers, traders or procesos, have access to credit.

* Tbird, we are detemined to finalize as quickly as possile the land reformprocess, both on fmer coopeave land and on former state farm Wl, and todevelop the legal framewk for land. Our objective is to ensur securi oftenr for the n landown and to feili legal land tranctonL In orderto Increase the ducdvity of our scarce agricultural land, we want to encouraeth procs of lnd co ugh frely negod market tansctoand troughbettr a mt of natural eourethat are in tbe piWcdomain

* Fourdh, we are committed to privaize as quicldy as possible the stat&,ownedenterprin ae ic urketing and procesg wsc that are now undethe Mnistry of Agricltue and the Ministry of Trade. We are curetlydeveloping a c hensive a tion strategy for stateowned entepiseAs most ag4icual Smrket and prcesn entris ae smal or mediumin scde and prepartory worc has already begun, we expect the procs ofownership tansfer to be completed very soon.

* Fifth, we want to impwve the admiae cacity of the Goverment so thatit can better ser the needs of the rural population. The ad Is of thesector needs to be refrmed and adapted to the market economr; our staff needsto be tained to acieve these goals more efficny; and our serAvices need to beImprve:d whether to prepare and lmpleme't enabling lgislation; to paie,evuate and execute public Investments n the sector, or to opeate and maitnthe rural in e in an effcient and economic ashion

Page 4 of 12

In trm of publicinvesm , we intend to give prioty to the t of tphya f c in rurl are Incuding Irrigan, roads, and market I te; tothe ceation of emloymet and income ppIn rade,, services and smal-scaeindustry In rua areas; and to the rfrm of agriual educaton, reseb, extenio and

pport serivices, adaptig tm to the needs of the prit farm sector. Projects In each ofthese areas have arady begun or are at an advanedage stpof prepaion.

Agric ltural Pie and Trade Polley

Our Govrment has already a grea ss in prc ofagritural and food products. On Januy 15, 1993, the Council of Ministers passed aDee b all prducer, wholse and retail pc with the excepn of wheat andbmd

ne mndium term obJective of our agriutural Pice policy I to ensure an efficeallocaon of res s aie by p sy adjusting he sbctor tworld marketconditions increasing t c i s domest agiutal market and Impoving the

pe imne o of mareting and pwrcessig enteises.

In te case of wheat, by the 1993 havest, we1 bIIn creasthe pie of food aidwhut paid to countepa fods and the consumer pric of bred so as to bring pices atleves constwitf ecomomic incentie and budgeay se s, while mitgting tereducton hi eal ncom and modeating the soial cost of adjustm As for the producprce of wheat, we wa to giv famesIncentives to hicrea the quatity of wheat hatIsmarkeed. By Decsion No. 526 (11 Deceber 1992), the Coumcil of Minists has areadyInud t pice of wheat to 14 L.k effective Ju 1,1993. This offi producerprc constts a floor prie at which stateond purchasing center agree to pm ase twhat Prvate buy are fe to pubas at a iprice.

By mid-1993, the pdrc at whih food aidwheat Is craedited to counterpart fmds vilbe raised to 16 LekIg The pic of bsrlmai will, be set at2S Ickk. We esdmatetat a maurgin of 9 Lek/kg il be sufficent to cover thecost ofhading, storage anddirbion of wheat, milling and bread bng duing t second half of 1993. Thi isbecue we are taking concrete msurs to effect suctu changes and introfdc priatecompetin the wheatlbread subsctwr these measur are cxp d to yied mojoreffidec ains and to restrain magin of statenterpises which are now dominant in thsubsector. The Govemment will monitor wheat and bread pices, as well as margins of stateenterprses, In order to avoid a decine In the rel price of food aid wheat, to maininsuffcient margins to attrct priat participaton In the walbadsubsector at all leels,and to ensur that the price of fbod aid does not fail below th domestic producer price.

At the conser level, in order to moderate the socw cost of the bread pikeincrease, the budget will compensate for a one year perod the most afficted segmen of thepvulti The m ton wi be gradally phmsed out over a one yea period. Duringthis year, we will review the type of program that Is most appropate to Albaxan conditions

-55- IZiRZ2Page S of 12

Wsed on a rview of the nutiton stu and Income lel of the pop ti, and on thecapiy of our admi n to handle our socia astance program

Por other food products Imported by donors, our policy sice January 15, 1993 hasbeen to set the price at which impors are charged to countrpa funds at impot parity ev

kldmg into account quaity differeces and market condidons, and we intend to continue withthis polcy. In no case wil the prices of food aid products creited to counterpart fund fl,la real tms, below the prices set in May 1993. Prvat Inm of'these products areallow, retail prices hv been baized and no consumer subsidies wi be applied.

Ihe Govm ment will Introduce pivate pa -ci't at al levels of impoftdistr on and pressing of all food aid coi. ln pacul, we wi abo ftemonopoly position now held by stae entprises In the storage and distribution of foW aidand ranize acdons for the sal of food aid.

Given the present siton and low level of effidency of the food Industry,frmgate pdes per se is not likely to result in madkd increases in prices paid by

ste-wned entrprise Price libe on wl thfore be lem d by measures toen eenterps t purchse domestically, eifically pon of enterpise whichwoud create a diffent Incentive struct in p asin enterprises. In the medium tern,purchase prie paid by state-owned s ete for tded products will dependan the competitvs ofthedomestic industry sa-vis imports and m hould receivepics that are co to the world mae pries Private grain markets are d.Our cbjectv for the wheat sector are to encorag the develo nt of the sector In

lection of gan at the fum level, sage, transpor, wholesae and retail of wheatlwductL

Our trade policy for agdrculal products i aimed at eusuring the development of anopen and competitive economy, free from restrctons to private actvity. Tarfs anagric1tuax products will be set at modeate leves with two objecdves in mind: generatinggoveniment renues linked to the development of foreig trade and protecting domesticproduce againt unfr cmpeition from abd. AU prc eilings on privatly importedgoods have been removed. Expaot stons will be imited to the need to avoid illegal re-export of food aid. Export l;wes whih est for a limited number of products, such asmedicina plas, have the objectve of preven the excessive degrdatio of out naturaevrnent

Agricltural inputs finaed by donor oganization wi be sold to farme atauctions with a rervatwin price equal to their CIF pric at the prvailng exchange rate plushandlng and trnport charges except when there is a case for selling the inputs at pricesbelow cost, such as below-cost sae of vaccie and drugs for publhc health reasonL Donor

lied Inputb wil be aeempt from taxes and riffs. We will enre that private adsselling iputs o farme do not face unfair comtition from the statowned Agrorgtarenetwork Once competiive condiions are estabshed in agriculul input markets, we

pa6 of12

ecpect dome pie to abilze arond their Import paty prices. Tra mas sholdgrdvUay be educed as compedtie condions deveo.

Together with land distribution and enterpri n, creation of a modernurat fina l system adaptd to the needs of th new market economy and of prvatefa s s an ureat prioi. Farmers and othr pivatep_h eneprneurs must have aces tocredit to Snane ther working capl d Invesmt needs. Given me urgent nature of thsIe, our Government has decided to follw two parle apprches: (i liqudat of thexlsdi Bak for Agricul and Deveopment (BAD) and creato of a new, financily

strong Aiuladl Dak that will pridons to frmers and fme' to theagropracessing sector, to transport entmprs and traders, and to ote rur etpnrthogh th exist network of branches ad ae ; and CA) creato of independent andecend Allagebased credit cmmit wbich will offer smal loans to Individual

irms and oth small-scAe enterpises In rr aa Viage Cedit Funds are cuntlybdig se under the Goverment's Rugal Pot Alleviation Program suppoted by IDA.

With aspect to BAD, Govemment I ommitted to actvely port the requiredlqudation of BAD and the creation of a new Agriculul Bank as a commneally opera_-ruralfinci in y. Under tbe Ivestment Compont of the ASAC, Govementil ounXd IDA fuds thrugh the new Dak to the pivate rural sector.

qudton of BD Invle lifting th burden of nogloans to Statem ad othe sae enterprs made durig e pas ad financed by t budge. Thesen ar not arewverb and will be written down. As a firs and Importn step, the

Concil of Miisters decided, on Apr 8, 1993, to cover BAD's outaunn state enterpiedebt as of Jue 30, 1992, though clearance of Inter-bank debt and issuance of bonds.Socoad, Govement is committed to cover all aew loan to s"t enterpri that have beene_nded between July 1, 1992 and June 30, 1993. through proceeds frm liqidatig atfam ast Third, all housing la, made by the fmer State Bak of Albania andtamned to BAD in 1991, wi be written down through proceeds from privaetn stathosing property, folowng the provions of the Law on the Pvaticzaon of State Housingo December 23, 1992. As of July 1, 1993, the ew Agrcultul Bank will start off with ade balane seet by Ihiting only those Ioans extended to the prte sctor. Allmainb g stae enteis and housing loan, not replaed and written down by that date,

wiM stay on BAD's book. Goverment wil quia BAD as soon as posile.

Le blisment of the Agrcull Bank (AB) wil involve the issace of aba g licene by te Bank of Albania, us plcing AB uMder tie provisions of the Law forthe Bakig Systm Under the Banldng Law, In order to obin a license, the new financialIstuo wi need to be adequatly capitalized, be managed by quaificd of, andhw a Charter and By-laws.

Page 7 of 1l

Sine it i the objective of Govenment to privatie the Banks AB wil be establishedas joi-stock company, initialy with al shares being held by Govrnmt. The Bank wilbe esabished so as to satisf extg capt adequwy In the inteim pior toprvatation, overnment intends AB to opete an the basis of strictly commeial criteriaHence, AB will etaend loans at its own ris only to thosv borwen who the Bank judges tobe creditworthy. Govenment will enforce strict govnance over AB, and will establish aBoard of Supevisors composed of qualfied idividuals, to eonsue that the Bank adher tothese oommercial priciples. In addition, Government wMll ensure that the management ofthe Bak Is fully qualified to opeate the Bank on a profesional basis, and meets thelcensing crtera of the Bank of Albania.

Concerning the new Caer, Govemment strongly endorses the Bank's intention tofocus its lending on the private sector. Govenment recognizes that the financial safety andsoundns of the new Bank hinges upon the Bank's autonomy i day-to-day credit decisons.Specifically,f the Bnk judges a prospecive borrower not to be creditwothy, andGovernment nonets wise credit to be eatended to that borrower, the Bank can providecredit, but only as an agent for the Government, which wi provide the required fimds,asme the credit risk, and reimburse the Bank for its administive expenses.

Insttuonal development of the new Bank will be caried out over sevel yeanbased on a comp ive insti a reform program Govenment is committed tosupport this progimn through financing of teccal aitanc and exe training in key

eas suh as credit poly and procedures, loa portfolo supevio and credit review,financial management and acountg, brch mnagemet and rehabil, and human

Iresorcae development, To asse transpar c of the Ban's opeto and to strngthend o dence, the Bans annual financial statemets will be audited by indqedent

eternal auditors.

Te new Agric Bank will bave a small, though pWidly epanding stock ofsaings depost which will enable it to engage in limited lending for imvestment projects Inorder to expd lenng to pve ivesto, GoVmet will make availe to the Bankfunds which we expect to receive from the lIvestmeat Component of the ASAC and fromother sources such as EC-PHRE With reet to ASAC, the funds will financerglyneeded medium- and long-term loans which are currenly not available in the country.Govrment is aware tht, for the near fuure, the Agricultural Bank will not be in a postionto asme the credit risk reated to hese loans under the ASAC, which will therefore beguarante by Gment. However, proper incentives will be designed for the Bank tomake sound lending desions and to rcise diligece in colectig on the loans.

Stae Farms

By Decision No. 452 dated October 17, 1992, the Council of Ministers has decidedto liquidate the isting state fms, sell their movable and immovable assets, settle theirclaims, and distribute hir land to worker and tir families All workrs registred onpay-rlls as of August, 1992 and members of their family, and selected other persons that

A -5s8 -Page 8 of 12

contributed to the craon of stat fam at their founding are entitled to receive land. Landwil be distributed on an egaiaian basi to aU entitled persons, regrdes of age and s.The avge land holding per capa wil be between 0.2 and 0.3 ha.

Th. tota sat farm l ea is composed, in part, of land originally acquired fromcoopertives and of recimed bnd. The Goverment is distributing the land of ex-cooperative state farms (24 percent of total land) hirough propety rights for former work.For the remainder (65 pecent of total land) user rights will be given to the work and theirfamiles. Another 11 percent of total land wi main state property and wM contne tD bemanged by exsting joint-venture.

The Naionl Ageny for Restructuring and Privatzation of State Farms created inJiuy 1992 witi the Ministry of Agricuue and Food is in charge of the execudon of spogm The Agency has nominated liquidaton for all state fms. Land com s havebeon formed in each state farm, at the commune level, and at the dt level

As of Way 14, 1993, 57 percent (63,840 ha) of the land bad been distributed. Weexpect da, following the enacment of the law on the cn of former lad ownrs,themaie will be distributed by the end of June 1993.

