Cyprusdevelopment Bank (CDB)Including a Smallscale Industry Scheme Cyprus Public Disclosure Authorized

Report No. 1079a-CY FILECOPY Appraisalof the CyprusDevelopment Bank (CDB)Including a SmallScale Industry Scheme Cyprus Public Disclosure Authorized

May 10, 1976 ProjectsDepartment Europe,Middle East,and North Africa RegionalOffice

FOR OFFICIAL USE ONLY Public Disclosure Authorized Public Disclosure Authorized

Public Disclosure Authorized Document of the World Bank

This document hasa restricteddistribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosedwithout World Bankauthorization. CURRENCYEQUIVALENTS

(US Dollars per Cyprus Pounds)

Period End of Period Period Average

1972 2.6100 2.6100

1973 2.7700 2.8650

1974 2.7965 2.7666

1975 2.5425 2.6772

1976 (April 30) 2.4285 2.4970

Source: IMF, International Finance Statistics. Unless otherwise indicated, the rate of Cfl = US$ 2.50 rate has been used for all conversions in this report.

ABBREVIATIONS

CDB CYPRUS DEVELOPMENTBANK

EEAP EMERGENCYECONOMIC ACTION PLAN

CTO CYPRUS TOURIST ORGANIZATION

KfW KREDITANSTALT FUR WIEDERAUFBAU

SSI SMALL SCALE INDUSTRIES

FISCAL YEAR

January 1 - December 31 FOR OFICIUL USU ONLY

APPRAISAL REPORT

THE CYPRUS DEVELOPMENTBANK (CDB)

INCLUDINGA SMALL SCALE INDUSTRY SCHEME

TABLE OF CONTENTS

Page No.

SUMMARY ...... i-i

I. INTRODUCTION ...... 1

II. THE ENVIRONMENT ...... 1

A. Background ...... 1 B. Manufacturing Industries and Mining ...... 3 C. Tourism ...... 4 D. Financial Environmentand CDB .. 5...... 5 E. Interest Rates ...... 7

III. INSTITUTIONAL ASPECTS ...... 8

A. Ownership ...... 8 B. Board of Directors ...... 9 C. Policies ...... 9 D. Procedures ...... 10 E. Management and Staff ...... 10 F. Government Policies and Future Status of CDB ...... 11

IV. OPERATIONS ...... *.* 12

A. The 1974 Events and their Effects on CDB ...... 12 B, Operations Before and After the 1974 Events ...... 12 C. Economic Impact of CDB ...... 13 D. CDB's First IBRD Loan ...... 14

V. RESOURCES,FINANCIAL PERFORMANCEAND POSITION ...... 14

A. Resources ...... 14 B. Loan Portfolio in South Cyprus ...... 15 C. Loan Portfolio in North Cyprus ...... 16 D. Equity Portfolio ...... 16 E. Profitabilityand Financial Position ...... 16

This report was prepared by Messrs. J. Coudol, J.M.R. Feige and H. Wachs on the basis of missions to Cyprus in November, 1975 and January, 1976.

This documenthas a restricteddistribution and maybe usedby recipientsonly in the performance of theirofficial duties. It contentsmay not otherwisebe disclosedwithout World Bank authorization. TABLE OF CONTENTS (Continued) Page No.

VI. PROSPECTS ...... *...... **...... 17

A. The Environment .... *..*..0...... -...... 17 B. CDB's Business Projections ...... o 18 C. Small-Scale Industries (SSI) ...... 19 D. Resource Requirements ...... 22 E. Profitability ...... * 23 F. Financial Projections ...... 24

VII. THE LOAN ...... o...... 24

A. Objectives and Strategy ...... *... 24 B. Evaluation ...... * ...... O... 25 C. Recommendations ...... 26

LIST OF ANNEXES

Annex No.

1 Map of Cyprus 2 Industries as Ranked in Terms of Employment, Gross Output and Value Added (1973) 3 Actual and Projected Exports of Manufactured Goods, 1974, 1975 and 1976 4 List of Shareholders 5 The Board of Directors 6 Statement of Policies and Procedures 7 Organization Chart 8 Approvals, Commitments, and Disbursements, 1972-1975 9 IBRD Loan 830-CY to CDB 10 Statement of Resources, December 31, 1975 11 Small Scale Industry (SSI) - Proposed Scheme 12 Analysis of Equity Investments 13 Audited Income Statements, 1973-1975 14 Audited Balance Sheets, 1973-1975 15 Major Assumptions Underlying Business Projections, 1976-1980 16 Operations Actual (1974-1975) and Projected (1976-1980) 17 Major Assumptions Underlying the Financial Statements 18 Projected (1976-1980) and Actual (1975) Income and Expense Statement 19 Actual (1975) and Projected (1976-1980) Balance Sheets 20 Projected Sources and Applications of Funds (1976-1980) 21 Financial Indicators 22 Interest Rates in Cyprus 23 Disbursement Schedule APPRAISAL OF

THE CYPRUS DEVELOPMENTBANK

INCLUDING A SMALL SCALE INDUSTRY SCHEME

SUMMARY i. The Cyprus DevelopmentBank (CDB) was establishedin 1963 with the objective of providingmedium- and long-term financingfor industry and tourism. Total capitalizationwas CL 1 million, with 60% of the shares held by the Governmentand 40% by private investors. ii. The first Bank loan to CDB of $3 million, approved in 1972, helped to finance the foreign exchange componentof 17 projects with a total value of $20.6 million. iii. The economic developmentof Cyprus has been seriouslyaffected by political events in July 1974. Since then, a separate de facto Turkish- Cypriot administrationhas retained control of the northern part of the island (36% of the land area), which includes rich agriculturalareas, touristic importantcities, as well as the island'smajor port of Famagusta. About one-third of both Greek- and Turkish-Cypriotswere displaced and became refugees. iv. The shock of these events led to a temporarystagnation in the buoyant economic life, but with active Government support, and following the establishmentof an apparently stable status quo, an upturn in the economic activities,at least in the southern,Government-controlled area, has been noted. This appraisal limits itself to the area under Governmentcontrol, as this is the area in which CDB can effectivelyoperate at present. v. CDB's portfolio in the northern area, amounting to half its total loan portfolio and a third of its total equity portfolio by end 1975, is no longer under CDB's control or supervision. Reports indicate that many of the enterprisesfinanced by CDB in the northern area are either closed down or operating at a greatly reduced rate. With the loan and equity portfolio in the north (includingaccrued interest)amounting to CL 2.9 million virtually "lost", CDB would have been technicallyinsolvent as its equity and reserves amount to only CL 1.2 million. vi. The Governmenthas recognized these difficulties. In order to make CDB a major instrument of development assistance to industry and tourism, it has initiateda series of measures to rescue CDB and restore its creditworthiness. The Government will take over all CDB's shares still in private hands, and subsequentlyprovide CDB with grants and guaranteesof payment to offset past and future non-paymentsof principaland interest on the northern area portfolio; CDB will also receive compensationfor its small equity holding in projects in the north. The Board of CDB will retain a majority of non-GovernmentDirectors, and continue to make decisionsbased on sound professionalcriteria. - ii -

vii. CDB has prepared a new Policy Statement defining its future role in Cyprus, and its status as an autonomous institution within general. Govern- ment policies.

viii. These changes have been accompanied by the appointment of new management and a reorganization of the staff. The new organization, although yet untested, appears to be sound and dynamic. It includes a small but experienced and capable staff. CDB's appraisal work is good, and it is strengthening its supervision work which has been lagging in the past, resulting in excessive arrears in loan collection. A substantial increase in staff is considered a prerequisite to the efficient operation of CDB, particularly as it is facing an increasingly important task in Cyprus.

ix. CDB has been moderately profitable in the past, earning a 5.6% return on its equity in 1973, the last undisturbed year of operations; profits in 1974 and 1975 (after substantial provisions) were negligible. Total capital mobilized by CDB at the end of 1975 amounted to CL 8.2 million, of which 68% in local currency. In 1973, the last year of normal operations, 31 projects were approved with a value amounting to CL 1.2 million. The corresponding figures for 1974 were 25 projects and CL 0.6 million, and for 1975, 28 projects and also CL 0.6 million. In 1974, 9% of approvals were for agro-industry, 20% for tourism, and 71/% for industry; the corresponding figures for 1975 were 24%, 2/,', and 74%.

x. Until mid-1974, CDB was faced with a strong competitioh from commercial banks, providing rolled-over short-term funds for long-term projects. The commercial banks, which also suffered financially from the 1974 events, have since become more selective in matching the terms of their resources to the terms of their loans. They are prepared to recognize CDB as the major source for medium- and long-term financing, and to participate in projects financed by CDB to meet the liquidity and working capital needs of these projects. Lending rates in Cyprus are controlled by the Government. Long-term interest rates are limited to 9% p.a., i.e. close to the cost to CDB of the proposed Bank loan. However, CDB expects to receive German bilateral and Government loans at rates substantially below 9%. On the average, CDB would therefore remain profitable.

xi. Prospects for CDB are good, and reflect the important investment objectives and programs in manufacturing and tourism proposed by the Govern- ment to accelerate economic growth in the south of Cyprus. Special emphasis, supported by generous incentives, is placed on (i) export-oriented industries taking advantage of Cyprus low-cost and efficient labor and (ii) labor intensive small scale enterprise. CDB's business volume for 1976 is estimated at CL 1.3 million in approvals, and CL 0.7 million in disbursements; subsequent annual increases in business are expected to be in the 20-25% range.

xii. At the request of the Government, CDB is also planning to finance small scale industries (SSI) in Cyprus under a special Scheme which would be funded in equal parts by the Government and the Bank. Though certain aspects of the SSI Scheme are still under review, and will have to be approved by the - iii -

Bank as a condition of disbursement for the SSI Scheme component of the proposed loan, CDB's role in this area is expected to fill a major gap in the financing of small manufacturing enterprises in Cyprus. xiii. The proposed second Bank loan to CDB of $6 million will finance about 60% of its estimated resource needs in foreign exchange, over the next 2-1/2 years or so, to finance imports for enterprises in the manufacturing and service sector (including tourism, small scale industries, and processing of agricultural products). Of the total loan of $6 million, an initial amount of $0.75 million is allocated to small scale industries (SSI), and $5.25 million to CDB's other business operations. After about a year or so, the Bank will review, with the Government and CDB, the progress of the Scheme. If progress and prospects are found satisfactory and promising, as now expected, the Bank will agree to an additional amount of up to $0.75 million to be used for the SSI Scheme, raising the Bank's contribution to $1.5 million. The amount available for CDB's normal operations would, in that event, be reduced to $4.5 million.

I. INTRODUCTIOf

1.(1 This report appraises the Cyprus Developrent Bank (CT)B)for a second Bank loan to finance part of the import requirements of projects financed by this institution.

II. THE ENVIRONMIENT

A. Background

2.01 Cyprus became an independent country in 1960, and now has a total population of 650,000. Since independence, the country has been plagued by the political difficulties arising from the intercommunal disputes between the Greek Cypriot majority (80%) and the Turkish Cypriot minority (20%:). In spite of these difficulties, Cyprus as a whole had an impressive growth record. Economic growth averaged 7% per annum in real terms from 1960 up to 1972, but an unprecedented drought led to stagnation in 1973. Agriculture has been the largest economic sector, contributing about 18% to GDP in 1972 and employing 34% of the economically active population. Manufacturing contri- buted 13% to GDP (1973) and employed 14% of the work force. Tourism revenues were also substantial and, at CL 23.8 million in 1974, equivalent to 42% of all export earnings. In 1974, foreign intervention lead to a major upheaval of the political, economic and social life in Cyprus. A de facto Turkish- Cypriot administration has retained control of the northern part, which includes rich agricultural areas, a quarter of industrial investments, the touristic important cities of Kyrenia and Famagusta, as well as the island's major port of Famagusta.

2. 02 At present, reliable data and information about the economic situation in the north, is not available. Movement of goods and persons between the two zones (see map, Annex 1) is very limited. Various sources, including a Bank economic mission which made a brief visit to north Cyprus in November 1975, indicate that many productive enterprises in manufacturing and tourism, owned by Greek Cypriots who have left the area, have remained idle since mid-1974. This appraisal report limits economic assessment of the situation and prospects of Cyprus to the southern part of the island which is controlled by the Government, and in which the Cyprus Development Bank operates for the time being.

2.03 As a result of the 1974 events, the Government now controls about 64% of the island. The area out of control includes 47% of the cultivated area, with 80% of the citrus orchards and 65% of the dryland grain-growing areas. One-third of the country's livestock population remains in the north. The industrial losses included 20%oof total industrial fixed assets, producing 30% of gross output and 25%oof industrial value added, and providing some - 2 -

11,000 industrial jobs. About 60%" of tourist hotel accommodation was lost, as well as infrastructure facilities and major sources of Government revenue. A massive displacement of population took place as 180,000 Greek Cypriots moved south and bout 45,000 Turkish Cypriots left for the north; about one-third of each community was thus displaced. Full employment was replaced by an unem- plovment rate of nearly 20% in the Government-controlled area, although only about half of those unemployed registered at the Labour Exchange. Wlith the Loss of the tourist centers, the Turkish Cypriot market, and the creation of a large number of refugees with minimal purchasing power, the domestic market for industrial products for industries in the south was about halved. Some of these industries have also been cut off from their normai sources of raw materials.

2.()4 The 1974 events resulted in large structural changes in the Government-controlled area. In the second half of 1974, exports fell by 30%. following the loss of productive assets in the north, and imports by 45% due to a combination of reduced purchasing power, reliance on existing stocks and the collapse of investment generally and construction activity in particular. Tourism and foreign private investment also virtually ceased. According to latest Government estimates, GNP per capita droped 17% between 1973 and 1975.

2.05 Both Government and the private sector have shown great resilience in reacting to the shock of the hostilities. The Government set up a relief service for the refugees which supports almost 140,000 people; it has embarked on a large housing program for the 26,000 people still living in tents and other temporary shelters. It also compulsorily reduced incomes in both the public and private sectors on a progressive scale running from 10% to 25%, and channelled the proceeds into refugee relief; dismissal of employees has been regulated. Finally, it has been running a large budget deficit and an expansionary monetary policy to supplement private demand, which has been greatly reduced by the fall in disposable income and the loss of the Turkish Cypriot market. In August 1975, the Government issued an Emergency Economic Action Plan (EEAP) for the area under its control, covering 1975 and 1976. Its basic approach is to reactivate the economy and provide maximum employment, with emnphasison intensive utilization of existing resources, and priority for export-oriented activities. Development expenditures by the Government were targeted at CL 23 million for 1975 and CL 28 million for 1976.

2.06 The Government is promoting quick-yielding small-scale agricultural schemes under the EEAP which are land- and capital-saving, to reactivate as many farmers as possible, recover lost production, and save or earn foreign exchange. The EEAP also aims at the creation of additional capacity in labor-intensive export-oriented industries, as well as increased utilization of the existing capital assets, for example through double-shifting working. It has introduced new tax incentives for accelerated depreciation of new investment, mergers of firms, and establishment of foreign companies in Cyprus. Other measures include the proposed rehabilitation of the Cyprus Development Bank, as described below, liberalization of bank credit, a Special Fund at the Central Bank for loans to mianufacturing, elimination of remaining import duties on industrial raw materials and machinery, an export credit guarantee faciLity and the maintenance of relatively low interest rates on bank loans (para. 2.20). The Government, under the EEAP, is also prepared to guarantee about 75%Oof the value of approved bank loans to industry, including CDB's loans. Up to December 1975, about CL 2.5 million had been so guaranteed, with three times that amount in pending applications (CDB's guaranteed loans amounted to an insignificant CL 55,000). Finally, the Government proposes to take shares in several Larger industrial projects, the construction of which is projected to begin in 1976.

B. Manufacturing and Mining

2.07 The 1972 census of industrial production in Cyprus indicated that, at the end of that year, there was a total of 6,421 manufacturing establishments (excluding cottage industries) in the island with an employment of 32,279 persons; about 90% of all manufacturing establishments employed less than 10 persons. The gross output from these industries in 1972 was CL 93 million and the value added CL 39 million. The estimated mid-1974 annual rate of gross output of manufacturing industries in all of Cyprus was CL 113 million, and value added CL 48 million, according to estimates by the Ministry of Commerce and Industry.

2.08 After the 1974 events, 31% of manufacturing industries employing at least 5 workers, and 36%oof the smaller industries were located in the north; as mentioned above, reports indicate that there is only very limited production in these factories and workshops at present. Moreover, the northern area was a major supplier of raw materials and intermediate products to the rest of the island, and this has had further serious effects on the industrial activity in the south.

2.09 Consultants to the Government have prepared projections for employment, gross output and value added for south Cyprus for 1975 and 1976. These figures are shown below, together with comparable 1972 and estimated 1974 figures:

Manufacturing Industries Employment, Gross Output and Value Added (at current prices)

All Cyprus South Cyprus Actual Estimated Projected 1972 1974* 1975 1976

Gross Output (CL million) 93 113 97 114 Value Added (CL million) 39 48 35 42 Exports (CL million) 21 17 25 34 Emp loyment 35,600 n.a. 24,300 29,600

* 'Projectedoutput for the year if no invasion had occurred, based on first six months. Export figures for 1974 are actual figures. - it -

The above projected figures ( in currenit p rices), indicate the setback which has been suffered in industrial outlput in Cyprus. No figures are yet available to verify the 1976 projectionis.

2.10 Annex 2 gives the structure of the manufacturing industry in Cyprus. The main sub-sectors, in order of importance, are food, beverages and tobacco; petroleum refining; footwear and apparel; and non-metallic products (mainly cement). In recent years, exports lhave played a very significant role in industry. It is estimiated that in 1975 exports represented about 25% of gross manufacturing output. Annex 3 gives a breakdown of the manufactured exports, whichl are dominated by the food, beverage and tobacco industry, followed by footwear and apparel, and by non-metallic mineral products.

2.11 The mining industry in Cyprus has been declining over the years; in 1972, its contribution to GDP was only 5%. In 1970, there were 208 mining operations employing 4,900 persons, but in 1975 only 181 operations remained, employing 3,700. About 70% of the operations are for building materials such as stone, sand and clay.

C. Tourism

2.12 Large-scale tourism is relatively new in Cyprus; however it has been very successful until the 1974 events. Tourist arrivals increased at an average rate of 27% per annum from 1966 to 1972; in 1973, as a result of the disturbances in the Middle East, the rate of increase dropped to 16%. In 1974, the rate of increase was 17% during the first six months of the year, despite the world recession, but tourist traffic essentially ceased thereafter. In 1975, there was a modest return of tourists after the new airport at Larnaca was opened, and a further increase is expected in 1976 if there is no further unrest in the area.

Tourist Arrivals*

1972 228,000 1973 264,000 1974 150,000 (of which 145,000 before August) 1975 47,000 1976 (projected) 87,000

* Source: Cyprus Tourism Organization (Cr0).

2.13 The tourists arriving prior to 1974 staved predominantly in either the old town of Kyrenia on the north coast of Cyprus, or in the beach resort of Famagusta. Both towns are now in the Turkish-Cypriot controlled area. Of the 13,050 hotel beds in 1973, 8,368 (64%) are in north Cyprus, as well as all the 4,000 beds in service flats. -5-

2.14 The Governnent wishes to stimulate tlhe tourist industry in south Cyprus, as it is both an earner of foreign exchange and a major provider of employment. In particular, low interest Government loans at 5-1/2% are made available for hotel construction. Due to the construction time required, it will be at least two years before new hotels become available, even if such loans are taken up now. However, it is difficult to forecast the tourism potential of south Cyprus, which may offer less scenic attraction and ameni- ties to tourists than the northern area. Large-scale expansion of tourism centers in the south is likely to require considerable infrastructure expenses, which have not yet been budgeted.

D. Financial Environment and CDB

2.15 The financial community in Cyprus includes the Central Bank, two Greek-Cypriot banks, six international and two Turkish com-mercial banks. Two cooperative banks, three long-term financial institutions (among which CDB), and the Loan Commissioners complete the banking structure. 1/ After a steady growth (10 - 12% p.a.) of the assets of the banking sector over the past decade (until 1973 which was a year when banking resources dropped sharply), total assets of all banks amounted to CL 304 million by mid-1975 (latest available figures) of which CL 268 million for commercial banks and CL 36 million for other financial institutions, including CDB. Advances and loans amounted to 66% of total assets for the commercial banks, and to 81% for other financial institutions. Investments and other assets accounted for 12% of the commercial banks' total assets, and for 17% of the financial institutions' total assets. Only the commercial banks had invested in government papers (6% of their total assets). Equity funds were 30% of the total assets of the financial institutions, compared to 20% for commercial banks.

1/ The two Greek-Cypriot banks are the Bank of Cyprus Ltd. and The Popular Bank of Cyprus Ltd. The international banks are British-, Greek- and partly American-owned, of which the British banks operate in the south and north Cyprus. One of the cooperative banks is Greek-Cypriot, the other Turkish-Cypriot owned and accordingly operate in the respective parts of Cyprus. The Turkish banks (Turkiye Is Bankasi A.S. and Turkish Bank Ltd.) are in the north. All other financial institutions are Greek- Cypriot: the Mortgage Bank of Cyprus Ltd., Lombard Banking (Cyprus) Ltd. and The Cyprus Development Bank. The Loan Commissioners is a government agency currently operating only in south Cyprus, and lending directly and/or through banks to industry, hotels, agriculture, and for village and other community projects. - 6 -

2.16 Before July 1974, especially following the increase in oil,prices, demand for bank credits continued to rise. Accordingly, the average bank liquidity ratio which was 35%' in mid-1973 decreased to 26% in June 1974. Af- ter July 1974, the situation chanlged. Firstly, the loan portfolios of all banks, primarily CDB, but also all commercial banks, were affected to various degrees by the division of the country. Collection of debts was disrupted, the level of deposits stagnated, and savings and deposits were shifted from the Greek-Cypriot banks to local branches of international banks. The banks became very hesitant in granting loans, given the uncertain political and economic outlook.

2.17 To stimulate the recovery of the economy, the Government initiated in the fall of 1974 a reactivation program which included financing facilities for priority sectors of the economy, and incentives for bank lending. The Emergency Action Plan 1975-76 includes these financial measures. The main measures taken were:

(a) The minimum liquidity ratio of commercial banks was reduced to 20% and a penalty was introduced for banks maintaining a high liquidity (mainly foreign banks which received considerable deposits).

(b) Three percent of the total deposits (or 15,%of the deposits with the Central Bank) have been set aside by the Central Bank as a Special Fund. Banks can draw on this Fund (amounting to about CL 6 million at the end of 1975) for government-approved priority investments, mainly in construction and manufacturing. (In effect, the liquidity ratio required of banks is thus now 17%.)

2.18 CDB has a special role in the banking sector: It lends exclusively at long- and medium-term, but takes no deposits and must rely in part on Gov- ernment support for its resources (para. 5.01). Until mid-1974, CDB's competitive position vis-a-vis the commercial banks was weak. The commercial banks, which at that time were very liquid, used to finance long-term investments through short-term loans which they would roll over. Their simplified appraisal procedures, their loans based on knowledge of their customers, and their competitive interest rates, allowed them to outbid CDB for new business. Since mid-1974, the situation has changed considerably, and commercial banks appear to have recognized the danger of their previous practice. In fact, the commercial banks and CDB now see each other's roles as complementary and they are likely to work together according to their objectives, with CD)Bhaving the key role in long-term financing and appraisal, and the commercial banks providing mainly working capital and short-term loans. -7-

E. Interest Rates

9.19 Cyprus has experienced a remarkable price stability in recent years. During 1965-70, consumer prices rose an average of 2% annually, while in the period 1971-73 the average increase was 4%. In 1974, however, there was a jump of 16% in the consumer prices due to the disturbances and the general international price increases (including oil prices). Though the data is still tentative, it appears that, even given the economic disruption and the Government's expansionary financial policies, inflation was maintained at less than 5% in 1975. The 1974 events led to considerable unemployment, idle capacity, and reduction of incomes (including the impact of the tax for refugees). These problems are likely to persist for some years and keep rates of inflation in Cyprus relatively low by international standards. Consumer prices are projected to rise by about 6.5% per annum during 1976-80, taking account of the domestic factors mentioned above and the likely rates of international price increases.

2.20 The current interest rate ceiling of 9% p.a. for alL loans was imposed after mid-1974 to prevent charges going beyond what underlying conditions could justify. It also gave some relief to debtors whose assets were affected by the hostiLities. It has been sufficient to maintain a positive real interest rate and avoid misallocation of resources. In the present situation, investors in fact have a considerable incentive to design new investments, or to expand existing investments, on a labor-intensive basis to gain a significant advantage for exports from the low cost of labor. The Government supports the 9% interest rate ceiling very strongly as part of its overall policy for reactivation of the economy. It has decided to maintain relatively low cost credit conditions until the political situation has settled, and the economy has taken off. It believes that any action at this stage which would put an additional burden on investors could provoke a marked setback in investments. This fear applies especially to small investors, many of whom have lost their businesses in the north. The Government would consider reviewing the interest rate policy when the economic situation changes. It agrees that, in general, a positive - though small - spread between inflation and lending rates should be maintained.

2.21 The interest rate ceiling applies to loans in foreign exchange as well as to local currency credits. CDB is the main provider of foreign exchange to industry and tourism and the question is whether CDB could possibly require its borrowers to bear the exchange risk on foreign exchange loans made to it. For the time being, the Government has decided to assume the foreign exchange risk. Though the Cyprus pound has steadily lost value vis-a-vis the US dollar over the past two years, its value vis-a-vis the currencies of Cyprus' major trading partners is being kept stable by the Central Bank. In the two or three years to come, this policy is expected to remain basically unchanged given the reserves position. The Government's decision thus appears to be the right one for investment to be stimulated in the framework of the reactivation program. - 8 -

2.22 For the proposed loan, the Bank recognizes that the current policy maintains a positive real interest rate, and thiat it does not seem to induce mis-allocation of resources. The coverage by the Government of CDB's foreign exchange risk is necessary in order to promote investment in an extremely difficult political and economic situation. The Bank and the Government have agreed to review and discuss the appropriateness of present policy in these respects in the light of future economic developments.

III. CDB'S INSTITUTIONAL ASPECTS

3.01 A main aspect of this appraisal is the financial situation faced by CD)B after the 1974 events. As explained in para. 4.01, CDB would have been unable to continue its existence after the "loss" of 47% of its assets, which was equivalent to more than twice CDB's equity. The Government, recognizing the vital role CDB has to play in the Cyprus economy and, allowing for the fact that CDB had no responsibility for the events which caused its financial problems, has agreed to undertake special measures to restore CDB's creditworthiness. This appraisal has taken place in parallel with the Government's actions in this respect which, when completed, will have changed CDB ownership and management structure as well as provided adequate financial resources to cover past losses.

A. Ownership

3.02 CDB's authorized share capital is CL 3 million. Its paid-in share capital on January 1, 1976 was CL 1 million divided into 400,000 "A" shares and 600,000 "B" shares, the latter owned by the Government 1/. The "A" shares were owned at that time by about 900 shareholders, none of them holding more than 3.75% of the "A" share capital, as shown in Annex 4. The commercial banks in Cyprus have a small share participation, but they are prevented by CDB's Articles of Association from being represented on the Board. The Government guaranteed a tax-free dividend of 6% to the private shareholders for a ten- year period, 1963-72. As a pre-requisite for indemnifying CDB for its losses in northern Cyprus (whether or not eventually recoverable), the Government intends to acquire all shares now in private hands. Compensation will be in the form of non-voting preference shares redeemable at par over a 12 year period, providing a 5% dividend (guaranteed by the Government) to the private shareholders. This compensation is reasonable, considering that, without the Government's financial rescue action CDB would have been unable to meet its financial commitments (Annex 17). The take-over of the shares is expected to take place by the end of July 1976. The shareholders will decide on the Gov- ernnent's offer for the take-over of their slhares in a special shareholders' meeting, which will be held on May 27 of this year; thereafter, their decision must be ratified by the Court. Preliminary sotundings of the shareholders' position strongly indicate that they plan to approve the above scheme on that date.

1/ Class A shares have full voting rights. Class B shares carry no voting rights except in the case of special resolutions proposed by Government directors or CLass A shareholders. - 9-

B. Board of Directors

3.03 The Articles provide at present for a board of 11 or 14 directors, comprising 3 or 6 Government-appointed directors, 5 private directors, and 3 public sector directors. Annex 5 gives the composition of CDB's Board on January 1, 1976. The present Chairman of the Board is Mr. Papadopoulos, a private-sector Director, and the Vice-Chairman is Mr. Afxentiou, Director- General of the Ministry of Finance.

3.04 After the proposed acquisition of all CDB shares by the Government, a new system for electing directors will be implemented. The Government and CDB have agreed on the following composition of the new Board:

Number of directors 7 Government-appointed directors 3 Private sector directors (representatives of industry, commerce, etc.) 4 Chairman of the Board: Private sector director Quorum : 3 directors, of which two private sector directors and one Government director.

Appointment of the private sector directors would be made by the Government; these directors would be selected from among experienced leaders in the private sector. The proposed new composition of the Board, and its quorum system provide reasonable safeguards for an autonomous Board, seeing to it that CDB will continue to operate on the basis of sound financial and economic standards.

C. Policies

3.05 CDB's Memorandum and Articles of Association allow it to lend long- and medium-term to productive enterprises in any economic sector, and to take equity participations. Advances to a single enterprise are limited to 20% of CDB's net worth; equity participations in a single enterprise are limited to 5% of CDB's net worth, except when necessary to secure or recover any advance. The total equity portfolio is limited to 40% of CDB's net worth, which is conservative. 1/ Loans for Government or semi-Government projects, or projects of cooperative banks or societies, are not allowed to total more than 25% of total outstanding CDB loans.

3.06 CDB's new policy statement was approved by CDB's Board of Directors on February 26, 1976. This statement, attached as Annex 6, is satisfactory. Major features of the Policy Statement are: (i) emphasis on sound appraisal

1/ CDB's new Policy Statement (par. 3.06) raises the maximum equity participation in a single enterprise to 10%, and the total equity portfolio to 100% of CDB's net worth. These figures are acceptable, and the M1emorandum and Articles of Association will be amended accordingly. - 10 -

and supervision standards by CUB; (ii) promotional objectives; and, (iii) diversification of CDB's portfolio and resources.

D. Procedures

3.07 Appraisal. CDB's technical and financial appraisal work has reached a good standard. However, the evaluation of markets and sales prospects is still weak, and such market studies are especially important now that the domestic economy of Cyprus has been considerably disturbed and industriaL exports are being fostered. This is realized by CDB's management, which intends to add a marketing specialist to its staff. Economic analysis of projects should also be improved. CDB's staff, which includes two EDI fellows, is familiar with the economic rate of return calculation and, as indicated in CDB's new Policy Statement (Annex 6), such calculations would be carried out for major projects whether or not financed with Bank funds. During negotiations, it was agreed that CDB will prepare economic rate of return calculations for projects involving a CDB financing exceeding $200,000 equivalent.

3.08 Supervision. Project supervision has been somewhat hampered by the small size of the staff. Technical supervision is satisfactory, with an average of four visits by CDB engineers to the site during the construction period of major projects. However, financial follow-up, particularly of completed projects, has often been inadequate. The extraordinary circumstances following the 1974 events no doubt created a business climate which partly explained the increase of CDB's arrears, but it has been proven during the last few months that stricter control and pressure by CDB can considerably improve loan collections (para. 5.03). CDB is conscious that close supervision of its projects is essential. CDB has agreed to strengthen its staff in order to further improve CDB's supervision effectiveness (para 3.11).

3.09 Disbursement. Disbursements are carefully handled, in line with the progress of the project, and CDB insists on the sponsor providing funds pro- rata. Payments are generally made to the suppliers on submission of invoices, and the control procedures used appear adequate.

3.10 Procurement. CDB requires its borrowers to submit more than one tender for machinery and equipment, except in very small projects or in special circumstances, and requires an architect's estimate of building costs. All cost elements of a project are carefully checked by CDB's engineers.

E. Management and Staff

3.L1 The General Manager of CDB, in office since 1967, resigned in September 1975. After an interim period as joint-acting General Manager, Mr. J.G. Joannides, an economist, with CDB since 1963 and formerly in charge of the Economic Department (new customers, economic and technical studies), was - 11 - promoted to General Manager on February 1, 1976. Subsequently, Mr. L.D. Sparsis (the other interim joint-acting General Manager), an economist and EDI fellow, also with CDB since 1963 and formerly in charge of the Operations Department (repeat customers and supervision), was appointed Assistant General Manager and a realignment of duties followed. Both men have had extensive experience in development banking, and are well qualified to fill their posi- tions. The new CDB organization is shown in Annex 7. The total strength of CDB staff as of February 1, 1976, was 16, of which 7 are professional staff. This number includes an experienced technical adviser, provided and paid for by the British Government, who has been working for CDB since 1973. The quality of the staff is good, and in particular the efforts made to have in-house technical judgement by engaging sufficient engineers is commendable. This small team also relies very extensively on the work and advice of outside legal and accounting firms, and in specific case on outside technical advisers. However, an expansion of staff is urgently required to meet the existing and projected work load. The Government, CDB and the Bank have agreed that a further 5 professional will be engaged during 1976 to strengthen CDB's capabilities to handle the projected increase in normal business operations, while a further 3 professionals (one of whom will have extensive prior experience) will be engaged in 1976 or early 1976 to handle the SSI Scheme (para. 6.08). The staffing of CDB after this extension will be 26, including 15 professionals as shown in Annex 7; further staff increases are likely to take place to enable CDB to cope adequately with its operations and related supervision. The current staff expansion program seems sufficient to permit CDB to carry its business program over the next two-to-three years.

3.12 Legal support for CDB is obtained from Messrs. Chryssafinis and Polyvious, a well-known private law practice in Nicosia, and from Mr. Stavros G. Ambizas, a lawyer formerly on the staff of CDB. Accounting support is provided by Messrs. Metaxos, Christofides, Loizides & Co., an experienced firm of Certified Public Accountants associated with the well-known auditing firm Touche, Ross & Co.

F. Government Policies and Future Status of CDB

3.13 The Government wants to make CDB a major instrument for development. It is intended that CDB will make loans and provide equity for economically sound and profitable projects, with emphasis on industry (manufacturing, and processing of agricultural products), and the service sector (including tourism).

3.14 In order to achieve these objectives, the Government will provide CDB with grants to offset past and present maturities of interest and principal due on loans made to projects now located in north Cyprus. Additional grants will be made to CDB to compensate for the small equity holdings in these projects, the value of which is now questionable. The principle of this guarantee has been approved by the Council of MJinisterson December 19, 1975 and the signing of a formal agreement on this guarantee between CDB and the - 12 -

Government is a condition of effectiveness of the proposed loan. This action will he the fundamentaL step to restore CDB's creditworthiness and the Govern- ment hopes that CDB will thus be able to attract further outside financing in the future, including loans from the Bank, bilateraL institutions and private sources. The Government wishes CDB to continue to operate as an autonomous institution.

IV. OPERATIONS

A. The 1974 Events and their Effects on CDB

4.01 In July 1974, CDB had in the now Turkish-Cypriot controlled area outstanding loans and equity investments totalling CL 2.6 million; with subsequent accrued interest, the total book value of these holdings amounted to CL2.9 million by December 31, 1975 (about 2.4 times its share capital). CDB has retained the liabilities relating to borrowings incurred to finance its projects located in the north, and hence had to continue servicing these liabilities. On the other hand, CDB has ceased to derive any income from these assets after mid-1974. Clearly, it was not within the power of CDB itself to remove the uncertainty regarding its future debt servicing capacity and its creditworthiness. CDB's financial problem, given both its nature and its magnitude, could only be resolved with the Government's help and within the context of Government policies in general. The Government has been forthcoming in providing operating funds to CDB, and has now agreed to provide a permanent financial solution in regard to CDB's northern portfolio affected by the 1974 events (para. 3.14). Ilowever,many projects in the Governnent controlled sector were also affected by the general economic upheaval following the invasion, and thus resulted in delay in repaying CDB's loans. As discussed later (para 5.03), a number of steps have, or will be initiated to assure servicing of the outstanding loans in this area.