Fixed ass and workng capt of state farms are sold, with sales reveues beingutlized to y loans extended by the Bank for Agdcultur and Dev ment (BAD) to staefm si July 1, 199. Asets are sold by means of public auctions with a minimumprice, with pref ce given to person eligible fo receiving land. We etmate ta thecombind total val of s farms a equals about Le 2 bilon, of which only up toLek 1 bllion is epected to be reived fom auctions to intersted buyes. As of endMrch, 1993, state farm assets worth Lek 400 million have been sold, of which Lec 385million have been tansferred to BAD. The sale of another Lek 300 of assets is epected byJuly of 1993, with te mning assets worth Lek 300 miion to be sold by the end of 1993.Actual payment from dtese sales will be received fully only after about three years due tocredit In-kind a gements fo some sale of assets

Land Reform and land Poley

Our Padiament and our Goverment have given a great priority to land reform.Threenportant pieces of legisi have been passed. First, the Land Law was passed onJuy 19, 1991. It stpulated th lad previosly belonging to agrdtual coopera should,be ditributed toworkers and their famili. As of today, close to 95 percent of the land hasbeen allocated to some 370,000 resident famili with approxiy 1.2 milLion parcsbeig distbuted. Some 160,000 cetficates of allotn (tapa) made out to heads ofhoueholds have been issued. Second, as mentioned above, the decision bas also been taknto distrbte sta farm land. Third, the Parliament has passed on April 22, 1993 the IAw ofCompatin of Fm Owners of A talLand, which allows for tie ato ofptevius land ownen of up to 1,000 becae by vouches. The former owner or his hein ofany parcel of 15 hects or less is to receive full compensaton. Addidonal hecar, up to a

-59- 2Page 9 of 12

ma-imum of 1000, are to receive compensaton on a decreasing sce bass, so tat no priorowner or bis heirs may receive fll compenion on more 46 hecares. The value ofeach voucher will be fixed at some fiture date by the Council of Ministers. Ibe newlegisatn o compeon will ensure tht delays caused by diputes about rtutton ofpreviously owned land will be reduced to a miimum and that investment on the land cantabe place in a secure eonent

Our Govnment's poicy regarding land reform has been to distribute bld to allmembers a cO p and state fm, In the interests of speed and equity, ather than tryto prd mine ioptmal fam s for modem mechanized agricultre for distribution to aseleted few. While our policy has resulted so far in the creation of a large number of small

rm with a Lmited income potential, we believe that it will soon lead to productivity gainsin the sector.

In spite of the great progress has been achieved, thee are sti lacna in ourlega famework. The rights and obligdans of owners and users are not yet clearly defined.Ie law abo needs to define the meaning and implicaons of the rights of users of ex-stabfarm land owned by the State. In tem of land titlg, although the inFmation on each htwil form the basis of registe titles in ime, as yet, no titles as such exist and no system ofland regisaon is in effecL Meover, we have fitfle expertise in og, dispaying andproci propertyrights.

We have prepared a Lad Market Acdon Plan and a draft Land Registation Actwhich coains deiled provions regaring the ansfr, ease and mortgaging of land. OurAco Plan is cpreh v and aims at developing over a perod of 4-5 yeas v gand mag ap , opeaing land ritr offices in the 36 Distis of our comtry,and developing the approprate legl and gulatory famework for land. We are committedto the eady enmSent of relevat provisio of the Land Regtatdon AcL

In respect of legislation permitting the sale, leasig and mortgaging of land, we shasoon comple our review of the draft Land Regsraion Act and of the draft Civil Code(Volume I, Book 2). We recognize the need to harmone the tms of fte two drafts insubstntie pvin regarding the sale, lasng and mortgaging of land.

In the near futre, we do not intend to permit the sale or purcbase of agricultuland which is prohbited by aicde 2 ofte law of July 1991. Sales of rulura land willnot be allowed uwl a modenn sysmn f land reg8radion In place. As land ysystems are establied and land tide documns propedy recorded, the Govement wianction sales on an vr widening bas, district by distict, unil tansfers of land

throug t the entre ountry are pemitted. We beieve that to allow otherwse wouldrelt: in a chaotic, unregulaktd market which would be open to abuse and unending disputesover land.

Pending the enactment of general legilation allowing for the sale, leasig andmortgagig of land, we saI pre lslin pemit leaLhold interests in all

ANNEX z 60-Page 10 of 12

agricultul land, on an appoprit Interim basis, as soon as possible. We Intend to enactappropiate ilation In tis respect no later than end of December 1993. For land whichhas been distributed In ownership, we shall en a I*ndlord and Tenant Act providing thebasis an which the leaing of fomer cooperative land by exiting owners may beaccomplished. For "in use* holdings we shall enact legiaon aimed at turning all "in useholdings of certa defined types Into Government leases of reasonable, fixed duration;defining all terms and conditions of such leases In the law, thereby obviating the need forindividual lease contract during this tansitional stage; allowing sub-leases, agan on fteterms and conditons provide by law; reordig the relat changes to stu and rghts onthe tap of eah Individual 'user, peig the oficl recording and registration of leases, inaccordancewith the Land Registration Act, once enactd and mplemented; providing ndesrednghe ath ometcans son fleasehold rghts on the occurrence of an event, suchas death or bankrptcy of the lessee or sub-lessee; and introducing provisons dealing withthe valuain of land and wh the mortgagn of leasehold intrests.

It is our intention to hve such transitional legislation repealed and superseded by theatm of a sepat Land Law and relevant povisns of a Civil Code, which woud be

opertive as soon as the land registration system is in ple.

Prvatzation of State-owned Marketig and P_ocessng Enterpis and EnablngEnvirnment for the Private Sector

For the state entprs sector, we are committed to a stategy based on dtee pilarsFit resolution of int r e arrears. Second, quick oiva n t be caried out bythe Naiond Agency for Pdovatizatlon (NAP) with prepataty work done by the entrpisesand tie lne minisie We are stl reviewing the opons to car out small-scaleprvatzatio as rapidly as possible and we expect to finalize our pva ion famework inth next few week. Third, technica and fcial sot for restuctrg of selectedenterises, which would be caid out by the som to be creatd pse RestcingAgency tERA).

Prvatzato decision concerning state enrprses would be the responsibiity of hieNational Agency for Priatntion. Line ministries would bave the lesponsibilty to formulatesectl plici facilitat vati

The oveall objectve of our policy with respect to the enteprise sectr is toradicaly reorgnize the pbic sector by impoving coqrprae governance and achieing rapidincreases in capacity utlization and production in viable enterprises, and by closing downunviable e ises and selling off their assets. We have alady k signficant steps hthis direcdon inudig creaing an appropriate legal framework permitting effectivemanagement and reestlishing effecive ownerip and conrl of the entepises; impwvingdte fianc siation of the public sector, including pln for wing off the stock ofacc=urLule debts of statowned farms and enftewises; establishng an unemploymentinsuan system; prepaing buiness plans for the viable state entses and providing

-61 - AN NiXPape l of 12

inported inputs and tnical asstance semices to impeoe efficiency and introduce morebuinss-reed magent.

lhe steowned eitprises belongi to the agriual mareing ad procesgsector th are under the Ministy of Agriculre and the Ministy of Trade are mostly smalor medium scale enterprises. Moreover, preatory work for their privatzation has alreadybegun. We theefore expct the process of ownership transfer to be completed soon. Weare commited to priatize a sma and medium aiclua enteses by March 1994 and,for large enterprises, to adopt and implement a tmetable of pion. n the agriuturaltrade and processing sector, enterpie restructr-ig befe pa n will be mited to avery small nunber of cases that will be bandled by the Entepi Res i Agency(ERA). We do not intend to use subsidies for entprise reucing over and above whatwill be earmarked for the ERA in the 1993 and 1994 budgets.

Role of the Goverment I A icut

The aministaIon of the sector needs to be refmed and adapted to ttie marketecmomy and the role to be played by our Govemment in agricultu wil need to beredefined over the medium t Sm ultaneouisly our administrative capacity needs to beimproved and our staff wil need to be trained. We wi require large amounts of technicalassistnce to achieve our goals.

The main tas of the public sector In agriculue are the prodauon anddissemition of staical information on agricultual pductin, prices and markt; theformulation and implem of policies for agdriule and natur reources; agriculturalsupportseic for farm (educaton, research and extension); the appraisal, evaluationand eecutoin of the public nestment progam for the secr, the opeation and mitanceof the rural infuctur; and developing the legl regulatory and ie ameworkfor human and animal health, hygiene, food standards, pest nmet and eninmentalprotecx.

In tfie next two yeans, we intend to concenhtabe on fcilitating the development of hieprivate sector in agrcle through leg and reguatory actons. An acdon plan for publicinvestment in in (mainly irrigation and madst and fresh produce, lvestock andother wholesale makes) will be developed. Specific actons to ensur safeuse of inputs in agroindustrial plants and measres to certify compliance with vi lsandards w be ta. An action program wi be adopted for stat izationssupevNising the andarization, safet and inscton, and export and import certfication ofproducts. It will be necessary to clarify the scope of actvity, product coverage andimplementation instruments of these institions and to prepare the neessary legisation andImprove equipments and Ldabratries.

Mj. -~. * 62.-

Pag 12 o 12

Coodinato, pleento and Molntoring of the Pgram

In order to coordinate and monitor dt implemenaon f our medium tem progamof arctu refom, we will set up in the Ministry of Agictr and Food a special unicalled4grku t Propgn QOfce (APO) under the direct esponsibility of the Minister.Mh two main fincdons of the APO would be, on the one hand, coordiion, mnitoingand evauion of the programs pe ance and, on the other hand, execudve suervisionof the tecical astance programs fmanced by intenatonl donors. no APO wMcoordinatewidi the Dirctorates of the Mistry of Agriculte and with other Minisie andagencies and seek their Inputs. The APO will be headed by a staff member of the Mistryhaving the rnk of Vice Mnister and wil have staff in rana, suppoted by extemlconsults, and regional teams entsted with the good execution of the program at distictleveL. The APO will have a Coo ag Committee composed of pesentatives of thMnistry of Finance, Ministry of Agriclture, National Agency for nPon, Miistry ofTade, Misy of Justie and other agencies that ae remn le for the implemenion ofthe sctoral progmm.

Your sincerey,

Mfinibtr of Aguicltur and Food NO&MGc ad fonommy

ALBANIAAGRICULTURE SECrN)R ADJUSTMENT CREDIr

EnIca MIeaw - Aetlo to be oitred

L Boom du* po sirsm L dp ofC* dab ld, * to heprske a-f *r o f oe _ _ s d1 da dot, " a id does watoquet fnd - tf fd dmVaa&d roo ted & a (o)w cedto t0 NabFl_ domd p t ad is dbmoiep fo lia t kif L Cuvwbes ol bd tol. de)I In red g= dbe bw

cabfo to Sm 'ois_f &mWiO p** of } Se regp*akWa 2S L**8aot" =Pw wbdo 14 1Wkg. *deo otbwdoewersu hd

pdm~ t_r er t a _dk to a&frI&ntgJmay 1993, aslqmto set OSp gde 1l diddo_ 01m ** ^JONM M3 a_d fiom. kpRd of foodfoed _t

4" ~ ~ ~ Xg F*dObk td di5_ v6

* Cotf_m P

( Cu _dtmof Secoand Trancbe Relse

AL A l * I i tthe Bank * Council af finid decid * [(ak _ r _ o<f BA, * Cam o lt *W of atad Ait an S, 1993, " to budin"01011 vac t Ot(BAD) ad creat te banko autsanb* bad hlm to of e s11 tbe new AaApIculftuutBack as a vible "s aitopis as of 1ue 30, .Orp&e det as d ns. 30,1992; ob) e mini Financial Intenm OA 2.87 bio m) und sae sterpe loansIsd_p al( dpaviding csdita thinwa clea of hebaok debt aid e dea bee Ja4 1,1992 MId Sum Pd n _ma adi rua Imance of bafbs. 30, 1993; (c) wadwn of beaiga*op*_m lm mAe by de famser Sat-e MDI- of

F,.um Mne e) w to a _sc_ Ssance ol daL ese by do Bank et trainng (

Bai4hs on nsas oflsl 1,193

fina "Wb d a(S)k , l D G

* TechnIcal Assistame Psiole AM

btarte ha Fgor te tw.

haZ sin .aleo branc Wasdo

_b - _ & . '

* T aconing

rA6w*d nd Shodd 13_i

* Todi4 of to of Boa dR fi aa o a

in_(0_ Cod on. kn oid

* NO seom a ed _ul-X Smt&Wfr dBtl b bond bond 81 "Worso

COCo_nof Ibard PhkotoCoufb of Seon TIhe Rdret

L4ddwm SW$ hm bad a * Ngatkm mn" a Juyi*kmmnudot ) ko s ut mat beU~~~~~bI Dwli# t_o dEJ a soft atwDXlwolpl_ t l_ fE

.~~~~~~~~irW d 3 a 0 1O *#sf_b

* Dis*hadSpumiof*.e Iau of bmm ii. ha

* _bi suM by adi.

IV. flm m * a st.adm * Dr Ch <umu f * E at tkadoimad d b hdh fawer .Psimwaak * Aflsw Inr do pon"il D* t1Law .t lAnd ofWdIU OIu5S" I*f amd oomosddide it due tbin hhof

Fon ar Owner af It

0 CmUumElsuwdbmm.idl.m Jded i

~ COMiMO of Owmi 1kumk Sde

.01

v. hwa_zfi Pridva Ia1 qpiadul N81on A X* bf 4oitlg oa4wdn b do w- er14 t ON

of 986 oldpmomw "go W ^__ 41010,41mo_ , _bs*Wd 9Mia_ ^_ km gm Aukubag way. law Gsdu * C olplJaihstaf0LawanSI* N Sto mbik l le in IDA lbe

_ "09mbs mmobd in Jum Oft 6V W P . doV* Vaoa of sIiN.g umbrn

of a( piaksi aui and * A wbhMdu uaira lm .do.1993.rocmainp aut AM-0 emf ird.d for otWe equbs Made 1b9 1 l* M

.obeamlulveq bD b de m al eqr cbm pdnlew of LII s"* A eZd of 190 Mka,% SA ON 1-- siado. at la4. bhn &Au to be dr*ivo bw hon* % lab d 19 tar __ d e * Ior m b_ph- in paa. b t 19* t,r

* MefAuraiulUmiakoTrado t Do on so" orn k _ _dnr

V*rd eeMis ht of . PenEdiz aE. . ~ ~ ~~ ~~~~~~agdulti _ .etr .w .o~diSsa

Moalloufug of Urn 1Suh andes

CS)CAndihanof Sea"mi Tra Re.eut

pap lof 1

AGE~gnu3 ftr Ai n V3WAOLr xx rO POcg zm

1. f TnMll pWlol m. ......... *.... *e wo*s

2. Pzep$ad by ......... .... qy of AgtcIuMsu Food &....... ....... SMh y oioa nd Umomy wit IDA AdNM

6. PkDlae S. fBUwm ................ . .N. bvngb lm

7. LApp ow Dva ...

7. Istof _e Z 1 lCRod ! A

-69- J&ZL

ALBANIA

AGRICULTURE SEYR ADJUSTMEN CREDIT

STATUS OF BANK GROUP OPERATIONS(As of May 25, 993)r

USS lllacam Find (AS ~aCufliiom)NO. Yew Borrow Pnd Unid

2404 1992 I GovL of baa Citdcal Impo PojMect 41.1 35.4

2461 1993 GovL of Albm Rural Pwerty Allaion Plo Pject 2.4 2.1

2492 1993 GvtofJAbnia TlechnicaAstmncPo onomic 4.0 4.0Raibms b

1993 Govt of AJba Tanort Priect' 18.0 1.0

ToSLd 6s5

Of which Rad: 0.0

Toaldnowhelddby do Baur 65.5

Totl Amo Sold: 0.0

Of which Rad: 0.0

Total undidbuiM 59.5

a T* a of Gm proet is durlbed in a peparate pot on al Bak/IDA financed poject i utla.whi I up*dad twice yeaIy and cibuld to tdo Execuiv Dizct on Aprl 30 and 31.

b Not yet eftv&

4:s3.^' -*.v.. .FC".* ¢

-71 - . 6Page l of S

ALBANIA

AGRICULTURE SECTOR ADJUSIMENT CREDIT

IST OF DOCUMENTS IN PROJECT FILE

Govemment of Albania, Mnter l Monetary Fund and World Bank, 'MediumTeam E mic and Facial Poliy Framework Paper, 199396," May 1993

- World Bank and Euoe Communty, An gig1Ifl S== for Albani&pubihd by the World Bank, Washington, D.C., Ocoaer 1992.