B. Operations before and after the 1974 Events

4.02 Since CDB started operations in 1963, total approvals of loans and equity investments have amounted to CL 8 million; 62% of approvals was for projects in manufacturing, 32% for tourism projects, and 6%O for others. A summary of operations for the years 1972-1975 , the period during which the first Bank loan was effective, is given in Annex 8. CDB's annual approvals reached a peak in 1973; based on the first half of 1974, results for that year looked even more promising, but the hostilities led to a sharp decline in business after mid-year. The 18 months from mid-1974 until end-1975 were essentially a holding operation, pending a decision on the future of CDB; operations were in part based on applications already under consideration in June 1974. Inves- tors were hesitant to bring forward new projects during this period. Taking the - 13 - overall situation into account, the 25 approvals (CL 592,000) in 1974, and the 28 in 1975 (CL 556,000) indicate a commendable effort. The share of tourism loans, which in 1973 represented 40% of approvals, has been drastically reduced after mid-1974. In 1975 tourism loans were nearly nil. The number of approvals of manufacturing projects was in line with those of previous years, although the reduction of more than 50% in total value of approvals reflects investors' perception of the uncertain prospects during this period. The time-lag between approval and disbursement led to a peak in disbursements in 1974, and a sharp reduction of disbursements in 1975.

C. Economic Impact of CDB

4.03 CDB's past lending operations have resulted in a well diversified portfolio with an average size loan of CL 50,000. However, before 1974, CDB had only a limited impact on the economy of Cyprus, and then only in the industrial and tourism sectors. The table below shows the evolution of CDB's share in these sectors since 1972:

CDB Financing of Industry and Tourism (000's CL)

Industry Total Investment CDB's Disbursements %

1972 7,500 448 6 1973 8,000 420 5 1974 6,400 886 14 1975 n.a. 381 n.a.

Tourism

1972 5,800 453 8 1973 6,300 224 4 1974 3,100 439 14 1975 200 18 9

Since 1972, when the first Bank loan to CDB was made, CDB's disbursements have remained below 10% of total investments in these sectors, except in 1974 when, as a result of hesitancy by other sources of finance to provide funds, and a general drop in investment following the hostilities, CDB financed approximately 14% of total investment in both industry and tourism. The Bank loan helped to create nearly 800 jobs, at an average cost per job of approximately CL 10,000. Total investment in enterprises financed with assistance of Bank funds made available by CDB was CL 8 million (US$20 million). - 14 -

0+.i4 The factors which inhibited a more dynamic approach by CDB were (i? competition from commercial banks, providing short-term loans for long- term financing (para. 2.18); (ii) staff constraints, particularly after 1974 when the Board did not wish to appoint more staff as long as CDB's future was not firmly decided; and (iii) a rather passive stance on seeking out and promoting new investment opportunities.

4.05 With Government backing, and under new management which is promotion minded, CDB is expected to play a more important role in the reconstruction of the Cyprus economy (Chapter VI).

D. CDB's First IBRD Loan

4.06 By the end of 1975, CDB had committed essentially all of the $3 million provided under the first 1972 IBRD loan (Loan 830-CY). An evaluation has been made in Annex 9 of the application of the funds provided by the Bank to CDB, and to ascertain how the objectives set for CDB under Loan 830-CY were fulfilled. However, due to the hostilities, its associated losses, and the fact that 47% of CDB portfolio could not be supervised since July 1974, the evaluation, as given in Annex 9, is of necessity somewhat limited.

4.07 In summary, the IBRD loan of $3 million was used to provide part of -he foreign exchange component of 17 projects, of which 13 in manufacturing, ;lnd 4 hotels. Light of the 17 projects are now in north Cyprus; two of the projects had Turkish-Cypriot sponsors. Of the 13 manufacturing projects, 4 w'ere for exports and 4 for import substitution, while a further 4 served both exflortsand provided import substitution; one project was in the service s'tor. The total cost of these projects was $20.6 million, of which CDB provided 19% of the total financing required. CDB provided 28% of the foreign exchange required, and the IBRD loan in turn provided CDB with 81% of the foreign exchange required for that purpose. The projects for which Bank fuindswere provided through CDB created 767 jobs, at an average cost of S27,000 per job. This relatively high figure is due to CDB's participation in a number of capital-intensive projects, including a large luxury hotel, and a number of more sophisticated industries (PVC pipes, wood and paper products, soap; see Annex 9, Table 1 and 2).

V. RESOURCES, FINANCIAL PERFORMANCE AND POSITION

A. Resources

5.01 _DB's .taternentof Resources as of December 31, 1975 is given in >.c1 10. .At that date, CDB had mobilized CL 8.2 million, with 68% in local - 15 - currencv 1/. The cost of CDB's borrowed resources has been rising since 1973 and reached 7.0%,in 1975. The hulk of Local currency resources has been provided hy the Government in the form of loans he Govern- ment at 7-1/2'N, Dartly tused to repay the then high short-term commitments. During the fall of 1975, CDB received a government loan of CL 1 million at 5-1/2% for 12 years. To finance imports, C])B until 1972 used to make Loans in local currencv, since it had no resources in foreign currency. These loans in turn were converted into foreign exchange at the Central Bank. Since 1972, however, CD)B has financed imports directly from its own resources in foreign exchange, which have been provided essentially from bilateral sources and the Bank. As of December 31, 1975, CDB's outstanding foreign borrowings of CL 1.4 million consisted of: CL 0.3 million from KfW, CL 0.1 miLlion from the Export Credit Guarantee Department of the U.K., and CL 1.0 million from IBRD. In addition, CDB obtained a US$1 million line of credit from the U.S. Export-Import Bank which it could not use due to limited procurements in the U.S. All foreign exchange resources have been fully committed. As of December 31, 1975, total resources available for commitment amounted to CL 35,000, all of them in local currency.

5.02 CDB had to undertake part of the foreign exchange risk on its foreign currency borrowings. As a result, it has suffered some exchange losses (mainlv on borrowings from KftJ: CL 29.000). The Government has agreed that the foreign exchange risk on CDB's future foreign borrowings, including the proposed second Bank loan will be borne by the Government (para. 2.21).

B. Loan Portfolio in Southern Cyprus

5.03 As of July 15, 1974, the CDB portfolio in southern Cyprus totalled CL 2.7 miLlion or 53% of CDB's total portfolio. It has been badly affected by the 1974 events, but also suffered from insufficiently close supervision. Loans affected by arrears were 71% of the south Cyprus portfolio as of September 1975, and the arrears amounted to CL 435,000. In November 1975, Cl)Bundertook a thorough and detailed supervision of all its loans in arrears, including an assessment of the security on these loans. As a result, by the end of 1975, loans affected by arrears as a percentage of the southern Cyprus portfolio decreased to 54%. This 54% of the portfolio falls into two main categories. First, some enterprises have faced temporary difficulties folLowing the 1974 events, but have provided CDB with adequate security and have good prospects of recovery; they present little risk for CDB. For these, CDB has negotiated a rescheduling of their debt; about 30% of the free area port-folio has thus been rescheduled and this action appears justified. For the baLance (24% of

1/ Equity CL 1.2 miLlion; loans from Government CL 2.7 million; debentures CL 2.0 million; IBRD CL 1.1 miLlion; DfW Cl. 0.5 million; UK CL 0.3 miL- lion; Eximban Cl.0.4 miLlion (not used). - 16 -

tiheportfolio), and taking account of the security which in many cases is very good, CDB has made provision of CL 111,000 on its 1975 accounts to cover any foreseeable risk on this portion, which appears adequate. With this coverage, and the more active supervision CDB intends to, and can carry out on its souttern Cyprus portfolio, CDB's financial situation is sound.

5.04 By December 31, 1975, the arrears position had thus been substantially decreased; it is however open to further improvement. The situation is under control, but the future soundness of CDB's portfolio depends to a large extent on CDB's ability to collect due maturities and not merely to reschedule loans or to rely on the value of its security. If CDB supervises its portfolio closely, as it should be able to do following the proposed increase in staff, the arrears could be reduced to much lower levels within a couple of years.

C. Loan Portfolio in Northern Cyprus

5.05 CDB's loan portfolio in northern Cyprus amounted at the end of 1975 to CL 2.5 million (47% of the total loan portfolio outstanding), of which CL 815,000 represented current (1975) and past-due maturities (1974) of principal. Interest due on the northern portfolio at the end of 1975 amounted to CL 332,000. All loans to projects in northern Cyprus are de facto delinquent since July 1974. Since July 1974, it has not been possible for CDB to assess the actual situation of these enterprises; however, it is reported that virtually all have stopped operations. For practical purposes, CDB considers this part of the portfolio as lost until a financial settlement between the two communities takes place. The Government has agreed to guarantee CDB repayment of principal.,and payments of interest due on this portfolio (para 3.14); to CDB, this part of its portfolio is therefore riskless and CDB has made no provisions for it.

D. Equity Portfolio

5.06 A list of the equity portfolio is given in Annex 12. It remained unchanged through 1975, with six equity investments amounting to CL 177,200 (15% of CDB's equity). Two of the six participations (CL 55,000) are located in the north.

5.07 The four participations in the south perform to the satisfaction of CDB. One is paying dividends, while the others are in relatively new projects, and are expected to start payments in 1978. By 1978, CDB expects a return of 8% p.a. on its equity investments in south Cyprus.

E. Profitability and Financial Position

5.08 CDB's summarized income statements and balance sheets for 1973-1975 are given in Annexes 13 and 14. As noted earlier, in the 1975 statements tihe - 17 - loan and equity portfolios in north Cyprus wilL be subject to payments by the Government eqtuivalent to (i) principal and interest due on loans, and (ii) the total of the equity invested in the north (para 3.14). CD)B'sauditors are Metaxas, Christofides, Loizides & Co., a Cyprus auditing firm associated with Touche Ross & Co. Over the past years, auditing standards applied by this firm have been satisfactory. ClDB'sauditors approved CHB accounts for 1975. The only qualification is on CI)B'snorthern portfolio pending payments by the Gov- ernment as mentioned above.

5.09 Interest due on loans for 1975 amounted to CL 471,000, of which 53% interest on loans for projects in the south. Interest actually received was only CL 50,000, or 21% of total interest due on loans in the south (see also para. 5.03). Financial expenses as a percentage of total assets did not increase substantially as compared with previous years, and amounted to 5.5% for 1975, (4.9% and 4.5% in 1974 and 1973, respectively). The average interest paid by CDB on its borrowed funds was 7.0% in 1975, up from 6.7% in 1974, and 6.2% in 1973. CDB's interest spread between its loans and borrowings was 2.2% in 1975 and remained sufficient to generate profits (see ratios in Annex 21). With administrative expenses at a reasonable level, CD)B's profit before tax and provisions in 1975 was CL 125,900. The large provision made for potential losses on the southern portfolio of CL 111,000 (para. 5.03), and the provision for exchange risk of CL 10,800, has however absorbed almost all of this potential profit. This had to be expected as the price CDB had to pay to put its finances on a sound basis.

5.10 With the provisions set aside against losses on the southern portfolio, and the guarantee of grants from the government on the northern portfolio, CDB as of end-1975 presented a balanced financial situation. The growth of total assets slowed down in 1975, reflecting the situation in Cyprus since July 1974. The current ratio was 3.1 for 1975 (0.7 for 1974); the large improvement in the 1975 ratio is due to the elimination of maturities and interest (due and past-due) on the northern area portfolio from 1975's figures, as payment of these will now be undertaken by the Government. CDlB's long-term debt/equity ratio remained comfortable at 4:1, well within the limit of 5:1 agreed witlh CDB for the first Bank loan.

VI. PROSPECTS

A. The Environment

6.01 The 1974 events were followed by a relatively stable situation, which has enabled the business community in the south to regain some confidence in the economic prospects. Wlith Governmelnt assistance, new projects are being undertaken, including the estabLishment or enlargement of - 18 - industrial estates in Nicosia, Larnaca, Limassol and Plaphos, and the establishment of a free trade zone in Larnaca; infrastructure projects are being planned or are in the process of execution; and, finalLy, low interest government loans are being made available through a number of schemes under the EEAP (para 2.06). All these plans and programs, coupled with the growing feeling that the status quo may last for some time, appear to provide the stimulus for resumed economic growth.

6.02 Cyprus has relatively low labor costs, and only a mild rate of inflation (just under 5% in 1975). With its skilled and well-educated population, surplus labor, and government incentives, its exports should continue to expand, particularly in consumer goods such as clothing, shoes, tobacco and paper products, but also in certain products where proximity to the oil- rich nations gives a natural freight advantage, for example, cement, assembly and part-manufacture of special-purpose trucks and buses, and furniture (Annex 3).

6.03 A further increase in agricultural production, manufactured goods output, and a reactivation of the tourist industry are foreseen. CDB is not willing to consider agricultural projects (as opposed to agro-industrial projects) at this time due to its lack of knowledge - at all levels - in this field. However, there are substantial possibilities for assisting in the preparation, appraisal and financing of projects in the tourism and industrial sectors.

B. CDB Business Projections b.04 ''rojections for CDB's business volume for 1976, and in part for 1977, are based on major projects now under study and/or being actively promoted by CDB, augmented by an estimate of routine business covering small loans. Projections for the period 1978 - 1980 are based on an average increase in loan volume of 15% per year for industrial projects, 40% per year for tourism projects (hotels), and 10% for other projects. These percentages are based on CDB's evaluation of the situation, as well as on the governmental medium term economic development plans. These estimates, and in particular the tourism project projections, are necessarily subject to review in case of drastic changes in the economic or political climate of the island.

6.05 CDB's business projections for the period 1976 - 1979, are given in Annex 15, and are summarized below: - 19 -

CDB Business Projections (Commitments) (- in CL'OOO -)

1976 1977 1978 1979

Loans

Industry 919 1,250 1,447 1,656 Tourism 77 221 327 460 Others 99 104 127 141

Sub-Total 1,095 1,575 1,901 2,257

SSI 70 242 280 90*

Total 1,165 1,817 2,181 2,347

of which:

Equity 111 181 193 244 Foreign Exchange 896 1,358 1,621 1,794

* Provisional figure.

6.06 The 1976 and 1977 investment projects under consideration are shown in Annex 15. The mission has reviewed major projects to determine the chance that they might be realized, and this review has been supplemented by discus- sions with Government officials, trade organizations, industrialists, hoteliers and banks. These projections represent a realistic target.

6.07 In addition to the normal operations of CDB, mainly concerned with industry and tourism, and supplemented by a small number of projects in the agro-industrial sector, further business may develop through a scheme to assist small scale industries (SSI). CDB and the Government are preparing a detailed study which constitutes a basis for the SSI component in the proposed loan, as described in the following.

C. Small Scale Industries (SSI)

6.08 General. Present circumstances in Cyprus appear particularly suit- able for the promotion of small scale industries. Not only is there in Cyprus a tradition of operating in small, often family-controlled enterprises employing less than 10 people (about 90% of existing manufacturing enterprises), but, since the 1974 events, many small-scale entrepreneurs and workers who were displaced lost their businesses and jobs and are now eager to resume their activities in south Cyprus. The need for adequate financing facilities seems to be very high as indicated by the large number of applications which the two ministries most involved with SSI (Labour and Commerce and Industry) - 20 -

have received in the recent past. Financing, however, is not normally readily available to small scale enterprises. Commercial banks are neither equipped, nor inclined, to get involved on a large scale in financing operations which, by conservative commercial banking criteria, might be relatively risky and administratively costly. The Government has lacked, so far, a credit agency with the requisite capability and facilities to establish an adequate program of assistance to SSI. The Government has concluded, therefore, that CDB is the only institution with the capability of providing useful and constructive assistance to SSI, in close cooperation with the Government.

6.09 Having arrived at this conclusion, the Government requested the Bank to allow a portion of the proposed loan to CDB to be used for the financing of SSI. The request was accompanied by a proposal (the SSI Scheme) for such financing, jointly prepared by CDB and the Government, which was reviewed and discussed during negotiations for the proposed loan. This proposal, whose main features are given in Annex 11, is based on a tentative definition of SSI as enterprises found primarily in the manufacturing sector, employing up to 10 persons and involving loans between CL 500 and CL 10,000 (i.e. higher than special assistance loans available to the refugees under the Emergency Scheme and lower than loans normally granted by commercial banks or CDB). The proposal outlines specific institutional arrangements for CDB, such as the employment of three additional professional staff, and a broadly defined assistance package which will draw upon Government's staff and services both to screen SSI loan applications before they reach CDB and to provide the SSI enterprises with technical assistance to help them plan their projects, organize their work, purchase their raw materials and sell their products. The SSI Scheme, as prepared by the Government and CDB also provides for (i) soft-term financial assistance from the Government, in equal amaount with the bank, (ii) Government guarantees for CDB on 75% of its SSI loans outstanding, and (iii) the assurance that CDB will receive additional financial support, if needed, to cover, on a break-even basis, all administrative expenses and reasonable provisions on its SSI program. The CDB proposal envisages simplified procedures for appraisal, procurement, disbursement and supervision of SSI loans; these are detailed in Annex 11.

6.10 The proposed organizational and financial measures seem sufficient- ly sound to warrant Banlcsupport. However, some aspects of the SSI Scheme need further evaluation and exploration, especially with regard to the following:

(a) Definition of SSI Enterprises under the Scheme. The broad definition (ten people or less employed - loans within the CL 500 - 10,000 range) has not yet been corroborated by a detailed assessment of the needs and priorities of SSI sub-groups in Cyprus. Since there are real human and financial constraints both within CDB and cooperating Government services, the Scheme has to be tailored to what is realistically feasible. Therefore, while using the proposed definition as an apparently reasonable starting point, the Bank has reserved - 21 -

its position regarding the definition of SSI to be used under the proposed loan until the Government and CDB have completed, on the basis of existing data, and taking into account staff and resource constraints in both quarters, their assessment of the type and range of enterprises and subloans that should be given priority for financing under the SSI scheme. Labor intensity would be among the criteria to be used to define these priorities. Agreement by the Bank on the definition of the SSI target enterprises under the Scheme is a condition of disbursement of the proposed loan.

(b) Organization. While the organizational scheme presented by CDB and the Government at negotiations seems workable, details of it may have to be modified depending on the agreed definition of SSI under the Scheme. It was therefore agreed that the SSI organization plan would have been reviewed and accepted by the Bank, and that the organization would be operational, as a condition of disbursement of the SSI portion of the proposed loan.

(c) Resource Requirements. It is difficult to estimate what the total resource requirements, manageable under the SSI Scheme, will be. Rough estimates by the Government and CDB suggest that CDB nay be able to make loans of about $4 million to finance SSI projects over the next 2 to 3 years. It is conceivable that resources up to $4 million, could be committed by CDB over this period. Ilowever, the SSI Scheme is, at this stage, too experimental in nature for resources of this magnitude to be firmly committed to it. Further caution is called for, since there is a risk that CDB may get involved to such a degree that the Scheme may over-tax CDB's staffing and management resources. Even though CDB has some familiar- ity with SSI projects, the organizational set-up required within and outside CDB is untested, and it is too early to foresee how CDB will react to a substantial involvement in this field.

6.11 A two-step approach is therefore recommended. First, subject to a satisfactory review of the Scheme, including the definition of the scope and range of SSI subloans (as a condition of disbursement for the proposed loan), the Bank would lend $0.75 million to CDB for SSI financing. This amount, together with the financing of $5.25 million identified for CDB's normal operations (para. 6.13), would justify the recommendation for a loan of $6 million. If, however, in the course of project implementation, the Bank is satisfied with the progress of the SSI Scheme and additional funds are needed for SSI, say, by mid-1977, CDB would be authorized by the Bank to use an additional amount of up to $0.75 million to bring the total of funds available to SSI under the proposed loan to $1.5 million. CDB would have to do this at the expense of Bank funds available for CDB's normal business, i.e. reducing this portion of the proposed loan from $5.25 million to $4.5 million. - 22 -

The main consequence would be a shorter commitment period than the approximately 2-1/2 years now envisaged for this main portion of the Bank loan; it is unlikely, however, that the $4.5 million would be committed in less than 2 years. Under the negotiated agreement, the Government and the Bank would lend equal amounts for SSI each under basically similar terms (i.e. repayments period would be up to 10 years). However, while the Bank would lend its portion (50%) to CDB at the Bank's current lending rate of interest, the Govern- ment loans would be at no contractual cost to CDB. To compensate the Govern- ment for this subsidy, CDB would agree to return any profit (after expenses and reasonable provisions) it may generate under the SSI Scheme to the Govern- ment. CDB's lending rate for loans under the SSI Scheme would be its normal 9% p.a. The Government proposal to match Bank funds by an equal amount for each SSI loan would ensure that the allocation of Bank funds would be limited to import financing since the data available (and which will be reviewed by the Bank together with the details of the Scheme) strongly suggest that at least 60% of SSI loans granted would be for the purchase of imported goods (machinery and other equipment). Disbursements under the Bank loan for the SSI Scheme will be made against certificates of expenditure provided by CDB (Annex 11, para 15). Supporting documentation, such as purchase invoices, will not be submitted for review by the Bank, but will be retained by CDB and be available for inspection by the Bank during supervision missions.

D. Resource Requirements 1/

6.12 To meet its future commitments, CDB at the beginning of 1976 had no resources other than CL 35,000 in local currency funds in the form of Govern- ment loans and self-generated funds; it had exhausted all its resources in foreign exchange. CDB is anxious to mobilize resources abroad at reasonable terms. Given its current interest rate policy and, more importantly, the uncertainty of the Cyprus political situation, CDB does not expect in the short run to be able to attract loans from the international capital markets. How- ever, it has received positive indications fom the Government of Germany that KfW is prepared to consider a second loan to CDB of DM 10 million (about $4 million) for 30 years, including 10 years of grace, at an interest rate to CDB of 6% p.a. 2/ It is expected that this loan will be approved by the middle of 1976 to cover part of CDB's commitments over the period 1976-1978. The availability of

1/ In this section, resource requirements are based on CDB's projected commitments only for its normal DFC operations, i.e. excluding SSI operations which have been reviewed in paras 6.08-6.11.

2/ The KfW loan would bear interest at a rate of 6% p.a. of which 4% p.a. would be retained by CDB for special development purposes agreed between Kfr. and CDB, such as financing SSI or promotional activities. For prac- tic~al purposes these funds will be considered as part of CDB's resources as a grant. They have been accounted for as "KfW interest fund" in An- nexus 18-20. - 23 - funds on such terms is essential to ensure CDB's profitability and, should the KfW loan not be concluded shortly, as expected, before presentation of the proposed Bank loan to the Executive Directors, it will be a condition of effectiveness that CDB would have secured approximately $4 million of additional resources on comparable terms and conditions. The Government has agreed to protect CDB fully against the foreign exchange risk on its foreign resources (para. 2.21).

6.13 With projected commitment needs, excluding those relevant to the SSI Scheme, to finance imports estimated at CL 3.7 million over the period, 1976-78 (Annex 16), CDB will have a foreign exchange resource gap, after approval of the loan from KfW, of CL 2.1 million ($5.25 million). 1/ It has thus asked the Bank to cover commitments in foreign currency for up to $5.25 million. (The program envisaged for the SSI scheme (para 6.10) will call for additional foreign exchange resources which are estimated initially at $0.75 million.) To cover its resource needs in local currency, CDB is relying essentially on Government funds. Pending approvals of the proposed IBRD and KfW second loans, CDB has no resources in foreign exchange. To bridge part of CDB's foreign exchange gap since the beginning of 1976, the Bank loan will provide retroactive financing for the 90-day period before loan signing up to $500,000.

6.14 For the longer run, CDB expects that the evolution of the political and economic situation in Cyprus will permit a liberalization of interest rate policy and will allay any apprehensions that potential foreign lenders may have now. CDB hopes in about two years' time to be able to start diversifying its foreign exchange resources in order to rely less exclusively than at present on concessionary funds. In its projections (Annexes 19 and 20), CDB has provided for a gradual increase of such resources, starting in 1979; as of now, however, these resources are unidentified. The projections also assume a continuation of financial assistance from IBRD and KfW after 1978.

E. Profitability

6.15 CDB's projected Profit and Loss Statements for the year 1976-80 are shown in Annex 18. Annex 17 spells out the assumption made in their preparation. (These Annexes do not include data on the SSI Scheme which is basically a non profit operation). SSI forecasts are detailed in Annex 11. Thanks to an increase in low-cost resources from the Government, CDB expects to be able to maintain over the next five years a sufficient average spread between lending and borrowing interest rates (2.1% in 1976, 2.5% in 1977, 2.8% in 1980).

1/ Though the Cyprus pound has remained fully convertible, it is against normal CDB policy to have recourse to conversion of its local currency resources; this policy has been reinforced in the light of Cyprus' balance of payments difficulties since 1974. - 24 -

However, profits before tax will increase slightLy from Cl. 36,300 to CL 101,800 frorn 1976 to 1980 (4.97 to 11.0% of average net worth). Net profits after tax will grow from about 3% to 6% of net worth during the period 1976-80. Hence profitability as foreseen is acceptable for a fully Government-owned DFC.

6.16 The projections provide adequately for CD)B's staff and administration expenses, which will grow rapidly in 1976 after hiring new staff. tNever- theless, projected administrative expenses remain quite moderate over the period 1976-1980 (below 1.5% of average total assets). Following the reassess- ment of CDB's portfolio at the end of 1975, the provisions for doubtful loans at 2% of new loan disbursements seem sufficient over the projected period; ac- cumulated provisions will remain at about 5% of total portfolio.

F. Financial Projections

6.17 CDB's projected Balance Sheets and Source and Application of Funds for the year 1976-80 are presented in Annexes 19 and 20. They reflect the projected disbursements shown in Annex 16. Major indicators and ratios are summarized in Annex 21.

6.18 Overall, these projections show a sound financial situation over the period. The liberal terms of the KfW loan, and the Government guarantee on the northern portfolio, should enable CDB to improve its debt service coverage considerably from a narrow 1.0:1 in 1977 to a comfortable level of about 1.4:1 in 1980. CDB does not foresee any liquidity problem over the next five years (Annex 20). Consequently, the projections have assumed some prepayment of Government loans, which were basically a stop-gap measure.

6.19 The financial reorganization currently underway will allow CDB to maintain a proper capital structure in the medium term. The debt/equity limit of 5:1 agreed with the Bank for the first loan remains a prudent one for the proposed loan; even more so if CDB were to make use of the Government guarantees under the EEAP (para 2.06). The projections, through 1978, indicate that CDB does not foresee any excess over the 5:1 debt/equity limit (3.6, 3.9 and 4.1 are projected for 1976, 1977 and 1978 respectively). In 1979 and 1980, when the limit would be nearly reached, two share capital increases would permit CDB to maintain the limit.

VII. THE LOAN

A. Objectives and Strategy

7.01 The central purpose of the proposed Bank loan is assistance to Cyprus at a time when its economy has suffered a severe setback. Recovery and - 25 - reconstruction of the economy through a special effort to assist the manufacturing, tourism sectors and SSI are an essential part of the Government's Economic Plan, which pay special attention to reducing unemployment and in- creasing exports. The Government has agreed to rehabilitate CDB which, as a result of the 1974 events, was in a very weak financial situation. In turn, it has requested the Bank and KfW to continue to assist CDB with new loans.

7.02 The proposed loan of $6 million, which would provide about 40% of CDB's total resources, and about 60% of its foreign exchange requirements, approximately over the next 30 months, has three main objectives. Firstly, it will provide funds to CDB to finance medium-sized industrial and tourism projects in accordance with its Policy Statement (Annex 6). This is CDB's traditional business, at which it vwas quite successful until the 1974 events. The gradual revival of investments in Cyprus should permit CDB to use up to $5.25 million in Bank funds to finance about 50 projects. This amount, in conjunction with other funds, will help to finance projects with a total value of $35 million which should create some 1,250 jobs, and have a substantial impact on Cyprus exports since the majority of sub-loans are expected to be to export industries in the shoe, garment, and small manufacturing, and to the tourism sector. Secondly, it will provide, for the first time in Cyprus, financing and appraisal capabilities to SSI which in the current economic situation in Cyprus are in critical need of such assistance. The portion of the Bank loan which will finance SSI is expected to have significant effects on employment for projects which are basically labor intensive. Thirdly, while the ownership structure of CDB is being resolved, the major objective of CDB to assist the private sector industry is maintained. The focus over the coming years will be on building up a strong institution. The Bank will, through this loan, remain closely associated with CDB and be able to contri- bute, as a result of this association, to common institution building goals.

B. Evaluation

7.03 There are risks. There is a political risk, since Cyprus remains divided and the form of an eventual political settlement is presently unknown. Unless hostilities are renewed, it is likely that both south and north would need to undertake important investment programs in manufacturing and tourism, including small scale industries. The rate at which these investments will take place depends to a large extent on the confidence of investors in the political future. Thus, CDB's projections, although the best estimates possible at this time for south Cyprus, have to be looked at with prudence.

7.04 Another risk, inherent to CDB itself, is its capability to process a relatively large number of projects both under the SSI Scheme and for traditional business, within its staff constraints. In this respect, the Bank - 26 -

will keep a close watch over CDB's volume and quality of work. This con- straint is perhaps the main challenge facing CDB for the next couple of years. The Bank is prepared to provide all the training and assistance it can usefully give CDB.

C. Recommendations

7.05 A Bank loan to CDB of US$6 million equivalent is recommended to finance part of the import component of industrial and tourism subprojects financed by CDB over the period 1976-78. The loan includes two components; Part A, to finance up to US$5.25 million for CDB normal DFC operations; and Part B, to finance US$0.75 million (which may later be increased to US$1.5 million if the Bank and CDB agree to reduce the amount available for normal operations) for the financing of small scale industries (SSI).

7.06 The Bank loan would cover about 60% of CDB's foreign exchange commitments over a period of about two and a half years, June 1976 through December 1978. In line with the Bank's and CDB's experience with the type of subprojects included under the loan, subloans should be repaid over a maximum period of 15 years, with terms expected to range between 5 and 12 years for medium-size manufacturing normal DFC projects with an average life of about 8 years. The terms of tourism subloans would range between 10 and 15 years. Grace periods of 1-4 years (the longer ones usually for tourism projects) would normally apply. SSI sub-loans would normally be repaid over a period of 10 years; their terms are expected to have an average life of about 6 years. The terms and conditions of the proposed loan should be those normally applied to loans to development finance companies, including the standard commitment charge. Given CDB's professional standards and the general increase of import prices over the past three years, the free limit under Part A of the loan should be set at $200,000; under the previous Bank loan it was $100,000. The proposed free limit would enable the Bank to review about 25% of the number of subprojects financed under Part A of the proposed loan. No aggregate free limit is considered necessary.

7.07 Because of legal delays, the transfer of full ownership of CDB's shares to the Government and the subsequent appointment of a new Board of Directors along the lines of para. 3.04, and the issuance of the Government guarantee on CDB's portfolio (para. 3.14) could not be completed before presentation of the loan to the Executive Directors. Implementation of these actions is therefore conditions of effectiveness of the proposed loan.

7.08 As under the first Bank loan to CDB the proceeds of the proposed loan for CDB's normal DFC subloans will be restricted to the financing of: - 27 -

(a) 100% of the CIF cost of imported equipment;

(b) 80% of the cost of imported equipment purchased in Cyprus;

For SSI subloans, the Bank disbursements will be made against certificates of expenditures provided by CDB (Annex 11, para 15). The Bank will disburse fifty percent of CDB's disbursements for SSI subloans under the Scheme.

7.09 Understandings with CDB have been reached during negotiations on the following points:

(a) CDB will hire five additional professional staff in 1976 for its normal operations and three more for its SSI operations (para. 6.09). It will hire additional staff as necessary to cope with its operations, including monitoring the assistance to SSI (para 3.11).

(b) CDB will maintain a debt/equity ratio of 5:1 (para 6.19).

(c) For normal DFC sub-projects for which CDB financing exceeds $200,000, CDB will calculate the economic rate of return and use this calculation in its investment decisions as mentioned in para 3.07.

7.10 Should the proposed KfW loan described in para 6.12 not be concluded before presentation of the proposed Bank loan to the Executive Di- rectors, it will be a condition of effectiveness that CDB would have secured approximately $4 million of additional resources on comparable terms and conditions.

7.11 As mentioned in paras 6.08-6.11, the financing of SSI enterprises under the proposed loan is subject to the Bank's approval of the details of the SSI Scheme and of the implementation of this Scheme; such approval is a condition of disbursement for the loan.

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CYPRUS INDUSTRIES AS RANKED IN TER`MSOF EMPLOYMENT, GROSS OUTPUT AND VALUE ADDED (1973)

Output (CE 000's)

Rank Employment Gross Output Valued Added

First Garment & Footwear (8,127) Food (22,976) Food (6,889)

Second Food Processing (5,077) Garment & Footwear (13,395) Garments & Footwear (5,719)

Third Furniture & Fixture (2,854) Beverages (12,194) Beverages (5,623)

Fourth Non-metallic (2,557) Non-metallic (8,138) Non-metallic (4,568) minerals 1/ minerals minerals

Fifth Metal Products (2,489) Petroleum Products (8,036) Furniture (2,828)

1/ Mostly clay, cement.

Source: Based on 1973 annual figures in "Short Term Industrial Indicators", July and August 1975. Nos. 26 and 27. Statistics and Research Department, Ministry of Finance, Nicosia.

EMENA/IC&DFC January 1976 ANNEX 3

CYPRUS ACTUAL AL D PROJECTED: EXPCFITS OF MANUFACTURED GOODS 1974, 1975 AND 1976 in CL O00's

Actual Projected 1974 1975 1976

Food 3,255 2,550 3,570

Beverages 5,288 5,000 5,000

Tobacco 967 2,000 2,400

Textiles, Footwear & Clothing 3,343 4,500 6,250

Wood Products 191 300 500

Paper and Printed Matter 858 1,500 2,000

Leather Products 735 500 650

Chemicals 51 250 325

Non-Metallic Minerals 1,450 5,500 9,000

.letalProducts 460 1,000 1,500

Machinery and Transport Equipment 255 1,500 2,500

.iscellaneous 87 100 150

16,940 24,700 33,845

Source: Ministry of Commerce and Industries and Directorate General of Planning, Ministry of Finance.