- Government of Albania, "Albana's Mc mi Reforms," report prested byMr. Genc RuJi, Minister of Fnance and Economy at the 0-24 Conferce onAgriculte, Tirana, November 18-19, 1993.

- Govenmentof Albania "L Cadre politique do d6veloppement de l'agricWultre,*rport preeed by Mr. Reaxep Uka, Mbister of Agriture and Food at the 0-24Confence an Agriculture, Tuaa, November 1849, 1993.

- {Govennt of Albania, External Assnce Needs for Agricultue," reportpented by Mr. Llazar Kora, Vlce Minister of Agricuire at the 0-24 Coferceon A, 1a, November 18-19, 1993.

- Commission of the Eurpean Community (0-24 Secretai), Fia Declario of tep ants at the 6-24 Meftg of the Pfincipal Donors on Agriclture and Food AidIn Abania, Brussels, F}uay 26, 1993.

- law No. 7491 oan the M4jor Constutional Prwisions, 29 April 1991;

- Law No. 7501 on the Land, 19 July 1991;

- Law No. 7512 on Sanctioning and Protecdon of Private Propr, Free itiatve ofIndepede PriPvae Actvities and Privaizain, 10 August 1991;

- Law No. 7520 an the Bank for Agriutre and Devdopment, 16 October 1991;

- Law No. 7S60 on the Bank of Albania 28 Apr 1992;

6paggx 072-

* law No. 75M on e Oon and Functiovng of Local Goverment, 10 June

- law No. 7582 on Sat Ederpdrs, 13 July 199;

Law No. 7594 on Forei Invesment, 4 August 1991;

- law No. 7631 on the Bankuptcy of State EnterpIses, 29 October 1992;

- law No. 7652 on the Privataton of Stae HosIn 23 December 1992;

* law No. 7672 on an Addition to Law No.7652 on t Psiv on of State Housing,11 Fbmy 199;

- law N. 7699 on the Com ation of Former Ownes of Agriculural Land, 21A.V 1993;

Ber No. 22 of the Presdent of ft Republic of Abania onFtalDisposits, 15 Augus 1991;

* Deroo No. 38 of the Pesden of the Republic of Albania on Some Anment tolaw No. 7377 (B May 1990) on the Albaian Stae Bank and Law No. 7378 (8 May1 on the Ag*ctul Bak 20 Stmber 1991;

ikeec No. 266 on Law on the State Budget of the Republc of Albaia, 22 July3M;

- Deer.e No. 7493 on the Albaian Comei Ban 1 December 1990;

- DeisIos No. 230 of the Council of Mniste on the Co tlo of Land Commi23 Jry 1991;

- Deosio N. 255 of tbe Counci of Mini on he Ctria for the Distribution ofde Ariutual Land, 2 Augu 1991;

- Doddon No. 256 of the C£ouni of Mnisters on Reguai for the Registrto,Nificinsin the land Situation and Cadaste Duties, 2 Augus 1991;

- DedsoW No. 266 of the Councl of Mnies on the Division of the Prety inApicuitmi Coopeatives, 8 August 1991;

M Dedsion No. 282 of the Council of Mini on the Cdtera of Valuing te StateP gpmty to be Pdvatzed and the Leasing of the Assets which are given in use to7W PtIes, 25 June 192;

- 73 MM A N

Page 3 of5

- DoDeison No. 307 of the Counci of Minsts an Duties and Rights of the NationalAgency of Privatiation and the Prpanatory Commission of the P zation Proces,29 August 1991;

- Deci onNo. 362 of the Council of Ministers on Citeria of Evaluation of the StaeProperty to be Privatzed, 23 Setember 1991;

- Decision No. 364 of the Coundl of Miste on the Rent for the Land that s givenfor Buildn to Legal and Physical Persons, Albaians or Poreigners, and for thPrice of the Non-Agcutural Land that is sold to the Albanians, 5 October 1991;

- Deaddon No. 4S2 of the Councl of Mlsen on theestRucturing of AgrcultuEnterprises (State Farms), 17 October 1992;

- Deciion No. 526 of the Council of Min s an the Purchs Pric by the State ofAriculturl Products, 11 December 1992;

- Decision No. 116 of the Conmcil of Minsters on the Purchase Price by the State ofSugarbeet and the Lberli of Agricltual Pri, 13 March 1993;

- Decsion No. 1033 of the Councl of Miistr on fte Coverage of Outsanding Statenterprise Debt with Bans, 8 April 1993;

- iinstcton No. 2 of the Councl of Mnisterson the Functioning of LadCommissions in the Executive Cmmittee of the Districts and Villages, 2 August1991;

- Qnstructio No. 3 of the Council of Ministers on the Work Oranizai andmplemtation of the Tason fom State Ownehip to Private Ownership though

Auctin, 30 August 1991;

- Instruction No. 16 of the Ministry of Finance and Economy on Resuion andCompensaton of the Confiscated Prperty of the Ex-Polidcal Psns and PoitcalDepoted that have been freed, 8 August 1992;

Addm P-Lces

- Mnistry of Finance and Economy, Price Directorate, Countrpart Fund Prices andStat Enterpis Mgins for Food Aid Products, January 1993.

- Commission of the Euopean Commun, -24 Food Asessment Mision R;poz%JuirfJuly 1992.

A~flhIZ1 -74.Pae 4 of S

1EC-PEARS Consultant, Food Aid Commodities: Needs, Stocks, Shipments andDonor IoImit ents by food product for July 1992-July 1993, Food Aid Moitoig(Miniry of Trde), Marc 1993.

* Stmucure of the Alaian Banidng System and Orniion of the Banks in a MarbetEonomy*'; study by Price-Watrhouse to te Albanin Govrnmen 1and the WorldBank, Wasinglon, Apdl 1993

- Albadan Bankr Establ4sn an Accounting Framework'; report by Coopen &Lybrad to EBRD, London, Marc. 1993

- StudWy on the sturan of the Bank for Agriutr and Deveopment as of November,1992; consultant report to lhe World Bank, January 1993

Ils of Ranches and Agences of the Savings Bank with cing depositsoffered for tr-nsfer Into he new Agdrculaal Bank, haua, March 1993; Responeand Proposal by Bank for Agitm and Development, TianaApril 1993; Memoandum of Undernmding betwen the Bank for Agriculture andDvelopment and h Saigs Bank on the transfer of 28 branches and agencies omde Saving Bank Into te new Agicultural Bank, Tana, May 1993

.. 1.

*st of outsanding stat etprs las of the Bank for Agrietur and Developmesof July 31, 1992 (by enrr and district, by loan maurity); Tha, January

1993

Pan for nnial tg quo) of the Bank for Ag te andDevep, including draft Charter and By-laws for the new Agricultui Bank,prepated by the t of the bank, Taim, May 6, 1993

- rLetta by the Bank of Albania to the World Bank, cofiming that the codto forIs_ne of a bank licens to the new Agricultural Bank will be fulfilled by July 1993,Uzon, ay 10, 1993

- Opatng Predures of the Revolving Credit Account witiin fte Bank forAgditre and Deovelpment under the EC-PEARE progam, Trman, December1992; it of loans finaned under the Revolving Credit Account as of May 14, 1993

lIerim repor on credit poicies, on supervsion, acoouing and agemeInform-i sysems (MIS) submitted to the World Bank by the technica nceteam suportig the Bank for Agdcute and Development, Twana, Febrny-Apri1993

-75-Pae S Of S

- 4oAgement between the Minity of Finance and Economy and the Bank forAriult and Davelopment conceing on-lending of budge resour tobenelicia Im t Inputs under die Crical hmports Poject; T1a, November11, 1992

&le Farnn

4 Apisystem(Ovrs) Ltd., Albaia: Agricutiur Productio, Repo submitted toEC-PHAlE for the prpartion of the Agriculture Sector Adjusment Pamme,December 99.

Nadond Agency for Restuctuing and Rehabiltaton of State Farms, Mny ofAgriculture and PooJ, Status of Distribution of State Farm Land by District as ofMarch 26, 1993.

Nlatonal Agency fo Rd ig and Rehabiliion of State Farm, Mnistry ofAgr4dulueu and Food, Credit e tded o Stae Farms by District as of Marh 28,1993.

Ld bft

Land Markbt Action lan for Albania, prpared by the Land Tenure Center of thUnirity of W isconsn with tie Land Research nstite of Albania, 8 March 1993;

Land Registretion Act and Land Regis Rules and Forms, Seod Dra,preae by Pro. Singer, conslt to the Land Tenur Center of th Univeiy ofWiconsin, March 1993

Civil Code of Albnia, Volume I, Books 1-4), Prinary Draf%, prepared by Prf.Gianniara Ajani, consultant to the Intnational Monetary Fund, June 1992

- list of the 442 Stat Enterpdses under the Control and Supersion of the Ministry ofAgiclture and Food

Coopers and Lybrad (Paris), Albania: Pdrvatso of the Food Proces industr,Report submittd to EC-PHARE for the ppation of the Arcutu SectorAjjusit PrgrammeDecember 1992.

Agrsses (Overseas) Ltd., Abania:A Report submittedto dte BC-PHARE Emegency Aid Prgrmme, February 1993.

Pae 1 of 4

ALBAIA

AGRCMTME SECOR ADJUSIMN CREDIT

D0PENTATION l!PLAN

Apprx. Dates Activty ipeeng Agn

5193 Set up and staff APO MOA

5/93 Prepare terms of ref_rene forTA pmgams APO ant othrs

7193 Send tem of refence for TA APOprogamsto W1A/BC for review

9/93 Reruit conutants for TA APOprograms

9/93 Prpare and issu firt quaWerly APOmontorngreport

10/93 Send list of elected conslats APOto IDABC for vetg

12/93 Prepare and Issue second quarty APOmonitoring report

6/93 Start emet of PTconulant servce for AD

6193 Set up pr and Pdibrsmn arageetaccri to Opeonal Manual

93-96 P n and diursement PIUativites on-going under te thr ecomponents of prect

93-94 Staff aining progmm FU

PaZ 2 of 4

Food Aid and Prftn

693 Arge auctions and pp biding MOT, MOAprocedures for food aid imports

6/93 Ppare aucton procedures for MOAagicultural inputs and credit

arrangements wMit BAD for creditto famer

7/93 Prare terms of reference for ov tNutridonal Survey and HoseholdExpenditure Survey; recruit consultants

10/93 Adjust CP prices MOP

10/93 to Carry out Nutdtional Survey and Govenment2/94 Household Survey:

1194 Adjust CPP pices MOP

3/94 Adopt eCommndatins for betre Govementtargetng to vulnerble groups underreformed Social Assisanc system

4/94 Adjust CPF prices MOP

5/93 Send plan for liquiatio of BAD and MOP, BOAlegal eslishmt of the AgrbicuBank (AB) to IDA for review

6/93 Send d ea on on licensing of BOAnew AD and legal opinin to IDA for review

6193 Prepare terms of reerence for BADIABconsultat services for AB

7/93 BOA to issue lisem to AB; sepae BOA, MOP, ADacoumts of BAD and AB

7-8t93 Pmalize and sign Subsidiary MOP, ADAgreement for bnvement Compont(condition of disburt)

-79- APOp3 f4

8/93 Consultants to start work in AB; ADIndependent Lending Unit to be set upwithin AB (condition of disbursement)

8-9/93 Management and consultants to draft AS, PIUtechical specifications of officeequipment

9193 Begin implementation of rgzon MOAprogram of the Stastcs Department;recruit and train staff

9193 Set up and staff Price and Market MOAMonitoring Unit. Prepare business planand work program.

9193 Set up and staff Policy Analysis Unit; MOAreCUit short term consultts;begin taning progam for staff.

by 3/94 Prepare Study for the Reform of MOAAgricultural Extension and Support Svicesfor Farmers.

by 3/94 Prepare fracwork for negoaons betwoee MOAgrowers and agroindusries and subsectoalprice/trade policy framework

by 3/94 Develop plan for reform of health nspection, MOAfood quality control, consumer protectonand environmental standards for food industry.

by 3/94 Prepare Public Investment Program for MOAagricultural and food market infrastructure

LiqdaoState Es

5-12/93 Continue program of land distribution SPAand sale of assets of state farms

5/93 Submit detailed plan and implementaton SPAtimetable for liquidation of ste farms,distribution of user rights to beneficiariesand sale of assets to IDA.

hICi72 -80-Page 4 of 4

3/94 Complet liquidaton of stae farms, SFAdistribution of land and sale of asse.