ElENA/IC&DFC January 1976 ANNEX 4

TIIE CYrRUS DEVEL0PENT BANK LIMITED List of Shareholders (December 1975) Ho. of Amount Type of Shares (Ci) Shares Overall ": Shares

Eanks Co-Operative Central Bank Ltd. 2,090 2,090 0.52 0.20 Bank of Cyprus Ltd. 5,946 5,946 1.49 0.59 Barclays Bank International Ltd. 5,946 5,946 1.49 0.5.:; Banque Pcpulaire de Chypre 5,946 5,946 1.49 0.59 Cyprus Turkish Co-Oper. Cent.E/k 5,946 5,946 1.49 0.59 The Chartered Bank (U'K) 5,946 5,946 1.49 0.59 N.ational Bank of Greece 5,946 5,946 1.49 0.55 Grindlays Bank 5,946 5,946 1.49 1.' Turkish Bank of Nicosia 5,946 5,946 1.49 0.59 Turkiye Is Bankasi 5,946 5,946 1.49 C0.59 Lombard Banking (Cyprus) Ltd. 2,090 2,090 0.52 0.21

57,694 57,694 14.45 S.72 Insurance Cem.panies, Provident Funds Tamion Pronias Taktikou Emisthou Ipallil. Prosopikou KFEO Ltd. 2,973 2,973 0.74 U.2' Tamion Pronias Ipallil. Prosop. Kypr. Eterias Konservop. Ltd. 2,090 2,090 0.52 0.21 Pancyprian insurance Co. Ltd. 2,780 2,780 0.70 0.28 jItlantic Assurance Co. 2,220 2,220 0.55 0.20 Astir Insurance Co. 5,946 5,946 1.49 0.59 General Social Insurance Fund 5,946 5,946 1.49 0.59 CYTA Employees Pension Fund 5,946 5,946 1.49 0.59 EVKAF Finance Corporation 15,000 15,000 3.75 1.5;.' The Manufacturers Life Insurance 4,460 4,460 1.10 0.45 Prov.Fund of Cyprus Palest.Plan. 4,890 4,890 1.22 0.56 Tamion Pronias Ergatcyp. EME Ltd 5,946 5,946 1.49 0.5"; CDB Provident Fund 1,560 1,560 0.39 0.15 Minerva Insurance 1,820 1,820 0.45 C.18 Prudential Assurance 2,090 2,090 0.52 0.20 KEAN Provident Fund 1,040 1,040 0.26 0.10

61,927 61,927 15.48 (.1(l

866 Individual Shareholders lolding less than 1% Each 280,379 280,379 70.09 28.04

Total "A" Shares 400,000 400,000 100.00 40.00

E" Shares Government 600,000 600,000 100.00 60.00

TOTAL SHARE CAPITAL 1,000,000 1,000,000 100.C0

E"ENA/ IC &DFC January 1976 ANNEXC5

THE CYPRUS DEVELOPMENTBANK LIMITED THE BOARD OF DIRECTORS January, 19)76.

Chairman Mr. Christakis G. Papadopoulos - Shipping Agent and Broker Director of several shipping companies) Vicec-Chairman ) included below Mr. Afxentiou - Director General, Ministry of Finance Members

A. Government Directors:

1. Mr. Afxentis Afxentiou - Vice-Chairman - Appointed in 1972 2. Dr, Iacovos Aristidou, Director-General, Planning Bureau - Appointed in 1972. 3. ir. Spyros Phylaktis, Senior Officer, Research and Industrial Development, Ministry of Commerce and Industry - Appointed in 1y72.

B. Private Directors:

1. Mr. Christakis Papadopoulos - Chairman - elected in 16j6 2. Mr. Andreas Catsellis - Hotelier - elected in 1963.

3' br. Abdullah M. Ali - Architect - elected in 1973. 4. Vacant. 5. Vacant.

C. Public Directors:

1. Mr. Voris Michaelides - Shipping Agent and Broker - elected in 1963. 2. Mr. Stelios Demetriou - Industrialist - Appointed in 1,717 3. Vacant.

FTYA/; IC &DFC January 197C ANNEX 6

CYPRUS DEVELOPMENT BANK LIMITED

STATEMENT OF POLICIES AND PROCEDURES (January 28, 1976)

The Cyprus Development Bank Limited is a multi-purpose DFC which, though owned by the Government, is established and operates in the private sector as an autonomous public company.

A. OBJECTIVES OF THE BANK

1. The Bank shall develop, encourage and stimulate productive enterprises in Cyprus whose projects it considers viable and from the economic point of view desirable, with particular emphasis on, but not limited to, the fields of manufacturing and industrial processing, small-scale industries, tourism, agro-industries and mining.

2. In accordance with the above-mentioned policy, it shall:

i. Assist and take the initiative in the creation, expansion and modernization of such productive enterprises in the private sector by providing financing in the form of medium.- or long-terr: loans and/or in the form of share participation, and by guaranteeing loans and obligations.

ii. Develop, stimulate and expand the capital market in Cyprus (share and security markets) by sponsoring and underwriting and distributing the issues or conversion of shares and other securities and facilitating the transfer of shares and securities and by revolving its own investments as rapidly as they mature and/or appears prudent.

iii. Encourage, sponsor and facilitate participation of private and public, domestic and foreign capital, technical and managerial skills in the development of the Cyprus economy through joint ventures and other means.

iv. Furnish economic, technical, managerial and organizational advice to such productive enterprises and assist in obtaining such advice from other sources. ANNEX 6 Page 2 of 6

To achieve its objectives, the Bank shall adhere to the following broad policies:

B. OPERATIONAL PCLICIES

1. Eligibility

i. The Bank is empowered to assist productive enterprises engaged in industry and agro-industries, tourism and mining and related activities.

ii. Financing is restricted to enterprises operating in the private sector. The participation of the Government or seni- government institutions in the share capital of such enterprises will not necessarily preclude assistance from being extended to them, provided the said enterprise retains its operational independence and effectively controls its activities.

iii. Eligible for financial assistance are new as well as existing enterprises.

iv. Financing is provided for projects which are expected to make a quantifiable contribution to the development and further growth of Cyprus and its people. The economic viability of the project from a national point of view is the basic criterion for CDB assistance.

2. Investment Policy

i The Bank shall pursue a liberal lending policy but will concentrate on providing capital for the financing of fixed assets and working capital of a permanent nature.

ii. The Bank shall provide its capital assistance only to those productive projects which mieet its criteria of technical, managerial, organizational, commercial, financial and economic viability in the context of the development objectives of Cyprus. These latter criteria relate to: (a) the financial internal rate of return of a project, and (b) its economic rate of return. Cut-off rates for the two criteria will be determined by the Board, from time to time, taking into consideration the objectives of Cyprus' economic and social development and in the light of the prevalent economic and financial environment of the Bank.

iii. The Bank normally shall not provide its capital assistance to a project which is rejectible on the basis of the above criteria, unless the project's implementation is expected to generate demonstrable extra-economic benefits and provided further that the Government or Publiz Sector, institution/s and/or or-a-nizatioiI/ssafepuard the BSank's investment. ANNEX 6 Page 3 of 6

iv. The Bank is empoweredto provide capital assistance according to the needs of the project in the form of:

a. direct medium- and/or long-term loans, b. loans with participation,equity and conversionrights, c. direct participationin the share capital, d. guarantees, e. underwritingof public issues.

3. Developmentof the Capital Market

i. The Bank in its efforts to develop and expand the domestic capitalmarket will endeavor to obtain equity and/or conversion rights on the projects it finances,provided such action is financiallyprudent and meets with the approval of the Bank's clients, and provided further that the Bank does not seek a controllinginterest in the enterprisesit assists.

ii. The Bank shall rotate its investmentportfolio as rapidly as is financiallyprudent.

iii. The Bank will underwrite and distribute issues of shares and bonds of its clients as well as issuing its own bonds.

4. PromotionalRole

i. The Bank shall pay particular attention to the identification and promotion of new and significantindustrial and tourist and other related viable projects whose implementationis expected to have material impact on the Cyprus economy.

ii. The Bank may arrange for general industrial surveys and feasibilitystudies for special projects.

iii. The Bank may provide and/or assist in finding technical, managerial,financial and organizationalassistance, not only to its clients but also to any enterprise and organization whose operations further the objectivesof the Bank.

iv. The Bank may assist in arranging mergers, and finding technicaland entrepreneurialpartners for local clients or foreign investors.

v. The Bank may encourage the considerationof new ideas by the economic sector and business community.

(. CONDUCT OF BUSINESS

In achieving its objectives and executing its functions, the Bank shall pursue sound and prudent financial and business policies and practices. ANNEX 6 Page 4 of 6

1. Diversification of Risks

i. The Bank shall endeavor to spread and diversify its loan and equity investment as far as possible regarding type of project and ownership.

ii. The Bank shall not commit loan funds to any single enterprise in excess of 20 percent of its paid-up capital, surplus and reserves; similarly, commitments for equity participation to any single enterprise shall not exceed 10% of its paid-up share capital surplus and reserves, and provided further that overall equity commitments of the Bank shall not be in excess of 100% of its paid-up share capital, surplus and reserves, except when necessary to secure or recover any other amount advanced.

iii. It will endeavor to diversify the type, form and maturity of its financing with a view to obtaining a balanced portfolio.

2. Project Work

i. The Bank asserts that project appraisal and supervision are central to its method of operations.

ii. The Bank will appraise a project it intends to finance through the application of banking and developmental tests and criteria, aimed at assessing and determining project viability in terms of organizational, market, technical, management, commercial, financial and economic aspects. The financial and economic rates of return shall be employed for all projects which involve financing by the Bank in excess of CE 80,000.

iii. The Bank recognizes the great importance of capable and conscientious supervision over the utilization of the loans it affords at all stages o.f the financial transactions.

iv. Supervision (follow-up) will encompass: (a) short-term follow- up during disbursement ensuring that funds are disbursed in accordance with the loan agreement, and (b) long-term follow- up maintaining a continuing relationship with the client and the project through the collection and review of financial and other data, site visits and the provision of consulting services thus safeguarding its investments.

v. For projects facing difficulties, staff task forces will provide the required advice and assistance.

3. Profitability

i. The Bank through its lencing investment and other operations will air, at earning sufficient profits to yield a satisfactory return on its capital, wi:iie at the same time providing an accumulation of reserves ,bich is consistent with prudent ianklng an(J financial pract4ce. ANNEX 6 Page 5 of 6

ii. The Bank shall aim at becoming financially self-supporting in as short a time as possible, consistent with its self- imposed limitation regarding its development objectives.

iii. The Bank will keep its interest rate as low as possible consistent with the foregoing, and provide further that it does not distort the economic allocation of resources in Cyprus.

iv. The Bank may levy a charge for the advice and other consulting services it provides to clients and other enterprises and organizations.

4. Capital Borrowing by the Bank

i. The Bank will aim at diversifying its sources of borrowing both domestic and foreign.

ii. In this connection, total long-term debt will not exceed five times the amount of the Bank's paid-up capital, surplus and reserves.

iii. The Bank will arrange its borrowings so as to maintain a balanced relationship between the duration of its liabilities and the duration of its assets, in order to safeguard its liquidity.

iv. The foreign exchange risk on the Bank's external borrowings will be covered:

(a) by the Government and/or its agent, or (b) in case the foreign exchange risk is not covered as provided under (a) above, the Bank will pass that risk to its clients,

5. Relations with the Government

i. For the purpose of optimizing results from its activities and operations, the Bank shall keep regular and continuous contacts with the relevant Government Ministries and/or institutions, particularly the Ministries of Finance, Commerce and Industry and the Planning Bureau.

ii. The Bank will co-operate in furthering national aims such as implementing Government priorities for channeling investment, assisting particular sectors like small-scale industry, giving special attention to priority projects, attracting foreign investment, carrying-out of feasibility and other studies and advising on n:atterswithin its competence.

iii. The Bank shall retain at all times its independence in decision making, taking into account the public interest and the official policv es detailed by the Government's representatives on its Board ol Directors. ANNEX 6 Page 6 of 6

6. Internal Structure and Organization

i. The Bank will endeavor to have an efficient, effective, and balanced internal structure, organization and staff which should reflect, accord and be conducive to the attainment of its objectives, execution of its functions and fulfilment of its role.

ii. The foregoing should be adequate to make possible the proper appraisal of investment proposals, the promotion of projects, the extension of assistance to clients and the effective follow-up of the Bank's operations.

iii. The Bank provides compensation and employee benefits which are competitive to those available for similarly qualified and competent employees, engaged in comparable work in Cyprus.

EMENA/IC&DFC January 1976 CYPRUSDEVELOPMENT BANK LIMITED

ORGANIZATIONCHART

SHAREHOLDEHS

BOARD OF DIRECTOJRS

MANGER J. Joannides (econoisst)

q ~~~~~LEGAL ADVISORS|

ASST.GEN.MANAGER FOREIGN ADVISOR I L. Sparsis ______H. D. E'dwards _ -J (economist) (chem.engineer)

ECONOMIC & FINANCIAL TECHNICALAND MARKETIN SSI ACCOUNTING& DMINI5TRATION DEPARTFENT DEPARTMENT SECTION G Hadjigeorghiou DEEARTMENT 0 P. Panayides A. Aloneftig (economist) (civil engineer) (accountant) Financial Analyst (1)* Mechanical Ehgineer (1) Fin.Anplyst, Accounting Supervisor (1)* Economic Analyst (1)* Ind./Chem. Engineer (U and/or Admin. Supervisor (1) Marketing Specia-list 0(Q Engineer, Accounting Clerks (2) and/or Secretaries (1)* + (4) Feonomist (3 Telephorist (1)* Drivers/Messengers (2)

*Posts to be filled during 1976 -. Feb. 1, 1976 Projected End 1 76(earlg 1977" Professional Staff 7 15 M-gv 1976. Others 9 11 EMNA/IC&DFC

ANNEx 8

THE CYPRUSDEVELOPMENT BANK LIMITED

CDBs Approvals, connitments and disbursements in CL .000 1972 1973 1974 1975 Approvals Loans : Foreign Currency 713 866 439 338 local currency 448 372 153 218 total approvals 1161 1235 592 556

Equity investments 63 - - - Guarantee of bond issues - - - -

Total 1224 1238 592 556

Commitments

Loans: foreing currency 375 1061 561 178 local currency 241 381 316 102 total commitments 616 1442 B77 280

Equity Investments - 53 - - Guarantee of bond issues - -- - - Total 616 1495 877 280

Disbursements

Loans : foreign currency 613 477 997 244 local currency 283 214 386 193 total disbursements 896 691 1353 437

Equity Investments 52 27 10* -

Total 948 718 1363 437

Number of projects approved 27 31 25 28 Number of equity investments committed - 1 - - Number of bond issues guaranteed -

* = 10 sold in 1974 ( CovotsosTextiles ) acc. balancefor 1974 zero.

EMENA/IC&DFC January1976 ANNEX 9

CYPRUS DEVELOPMENT BANK LIMITED

IBRD Loan 830-CY to CDB

Introduction

Loan 830-CY, amounting to US$ 3 million, was approved by the Board on June 13, 1972, signed on June 19, 1972, and became effective on September 11, 1972. The interest was 7-1/4%, the free limit was $100,000, with an aggregate free limit of $750,000.

The terminal date for the submission of sub-projects was extended to September 30, 1975, from the original date of June 30, 1974. The closing date for disbursement is June 30, 1976.

On November 27, 1975, an amount of $84,236 of the loan was cancelled. Per February 1, 1975, a total of $ 12, 242 had not yet been disbursed.

Policies and procedures of CDB, as well as ownership details, are given in Chapter III of the Appraisal Report.

Objectives of the Bank Loan

CDB was established as a development bank in 1965 for the purpose of providing medium- and long-term financing, as well as equity capital, to small and medium-sized Cypriot firms. Commercial banks in Cyprus do not provide such financing, but specialize in short-term financing with frequent roll-over of loans.

In making the loan, the Bank's objectives were (i) to support the only bank making medium- and long-term loans, (ii) encourage the development of industries (including export-oriented industries) as well as of tourism (hotels), and (iii) in line with the Bank's general policies, assist in building an institution which would apply proper financial economic criteria to project appraisals and reach such a standing in the financial community that it would be able to attract other outside sources of funds in due course.

Attainment of Objectives

In 1974, during the time that the Bank loan 830-CY was effective, a major upheaval in the political and economic life of Cyprus took place, as detailed in the Appraisal Report. The performance of CDB must be judged against these realities. In the following the three main objectives as outlined above are discussed below.

i. Medium- and Long-Term Loans

As discussed in para. 4.03 of the Appraisal Report, CDB's role in the economic development of Cyprus has been very modest during the first two years of the Bank loan's effectiveness, amounting to 7.8% and 3.5% of total investments in tourism in 1972 and 1973 respectively, and to 6.0% and 5.3% of investments in industry in the same years. In 1974, due to a hesitancy by the commercial banks to commit funds after July, CDB gained a greater share of total investments, with 14.2% in tourism and 13.9% in industry. ANNEX g (Page 2 of 3)

ii. Encouragementof Industry and Tourism

The proceeds of the Bank loan were used in 17 projects, with a total cost of $20.6 million. Of the total cost (foreign exchange and local cost), CDB financed $3.9 million (19%). The foreign exchange cost of the 17 projects was $12.6 million, of which CDB financed $3.6 million (38%); of this $3.6 million, IBRD funds provided $2.9 million (81%).

The total number of jobs created by the 17 projects was 767, at an average cost of $26,835. Only part of the projects financed are in operation,and most of them not yet at optimum capacity;no informationis available on 8 of the 17 projects now in northern Cyprus. The attached Tables 1 and 2 summarize available informationon the 17 projects. Supplementaryinformation is provided in the Appraisal Report.

iii. InstitutionBuilding

CDB has now a well-qualifiedand experienced staff, which is often consultedby commercialbanks and the Governmentto advise on the feasibilityof projects. The quality of appraisalwork is good. A new managementhas been appointed on February 1, 1976, following the resignationof the previous General Manager who left Cyprus.

As CDB's future was uncertain until recently,when the Governmentstepped in, the CDB Board had refused expansion of the staff in the past. Such an expansion is now urgently needed, and has been agreed to by the Board and the Government. The Bank will be called upon to provide some training facilities (EDI courses) for the new staff, and further general support and technical assistance.

Evaluation

CDB has benefited from its associationwith the Bank; this view is shared by its managementand Board, who clearly indicated that their application for a second Bank loan is partly inspired by the wish to continue this association. The main benefits derived by CDB are the improvement in appraisal techniques,as a result of training and guidance received by CDB staff from Bank reviews of sub-projects,through contacts with supervisionmissions and through EDI training courses. In addition, CDB has been able to expand its business,thanksto Bank financingunder the first loan, and has made a useful contributionto the economic developmentof Cyprus as described above.