93-94 Manage joint venture ageements SPA

93-96 Imlment Land Market Action Plan MOA

94 Adopt LaW on Land Regtion and MOA andCivil Code (Volum I, Book 2) Jusdce

12/93 Prepare interim leggislation allowing Governmentfor leaig of land on cooperativeand state farm land; submit to IDA forreview; and adopt legsation

6/93 Finaize compoensive saegr fo GovermentSatowned Entrpises

7/93 Finalize plan for inter-enteps MOP, BOAatrears and bao

7/93 Adopt poicies and prooedures for Governmentprivaation of small and mediumnerrie (SIE)

793 to Cary out prepator work for MOA, NAP3/94 privatization of SMEs in the

3/94 Adopt dmetable for pri on of MOA, NAPlarge sste enises under the MOA

3/94 Puivatize all SMEs in the agdeultural MOA, NAPmarloeting and procesing sector

9/93 Prepare support program for private SMEs ESU and pivate sectorin agulual processing and markt

Pape 1 of I

AGRICULTURE SEcrOR ADjuSTMEN CREDIT

SUPRIINPLANEstiate Schdul ofIODA Suevismion- Misslon

9410193 Th't Sueriio ission

(Review SWar-up of policy prograr -'Vlw star-up of TA progams WIthAPO-, review imlmnaInof TA. progrm for the Agiulual ak rviewsotup of procurement/disbursement arrngmetswith Vflterf hmalhmmnt

of condhions offor the investment component)

2-3194 Seconad Supervisin PMissonReview of Tnh,Rdeles Condito

(Review progmam Imlmntto progress and verify fulfilmuent withconitinsof seond ace eease; review prourmet" and

statu; review progres with Imlmnaiof TA progamrs; supevis sub-Mman under investment component)

7-8/94 ¶biard Suprviio Misin

(Reiew prorm Imlmnainprogress review Imlmettinprogress ofTA progrmrs; revLFiew Aprourmet and dstifsbusee status sprvs sub-loaas under investment component)

12194 Fourth Spvionmission

(Review prorm Fmlmntto 9Mprogress; review imlmn taIo progres ofTA pWrgrms supervis sub-loams under investment copnn;reviewproueetand dirbusement staus discuss impact anlssand compledonreport for quick-disursing component)

1995 TWO Sue!so Misin

(Supervise sub-loans under Investment componet)

199 One BankSurisoMsin

(Supervise sub-loans under Invesftment component and discuss premtada of PCI)

-83 - NZ

ALBANA

AGRICULTUR SECIOR ADJUSMENT CEDIT

ORGANIZATIONAL CHART OF THE MINMRY OF AGRICULTURE AND FOODAND OF TRE AGRICULTURAL PROGRAM OMCE (APO)

' Z ! ~ ~ Gaw

D hectorate fwr i o or Dfctort fwr D mtIt fAffairs Produciordcuow ~ -. . P_. _ Rzoule ~~Food _iufy

APO-. . .. .. .

PrWs OordtV nd oA

APO Staffing. Th AMO Directo baa te rak of Vice WMinite ad meports diretly o toe Wmindw. ToMPO. locte in tdo Mmi*ity of Agricultue, opeafte with Albania and ftorg staff hinuding 8 01s AMvluand an Aid Coordinatio Advise (bot foreig cunsutunta). Upon apprval of the Minstdw, sdud itim oeignadvisers finane by danms wil be recmited for diot term or long ftem =p mban pa of fth APO btaleoae in tho General Directorate of doe miistry (oosWltate fr laud policy prvtisatio pricing for

arclueand agroindustry; credit poftc uSc) Adaditoa staff, Albanian or toreiga, wil be recuit as andwhen needed to acco mplis specific tUs[

APO FaumcIoum Th. functons of APO are (1) policy coordination and monitoring of the progrm&sp erfarmance a nd (2M ordnto of all fbrslpnsasistane prQgmai While pQject and pvogrm finanle bydonors (IDA, EC-PH E USAD. PAO, WAD and bilae prgams) we mand by unt opaftig in to

I of to Minsy, td APO Dietor wi tbe asistance of it Agxlin ad forig sta _respomibl for do cutive supeDrvsin adbcdian of allI or md fodetai of td APO wctions moiao widt go Gdea D irecot, sdt equiei mts dosg te

consutant quirns^uts, rang needs for Alban=a staff, opeating cotsu and equipmwaent nedswe describd into knin plax of the A(o.

-85 -

ALBANr&

AGRICULTURE SECrOR ADJUSTMT CREDIT

TECINIMCAL ASSISTANCE PROGPtM

AGUCUTUAL PROGRA OFFICE

Forig Consltats for the APO including:* Chief Adviser (EC-PHARE)* Aid Corinato Adviser (PAO under lian Trust Fund)* Other Consultants (to be determined)

FOOD AiD PROGRAM

* BSFood Aid Progmm Resdent Advse (EC-PHARE)* Consultant Servic t st Food Aid P pnon,

needs aLsmem; monly motiring of food aid smens or an ofucns; tndering of contractswith private sectr pricing for stateentrises (stage, handig, tranport milling and bag); alocaton offood aid to poor disticts (EC-PHARE and G-24)

* Household enditure Sunrey and Nutritional Assessment of the Popton(n nation with IDA Social Safety Net Develpment Proect)

DEVLOPMENT OPAGPCULTRAL MARU7

* Development of the Pivate Cereals Mafrting Netwok (BC-PRAJE)* Distribution of Agricultual Inputs (IDA Critcal Imports Prect, EC-PAE

Programme)

1NS12TONAL SUPPORT FOR TEJ MNIS7RY OF AGRICUTURE

* AgriAcul Sistics (USAJD)* Monitoring of Prices and Markets (USAID)* Policy Analyss (USAID and others)* Foestry and Naural Resources (IDA project)* Irrigation (IDA project)* Study of the Reform of Agricultural Extension and Support Sewrices ¢w

Fames (to be determined)* LIVestock Subswctor Review (PAO)

J/ Todaial AsistB PFm in wpport of tfip of ft ASicultual A4ustand PropgmGom mhb IDA* EC-PUE, USAIIor other biltel or mldtlateal dowoo

A O -86.Pag 2 of 2

* Health imensta Reion ons and Slty daContr donsueo Proo tecti (to be

* Preparation of Publc Invesment Program for the Developnt of A ltuand Pood Markltrasuctr (to be determined)

UN POLICY

* Prepaaion of Inteim Legiation on Leasn of Lan (IDA)* Land Maket Action Plan, including (a) surve* g and nmpimg; (b) set up

land regsty and distict-level land regs offices; (c) titing; (c) public andprivate land manageent (EC-PHARE; USAl; UK Knww Now Fund; IDA)

FRI VA ATO0NAAD PiVATE SECUOR DEVELOPMEN

* Policies and Procedures for the P of Small and Mldum-scdenterprises (IDA)

* Support for Pzvaiaton of Sta Enterises unde the Mnisty ofAgitu, including enterpi valuatin (IDA)

* Support for Piaton of Stat Entps unde the Mistry of Trade,ncudin engterprie vluation (IDA)

-Support to Pivate Sector Enterpies (Busa s Advisy Savices) inAgriultural. Processing aNd Martetng, inclug on fancialmanagementand pon of busness plans (EC-PHA1A USAID)

- Development of Subsectol Price and Trad PoHy Famework, includingcomeial negotiations betwees groweRsper and food industdes (to bedeemined)

iNTTUTrIONAL DEVJMOPMENT OF TE AGRICULTURAL BANK

* Fnancal Mnduding cash asset & iabesmanagement, financial planing and budget (IDA)

* CredIt PoHqy, Procedures and Superision (IDA)* Cdit Review, Loan Ca d Prioning, and Credit Ris

Management (IDA)* Saings and Resource Mbition (IDA)* Accoundng and Management nfomaio Sysems (IDA)* Human Reurces Developmet and Tining (IDA)* Eterna Audit of Financial Statements (IDA)

AGRICULTURAL CREDIT

* Rura Povt Alevaion Pgram (IDA, EC-PHEARE, IFAD and ote)* Revovig Credit Acu (BC-PHARL)* aOthr Credit Lines

-17 - ANNf.1Pag 1 of 22

AGRICULTURE SECTOR ADJUSTMENT CREDIT

APPRASAL OF THE AGRICULTURAL BANK

L Tim FDINc[L SEcTO w ALAK

A. Ia, La dRegulatoryftemework

1.1 B=&n husaa . Tme emege of ommerW bakn Institos, as separe lgentl with a cusomer bas d staff separae fom the Cetal Bank, Is a renot tiAlbania Baed on Law No. 7491 of Apl 29, 1991 on the aiConl P, Sta Bank of Abania (aer asformed inlo the Bank of Albania (BOA), tho Cald Bank) ws su-divided into u bank: th Nationd Bank, the Albai Commercial Ban, th Saving Bak (SB),ando Bn for inuAgi re and Deveopmet (BAD). Eah of thes bank was ceatd throughindi l laws. 7he rsective leg bass fr BAD s Iaw No. 7520, dated October 16, 1991.ArtIcb 1 of this law deis BAD as a banking stiutio Ardcle 9 peIfie that Is autordcapia of Lek 450 mlio I being hed by th Stat. Practically, th Ministry of Fane and

conoy (O) holds th effe control over BAD.

1.2 Mm supply offin;anil srile by the formal bankg sector Is severly costined by agnad inabli of th stat bank to reod to a growing credit demnd by th pivate sector.Baker under t c aly-pbled economy were me bookeepes, trnsfebg budget fds tostate eeprdses. her wre no hard budget constraints and tereor no need to assess borwer'credit-ortiness and abity ID ra a loan Now bank face th need for radical cge as tyconvet tem s hto den desomar olvd In al aspS of financial

(Le. allocatin of crodk, pricing of loans, risk , pmotion of savingmobiliaton, assets and iabile mna ). Cqu ere b an urgent need for maiwstaff training and te assistance all bans in order to close the gap betwe the prevuscentaly.controlled bank system and a system of efficit finacial In in a free-entePr-ise reshm

13 Legal Stas of Bns. On Aprl 28, 1992, Parliament pased te Law for the BankngSystem of Albania' (Law No. 7S60) which defines a two-ter baking system, with th Bank ofAlani being asigned the rol of h Cental Bk sein banks atthe second level. lie lawspecifios, Ier a, bank licensing, bank d i antd ownesip, Operational n forba (inci fee to prdent baing regula ), and auditing and rprtirequirement. Article 61 In the fal povis of this law defines prvxo laws dt establshad*t Alban Commercial Bank id th Saing Bak are spended by the new Banking aw, thusplacig both bab und die proviins of that law. Following an explicit decsion by Pariment,BAD is not menond hI Artcle 61, whIch Impe that s resctive legal basis (Law No. 7520)remains In effc T merge of th National Bank and the Albania Commercial Bak as ofJamu 1993 creaed a new National Commerci Ban (NCB) whkh received a license fm the

hp 2 of22

Bsn of Albana and I by defal plaed uxde Bakn law. Curty, BAD I the ony bakIn county with hts own legal framwwork otsde dhe Banking Law and, threore,. w4ithot suparvsioby th Bank of Albna

1.4 Intere as. Minimum sates fbr dpoit ad lending operatbns of bank ae setby BOA. Bank ar free to pay hih dposit rs and crp rer len rats, w BOAling the avep iWntrt ad to 7 percent fr each slt M m ierest rawes as ofApr 1993 been In effect since July 1992 and re h In table 1. In prctce, al baks sethi hnt ates at ths mininm rates sic commerclal bank_ig concep such as rIk-basedpiig of lo are not yet applied In comparison with oanu nlatio during 199226 perce),A of hes rates wee dearly negative In a ems at ther Inoduction hI mid-1 . howev,at Iflaon vels prevaiig during he gfist quartor of 1993, coming down from 6.8 percen duringto month of Januay to only 0.8 percent for March 1993 and to a negadve levwl In Aprl 1993, Adeposit and lndig tes have readied hbW posive ea Il s. BOA s committed to su th

bilmum Interest rates wiU be kept In lin wth Ifla

ITAU1: STaucruRE OP I hu RATs (M mK ANJUAL alnS, S APo L 1993)

Dasud Deposh (ImMduuli a Ind Pews) ... 3%S_iu o Dqou OadId) .. 4 . . .. . 3%

Iliza. Dup,uIts Gadividuab) .............

3 mouff .......... 18%6 mati......... . 2S%n2u. 32%

LwUMo RATin

Up t.Smond. ................ 25%

3 to 6 iustn .......... ..... 32%

6 to 12 moan ................. . 39%

1 tSwysu ......... ..... 40%

3 to5y... ... ............. 42%

* ENaywldWiwab .dpeimbrwiiW mmnm faM lwrat 3%.PeAlAy an adu mount 1 wpa o tvins d o ha. utmosI d rats

1S Ba*(xg Regato BOA Is cureny In t proce of ing elements of banigregulaion bad on te provisions of h Aprdl 1992 Banin Lw. Ihe banig Pervisiodq_rn witbh BOA was only establshd In AuS 199, sIn banig regulation was not an

m under te previous ceally-cotold fiacil sem. In November of 1992, BOA ssueda AMt rglaory cica seng capial adequa standards at 8 percent of rik-wvitd asseu in

. 89 - ~~~~~ANNEX1Page 3 of 22

n wfith te Bas Accord. As of March 1993, baaro also qred to respect igle and groupborower eposure lmits. For BAD, hes are at 2 pere tt equity for single borrows,whib ouhttding loans to groups of borrwers may not exaed 50 percen of equity and 10 percentof tDot oUtsding loans. BOA curently draftin regulaon addng classifcandloa bss provisloning rqirements. These will so be In ne wi inteatonal stanards, callfor provisions of 20, 50 and 100 percent of th oal outstanding loan amoxt for substandard,doubtfo and lost loans, respetvey. Loan classflcaton will be based on the aging of a-rars,avaable collateral, and th genera flnancil son of the borowe. Purthr rogulat currentlybeing drafted deals wit lmi on open faoig currenc positions and will cadl fbr a lmit of Speren of equity in the cas of BAD.