However, certain deficienciesin CDB's operations and procedures still exist:

In the first place, the supervision- including the collectionof principal and interest payments - of its loan portfoliohas been slack, resulting in substantialarrears in payments by CDB's borrowers. Although CDB was badly affected ANNEX 9 (Page 3 of 3)

by the 1974 events resulting in the loss of its northern portfolio, staff constraints imposed by the Board, and a change in management, CDB showed a certain slackness in portfolio supervision even prior to 1974; the problem appears thus to be structural rather than temporary. The Bank will place greater emphasis on supervision in the future; CDB has already agreed to provide sufficient manpower for, and to pay more attention to supervision.

Secondly, even though CDB's portfolio was well diversified, the projects financed had a high average cost per job created. With a high unemployment rate since 1974, a shift to maximizing employment with /available funds is warranted. The Bank, through its support for the proposed SSI project, is helping CDB to focus on this problem.

A third point is the attention CDB pays to the economic benefits derived from the projects it finances. So far CDB, mainly due to staff constraints, has not computed the economic rate of return for its projects; however, under the terms of the proposed second Bank loan, economic rate of return calculations will become mandatory for all projects above the free limit.

Finally, and as already indicated in para. 3.11 of the main report, CDB's staff is too small to cope with the existing workload, let alone the projected workload resulting from the foreseen expansion of operations; an expansion of staff is urgently required.

EMENA/IC&DFC January 1976 CYPRUS rpEYLLOPMENT BANK LIMITED

Projects Financed Through IBRD Loan 830-CY

Manufacturing Amount Type of Project (US$) Tsimon Industries Ltd. 194,445 Polypropelenebags and sacks Substitution of imports and export Wolf Wire & Tin Industries Ltd. 43,736 Wire, tin containers Substitution of imports Cyprus Forest Industries 704,076 Wood products Substitution of imports Neoplast Ltd. 101,313 PVC pipes Substitution of imports Salamis Carton Industries 144,761 Carton boxes Substitution of imports and export Copal Wires & Cables Ltd. 100,000 Wires & cables Substitution of imports and export Papachristodoulou Cold Stores 18,522 Cold stores Services Nemitsas Industries Ltd. 71,744 Machine shop, foundry Export G. Kallis (Manufacturers)Ltd. 59,412 Wearing apparell Export G. Halcousis & Son 54,541 Textiles Export J. J. Shukuroglou 11,327 Metal Furniture Export Elma Paper Sacks Ltd. 401,972 Kraft paper sacks Substitution of imports Procopis Soap Manufacturing 89,864 Soap Substitution of imports and export

Total Manufacturing 1,995,713

Tourism

Leonard Fairclough 310,040 A. M. Papacharalambous 68,403 Aziz Mehmet 97,882 Seashore Development 431,986

Total Tourism 908,311 M M

GRAND TOTAL 2,904,024

EMENA/IC&DFC January 1976 CYPRUSDEVEL40PMENT BANK LIMITED (US$) Amount of Foreign Foreign CDB Exchange Jobs Total Cost CDB Exchange Foreign Provided Created by Investment Total Total of the Pro,ject Financing Total Exchange by IBRD Project Per Job Assets Output Exports

Tsimon Industries 777,400 208,000 611,260 208,ooo 194,445 42 18,420 ControlledArea Leonard Fairclough 6,536,400 520,000 3,921,200 520,000 310,040 180 36,310 Controlled Area Wolf Wire & Tin 169,780 78,000 111,200 74,100 43,736 10 16,978 284,430 450,100 _ Cyprus Forest Industries 5,200,000 704,076 3,000,000 704,076 704,076 100 52,000 4,459,oo0 301,600 A. M. Papacharalambous 182,000 78,000 116,480 78,000 68,403 10 18,200 Controlled Area Neoplast Ltdc. 448,000 130,000 213,100 130,000 101,313 10 44,800 Controlled Area Aziz Mehmet 803,400 208,000 415,000 113,100 97,882 70 11,477 Controlled Area Seashore Development 3,159,o00 520,000 1,895,400 431,986 431,986 160 19,743 Controlled Area Salamis Carton 252,200 144,761 158,600 144,761 144,761 22 11,460 ControlledArea Copal Wires & Cables 416,000 156,000 372,320 156,000 100,000 30 13,866 ControlledArea PapachristodoulouCold Stores 106,600 65,000 69,940 50,700 18,522 - - 296,400 101,400 Nemitsas Industries 399,880 139,100 286,300 71,744 71,744 20 19,994 777,200 1,055,600 G. Kallis (Manufacturing) - Ltd. 858,374 338,000 575,716 281,060 59,412 80 10,730 826,800 2,353,000 1,040,000 G. Halcousis& Son 78,000 54,541 65,200 54,541 54,541 - - 270,400 624,000 208,000 J. J. Shukuroglou 114,400 52,000 66,300 46,280 11,327 5 22,280 125,700 180,000 Elma Paper Sacks 936,ooo 162,000 390,000 640,300 401,972 401,972 24 39,000 980,000 - Procopis Soap - 145,600 104,000 129,000 104,000 89,864 4 36,400 312,790 390,000 80,000

20,583.0314 3.889.147 128 647,316 3,570,320 2,904,024 767 26,835

EMENA/IC&DFC January 1976 CYPRUSDEVELOPMENT BANK LIMITED

STAT2EMEWTOF RESOURCES- DECEMBER31, 1975 - in C&'t000- Date Interest local Currency Amount Signed Rat1e Repayment Terms as per Contract

Net Worth 1,145.0 - - Provisions 314.6 - - L/Commissioners II 269.5 6/4/70 6.0 Twelve equal annual instalm.First on 10/5/71, last on 10/5/82. III 218.6 3/20/72 5.5 Twelve equal annual instalm.First on 6/13/74, last on 6/13/85. IV 350.0 7/20772 5.5 Twelve equal annual instalm. First on 12/31/74, last on 12/31/85. IV.A. 234.7 7/20/72 5.5 Twelve equal annual instalm. First on 12/31/75, last on 12/31/86. IV,B. 100.0 7/20/72 5.5 Twelve equal annual instalm. FAzst on 12/31/76, last on 12/31/87. V. 752.0 11/27/75 5.5 Twelve equal annual instalm. First on 12/31/77, last on 12/31/88, Debenture Stock II. 500,0 3/15/71 7.5 Repayment of Larch 15, 1933. III. l00O 4,884.4 1/18/75 7,5 Repayment of January 18, 1987. Foreig Currency Kreditanstait fur Wiederaufbau (DII 1,860 million) 280.6 5/22/69 4.5 Twenty-one semi-annual instalments. First on 6/30/72, last on 12/30/81. LIidland Bank - ECGD (Stg.a8O.2 63.9 11/30/72 6.0 Ten equal semi-annual instalm.,beginning thousand) six months after mean delivery date. IBRD (US * 2.86 million) 1,039.4 1,383.9 6/19/72 7.25 Twenty-seven semi-annual instalm. F_rst 1,3839*on 7L5/75, last on 7/15/88. Total Resources 6T268.73 Local Currency Less: Loans outstanding 5,786.1 Equity Investments 177.2 Sinking Fund Investments 155.5 Fixed Assets (net) -_±.8 6,122.6 Available for disbursements and fresh cormitments 145r7 tTndisbursedcommitments (110.7) Availablefor commitments 35.0 EUMA/IC&DFC January 1976 ANNEX 11

THE CYPRUS DEVELOPMENT BANK, LIMITED

Small Scale Industry (SSI)

Proposed Scheme

I. Economic Background

A. Country Data

1. Small Scale Industries(SSI) account for about 90% of total establishments engaged in manufacturing activities in Cyprus. Their proportional pre- ponderance has declined only very marginally over the last year as shown in the table below.

Manufacturing Sector - Size of Enterprises

Enterprises 1974 Employing 1962 1967 1972 (South Only) No. % No. % No. % No. %

1 - 9 11,673 97.3 5,345 92.2 5,839 90.9 4,155 91.9 10 - 19 181 1.5 242 4.2 283 4.4 196 4.3 20 or more 146 1.2 213 3.6 299 4.7 172 3.8

Total 12,000 5,800 6,421 4,533

2. The contribution of SSI is of great significance to employment in manufacturing. Enterprises employing 1-9 persons accounted for approximately 40% of the manufacturing labor force in south Cyprus in 1974, as shown in the table below.

Manufacturing Sector - Employment by Type of Enterprise

Enterprises 1974 Employing 1962 1967 1972 (South Cyprus) No. % No. % No. X No. %

1 - 9 20,895 68.1 12,151 46.1 13,047 40.4 9,036 40.6 10 - 19 2,403 7.8 3,175 12.0 3,84f 11.9 2,620 11.8 20 or more 7,392 24.1 11,045 41.9 15 1.92 47.7 10,610 46.6

Total 30,690 26,371 32,279 22,266 ANNEX 11 Page 2

3. Gross output of manufacturing in 1974 in south Cyprus was estimated at CL 91 million and SSI (less than 10 employees) generated CL 30 million, or 33%. The contribution of SSI to value added in manufacturing for the same year came to 38% of the total. The evolution over the past years is shown in the following tables (CL million).

Manufacturing - Gross Output

Enterprises 1974 Employing 1962 1967 t972 (South Cyprus) No. % No. % No. % No. %

I - 9 10.42 35.3 16.70 36.9 22.64 24.4 20.20 22.2 10 - 19 3.94 13.4 6.60 14.1 10.68 11.5 9.50 10.5 20 or more 15.10 51.3 22.20 49.0 59.54 64.1 61.26 67.3

Total 29.46 45.30 92.86 90.96

Manufacturing - Value Added

Enterprises 1974 Employing 1962 1967 1972 (South Cyprus) No. % No. % No. % No. %

1 - 9 4.08 35.3 6.0 34.7 10.59 27.2 8.54 26.70 10 - 19 1.31 11.3 2.5 14.5 4.20 10.8 3.6 11.30 20 or more 6.18 53.4 8.8 50.8 24.10 62.0 19.68 62.0

Total 11.57 17.3 38.89 31.82

B. SSI Demand for financing

4. The Government has started to make detailed studies of the SSI sector both in manufacturing proper (including small tourism enterprises such as catering, bar and restaurant facilities) and in services. The data available from the Ministry of Labor and the Ministry of Commerce and Industry are being analyzed. Both Ministries have received a considerable number of applications for assitance over the past two years. In addition, local commercial banks are collaborating with the Government to provide the latter with information on SSI financing relating to applications received and loans granted through their offices. This survey, which will rely essentially on applications received, will not be able to reflect the potential and, so far, unexpressed demand for assistance; however, it is a necessary starting point. The Gov- ernment expects to complete its survey early in the summer of 1976. Prelim- inary data in the Ministry of Labor indicates that, for the period January through April 1976, some 860 loan applications for SSI projects were received under the Refugee Assistance Program. Out of these, 735 (for a total amount of CL 815,000) were not eligible because they called for financing in excess of the CL 500 ceiling on loans under the Refugee Program. It is significant ANNEX 11 Page 3 to note that the bulk of the applications which could not be financed were for projects of the type defined in this report, especially for financing the purchase of machinery. Additional statistics received from the Ministry of Com- merce show that 49 SSI project applications were submitted to the Ministry of Commerce and Industgry for a total amount of CL 430,000 (average CL 9,000 per project) and could not be accommodated since there was no scheme available. Without a more detailed analysis of these applications, it is not possible to draw definitive conclusions at this time, nevertheless these first indicators suggest that a considerable potential demand for SSI lending exists.

II. Organization Plan

CDB's Internal Organization

5. CDB realizes that assistance to SSI will bring new demand on its staff and management. In addition, CDB knows that, in spite of its experience in the past with long-term financing and, in a few cases, with financing SSI, a large-scale program geared to SSI requires a specific organization and ex- pertise. To start with, CDB will assign responsibility, under the Assistant General Manager, to a qualified officer with 3 years former experience with CDB. He will be assisted by two new recruits. The SSI section so staffed will be integrated within CDB's Projects Department in order to give this section all the advise and supervision its economists, engineers and financial analysts can provide. During the first year of operation (about mid-1976 through mid-1977) the section will have three officers; later, additional staff will be recruited as necessary.

6. The SSI section's main role will be to review and appraise SSI financing applications, and make recommendations to CDB's management for financing. It will also supervise the loans under a special arrangement described below.

Outside Support

7. For business development, promotion, technical assistance and, in part, loan supervision, the Government has agreed in principle to provide CDB with staff and services under terms of reference to be reviewed and agreed upon by the Bank, which will allow CDB to keep control over them. The main features of these agreements are the following.

8. Business Development and Promotion. The Ministry of Labor has agreed to provide, on a full-time basis, a team of professionals (at least four to start with) which will be selected from among well qualified and experienced economists, engineers and financial analysts. These experts, though civil servants in the Ministry of Labour, will be functionally responsible and report to CDB. CDB will also oversee their training. These experts will have geographic responsibilities to seek and screen SSI applications and help potential borrowers to define their projects, to prepare their applications ANNEX 11 Page 4

(including financial needs, market prospects and arrangements, procurement, raw material needs, etc.) and to identify possible areas of technical assistance. They will then send these applications (to be standardized along a basic though simple format) to CDB, together with their comments and recommendations. CDB would stress the importance of having the experts focus on the qualification, experience and business reputation on the applicant which, in CDB's view, would be the key determinants in their decision to finance SSI projects. Hence, CDB's proposal is to give the Ministry of Labour experts geographic responsibilities to enable them to be closely linked to the community of a given region. Regional coverage would at the outset most likely be limited to Nicosia, Limassol, Larnaca and Paphos. The experts would keep in regular working contact with CDB, reporting on their actions and progress in addition to receiving instructions from CDB on their work programs.

9. Technical Assistance. The Government has also agreed to provide CDB and its SSI clients with assistance from the Cyprus Productivity Center of the Ministry of Labor. The UNDP financed Productivity Centre, initiated in 1962, has now a long and successful record of technical assistance and t"rainingto industry in Cyprus. It employs about 25 experts including economists, market specialists and engineers. The Centre is able to provide CDB and its SSI borrowers with specific assistance when needed in three areas:

- Technical and management services; - Professional Training (The Centre has Training Workshops); and - Market Studies.

For the purpose of the SSI Scheme, the Productivity Center will coordinate its action programs with CDB under terms of references to be reviewed and agreed to by the Bank. it is too early to formalize budget and staff arrangements, but it is expected that CDB will be able to define its needs for assistance with the Productivity Centre before the end of 1976. The reputation, ability and anticipated assistance of the Centre would constitute an important element in providing the SSI Scheme with a strong development input.

SSI Loan Decisions

10. CDB envisages a two-step approach in its approval of SSI loans. First, at the staff level, after approving the applications received from the Ministry of Labour experts, CDB will interview the investor and prepare a simple standardized appraisal report (about 2 pages) which will include a summary description of the enterprise, the project, the loan request and the recommendation. This report will be circulated among CDB's management for clearance. Such clearance is expected to be a short process, since all the groundwork will have in essence already been completed by the SSI section. Applications recommended for approval will then be presented for decision to CDB's SSI Committee, which will consist of CDB's General Manager, the Chairman and another member of the Board. ANNEX 11 Page 5

Supervision of SSI and of SSI Sub-Loans

11. As for appraisals, CDB plans to organize the supervision of subloans using its own staff as well as staff and services from outside CDB. In the first year or two, the workload should not be excessive and supervision of SSI enterprises by CDB's own staff, in conjunction with the Ministry of Labour experts, every six months would be feasible. CDB plans also to ask, whenever possible, commercial banks to keep CDB informed on a regular basis about their experience with the financial situation of CDB's SSI borrowers as it appears from their records. This information system could be an effective way of keeping CDB aware of problems well in advance of severe difficulties, enabl- ing CDB to initiate steps for corrective action and assistance.

III. Financial Aspects

A. Basic Scheme

12. The principles agreed to by the Government for the SSI Scheme relies on the following understandings:

(a) CDB will have full autonomy to manage and organize the SSI Scheme, and to lend to SSI enterprises.

(b) The Government will provide resources to CDB under the Scheme for an amount equivalent to IBRD financing, so that every SSI subproject will be financed 50% from IBRD funds and 50% from Government funds.

(c) Government funds to CDB under the Scheme will be lent for similar terms as IBRD funds, except that the Government loan will be at a rate of interest which would enable CDB to break even on its SSI Scheme.

(d) The Government will cover the predominant portion of CDB's risk on its SSI loan portfolio. The Government guarantee scheme covering 75% of each loan (para 2.06 of the main report) which, for commercial banks or CDB's normal operations is granted only after appraisal and is subject to Government approval, will apply to CDB's SSI Scheme on an automatic basis, i.e. CDB will not run the risk of seeing appraised SSI loans being rejected at a late stage of their processing.

(e) The additional risk of 25% will be borned by CDB. However, particularly during the first two or three years when income from SSI loans will not yet be sufficient to offset CDB's financial expenses (on IBRD funds), administrative expenses and reasonable provisions, the Government will have to provide CDB with grants to enable it to break-even under the SSI Scheme. ANNEX 11 Page 6

(f) Provisions to be constituted by CDB against bad SSI debts, together with the collateral on which CDB would have first claim, should be sufficient to cover CDB's risk. The level of provisions will be negotiated between CDB and the Government and submitted to the Bank for review and approval as a condition of disbursement of the proposed loan. It would appear that a build up of provisions at a rate of 5% of disbursement of SSI subloans would be satisfactory, since CDB's risk on each subloan would not exceed 20% of its outstanding amount, and normally less than 15% of the initial cost of the project financed by CDB.

(g) After two or three years, CDB may begin to make small profits on its SSI operations. In order to compensate the Government for its assistance in providing grants, resources and guarantees, CDB will agree to return any profit on its SSI operations to the Government.

(h) CDB will keep internally separate accounts and records on all aspects of its SSI financing Scheme. Accounts wil be audited by CDB's auditors and records will be available to the Govern- ment and the Bank for inspection. In particular, CDB will keep invoices and other evidences of payment to SSI borrowers for Bank supervision.