1.6 Concerning resee ruire s for bant deposts, BOA req bak hold 10 percent ofdeposi in local cuurency and 100 percen of foreig curreny depodts with BOA. With assistaefom the 1MP, BOA developed a reportng system reqirn bank to prowvide monthly balanc sheetsand Infrmati on their open forei excag position. BOA also expects to rweeve, as of mid,1993, quarterly information on banks' hnome oments, on heir compli wih creditconce on limi and on banb' loan portflis sucred In lne with upcoming loanclasificaton stdards. Howver, banks will n be able to comply Afl wh these reportngrequiremet before substatl upgradig of thi accounting and MS systems has occurred.

S. Rural iluaa Serie

1.7 CedDa mand. Following the rapid dolutionof e-c ves ad th nealy completeddisibion of st fam lad, dmand for agricultural cret by h new private faming sector very strong. Fam s urgnty need access to cedt in order to purcha p such as ftIlizer,sees, and pestcdes. E th i stU demand for agricultual equipn, mostly small tooklsa th as of idivilfarms. BAD branches as rprtincring demand for nvestme loans by private anfn' asocatons, most of them withcon*ned areas of about 25 ha to 50 ha whr the use of mo Invesmen b m suchas aors andtrnpoequintis econo yjustified. With rig demad fbr nps and eupment by tiefarm sectora support servie such a taWe and tsport enterprises also seek financaresorcesto be able respond to tee new busie oppot .

1.8 Accurate esdmates of toal credt needs, of actual demand for loans, and of the poldon offincially viable loan demand are arenty not avaiale, given the underdeveloped status ofinfmon tchnolob and data collion In Aban bans. Prelimtuy surveys conducted amongmangers of all 27 branches of BAD in Mach 1993, hower, reteal t the bak expect aboutLek 2.5 bilion (US$ 22 miUlon equale) in ncamen loan demand by the privae farm sectorover a period of 12 moths, not ncudn loan demand by the agroproceng seor, traders andothr icultural services. BAD branche also reported tua only about 50 percent of evoad andapproved loa applications durng th first quarter of 993 received fia appv due to the acuteshortag of funds ma ib to the bhaL

1.9 Abfom Qid. Cuntly, baking services In rural es are provided In part by thinfoma fiaci sector. Taders, frers ad smal receiv Credit fromn tives,neighbors, and finds, generaly witout Interest chrgs. Ther i al an Iceasing well

A NNXU .-90-Page 4 of 22

organed group of non-lceused fincial intermediaries collecting excess liquidity from individulsand bndg for short-term credits; ntres rates on these loans, observed in March 1993, reach upto 1S percent per month (above 400 percen per year). t is likely that informal financialintermediation wM contne to play a signficat role In tie near future until the formal bankingsector will have Inreased the efficiency of Its operations and be able to provide services to fth rrareas of te country.

1.10 Bant Qedt. Due to Its substnoietworkofral agencies and the technial erti inapprang agicur-relaed projects aong some of its staff, BAD will, after is liquidation andtransformation into the new Agriculural Bank, be the predominant bank to providefinancl servicefor agdcultural and other productive rural activities. Although itialy it wil mainly serve as awindow for on-lendig resources provided by inteational donors, the new Agricutural Bank wilin1creaingly be able to colect rual savins and to trasfer them to ural investors. The efficiencyof the bank's services wl be promoted tirough the gradual tafer of its capital into privaeownershp, possil on a coopative basis. Th ba's mission will be to serve the finacial needsof Its rural owM and customers, based on commrcal principles to assure fmancial sustanailtyofits operations. Te bank's dientle will comprie medium- and large scae enterprses In variousectors of the rural economy, including trade, transport services, large farms and fams'associatons, agroprocessing entpris, and oher non-agricula sectors.

1.11 Imentaaonal Donors. An imortant share of agricultural credit Is expected to be madeavailable by nnional donors. Under the IDA-finaced Criical Imports Project (CIP), a totalof Lek 1 bilLion (US$ 8.8 miMlon equWalent) in credits is being offered since April 1993 through theBAD network to famer and traders who purchs imorted agulural input. Agricultural lendunder the Revolvn Credit Account (RCA) of the EC-PHARE program, set up witin BAD, IxpectedIto equal about CU 3.5 millon (USS 4.3 millon) durng the net ree years. Bilaral

lie of credit for agicu l Imports, chanmled through the National Commercial Bank (NCB) andfinanced by the Govenments of Greece and Germany will potentally add fiuther US$ 30 millnin loam to the agril sector over the coming years, starting In late 1993. Since most of thesinteronal lines of credit Involve short-term financing, it Is esmated that there wili be aconsiderable lack of medium- and long-term credit fr invesmnt ptojects in agicWle over thenem three to five years.

1.12 Vlage editFwIs. A fruher source of rua credit in Abania are Villge Credit Fundscurrently being set up under the IDA-finanod Rural Poverty Alleviation Pilot Project (FY93). Bythe end of 1993, a tota of 50 village-based credit committees w have been eslished, performingdecentrale loan evaluations, making decisions on credt allocation and loan conditions, andsupevising repaym . A total of US$ 10 million is expected to be on-lent over a period of 4years. Given their low tanacton and risk costs, Vilage Credi Funds will be able to extend verysmall loans to farmers and ote rural entrepren which woul be largely unaactive customersfor commecially operating bank. Ihe start-up capital of t fnds will slowly be replaced bysavings deposis from fmers, us creating a system of independent village-based mral fiancialnsitutons, which could evenally join to form communal and regional banks. It can be envisagedIhat, in the medhim and long term, th regiona banks will merge with the Agricultral Bank to

form a coopertvey-owned and finanay strong bank wih an extensive branch network to servethe financ needs of the irua economy.

-91 - &NINA 11Page 5 of 22

U. Tm BA=rx AGcuruw AmD DnEELo T

A. Institiona Analysis

2.1 Rok and Srtev. Since its emergence from the former State Bank of Albania in 1991,BAD has largely matained its role as payment mechanism for transferng budget resources to stateenrpises, and for clearg payments between them. Afker the dismantling of dte formeragriculral cperatives, Govenment stepped in and relieved BAD from LAk 1.95 biion of badloans to tee cooperatives as of mid-1992. Since that dme, BAD started to take a more proactiverole in ending to the private agricultura sector and in collectg rual savings deposits. However,BAD is sfill obliged to conne lending to remaining stae farms, on request ad backed by aguaae from the Sta Farm Agency within the Ministry of Agricuue and Food (MOA) and witresources provided from BOA t grough NCQ. After the distriuton of all state farm land, expectedby mid-1993, this lening will come to an end, and the new Agriculural Bank will focus entireyon lending to te privat rural sector in Albaia

2.2 Organkdonal Srure. BAD's network as of April1993 includes the ruanahead office,banches in al 27 ditc witin the former admistraive struue of the country, and 160 smallagencis which are linked to district branches. Total bank staff lncrased from 320 at end-1991 to400 as of end-1992. Mmee are currently 23 employees in the Tkana bead office while branchesemploy an averae of 10 employees, with up to fthe employees per agency. Head office staffincblde the CEO and Vice CEO, 6 anaysts in the credit department, 5 employees in th accountngdepartent, 8 officers In the area of personnel, training, public relations and adminis , 1 legaladvisor, and 1 driv. Since Febnry 1993, BAD receives urgently needed technassisance froma tm of 3 consult, financed uider th Critical Import Project, In the aeas of fnmcialmanagement, credit opations, and accounting and MIS. Two fuer consulta provide tecilassistance to BAD for the implemenatin of te credi components under the IDA-fanced CIP andthe EC-PHARE-fiaced RCA (see para 1.11).

2.3 Management and Staff Qualfcatn. As a resut of its isolation during te conunist rule,Albania acks any western or other banking traditons in the country's fnmcial sector. Unlhk inmost deloping economies, bankers In Albania had practically no exposure to baking practicesdeveloped elsewhere. Ihbis complete lack of knowledge transfer is reonsible for the currshortage of qualified staff and mmagement in local barnk. Concerning BAD, here is no doubt thaits staff Is not smfficitly quaified tso run a commercialy operating bank. Altugh stff at thebranch level appear fairly well experienced with respect to the tenical issues of agriculuproduction, thee is little knowledge of appraising projects on financial and commercia grounds.Staff in the rrana head office also demonstrate a considerable lack of expertie in fte areas of credtreview, fac management, ad accrual-based accountg. There is clearly a need for wide-spread, in-depth tranig of all staff, and for replacing a number of non-performing employees witintellectuly more flexible candidaes. lhe fist taining efforts are currently being u ken bythe team of expatie experts in the areas of credi appraisal and supervision and cost accountig.Much broader trainng programs wiU rwed to be designed and Implemented urgently.

AnMM 11 -92-Papg 6 of 22

2.4 BAD's preset salay struwr In based on publ sector wages which are too low In orderto ara quailified young ad dynmdic new utaf. Currenly, enterprises in the private sector aeoffering much higer s es at about 3 to 4 tim th level of public secwr wages. During ftecous of s nutoral devlopmet, he bank w need to develop a different compensation systemthat wi provido suffici hnendves for capabls nw staff to join the ba.

2.5 Leang Qpe ts. As of end-1992, BAD's credit customer bas nludes about 36,000privsa Indivias and enrpres, mng thn some 6 farmer assciations, and about 270 stateentrpris (mosdy stae fam). Mhe number l accoun has eased dramatically since Uid-1992 whe BAD stared aoendg oas to the privato secor. loans average Lek 50,000(US$450 equivalent) for Idividual frmers ad about LAk 1 million (US$9,000 equivalent) forprivat famer associao. Th bank extends short-termand medium-term loans with matriteof up to tree years Lo wit longer matri would Involve serious liquidity-related risk giventhe term strucure of the bn's liab . BAD In sngy requires the provision of loan collateralsuch as buildings, macie ad equipmn, livestock workn capia, ad perona guns.Da to the lack of land restrain ad titlng in the country, my fbrm have no accs to creditsince infotmal mortages on land are rarely accepted. Lo evaluon and apprsal I performdbased on a detailed Cedit Manu which has recently be revised and updated with asistane fmeptria epets. Loa up to Lek 1.0 mIlion ar proved by BAD managers at the brach level,with vrt y no loan approval authrity given to idivial agencie. Loans above fde branchaproval theshold are evuated by a credit co_mite at the bead office, composed of dte CEO,Vice CEO, and he heads of t credit and acountig darmentb.

2.6 Accowwsng. BAD's prse accounng system b a naad cash-based systemwhichwa desiged whea the bank was a depent of the Stat Bank with no independen decision-maldig reponsibil. e drmatc ha from mereb oper2ang cash windows and beingreponsble f bookkeeping of hading tson, for which decsions were made elsewhe, toma n te full scope of a bankn opeaton requires the establishent of an accrua-basedaccontn and maungemt inforaion system. le new accout system mst take ito accountreportig requirments to BOA, sharolders and the general public In order to avoid duplicaingeffnrs in designing and updadng fcial and opeasonal ports. Wilth fnancal support by EBRD,consults from Coopers & Lybrnd have recenly taled he french-based SunAccount generalledger and reporig system in the head offices of all the state banks. This system is based onnternIato Accounting Stand for Banking sutin ([AS 24) and wil be cosste with

rportng requirements by BOA and the IMP. Major dcaenge for an applcation of this system inBAD are cmrenty linked to staff traning, Impro t of raw data qualit, data tafer frombranches to the bead office, and hardae installation and m c . With assistance from theconsut am financed under the Critical Import Project, it Is eected hat the conversion ftomthe present cash-based system to dh new accrual-bsd geneal edger syste will be Ihplementedby fte fall of 1993.

2.7 FTnancfMageme and Pe mnnce Measwem . Curendy, th responsibilty forfnnia maeme within BAD les wth the Vice CEO; he assesses the banks costs of resourcesand revenus on ase out s fcant tudonal or techncal support through internalIfoMain wystems. PeFor macea ad *subsequentormulaon of deposki ad lompolcies i done based on incomlte and pardy SInaccu Ibmtion on the ba's tre finscial

Page 7 of 22

positon. Ibis siuaon wlImprov sub anly er e ll iMon of the new ac ting

2.8 Irtenw and Extenl Audt. At present th b has 2 Inrnaled ator. and controb ofthe futancial positon of the bank are Inadeut. There Is also no independet Intral review ofwhether sff follow th bans credi and other operating procedures. Nether of the tr publicbanks In Abaa have underg ext audisb of their financal statm . A fr audit onBAD's loan portfoUo quality and required loa loss provisos curem ty being udertan by thteam of consulta within h bank

B. Finacil Ausy

2.9 Data Quali. BAD's cash-based accountn system provdes no acct nfmato on thebans true financial position nce it does vot account for accrued Income itum. Most imporaly,the bank's curent practices of providig for potentia loan losses (see para 2.12) resul inadequaeptovisions, and th bank would face bmdiate isolvency if it were to prvide sufficiently for badloans to state fam and other st eneprlses. A more accrte pice of the bank's fincln

gth, aRer cleag the baln shdeet of unrecoverable loms and pviding prudeny for potentialosses on reaningr loans, is presentd In th following car. An in-depth assesment of thefial posiion and Income sitt, ater lquidon of BAD and cre0donof the new AguturABank, wil be undaken by exta auditors based on the bn's 193 *nnIal s .

2.10 Cis on BOA. As of December 31, 1992, BAD's ta claims on BOA dnude Lek 45million of nmm reseres and Lek 980 million of oher claims on BOA (see table 2a). m lattramount stems from the proces of wrii-down lk 1.95 billon of u erale 10a to formeraiculal cooperatves as of June 30, 1992, which Involved paridal placement of bad lostrugh clams on BOA, while the remainig pordon was witten downthrough reuction of BAD'sliabiies wih NCB by about Lek 1 billion (see tabb 2b).

2.11 Loars Poifolo. BAD's net loams outst as of end-1992 equd Lek 3.92 bfflion whichinclude Lek 3.34 biMon extended to sae eprs (95 percen of ta to state am), of whichLek 500 million have been approved sine July 1, 1992. New ending to ste ent has sloweddown considerably during dte fir tee month of 1993 to Lek 25 millon per month (net ofrepants), with BAD increasingly reitg pressure to condin is suppt for sta enterps.Loans to stae fars since July 1992, Cin fte garant the Stat Farm Agency, are endrelshort-term loans which ae used to p recweent cost of n dd sate fam such as saladesof remaining workers. Oder los as of December 1992 include Lek26 million to some 60 fmerassociatons, and Lek 621 mIlon to ndidual borrowers, of which Lek 118 million are housingloans approved ad disrsed In th past by the former State Ban1 About 50 percent of loans tofarmers' assoclations and 61 percent of oans to nvduals are medhmterm loas with auriiesbetween one and 1th yeas. Housg loans hwe mauites betwee 10 and 20 yearn and carry anextremely low Interest rate of 0.5 percent per year. BAD's ladi to the priva frm seor Isshowig very strong growth duing te first quser of 1993.

2.12 Loan Qality and Colletion Peonnac. Beginnig w financial year 1992, BAD hasstared providing for possible losse within is ouutsta loan as of December 31, 1992 under the

AN 11-94 Page 8 of 22

assumption a loans to the Sta sector made before July 1992 wil be fuly recovered throughGovernne assistance. Thefore, BAD maqagement calculated an los proviss as of end-1992by taking 100 percent provisions against the amount in arrears on new loans since July 1992, andby adding a addIonal 2 percent of provisions on he total outstandg balance of loans made afterta same date. 'The resultlng amount of provisions of Lek 70 million i8 clearly Inadequate to coverpontia loan losses for loans made between July and December of 1992: all new lon to stateenerpriss (Lek 500 million) and about 20 percent of loans to fmers' assocations and privatehdividuals (total outstanding of Lek 530 million) would reque pecific provisioning. When takingIno consideration th bant's complete nxperience with any form of proactive loan supervision adthe coIlctdon of overdue payments, BAD's collection performance on privae sector lons has beeacceptable during the first thee mont of 1993: 81 percent of new billings durng that period havebeen collected, and another 57 percent of arrears on private sector loan as of end-December 1992have been received during the first quarter of 1993. It can be expected that these ollecidon ratioswill improve considerably once bank staff are adequately traine d undstand the nplicatlons ofoverdue payme on the bak's loan classiftcation and on the resuling amount of required lossprovisions.

2.13 FXedAssets. BAD's balac she as of December 31, 1992 shows fixed asset wort Lek3.3 million, which is clearly below any realisdc market value. A conservative estmation of the realestat valu fr the 21 brancbes owned by the bank and its 160 agencies results In a market valeof at kast Lek 50 million, assuming fixed asst values of US$ 20,000 equivalnt per bnch and US$500 equivalen per agency.

2.14 Deposks. The bank's outsaindig liabilities as of Decembe 31, 1992 include Lek 660million In deposits, mosty low-yielding demand deposits. Ihis figure Includes Lek 250 millon ofdeposis by stat entrpre and by the Stae Farm Agency semming fom sae revenu ofliquidatin frm assets. AUl baks in Abania have been remarkably successful In atractng wwdeposits since the ntroducdon of mn Interest rats by BOA in mid-1992. Deposit gowth atBAD has been pardcularly strong since early 1993 with a net increase of about Lek 20 million permont It Is expected th deposits wil grow even faster durng the second quaer of 1993 due tothe shap Increase in real deposits iest rates caused by decreasing rates of tion in the county.

2.15 Borrowing From Baks. BAD's man source of financing are Lek 3.84 billio of loansreceived from NCB on order of BOA for on-lending to stae enterprises. The cost of these findsto BAD was zero during the first ftree month of 1992, inasig to 2.4 percent during the secondquart of 1992, and then raching 25 percent for additional loans eded to BAD between Julyand December of 1992. The average cost of fids durig 1992 has been 11.0 percen on allliabilities. Further loans received from NCB since lanay 1993 are priced at a high rate of 45percent per annum. BAD) has no access o other sources of borrowing since the uerbank marketIs not yet developed.

2.16 Capktal and Earnlp Performance. According to the law establishing the bank, BAD hasan authorized capital of Lek 450 million owned by the State. As of December 31, 1992, a total ofLek 340 million had been paid in from the budget, another Lek 95 miDion has been accmulated outof retained earnings and taes from fiscal year 1991. The bank Is not required to pay generalIncome taxes at the rate of 30 percent until it has build up its fll authorized capitaL BAD has also

- 95 -AN=UPage 9 of 22

accumulated another Lek 1S million in capital reserves. Includig the accounting proftl of Lek 93millioU for 1992, BAD's total capital as of end-1992 is sow as lAk 542 mlion However, if thebank were to apply the upcoming BOA standards for loan classificadon and loan loss provisioningas of December 1992, th capital would be wiped out entrely. Therefore, calculatlons me iga capital adequacy rato of 12.1 percent are misleading and meanngless (se table 2c). Tbis also Cabe sid for BAD's 1992 cash-based income stement and th bank's alleged eain per ,suggesting a return on average equity of 14.2 percent and a net profit equal to 1.4 percent of averageassets.

2.17 Ltquldity. The ba's liquldity depends largely on BOA fnds prvied *ugh NCB, witha crent ceiling of net incremental borrowing by BAD of Lek 200 miLlon per month. Theseresources are, however, not limited for on-lending to enterprises in the st sector. While BAD hasgenerally used the full amount of this ceiling for loans to stae enterprises duing 1992, some of thfunds borrowed during the first quarter have been chanelted by BAD ito new loans to the privateagicultral sector. A second Imporan source of funds to the bank its stro growing deoitbase. However, given a loans to deposit ratio of 6:1 as of December 31, 1992, Inadequase liquiditIs clearly sdll a very serious constaint to BAD's lending ability.

IlL THE NEw AGICuLTVRAL BANK

A. Liquidatiok of BAD)

3.1 In order to create a viable financial intemediarr for the rural sector, BAD needs to beliquidaed and a new Agriculural Bank be created which will undergo a comprehensive progra ofinstituonal developnt Liquidation of BAD will focus on writing-down al unre bl loansto state enterprises and also all housing loans outstanding as of June 30, 1993. Govermn bcommitted ot provide the qired financial spport. Since i is uncertain whether sufflcieent budgetfunds - namely proceeds from lquidatng state firms and from prvatzing public a est - wMbe made available to BAD by end-June 1993, these bad assets and the o ondig liabilities wihNCB will be separated from oter assets and limillities and remain in the eistng BAD. BAD'sprivate sector loans and deposits, capital, and all physical assets will be transfered to tie new*Agricultural Bank (AB), including some savings deposits In rural brnches of the Savig Bankwhich are to be shifted to the emerging AB. his creation of two legally Independent bank alwsfor a tritory period to resolve the bad debt problem of the BAD in liquidadton while eabling thenew AB to start operaions with a clean balance sheet Once al bad loans In BAD's podolio wMIhave been teplaced with new valuable assets, the latter will immediately be utilized to repay BAD'sdebt with NCB, and the former BAD will be liquidated.

3.2 BAD in LIWdaton. The BAD In liquidation will nherit all out debt of steenterprises as of June 30, 1993. It is expected ta total lending to the state sector will icrease toabout Lk 3.5 billion by tha date (see table 2a). In addion, BAD's portfolio wi contaln some lek110 million of housing loans. BAD's total assets of Lek 3.61 bilrion will be balaced by some Lk350 miWon In state sector deposis, mostly deposits by the State Farm Agency wihn MOA, and thebalnce of Lek 3.26 billion of liabilities with NCB (see table 2b).

Pap 10 f 22

TAKOAMDTUM _PMM Pk="MewrpbIb'

CAM 0.0 28. 1. 199 O0 0Domuib iny 0.0 7. 146.4 171.1 0.0 2o0Com"ahlumds 040 0.7 11.7 26. 0. 30

DMP vAnK 0.0 2Q34 1O 1O54.A 0*0 1t5Co" sa a m zuu) 0.0 23 44.9 449 0.0 50u0Oshu doomi binb 0.0 0.0 979.5 1009.5 00 1m000

UMQUI A8fEI 0.0 00 0. A0 0.0 00OWW0 N euwfIS 0.0 0.0 0.0 0.0 0.0 0.0Odor 0 s _ 0.0 0.0 0.0 0. 0.0 0.0

TLOAJS 418LS flW7 392 495 3610 9m0

L to jI # CoAapmnS 19U 19 1951.1 0.0 0.0 0.0 0.0

L'-a am s ad l8 l9d.$ 28. 33444 3394.3 3508W 0.0ah-mhm 138L 275.2 336. 3347.7 3460.0 04ig3i..adum4 -m u 472 4.1 48. 44.6 40.0 0.0

IL _to Amodd0 0.0 26.3 56 . 0.0 100.0Sbo*-%Mbm 0.0 0.0 13.4 26.1 0.0 70.0M.*ua dbv-t1mm 0.0 0.0 1mg 28. 0.0 30

Lam toludlvual 293.4 48. 01.1 7103 110.0 1100.shoa-tm lilQ6 28 110. 259.7 375. 0.0 840.0Me4 _d lo l 139.5 20A 343.S 2183 0.0 20.01mft1_.. 2.1 173 117.9 116. 110.0 0.0

Low llut. Iovsi_M 0.0 0.0 69.7 0.7 0.0 240.0

QUflT DIYSTNIT to 0.0 0.0 0.0 0.0 0.0

IMA== 0.0 0.0 33 33 0.0 Su

01 A23 21.3 9O 36M0 313 0.0 30.0s laisaob 19.6 0.0 20. 2s 0.0 15.0

O usum. 9.8 15.2 28.5 0.0 15.0

PRN UAYMES AND ACOCD INX4 0A 0.0 10.0 0.0 0.0 0.0

TOTAL MIEI 4218 was 513. 5 4 3610.0 2320.0

.97- A Pap 11 of 22

bumaboulaS ~~~273. 337.6 414.5 666.1 35.0 700.ma bdiplabaft ~0.0 0.0 0.0 0.0 0.0 0.0

S&Vbv dva" ka~~0. 0.0 4.0 4.3 060 20.VAG 4qmb ~~~~13 2.3 31.0 44.3 0.0 40.

1S 0*6 7.0 13.7 0.0 20.0

r n I O SAMMAND GOZRUMT3425. 4794.7 3830. 407.1 W"00 1.Cubd Book ~~~~0.0 0.0 44.9 44.9 0.0 0.0

fatka1 Coaued 3mskop*1 dIltIud 3615.7 4794.7 38354 4026 3260.0 172.com damuft blob ~0.0 0.0 0c0 0.0 0.0 0.0

Ba.rowJas fm ommws 0.Q 0.0 0. 0.0 0.0 0.0

WAS~. PAYAULU 4.0 48 5.I 5.2 0.o s.o

%)TRRBHRUADIRS L5. 46.0 W99L 0.0 30.0Bmin =%"a 13.6 46.0 69.9 &I 0.0 30.0

0thsi1kb~~~~~~s 0.0 ~~~0.0 0.0 0.0 0.0 0.0

TOTAL tAIUL3 396.0 5186.0 4611.8 4814.4 3610. 170.$

CORE CAMIrAL 250. 519.1 449.4 542.2 0.0 412.PMd-ia =oAM 2503 26.4 434.4 434.6 0.0 450.

Avfmha4 uah1 450. 450.0 430.0 450. 0.0 450.0

LAnW Thupsl OR" 139.7 117* 25.4 15.4 0.0 0.Cbzaumwv 0.0 0.0 13.0 15.0 0.0 142.

Reb4s armhg 0.0 56.7 0.0 92.6 0.0 0.0Gte azosfvd . 0.0 ~~~~0.0 0.0 0.0 0.0 0L0

SVZDaBMAftTCAIWAL 43.6 51.5 IM6 19.6 0.0 0.G.aalpzowlm LO.0 0 0.0 0.0 0.0 0.0Pnt for, you 43.6 51.5 gm. 19.6 0.0 0.0

TOTAL CAPITAL 2933 370.1 5621 SM. 00 41.

TOAL LIAMIUUZI AIND CAPITAL 4260. 5556. 5153. 57. 3610.0 2.

CONTIKRNTULA1MUR13 0.0 0.0 0.0 0.0 0.000

Page 12 of 22

(uuudSsd mHR md 4s. f.ar pasoi ]lomlo s _

Q)AS 5; OF AVilAaR AS i

_ S 1X~~~~~~~~~~~~~.6%S

(.) TtIo tagLm%(4) Neotpft IA.%

(1I)NNmr4T3U11 MARG(W(a) !amtme boom* km. am= a S ufavmp uilosin 10.%

(a) Ntt a naigsX) mlus b)] 4.7%

(O EARINO H iWOWMANMi(a) NA --agaSalma 1.2%(b) Rex= m a.sq& 14.2%

(lV NOMINAL GOWWH RA7ES (Des 1992 Dec. 1991)(a) Net).. . .%(b) Tdab 22.%W(e) Depainb 138.%(4) Tobcae 34j%(aff 33S3%a.

(V) RIl" GROW RATES 0. I9 DeL 1991)(A) luBaUm( Soft (sman chep iC 226CII'

o etlama -71.2%(c) Totl. 4.4(d) DepCus(.) ToblduJ -43A4%

(VI CAPITAL ADEQUACY(a) Vdu .tr_-we&n aoIm L4o 59 4470.2 4637.8 15.0(b) Coxe*a pW 1a%of(a) 0% 1014% 117% 39.s(a) Total"VWdsb% of(a) 7.0% 12.1% 121% 39il(d) Addldami iol h to tna 10% fe (b)

a MR. I'd* 2IL -25 -78.4 -f7.4(a) AMdnspbd =VW v 20% fa(.)

a milo LdgL . 351.9 364.8 -302F

LWODMAND0OR0oLIIUmm;a) Lom wIesbat wss% s% wd*lmm .9.7% 83.s% 8L6d% 0.0O(b) Dketed pui sesames a % ofU l Utlbie 83% 74A4% 74.9% 37.6(a) TOenIN=ltI olcapbF 14 7 7 2(d) Totl lam fIte deeb 540%s 57% 561% 120s

099- ANNM UPag 13 of 22

3.3 Loans to Rrae Eerprses as Qflune 30.1992. The Council of inist decided to relievBAD and NCB frm all debt by st entepi outtandn as of Jum 30, 1992 (Decson No.1033, dated April 8, 1993). no amount concnng BAD is equal to Lek 2.87 bilon. Ibis Infac equal to the aggregate vom of state sector loans by BAD as of July 31, 1992 o wbich thebank requted covera though h budget. MOP will work out detais wih BOA on themehanbm to be used for writ downthese une able loa. It s envged to firs cla nr-bank debt beween BAD, NCB, SB and BOA. and to b Govemet bonds coveing h et lossaThe fom and mehnim for issu bonds wM be addressed underth proposed EPSAC (PY 94).