B. Characteristics of SSI subloans

13. The proposed loan would limit on lending to the manufacturing, services and tourism sectors. CDB plans to remain flexible in considering financing plans for its SSI subloans. Normally, however, these loans should not exceed 75% of total capital requirements for SSI projects.

14. Terms and Conditions. CDB estimate that SSI subloans will require financing with maturities ranging from three to ten years, depending on the size and type of loan and the cash generation of the project. Grace periods should not, on the average, exceed one year.

15. Disbursement. CDB's experience with SSI and industry in general indicates that over 60% of its long-term loans are to finance imports; this seems to be especially true of SSI where the needs are to buy machines, tools and equipment which are all imported directly or indirectly. Under the proposed Scheme, which must be flexible to be practical, CDB proposes to have access to Bank funds under a simplified procedure. CDB will assure itself that purchases under its subloans are effectively made for the capital goods which have been specified in its subloan agreement. This check will be undertaken principally by the team of experts of the Ministry of Labor (though CDB's staff will undertake a portion of this work) who will assure themselves that invoices and goods are those agreed upon. CDB will disburse only after these experts have recommended payments, though CDB will itself verify from ANNEX 11 Page 7

time to time these certifications through field visits. In addition, CDB will normally pay directly to the suppliers, not to the investors. To draw Bank funds, CDB will provide the Bank with a bi-monthly statement showing the following information:

- name of investor and sub-sector; - type of project, total amount; - summary list of purchases; - amount of CDB sub-loan, terms and conditions; - amount disbursed over the period, and total amount disbursed to-date.

On that basis, CDB will ask the Bank to reimburse 50% of the amount it has effectively disbursed over the period, the balance being obtained from CDB's other resources (mainly Government). This would be less than the estimated average foreign exchange costs of SSI projects.

Collection of sub-loans

16. While for normal operations, collections of loans are on a semi- annual basis, for SSI sub-loans, depending on the sub-sector, CDB plans to have monthly or quarterly repayments. It also intends, to the extent possible, to domiciliate its loans with commercial banks which will automatically collect for CDB at maturity from the accounts of the investors with them. Such a procedure will be agreed upon between CDB, the investor and his commercial bank, and would be stipulated in CDB's sub-loan agreements. CDB is confident that such a procedure will be acceptable to investors and will minimize potential arrears on its SSI loans.

C. Financial Projections

17. Based on the recommendations made in para. 6.13 of the main report, two alternative financial projections are possible depending on whether CDB obtains $750,000 or $1.5 million from the Bank. These two sets are detailed in Attachments 1 through 7 of this Annex. Though these projections would need to be refined as the result of the Study at present underway and referred to in para. 6.09 of this report, the Government and CDB will undertake to meet the conditions of disbursement for the proposed loan, they clearly indicate that, to break-even, CDB will have to receive grants from the Government (especially over the two first years of operations). Subsequently, the SSI Scheme may eventually be profitable and thus allow CDB to repay the Government to some extent for its initial support. ANNEX 11 (Page8 ) Attachment 1

SMALLSCALE INDUSTRY

Financial Projections (Attachments1-7)

Basic Assumptions and Conclusions

I. Projected Operations

The projected operationspresented in Attachment 1 and 4 are not based on actual observationof the market. Their purpose is only to serve as a base (i) for the computationof Attachment 2, 3, 5 and 6 and (ii) for providingan estimate of the volume of operations to be expected under the two alternativesof the Scheme.

As regards this second point, CDB is expecting that on the average SSI subloans will amount to CE 5000 each. This assumption is based on data available at the Ministry of Commerce and Industry. On that basis, CDB's approvals over the period 1976-78, totalling CE 760,000 in Attachment 1 and CE 1,520,000 in Attachment 4 imply that CDB would approve about 150 and 300 projects respectivelyover this period or, an average of 1 - 2.5 projects per week. The staffing arrangementforeseen for the SSI Scheme should be sufficientto process such a volume of work.

In Attachment 1 and 4, it has been assumed that (i) there is a 10% casualty rate on approvals, (ii) 65% of approvals are committed in the year of approval and 35% in the subsequentyear, (iii) 70% of commimtnets are disbursed in the year of commitment and 30% in the subsequent year.

The rate of exchange usedin the Attachment is CE 1 - $2.53. Thus total amounts committed in 1976-78 are equivalent to $1.5 million in Attachment 1 and $3.0 million in Attachment 4. The carry over of commitments and disbursementsin 1979 and 1980 are not related to the proposed loan but would have to be considered if the Scheme is continuedafter the proposed loan is fully committed.

II. Projected Income and Expenditure

Interest received are based on subloans at 9% p.a. and interest paid on IBRD funds at 8.5% p.a. Government financing is assumed at no interest cost. Provisions at 5% of annual disbursementsare build up until cumulatedprovisions amount to 5% of total outstandingportfolio. All profits under the Scheme are transferredto the Government. It is assumed that such profits are not taxable. Administrativeexpenses are based on CDB employing three professionalsin Attachment 3 and five professionalsin Attachment 6. ANNEX 11 (Page 9) Attachment 2

THE CYPRUS DEVELOPMENTBANK, LTD.

Small Scale Industry Component Assumption: IBRD Financing of $0.75 million (CE '000)

I. Projected Operations

1976 1977 1978 1979 1980

A. Approvals

Industry 78 228 188 Services 36 104 87 Tourism 6 18 15 120 350 290

B. Commitments

Industry 45.63 157.95 181.80 59.22 Services 21.06 72.18 83.65 27.41 Tourism 3.51 12.42 14.45 4.72 70.20 242.55 279.90 91.35

C. Disbursements

Industry 31.96 124.28 174.65 96.00 17.77 Services 14.74 56.85 80.23 44.28 8.22 Tourism 2.46 9.74 13.85 7.64 1.42 49.16 190.87 268.73 147.92 27.41 ANNEX 11 (Page 10) Attachment 3

THE CYPRUS DEVELOPMENTBANK, LTD.

Small Scale Industry Component Assumption: IBRD Financing of $0.75 million (CE 000)

II. Projected Sources & Applications of Funds

1976 1977 1978 1979 1980

Sources of Funds

Provisions 2.45 9.54 13.43 4.60 - Loan Collections - 2.50 14.40 37.40 53.30 Government Resources 23.35 90.66 127.65 109.43 27.41 IBRD Loan 23.35 90.67 127.65 24.77 - Total 49.15 193.37 283.13 176.20 80.71

Applications of Funds

Disbursement 49.15 190.87 268.73 138.80 27.41 Repayment - IBRD - 1.25 7.20 18.70 26.65 Repayment - Government - 1.25 7.20 18.70 26.65 Total 49.15 193.37 283.13 176.20 80.71 ANNEX 11 (Page 11) Attachment 4

THE CYPRUS DEVELOPMENTBANK, LTD.

Small Scale Industry Component Assumption: IBRD Financing of $0.75 million (ClI 000)

III. Projected Income & Expenditure Statements

1976 1977 1978 1979 1980

Income

Interest Received 1.10 12.90 32.82 49.24 53.05

Expenses

Financial IBRD: Interest 0.52 5.80 14.73 21.55 22.11 Committment 0.48 1.61 0.75 0.15 -

Administrative Staff 3.70 5.00 5.50 5.80 6.20 Overhead 2.00 3.30 4.00 4.20 4.50

Provisions (5% of disbursement) 2.45 9.54 13.43 4.60 -

Total 9.15 25.25 38.41 36.30 32.81

Net Profit (Loss) (8.05) (12.35) (5.59) 12.94 20.24

Government Grant 8.05 12.35 5.59

Transfer to Government - - - 12.94 20.24 ANNEX 11 (Page 12) Attachment 5

THE CYPRUS DEVELOPMENTBANK, LTD.

Small Scale Industry Component Assumption: IBRD Financing of $ 1.5 million (CVOOO)

I. ProjectedOperations

1976 1977 1978 1979 1980 A. Approvals

Industry 156 456 276 Services 72 208 174 Tourism 12 36 30 240 700 480

B. Commitments

Industry 91.26 315.90 363.60 118.44 Services 42.12 144.36 167.30 54.82 Tourism 7.02 24.84 28.90 9.44 140.40 485.10 559.80 182.70

C. Disbursements

Industry 63.92 248.56 349.30 192.00 35.54 Services 29.48 113.70 160.46 88.56 16.44 Tourism 4.92 19.48 27.70 15.28 2.84 98.32 381.74 537.46 295.84 54.82 ANNEX 11 (Page 13) Attachment 6

THE CYPRUS DEVELOPMENTBANK, LTD.

Small Scale Industry Component Assumption: IBRD Financing of $ 1.5 million (CV 000)

II. Projected Sources & Applications of Funds

1976 1977 1978 1979 1980

Sources of Funds

Provisions 4.90 19.08 26.86 9.20 Loan Collection 5.00 28.80 74.80 106.60 Government Resource 46.70 181.32 255.30 218.86 54.82 IBRD Loan 46.70 181.32 255.30 49.54 - -98.30 386.72 566.26 352.40 161.42

Applicationsof Funds

Disbursement 98.30 381.72 537.46 277.60 54.82 Repayment - IBRD - 2.50 14.40 37.40 53.30 Repayment - Govt. - 2.50 14.40 37.40 53.30 98.30 386.72 566.26 352.40 161.42 ANNEX 11 (Page 14) Attachment 7

THE CYPRUS DEVELOPMENTBANK, LTD.

Small Scale Industry Component Assumption: IBRD Financing of $ 1.5 million (CE' 000)

III. Projected Income & Expenditure Statements

1976 1977 1978 1979 1980

Income

Interest received 2.2 25.80 64.64 98.48 106.10

Expenses

Financial IBRD: Interest 1.04 11.60 29.46 43.10 44.22 Commitment .96 3.22 1.50 0.30 -

Administrative Staff 3.70 6.00 7.00 7.50 8.00 Overhead 2.50 4.00 4.50 5.00 5.50

Provision 4.90 19.08 26.86 9.20 -

Total 13.10 43.90 69.32 65.10 57.72

Net Profit (Loss) (10.90) (18.10) (4.68) 33.38 48.38

Government Grant 10.90 18.10 4.68

Transfer to Government 33.38 48.38

ENEMNA/IC&DFC April 1976 ANNEX 12

THE CYPRUS DEVELOPMENTBANK LIMITED

CDB: ANALYSIS OF EQUITY INVESTMENTS

Held as per 31/12/1975

No. of Earnings per Share Company Shares Current Prior % Amount Held Year Year Owned Held (Cost)

South Cyprus:

Vassilico Cement Works 25,000 NIL 14.0 2.0 25,000.000 ALFA Shoe Company Ltd. 38,556 NIL NIL 15.0 33,699.120 Cyprus Forest Industries 53,500 NIL NIL 6.7 53,500.000 Covotsos Textiles 10,000 NIL NIL 6.6 10,001.000 TOTAL South Cyprus 122,200,120

North Cyprus:

Salamis Carton Industry 45,000 NIL NIL 10.0 30,000.000 Leonard Fairclough (Hotel) 25,000 NIL NIL 2.8 25,000.000 TOTAL North Cyprus 55,000.000

TOTAL of EQUITY INVESTMENTS CL 177,200.120

EMENA/IC&DFC January 1976 THE CYPRUS DEVELOPMENTBANK LIMITED ANNEX 13

Aadited Iiccue Statements Years ended December 31 -in CFA000- 1973 1974 1975 1I1i0 OL,. Interest 352.1 430.5 506.9 Dividends 7.0 9.5 2.5 Commitment and other fees 18.0 7.2 1.8 Provisions written back 11.2 6.6 1.9 Gross Income 388-3 453,8 513.1 Add Profit an Exchange (Lidland) 4. 513.9 lPENSES Charges on borrowing 209.1 259.8 333.2 Staff and Administrative costs 56,0 58.3 56.0 Exchange lose (KPW loan) 43.6 37.2 1.9 Provisions .6- doubtful loans 7.0 84.7 111.0 - exchange risks 7.6 10.8 10.8 investment promotion - - - Total Expenses 323.9 450.8 512,9 Income before tax 64.4 3.0 4,1 Income Tax 28.0 2,7 - 1;etIncome 26.4 3 4

APPROPRIATION Dividende "A" Shares 14.1 - - "B1 Shares 10.0 - - Reserves 11,4 - - Unnappropriated balance 9 0 4*1

EMENA/IC&DFC January 1976 ANNEX 14 THF CYPRXTSDEVELOPMENT BANK LIMITED Audited.Eslance Sheets-Year ended December, 31 -in CQ0o-

-S:ffETS 1973 1974 1975 Current Asnete Cash, short-term deposits and securities 524.5 89.6 328.5 CJurrentmaturities (incl.past due) 715.8 1,069.4 1,550.3 Accrued Income and other current assets 99.8 296.6 577.1 1,340.1 1,455.6 2,455.9 Investment Portfolio Loans 3,929.4 5,044.4 5,236.1 Less: Current maturities and past due maturities 715.8 1,069.4 1,550.3 3,213.6 3,9!5.0 3,685.8 Equity Investments 167.2 177.2 177,2 3,380.8 4,152.2 3,863.0 Less: Provisions for lossos 73.0 157.7 268.9 3,307.8 3,994.5 3,594.1 SinkingFund Investments 269.8 301.8 155.5 3,577.6 4,296.3 3,749.5 FixediAsets (not) 5.0 3.8 3.8 Total Assets 4_2_ 7 5.755.7 6_209.3 LI23ILITIES AND EQUITY Current Liabilities Short-term deposits 612.2 630.1 97.0 Current maturities of long-teim debt 178.4 282.3 202.0 jocrued charges and other current liabilities 313.7 290.0 112.9 1,104.3 1,202.4 -411.9 Con inency Reserve & Provisions Contingency Reserve 25.0 25.0 25.0 Exchange risks 7.6 11.8 20.0 Other 97 - .7 33.3 45.7 L2on-Term Debt Debentures 1,000.0 1,000.0 1,500.0 Government Loans 1,295.3 1,380.0 1,924.8 I'LaV7 332.2 325.8 280,6 13CGD 8,089 86.5 63.9 IJ3IU3- 18-4,9 865,6 1,039.4 2,821.3 3,657.9 4,808.7 Less: Current maturities 178.4 282.3 202.0 2,642.9 3,375.6 4,606.7

Share Capital "A"l 400,0 400,0 400,0 - "B" 600.0 600.0 600,0 Reaerves and retained earnings 142.2 140.9 145.0 1,142.2 1,140.9 1,145.0

Total Liabilities and Equity 41922.7 5,755.7 6_209.3

L1MENA/IC&DFC January 1976 ANNEX 15

THE CYPRUS DEVELOPMENT BANK LIMITED

Major Assumptions Underlying Business Projections,1976-1980

APPROVALS

Industry: Approvals for 1976, and partly for 1977, are based on CDB's pipeline of projects, projects to be promoted by CDB and projects to be implemented as provided in the Emergency Economic Action Plan. A growth rate of 15% is assumed thereafter.

Tourism: Approvals are based on projected total investment requirements in the Hotel Industry, and based on an average growth rate of 25% per year after 1977.

Other: Approvals for other sectors (mainly agro-industry) will grow at 10% after 1977.

COMMITMENTS

Industry: 65% of amounts approved will be committed in the same year of approval, and 35% in the following year.

Tourism: 55% will be committed in the year of approval, and 45% in the following year.

Other: 65% of amounts approved will be committed in the same year of approval,and 35% in the following year.

DISBURSEMENTS

Industry: 55% of commitments will be disbursed in the year of commitment, and the balance in the following year.

Tourism: 44% of commitments will be disbursed in the year of commitment, 46% in the year after and 10% in the second year following commitments.