3.4 Looms t SateEntpsesanc Jl 1, 1992. Loansxended to stat eteprws sic tadate are mainly loas to state frm, made on request of to State Farm Agency. These will berecovered though proceeds of asseas sales during the process of liqudating state fam. As ofMarch 31, 1993, BAD had extended a total of Lek 850 million in new shor-term loans to statfarms. Repayments by th State Fam Agency as of hat sme date equal Lek 500 mi, leavinga net out ig bal of Lek 350 million. Based on projections by th Stat Farm Agency, itis expected that addtona short-tem loans to ema state ams betwee Api ad June of 1993wil equal about Lek 4millon. Dring these tr months, epymentf by ta Agency to BADcould offset most of this additoal lendi. Hower, as a conservative asumpton, is It expectedthat the net outading balmce of bans to state entpdses made since July 1, 1992, hding statefarm loans and loam to state-owd traders and some aarpies, will increase toabout Lek 630 milon by the end of June, 1993. Togethr with state sectr los of Lek 2.87 bilas of June 30, 1992, these lo w be tsfered to the BAD In liquidaon after June 30, 1993.

3.5 HoSsg Loans. Befr th ceation of BAD, toh agultua deparen wihin te formerStat B*nk of Albania has ext d log-tm hoing bla to privat Individuals, which bave beetransfetred to the loan portfolios of BAD and NCB upon their ceation In 1991. Outamounts as of December 31, 1992, are Lek 118 mon fo BAD and Ik 55 million for NCB.Accrdn bt Article 15 of th Privatizatlon Law on Stat-own Houses (No. 7652, dated December23, 1992), wes are d fom repag teir doutsaing debt as of June 30, 1991, uptoan amount of Lek 1S,000 per loan which, in the case of BAD, covers fte entr outtnding amountof housing loans. Goverment Intends to a telons through proceeds from pdvatzg ste-owned apartmn and othder r estate. In case te repament does not occur by June 30, 1993,the expct respecve outstanding debt of Lek 110 million wiU remain in the BAD In liquidadonIn order to be wvered by tie Stat budget

3.6 lZ=er ofDeposisfrm Savkjs BanL Durig the dissoioan of the va s deparmetof dte fomer State Bank of Albania, SB has receivd al aviW desl whie BAD and NCBnherited the respecdve blo portfoios. This Imbalance between sources and uses of Rinds in Ihehree banks can either be corrected through development of an t*bank markt or through a merger

of SB branches with BAD and NCB. Based on th 4e rof a recet study by PrcoWaterhouse, Govermn bnts to preserve the ipence of the three banks ad not to engagIn furter bank mergers. This would enhance competiton In te banking sector and avoid placing

addia olc es on the tee banks durtg the present phase of restucrng ine financia sector. However, th economic bnefits of consolid some selected rural branches

of SB wih those-of BAD would be evaluted. BAD management has developed a short-lis of 28respctive SB branches ad has reached agmement on t list d an A iplementatin tmetable, with

ANNex 11 .100Page 14 of 22

SD mangeme. It s epected tat about Lek S0 mllon worth of savins deposits wl betrared from SB to the new AD, by dte end of 1993.

B. Fn dal Sture sad Perfrmce of the Agricldtural Bank

3.7 OpenBalae Seheet. Ulpon ttcrationonJut 1, 1993,ihenowABbsexpectedtohava tol loan portfolio of about Lek 1.2 million, of which Lek 1.1 bilion w1il be las to niidualfamer and a furthe el 100 millon credt extded to privat farm' asockatios (0e table 2a).The fgues assume a contined strong demand for credi by the farm ector trgbho e firsttwo quarte of 1993. Pending compleon of te cur ent reviw of te bans loa porftflo, It Isesmated that about 20 percent of al loas will r e specific pisio agait possible losses,resing in a not ousanding loan balance of about Lek 960 milLio In AB's opeinsg bance sheet.Other asse Incude claims on BOA of about Lek 1 biMon, cash holdig, and a revied valu forthe bn's fixed asses of Lek 50 mllion (see par 2.13). AB's ia stock of deposs b expectedto equa about Lek 800 mnlln, up fon a total of Lek 670 mMion in deposit- icdig Lek 310mion from the prt sector - in fte foroer BAD as of end-Pebuay 1993 (se table 2b).Assumd deposk grwth s based on the bank's estmate ta between Lek 80 and 120 mIllin inaNddin deposis will be generated per month by the faomer BAD during the seond quwer of1993, and that up to Lek 100 mMlon of depoits would be trTnsed fom fte Saving Bank byearly July 1993. AB will fithmore Inherit about Lek 870 milion of liabites wh NCB ttmain after e wrimt-down of corespondig stat sector bans of the fornmer BAD. AB is expectedto repay this balance of high-cost liabiles imnediatly by redcing is claims an BOA by an equalamount

3.8 Asuming ta th authorizd capial base of L 450 mMlion of the fomer BAD wouldcose AB's initial capi endowment, te new bank wil be comfrtably capiaid at a capitalto risk-wgihed assets ratio of abo 40 percent, therefore ee a conservatv bendmak radoof 20 pen (see table 2c). T ban's loas tD equity ratio is espeted t prove from 7:1 as ofed-1992 for the former BAD to about 2:1 as of July 1993. The proe on the bank's liquidtwil be significantly eased through a near balace beeen outsanding boas and deposits.

3.9 Fbianal Projecions. Projecdons on AB's finani perfmnce re afcted by anunusay high degree of uncertainty. Major unknown variabls relate to th country's fituremac c and m y station ta wl influene rates of iflation and conequently rearates of interest on loans and deposits; tee, i tur, will have an impact on demand for lo davaabilWty of deposits. Net lnterest seads of financial intemdio wl also be detmined, italla, by the degre of iterbank competion and each bank as own -nandcapackytoaact crdworthy customers. Most impormttly, AB's profitabilit wil depend on the baksability tD Im e the quality of its loan portfolio, manly through coniued and thorough staff

tg on proJect apprisal and loan superision technique. re, AD wl need tomunetake major efforts to keep its admistive costs under ght control and to mprove theefficieny of its opeatons while offering atrctve salares to is staff.

3.10 Los and Desks. In view of tee uncertainties, a number of assump.ti hesn Lzmade to develop facial projections for calendar years 1994 to 1996 for the new bank (sve tabhIs3a and 3b). Loan demand i expected to remain stron, and Al's capacity to mobilize financi.d

- 101 - ' 1A r 1lPag 15 of 22

resources would be the ntning fctor to the bank's growth. With respect to AB's lomportfolio, the sar of ceit to prae firmers' assocWaons would become more Ipotant overdme folowing to fornmton of more numers and larger associaons. It i assumed tha total loansand depost would grow at a aual rues betwee 15 and 20 percent, with iaton rtes set Inaccodao w macroeconoic targes under th BMP 1992 standby agreemet. This wod Implya rtr constat ad cove rvatie ato of loan to deposits of about 1.3 to 1 thoughout the foecastperiod. Non-depository sources of finang for the bank would be Iter-bank borwing, expectedto rlse fom Lek 500 mllion hn 993M tboutM 2 billlonby 1996.

3.11 Rel e and E apee. Sln* cmpetive conditions in the finai sector am epected toemerg only over tme, It Is assumed at AD would be able t) secure an average itereditionmargin of 7 percent on net outstanding loans during the forecast period. Addidonal fe Wmwou!d be gneraed hough the bans on-lending of proceeds under multilatal and biaerai linesof credk, secuted by Goverment guarats coering cet-relaed risk. TI arespeie fmargs undec state-fnaned lines of cdt to AB related to the Crtical -Ipor Project and theprposed ASAC will be 7 and 5 percent per annum, repecvely. The baks main block oforgin expenses woud consist of staff ies and benefit which woud i real termrefetng a grdually growig staff base and ceasing real ensatlon lvels. LoaM lo

expene would be dth second mojor ctegory of AD's opeating cost It sumed tht t amoutof spcific loss pros required could be reduced gradualy over the years om 20 percet as ofJuly 1993 to 5 perce by t of end-1996, reflecting an mproving loaportlo qualt. Actualwrlteowns of lost asset are expe to equa 2 percen of net outsanding loans per year durnte fou-year period.

3.12 FTnal Pesynnance. Under tee assumptions, AB would be In a position to achievmodet after- proft stft In calenda year 1994 (see table 3b). Retn on equiy wwodfluctt bewee 3 and 8 percent between 1994 and 1996, wit a three-year average of 5.6 percenHower, tie ba's proftbty woud be vey senitve to c s in inerest spreads and the costof wrtg down lost lons: a reduction of the bank's mediaton margin by one percenta poitbeween 1994 and 1996, and an increase of actual loan losse by one additona pecentge point ofnet loans over Xt period, would each re In a reduction of avage retur on equity by abou1.5 percenUge points. Also, laer un assumed other e expenses would redu AB'sexpected eamihgs perrman. Between 1994 and 1995, the bank's tota capital would decasUlgtly in rea tm, and capi adequc based on risk-weighted assets would dop frm a highlevel of 35 perent at the end of 1993 to a nevertheless conservative value of 20 prn by the endof 1996. Ie bank's loa to capital rado w d inrease sightly but remain at a fairly low level of4:1, providing room for substal expansion in AB's ftue lnding actvides. Witin the set ofthe,assumptions laid out above, AB would, therefor, be in a position to remain fnncialy strongwhile udetgoing an nldepth Imutional development to strengthen the bank's operationalefficieny.

* 1C2 -

Pag 16 of 22

Zhu"

30 391 Sa 166 996Doy 200 340 4r6 06 t6Con _d3aak(@ 50 St 71 a W

DUIMPIUWAZ 177 23 398 in 725A'ub Dt(k os Swoo 1339 I 173

0Oh., 40mgb bas1 w 217 303 424 S2

Go AiSMuDr= 0 10 20 s3 40

Nut LAIO S go 1731 2579 3689 S032Losas to Fem A.usGm^ 100 25D SOO 850 1446

shod1*0 70 175 30 a9S 1012M.dhaadmlag-buanm z10 75 150 255 434

Lais _o ladividuds laoublodiahIo) tr 2366 30 3WS6w.S mIola 840 1344 1747 2271 2726i Wmodb -tm1m 260 441 619 66 16

Lw= hSUIpICWMS (4 240 305 287 299

AS T so50 Ss 119 167 217OTMMIM 30 S1 n too . 130

TOTALASJ 14 7 5 s3 a '740

elLDE 8l~~~~~~~ ~ ~~SW 1300 1z19 2912 38t ,. D_*p_ t1~~~~~~~~~70 IIISO W Itm 2t29 .

20 SO 12 313 44

20 SO 100 20 300

TOBAN0 no00 8SO S360 2040Cubda" 0 ~ ~~~~ 0 0 0 0

(MM dlm WU 0 so0 8S0 1360 2040

BMU PAYAKE S 19 1 17 22o ,A 3[.=S . 30 St 71 100 130

TTrALLAWlhus as5 1860 2823 4289 6009

CORE CAPtrAL 612 692 913 1020 1131pda Clo 450 4S0 450 450 450CqBdzwuvs ^162 242 463 S7 68

.SMUENTARYCAAL 0 0 0 0 0

TOrAL CAPITAL 612 692 913 1020 1131

TOTAL BL4AUIE AND CAM'AL 1447 2552 3736 SW39 7140

CONTV4TUtAU rIS (OaTAmdao 100 l1SO 1100 1000 100004611mpuJum so 700 250 0 0MAC 0 10 550 * -500 SO

I Odut SO 300 400 SOO SW0.)Lou m povloaa ar mamd as Mow.: 20% 5aeftoom as f73li J. 15% afaud-993. 10% as otand-1994.

7U5% area&-MS, sd 5% as ofaai-d-0

- 10 . ANM 1IPagp 17 of 22

zSm

AOMcU TURALBAN1L UuAc3al Pl*jbSl (L993-1996)

Mwr urgmR0e (a 6 1I S 258 362 E 9A lD I N 3I Ss 35 35

S sALDtM 92 2a34 293 38

0PRMOW M 112 138 254 301 adlahm b 925 81 i2 t81Odmadmbidmet_pows 4 24 39 54T l .qim 83 33 86 66

IoIjmSago 0lmalo...(oat kasmm) 65 -19 12 -34Mbial lameS(2% otaatIaea.) 17 52 74 lO1

PROMMIso Stb LM ffM TA 09- 86I OTAU (08otga_8 0 291 12 26

NIZMILD#I - 67 27 60

(r AS XOFAM=AM=(a) Re kw"* bow* 2.4% 5.7% 6.6% 6.5ib) Totd nmdbs ammm 44% 4.4% 6.% 5.5 ,(' ) f,pc Bt 4.81 2.1S 0.7% 1.1%

(a) Rtumoa&wiag.aimW 4.8% 2.1% 0.6% 1.0%(b) f oaavage.1 -us% US% 8X% 5.6

1 4 OWIW. AMUAL GRVWI AES(a) Netloam 22.3% s% 30.1% 26.7%|f) TotaasIe 3U% 46A% 42.1% 5(a) .qasb 313% 45.4% 4S.8S 3.7(4) TaI.sta 6.5% 31.9% 11.7% 10.9() Staff .s 5.0% 10.0X 10.(

IIF) AL A NUAL ROW RAL(a) hAt (of _JKbdchfupIACl 105% 26% 26% 18I(b) N.tlom. 18.1% 18s% 133% 15.6(c) TOW ac_ 15.6X 16.2% 12.8% 14.0%(6) DqoaIb 6.6% 15.4% 18.1% 1S.0

) TaI (la 45.9% 4.7% -113% -60%

(V)CAPITALAD ACT u(a) ae 2 4194 600() Cw.aMa s%(s) 34.8% 31.0% 24J% 19.9%(c) tacia$ Sot(a) X3.S% 31.0% 24.3% 19.9%

(VI) LWtDQ AJCXIVIT bowa-MO)(a) TotamlI tow Gcif 3 3 4 4| ) TatalaeusI WAl 133% 136S 131% 1%

(a) A-AS 1abI Im%Wd*f7% o1u4Ia 4 laIGIM

ANNEX~~~~~~~~~~~ 1 104-hp 18 of 22

C Lga Eofblmet othe AB

3.13 BanLMicew e. Tenw AD wi rece aba ce ftom BOA and, ter, byoplacedunde do provsons of the April1992 Banking Law. Creatng a now bank offes a substal legaladvantae sin no epli decsio by Parame wil be required to trminat t ambiuous leastatus of tde former BAD. Accordn to Atclo 8 of to Banking Law, an applcation for licenigneeds to include the Charter of the new bank Grntg of a lies Is also condital, Inter alia,on v of adequat capit and qualfied bk

3.14 Bk* Oiarer. AB's By-Law wl specify the type of bakinS oprtions tt AB wieae In Govem endorses the banks inten to conce_trat for lending on the pria

ctow. Government al rognis t h fto nancal sft ad soundns of the new bank hingesu the bans auonomy In day-t-day credit decions If AD judge a prospecdve borower motto be crediworthy, and Governmnt nnetless wise credit to be extded to tm borrow, Xtbmk could provide credit, but or4y as an agent fo Govenment which wl provide th requiredfiacial resources, asume the fuil credit risk, and remburse t bank for Is

3.15 Cptl d Bar nOwup. The bank wll be set up as a jointstock entprise wh allof Is capial initlly held by te Ste. Accodingly, te bans Board of Supervisors will becompo of fepres ives designated by th Ministry of Fammn, which wiA hold ffectieownership of the bank and will ensure strng govee thouSgh the Board of Supervsor Mthd epd ves would be oen baed on chnl q catio n th area ofbanking and fina, with an emphasis on spcfic expertise of agricultual and other rural fiancsevices. However, given the objectv of privatizom of the bank, posbly twogh a cooperivownasp structue, ABs charter wil set out that soe members of th Board of Superviw will

prsn ipdvate sector ntres In agriculte and h rurl economy.

3.16 QuIe ManagemeW. Mme Banidng Law spulaes tha t a two ividuals, whqualifcatin and expeiene re ed for the manement of the bank, be members of the Board ofDirects. BAD's present CEO migh not sads4 these standards in all respct. BAD's cueVice CBO, pevily the bank's president, Is knowedeeble about the bas overal operato andIndispensable to guae oord ionwhi the curren organizationa stucture of the ba Bothmagers, however, do n necealy reprent the f i chan towards comerialorienion that e new bank will requi. At least o addiond new manager, with a strongbakgound in finance and managm n, i need to be ppoined by AB's Board of Supevo.

D. Ito l Devlpment

3.17 After Is ega en t w Agriultral Bank wi need to undego, strtIng inmd-1993, a prooess of Istitutional development in order to build the bank on the principles of sound,efficient and compeiive baking. Only If thorough stt l teom ae carred out in a timelyfhin wi the bank be able to presve ks financial strenth d to himrove and expd theservices for its agricultural and rura clientele. Mhe baks bhdonal deweopnto pogram wilbe composed of the following en budg blocks: (D Inroducion of an eiiciJt oamaonalstructue, Including adequat Internal controbl; () srong financial manam and plnning; (ll

* - AN10 U

Pag 19 of 22

application of sound credit policies and procedures; (tv) periodic review of loan quality, andmanagement of aedit risk; (v) acdve mobiliion of savng deposis and ot resurces; (viprovision of accurate accounti data and other key mamenr t informion; (Vi) systmaticselecdon, traing and promotion of skilled staff; (ii) gradual Introduction of Intenional bankigactvties; (lx) upgrding od rehabilitadon of offices through new equipment; and (x) enuringtansparelcy of the bank's operations dtrough periodic exrnal audits by independez internieonalauditon.

3.18 Organatdonal Strcture. AB wl need to adapt BAD's exit o nal struct inte Tran head office for effective cnnIcaon, coordiation and control (see ct 1). Ma4orchanges wil involve the separation of ihe credit deatment In Independent divisions fo, credisupervIon (dealing with analys and approval of large loans) and credk review (responsible forccking credit uality and classification of loans). A finace department will need to be establishedwih divisions for fmicial management (cash management, planning and budgeti, resotucemobizadon, and intationd operations), and for accoung & MIS. All other functions will be

ped ito a general ati departent with divisional responsbildes for hman resources,lega affairs, public reltions, and general services. In accordane with the provisions of the April1992 Banking Law, the bank will have a Board of Supervisors, composed of represntaIves ofministrie and wih strong repeion of the privaw sector, and an Audik Comme reportng tothe Board of Supervisors. It is of pdmary importance that te bank also establishes a song interalaud function, Independent of bank management and reporig to the Audit Commite, wbich willcoduct audits of the bans fiancial posion and review wbvhr internal operaing pocedures arebemng followed by bamk stai The top nmnagement poision of AD wil be he Cief ExecuiveOMier (CEO), asssted by a depu CEO. Togethr with te three departmental directs, theexeutve wi foIrm the banc's Board of Direc . There b clea need for a better coordinaonand c niaton betwen the bank's branches and the han headquarter which would be the taskOf the Deputy CEO.

3.19 PFlida Managemen. MIh bank must whie fas and dramaic improvement I Itcapabilt tonoior, program and control Is over financial perm . Basic conep of assets& liablites aem ent and liquidity management will need to be intrced to AB's staff, andbank managemet wil bave to give hiea priority to tning in fti area. t essent for ABto ensure, from the begning of W operatons in July 1993, that a match be established bew theprojeced cost of is operations Interet, adminitrative and risk cost) and exped intrt and feebased revues. Major decisions inolving, for example, iterest rate polcies, inroduction of neproducts, large inmens into equipment and real estate, or staff compenion, il need to betkn In view of hir impact on the bank's exqected financial performance. lbe banb's toa ndgce!rng and maximm lo maurities will have to be defired in accordce with avaiale resourcesand plaed operating expens . Under the proposed ASAC, k s envaged to swppot thedeelopment of a fmancial maagement system for AB through long-term echnical assce (totalof 24 pewon-months).

3.20 O"edk Polides and Procedures. BAD's curnt Credit Manu been revised withassistace from h tam of conslats finnced under the CIP. Furtemoe, the credit departmentIs about to be split into divisions for ed supervision and credit review, and new staff will be hiredshortly. AB's new credit policies and procdures will be ilemented under the guidance of i stff

.DCl11 - 106-Page 20 of 22

n the supervislon division. at divsion wil have two amntons: one. pprais and final approvalof lare loas eeding the approval authority at the branch lel; and two, to cay out lrge-scaletraing programs for credt officers at the branch and agency level on echniques for financacommercial and tecal apprsal of projec, and on pr for credi processing andsuperviion. he proposed ASAC would provide technical assistance In these two areas (18 perso-months).

3.21 Cr& Review and Fisk Manageme. It will be of primary importace for the new AB toensue a consiteny hig quality of the bank's oan portfolio, and to assess and mit exposre-related risks. This task will be peomed by the new credit review division, currently being set upin the former BAD. A Credit Review Manual has been drted for use by the ba's staff. Afterinltensve t , the respnsibilkies of AB's credit review staff will inclide regular audits of allcredits made by the new AB in order to classify loans, to evaluate possibl losses, and to quantifyrequied loss provisions. Head office staff will need to.visit all branches and agen.cies within thebank's network on a regular biss. It ill be ncessary to develop and introduce loan data bases atthe branch level which wilt be updatd periodically based on information provided by agenciea. ThSwil require training of branch and agency staff, to be carried out by speciaists from the creditreview dhision at the head office. A can be envisaged that, after several yeas, ihe credit reviewfunction will be integated into the bank's irnal audit department Technical assistance would beprovided In the ar of cdt review under fte proposed ASAC (24 person-months).

3.22 Resource Mobazation. Despite the recent growth In BAD's deposi, the new AB wfll needto upgrade the physical and insttional capacity for accepting deposits in all of its branches and,subsequeny, In all local agencies. AB will face strong competition in this area fom the SavigsBank, NCB, and other potentially emerging ban, and a market monitoring system will need to bentlled and specific maet strategies be elbrted at fte head office levl. This will include

periodic decisions on the acceptable average cost of funds, the creation of attractive saving and otherdepositumets for different target grups, and their introduction and promotion on a nation-widebads. AB's staff will need to be provided with thorough taining and adequae incentives in orderto engage acdvely in the collection of deposits. An agent-based system could be intoduced tomobilize savings from private individuals In mral and remote areas. Ihe proposed ASAC wouldfinance tcbhical assistance in the area of resource mobilizaton (12 person-montbs).

3.23 4ccoPwng and MI. A msor step forward twards accrual-based and automated accotngwill have been achieved by the new AB on3 the current transforion from the cash-based manualaccountg framwork into the SunAccount general ledger and reportig system has beenaccomplished (see para 2.6). Staff in AB's accounti division will need to be tained thoroughlyIn the application of this system in order to be able to generate various reports in line with BOArequemnts. A next and urgent step wil be to Improve raw data quality though subsequent reforman an mation of bookkeing frameworks at the branch level, again in conjunction with in-eptstaff traning. Furthermore, reliable data transfer mecanisms will need to be developed andinsaed for transmhsion of accounting data from branches to the head office. In tie medium term.the general ledger system will need to be linked with various ote data bases in the bank, such asthe loan acuntg and credit risc ma e framework, in order to provide bank managementwithi dmely Information on AB's overall financial position. Technical assice would be nciudedunder the proposed ASAC (18 person-months).

- 107 - 1

Pag 21 of 22

3.24 Hwnw R ces Dewlopient. lhe speed of ABs change towards a comm allyopeatin rural bank tha responds to the needs of s agicultural clientele wi depend on whetherIt can oaize, develop and manage is human resources effectdely. Human capial is probably themost scarce resource for rebuilt Albaia's eoCnomic and finncial system AB wil have toevauate ystemadcally t skill needs and to detemine wnlch of BAD's current staff would beexpected to ne ce and te qualifIcadon reqirements, after respective train. Non-qua d staff will need to be replaced by new personnel. Polices for personnel evaluation,promoton and career development wHit have to be developed and introduced. A new compensatnsysem, based on qualcaton and merk, will have to be d ied in order to provide sufficientmodvaton for quaified staff to join and remain in the bank. "Ie bank's taning acdvies wilrequie coordiaton by the human resources division which will aa. establish close links with thenewly created Bakers' Training Cent at the University of TIaa The proposed ASAC wouldfinance technical assistance In the area of human resources development (18 person-months) andshort-tem study trips of AB's staff to bankers' taing instiutions and patner banks abroad.

3.25 Irmernxlnd Bankg. A new and pontially profitable area of AB's actvit areinternational banking services, such as letters of credit related to foreign trade t ns. Thesecould provide the bank with feeased income stemming from low-risk tasactons. Within the legalframework set by BOA, AB wil need to explore current and projected demand for such services,likely risks, expected returns, required tecncal equipment, and necessary staff taning beforeengagn in any foreIgn bankdng operations. Given the experience of NCB with internationaltransactions, AB will probably need to first build up sufficient in-house expertise before being in aposiion to compete with NCB In tIs area. Technical assitae would be provided under the ASACfor that purpose (6 person-monhs.

3.26 Ojie Rdeabitadon. Most.of BAD's offices require urgent repairs, rehabilition, andexpnsion of space, nclfig the current Tirana head office. Buildings and premises are often invery poor condition, with neither adequate nor attcive facilities for customers. Office equpmentat the branch and agency evel is mostly obsolete whereas some new equipment has been talledat the head office, brought in under technical assistance fmanced by the CIP. The bank has recentlypurchased 30 vehicles for use by credit officers in all agencies. t could be considered by AB's newmanagement whether a 'ited number of wmodel' branches should be established to gain valuableexperien on how to car out office upgrading in a most cost-efficient way, before te ban's otherbranches and agecies wld be included in a comprehensive office rehabiliaion program.Equipmnt for AB finced under the proposed ASAC would include computer hardwae andsoftwae for all 27 branches, coication and other office equipment, fniture, and vehicles forthe use of credit review staff in the bank's head office.

3.27 Ertefnal Aud. Start finanl year 1993, AB's anmnal fncial sttements will undergoex al audits by independent international auditors, based on international accounting standards.Tese aud will help bank management to Identfy and correct initial defincies in its financial

syse at an early stage. They would also establish ncesary trust and confidence by depositorsand the geneS publc Into the bank's operions. The 1993 audit would be financed under theproposed ASAC.

Agricultural Bank

A o }|} Aulm

I . Iof Sup.M.Oforsotw

Credit Financiol Aoo@t&nl)nol Iluman

I CaEO I

_egioA mnstaIo

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Crtdi ll Flnanc OMr Admlavlrlr

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F FED. R EDP. 0 F UGOSLAVIA ) 216

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AGRICUTURESETO

A DJ USTMENT CRE DIT Ci lAGC)"RICULTURALLN USECAND

ECONOMIC ACTIVITIES F. Y. R.

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ECONOMIC ACIT'VM

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FED. REP OF YUGOSLAVIA 21

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42?KUKES ~~~~~~~~~~~420

AGRICULTURE SECTORADJUSTMENT CREDIT

AGRICULTURAL LAND USE AND F. Y. RECONOMIC ACTIVIflES

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410 Tobacco * egtablei 4 -

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