EMENA/IC&DFC January, 1976 THE CYPRUSDEVELOPMENT BANK LIMITED

Projects Being Considered for Approval by CDB During 1976

1. Applications Under Consideration (Industry)

A. Applicant Amount Type of Project Chance of Project Proceeding Expected Amount Requested (C£) (CE)

Lime Project 200,000 Lime 90% 180,000 Alliance Trading 30,000 Sanitary, Towels, etc. 100% 30,000 Palekithro Bricks 38,500 Bricks 0 _ United Brickworks Ltd. 180,000 Bricks 90% 165,000 Nakis Hamalis 20,000 TV Assembly 0 - A. Savvides 20,000 Plastic Toys 0 Siderco Ltd. 12,000 Metal Works 0 - Premixco Ltd. 80,000 Road Aggregates 100% 80,000 580,500 455,000

B. Applications to be Received 275,000 Misc. Small Projects (Routine Business) 275,000

C. Projects to be Promoted by CDB

A-C Pipes Manufacturing 200,000 100% 200,000 Glass Containers Project 200,000 10% 20,000 400,000 220,000

D. Equity Participation

A-C Pipes Manufacturing 50,000 100% 50,000 Glass Containers Project 50,000 10% 5,000 Lime Project 50,000 90% 45,000 United Brickworks 20,000 90% 18,000 Other Projects 30,000 100% 30,000 200,000 148,000

II. Applications Expected (Hotels)

Loans 200,000 50% 100,000 Equity 50,000 50% 25,000 250,000 125.000

EMENA/IC&DFC January 1976

0 THE CYPRUS DEVELOPMENT BANK LIMITED

Projects AlreadyBeing Considered by CDB for 1977

I. Manufacturing - Industrial Loan Equity (CE) ((CE) Frozen Vegetables Plant 100,000 50,000

Cement and Textiles 300,000 50,000

Fancy Goods and Leather 50,000 -

Corrugated Cartons 200,000 50,000

Knock-down Furniture 50,000 -

Oxygen-Acetylene 40,000 -

Sanitaryware 200,000 50,000

Building Materials 100,000

Fabricating Machine Shops 100,000

Other Industrial Projects 100,000

Hog Raising 100,000

General Agro-industrial Projects 20,000

II. Hotels

Hotel in Paphos 200,000 -

Hotel in Limassol or Larnaca 200,000 - o v

EMENA/IC&DFC January 1976 ANNEX16 THE CYPRUS DEVELOPHEIIT BANK LEDT

OperationB Actual il97 197S5 e4 Prejeiii7nt 0 A *M&C .. tmn8 iboesft

(CZ '000)

1974 1975 7 1977 1978 1979 1980 (Atual) (Atual)

I. APPROVALS

Industry - Loans 423.0 415.1 950.0 1,150.0 1,310.0 1,510.0 1,740.0

Eqixity - 150.0 180.0 200.0 225.0 260.0

Totl 423.0 415.1 1.100.0 1.330.0 1.S10.0 1.735.0 2.000.0

Touriso - Loans 1l5.0 8.5 100.0 300.0 350.0 500.0 600.0

Eoapity - - 25.0 - - 50.0 60.0

Total 115.0 8.5 125.0 300.0 350.0 550.0 660.0

Other - Loans 54.0 133.0 75.0 120.0 130.0 145.0 160.0

Equity

Total 54'° 133.0 75.0 120.0 130.0 i45.0 16o.o

TOTAL APPROVALS 592.0 556.6 1,300.0 1,750.0 1,990.0 2.430.0 2,820.0

II, COMhITltENTS

Industry - Loane and Equity

65% of Approvals in year of approval 338.0 1i0.8 715.0 864.5 981.5 1,127.7 1,300.0 35% af Approvals in subsequent year 357.0 68.0 204.3 385.0 465.5 528.5 607.3

Total 695.0 208.8 919.3 1,249.5 1,447.0 1,656.2 1,907.3

of which Eqouity - - 97.5 169.5 193.0 21.6.2 247.8

of which import component 85% 587.0 177.5 781.4 1,062.1 1,230.0 1,407.8 1,621.2

TourismI - Loans and Equity

55% of Approvals in year of approval 115.0 - 68.7 165.0 192.5 302.5 363.0 35% of Approvals in subsequent Year - - 8.5 56.2 135.0 157.5 247.5

Total - 5.0 lli1 77.2 221.2 327.5 460.0 610.5

of which Equity - - 13.8 11.2 - 27.5 55.5

of which import component 65% 69.0 - 50.2 143.8 212.9 299.0 396.8

Other - Loans and Equity

65% of Approvals in year of approval 47.0 71.0 48.7 78.0 84.5 94.3 104.0 35% of Approvals in subsequent year 20.0 50.0 26.2 42.0 46.2 50.7

Total 67.0 71.0 98.7 104.2 126.5 140.5 154.7

of which Equity ___:_ - -

of which import component 35% 18.0 21.3 29.6 31.3 37.9 42.1 46.4

Import component of total Commitments 674.0 198.8 861.2 1,237.2 1,480.8 1,748.9 2,064.4

.TOTOL COWUTMEiIT3 877.0 279.8 1,095.2 1,574.9 1,901.0 256.? 2,672.5

of which Equity - ,- 111.3 180.7 193.0 243.7 303.3

III. 00SBURSEMENTS

Industry - Loans and Equity

55% of Comoitments in Year of commitment 556.7 139.1 505.6 687.2 795.9 910.9 1,049.0 45% of Oosmmitments in subsequent year 429.9 242.3 61.7 413.7 562.3 651.2 745.3

Total 886.6 381.4 567.3 1,100.9 1,358.2 1,562.1 1,794.3

of which Equity 975 169.5 193.0 216.2 247.8

Tourism - Loans and Equity

44% of Commitments in year of commitment 59.8 - 33.9 97.3 155.1 202.4 268.6 46% of Commitments in year of oommitment c 1 379.1 17.6 - 35.5 101.7 150.6 211.6 10% of Commitments in year of coommitment * 2 7.4 _ 7.7 22.1 32.7

Total 438.9 17.6 41.3 132.8 253.5 375.1 512.9

of which Equity _ - 13.8 11.2 - 27.5 55.5

Other - Loans and Equity

100% of Comm'itments in year of commitment 54.0 38.0 98.7 104.2 126.5 140.5 154.7 - 8 of Commitment in subsequent year 4.0

Total 58.0 38.0 98.7 104.2 126.5 140.5 154.7

TOTPL DISBURSWENTS _a 37.0 707.3 , 2077.7 261.9

of which Equity -111.73 180.7 193.0 243.7 303.3

EMENA/IC&DFC January 1976 ANNEX 16

THE CYPRUSDVELOPMZNT BANKLIMITED

Characteristics of operatioons h - yeare 1974 and 1975 cumulative Total 1 9 7 4 1 9 7 5 as at December 1975 A. By Tyve of Operaticme o. Amount % No. Amount % Bo-. A_o_u_t Equity operationa 2/ ______5 149.5 1.8 Bond Loans ______2 51.0 0.6 Straight Loans 25 591.8 100.0 28 556.6 100.0 261 8,065.3 97.6

25 591.8 100.0 28 556.6 100.0 268 8,265.8 100.0 B. Analysis of size Under ClO,oOO 10 47.5 8.0 12 92.5 16.6 93 583.3 7.1 C1o0,000 to ce50,000 13 329.3 55.6 15 404.1 72.7 137 3,519.5 42.6 CL50,000 to Cr100,O00 1 65.0 11.1 1 60.0 10.7 24 1,870.0 22.6 Over Ct100,000 1 150.0- 25.3- - - - 14 2,293.0 27.7

25 591.8 100.0 28 556.6 100.0 268 8,265.8 100.0

Average size 23.6 19.9 30.8

C. Analysis by Duration (loans 3/) One to five yeL-rs 12 142.5 24.0 16 237.9 42.7 81 1,382.4 17.1 Five to ten years 13 449.3 76.0 12 318.7 57.3 164 5,294.3 65.7 Above ten years ------16 1,388.6 17.2

25 591.0 100.0 28 556.6 100.0 261 8,065.3 100.0 D. Analysis by purpose New Project 4 85.0 14.4 4 117.0 21.1 99 4,848.6 58.6 Exparsion, modernization and revitaliz. 21 506.8 85.6 24 439.6 78.9 169 3,417.2 41.4

25 591.8 100.0 28 556.6 100.0 268 8,265.8 100.0

1 9 7 4 1 9 7 5 Cumulative Total as at December 1975 No. Amount % No. Amount DNO. Apmount % E. Analysis by sector Agriculture 5 54.0 9.1 9 133.0 23.9 37 576.5 7.0 Tourism 3 115.0 19.4 1 8.5 1.5 43 2,769.2 33.5 Industry: Food, beverage, tobacco 1 10.0 1.7 2 50.0 9.2 25 905.0 10.9 Textile, footwear 5 71.8 12.1 2 55.2 9.9 58 1,293.6 15.6 Metal products 3 47.0 7.9 3 63.4 11.4 23 484.4 5.9 Wood products ------2 253.5 3.0 Paper anid pLper board 1 150.0 25.3 1 18.0 3.2 8 442.0 5.3 Purniture and Pixtures 1 15.0 2.5 1 15.0 2.7 24 336.6 4.1 Chemical 1 40.0 6.7 1 10.0 1.8 7 142.5 1.7 Mineral products 1 15.0 2.5 1 26.o 4.6 15 351.5 4.2 Miscellaneous 4 74.0 12.8 7 177.5 31.8 26 711.0 8.8 Total 25 591.8 100.0 28 556.6 100.0 268 8,265.8 100.0 =-_ ======___

1/ Based on Board approvals, net of cancellations. 2/ Exclude equity acquired through exercise of stock options. 3/ Excluding grace period.

EMENA/IC&DFC January 1976 ANNEX 17

THE CYPRUS DEVELOPMENTBANK LIMITED

PROJECTIONS 1976-1980

MAJOR ASSUMPTIONS UNDERLYINGTHE FINANCIAL STATEMENTS

I. Projected Operations

See Annex 15 for detailed discussion on CDB's pipeline. Based on CDB's experience, the relationship between approvals, commitments and disbursements is defined as shown in Annex 16.

The financial projections do not include the projectior related to SSI operations. Those are presented in Annex 11. Depending on whether the SSI Scheme will obtain funds from IBRD and the Government up to $1.5 million or $3.0 million equivalent, the size of the projections will be different. Since the SSI Saheme is considered non-profit and adequately covered by Govern- ment guarantees and provisions, the only significant impact it could have on CDB's overall projections is an increase of CDB's debt/equity ratio. Under the $1.5 million equivalent funding scheme, CDB's debt/equity ratio in 1980 will increase from 4.8 to 5.3, slightly above the 5:1 limit. However, it is expected that in such a case the proposed capital increase in 1979 and 1980 will be increased accordingly.

II. Projected Income Statements

Interest Income. Loans made by CDB are at 9% p.a. This rate is expected to be maintained throughout the period.

Interest Expenses. New borrowings will bear interest as follows:

IBRD: 8.50% p.a. KfW: 6.00% p.a., of which 4% will be retained by CDB as Special Fund Unidentified Foreign Loans: 8.50% p.a. Government Loans: 5.50% p.a.

Administrative Expenses. Staff: Reflect adjustment of salaries in 1976 in line with Central Bank salaries. Staff is expected to increase from in 1975 to 22 in 1976 and 26 in 1980.

General Expenses. Based on past trends and indexed for staff increase.

Provisions. Loans: 2% on new loan disbursement. No provision on occupied area portfolio as explained in main report.

Foreign Exchange: No foreign exchange risk on new borrowings. Past exchange risk is 2% on year-end balance for KfW I and .5% on outstanding balance of IBRD I.

KfW Interest Fund. Under the proposed agreement with KfW, the KfW loan will be charged to CDB at 6% interest. However, only 2% interest will be paid to KfW, while CDB will be allowed to retain the remaining 4% interest rate paid in a special fund to be used for agreed operations by CDB (e.g. financing SSI, promotion, etc.).

Payments of 5% Preferred Dividend. These payments will be made by CDB if sufficient funds are available after deduction from net profits of 10% to free reserves. If insufficient funds remain from net profits after these deductions, tfieGovernment will pay the balance directly to the shareholders. ANNEX 17 (Page 2 of 2)

III. ProjectedBalance Sheets and Cash Flow

Portfolio: Major assumptionson portfolio follow the assumptionsgiven above in Section I.

Borrowing: The followingnew resources are expected to be mobilized

- Local currency - None - Foreign Exchange IBRD II: $5 million for 15 years (compositeamortization) KfW II : DM 10 million, for 30 years with 10 years of grace IBRD III: Approved in 1978 with same amount, terms and conditions as IBRD II KfW: Approved in 1978 with same amount, terms and conditions as KfW II Unidentifiedforeign exchange: $2.5 million to be obtained from internationalcapital markets. Expected terms about 10 years.

ShareholderEquity. After the Court will authorize Government take-over of private shares in mid-1976, the Governmentwill hold 600,000 shares with full voting rights; the private shareholderswill exchange their 400,000 shares of CY 1 for 400,000 preference shares also of CE 1 nominal value. On acceptance of this exchange offer, all voting power will rest exclusivelywith the Government. The Government has agreed to purchase these preference shares within a 12-year period at par. No purchase schedule has been agreed upon, but there are indicationsthat the Governmentmay decide to redeem all the preference shares only at the end of the twelve year period. This solution has served as an assumption for the projectionsand therefore the outstanding amount of the preference shares remains unchanged over the period shown, 1976-1980.

EMENA/IC&DFC May 1976 TIE CYPRUSDEVELOP?nT BAN LIMITED

1SIX 11976-1980) ANDACTUAL (1975) I80091 ANDS5PENSE STATENEwT (CZ 'GOO)

195 96 19T? 1978 1979 1980 (Actual) ISO

Pas tAn, Par501% 59.sm M.M75 241.5 216.1 181.2 143.6 105.2 76.2 Osld edsAPsifelo, athfl 31.1.75 229.5 176.0 126.2 9B.7 73.4 50.8 NW Portfolio - 26.8 105.7 226.8 374.1 539.5 471.0 418.9 413.1 469.1 552.7 666.5 Inc Snn pwity tlutng a 31.12.T5 Prs Aa 2.5 2.5 2.5 8.9 19.4 14.1 0csPIu4 Arnn - - . - - - in - - - - - 11.1 Profit ar sml C e1tp - - - .6 .6 .6 ISone an mk FM e . 23.3 15.3 22.8 30.8 39.4 48.6 hsr lncus 1.8 2.0 2.5 3.0 3.5 4.0 Incas an 2lAqa A_Lse 12.6 70.1 37.2 37.0 40.1 41.0 Profit - p at-s (sties) 3.9 - - - - - . alm fwor h m nut wn kb (in.w.) 19 TOTALm 517.0 468.8 478.1 549.4 655.7 785.9

Deb.Stock 1. 25.5 - - - - - II. 37.5 37.5 37.5 37.5 37.5 37.5 II}. 73 6 75.0 75.0 75.( 75. 75.i

0OwzotLa_a I. .6 - - - _ _ II. 18.4 16.6 - - _ _ " TIX. 12.9 12.5 11.6 10.6 9.6 - IT. 20.6 19.2 17.7 - - _ IVA. 13.8 12.9 12.0 11.1 - i1. 5.5 5.2 - - _ V. 6.8 31.0 - VA. - 9.8 - _ _

Gorernet l'-as 0&zus 8.4 - - - - - Time Deposits 16.5 .2 - _ _ - 1ORD I. 72.4 73.1 68.6 62.4 55.8 48.5 ;' I1. - 2.1 31.9 86.7 143.8 161.9

111. - - - - - 19.1 gm I. 14.3 12.1 10.0 7.9 5.8 3.7 O I1. - 4.0 14.0 25.1 30.2 30.2 II1. _ _ _ _ 4.0 14.0 I•13a4d (nnD) 4.6 3.3 2.2 1.0 .1 - 021140tiZ56 Perwsp earoes I. - - - - 25.5 68.0 c atn.t pesw In . 31 _ 2.5 3.0 .5 - - I= - - - - 2.5 3.0

IBn 1. .9 ------II. - 1.3 11.9 7.0 2.0 - I11. - - - - - 5.7 CIoAt-ct Pn a Ihiaaifisd Poesin BaSes I. - -- 5.2 1.5 o,ebsntuaf Iasu, Ikpsnese .9 - - - ';oam O= IX:nge IDF 1.9 - - - - -

Total PFloc4i1 Eupnsu 335.1 318.3 295.4 324,8 397.0 468,1

AdAmfuiitntlts Directors Peas 2.6 3.0 4.0 -4.0 --- 4.0 4.0 stair Costs 40.8 52.0 56.0 60.6 65.5 70.7 General 11.5 14,0 15.0 16.0 17.0 18.0 D preoiatl 1.1 3-. 3.8 3.8 3.8 .8 Total Adenistrativ Expenses 56.0 72.0 78.8 84.4 90.3 96.5

prowifla's Doubtful Debts (2% a us lam u±uats) 111.0 11.9 23.1 30.9 36.7 43.2 ochbnsl Risks 1 1 (2% a yeer etd balsne) 5.6 4.7 3.7 2.8 1.9 .9 1150 (.5% a o/s lon) 5.2 5.0 4.6 4.2 3.7 3.2 Tota1 Provisions 121.6 21.6 31.4 37.9 42.3 47.3 TOTALEgSES 512.9 411.9 478.1 447.1 529,6 611.9

Profit before tla 4.1 56.9 72.5 102.3 126.1 174.0 Ta. - 42.5X - 20.6 27.3 40.5 51.2 72.2

1snt profit 4.1 36.3 45.2 61.8 74.9 101.8

Lensu aGV icturec f_d 8 0 28 0 50 2 68.4 88.4 most p-fit aft"r XsMitrest f 28. 105 RIssrves truasferars to retained uar.iou 13_4 51 dividend for 0 rfsse,,s4 Sea2 '7 3. Profit aftr uppopr .tio3 to roruoc eaoeaa 4.7 ESIXAIC8DPC Ihy 1976 ANNEX19 THECYPRUS DeVELOPMENT BANK LIMITED

ACTUAL(1975) ANDPKONCIU (1976-1980) BAAINCESMEETS

lY/5 1976 1m 1978 17 19EO A,SSETS ACTUAL Current Assets Cash vith Honkers 142.8) 588.7 516.4 469.0 379.4 234.9 Time deposits (maturing within 3 maths) 16.8) Deposits ith COetral Bask 168.9) Special Act unt 8.0 36.0 86.2 154.6 243.0 nrt at past-due maturities of portfolio loens 1,550.3 1,006.0 944.9 804.6 731.1 841.7 Sundry Debtors 23.7 19.2 17.2 15.2 13.2 11.2 Accrued Incae 3.4 - - - - - Accrued Income from Portfolios Pree .'rea 181.6 150.0 90.0 10.0 - - Occupied Area 368.4 2,455.9 1,771.9 1.604.9 1.385.0 1.27S.3 1,330.8 Portfolio Investments Free Area 2,753.9 2,344.2 1,926.6 1,458.7 1,033.0 778.9 Occupied Area 2,487.2 1,669.6 1.336.3 1,015.7 733.3 477.0 5,236.1 4,013.8 3,262.9 2,474.4 1,766.3 1,255.9 See Portfolio - 596.0 1,753.2 3,287.8 5,025.3 6,963.2 Total Portfolio 5,236.1 4,609pQ8 5,016.1 5,762.2 6,791.6 8,219.1 Less: Current maturities Pree Irea 369.9 344.7 _ 358.6 279.9 254.1 232.2 Occupied Area 325.5 333.3 320.6 282.4 256.3 227.8 Hew Portfolio - 10.6 96.5 220.7 381,7 Less: Past-due maturities 4,540.7 3,931.8 4,326.3 5,103.4 6,060.5 7,377.4 Free area 367.8 328.0 255.1 145.8 - _ Occupied ,.rea 487.1 - - _ - - i:et Portfolio 3,685.0 3,6038 4,071.2 4,957.6 6.060,5 7,377.4

Equity Investments, at cost 177.2 288.5 469.2 656.8 895.1 1,193.0 Less: Provisions tar possible losses on portfolio Possible losses on equity 268.9 280.8 303.9 334.8 371.5 414.7

Net Portfolio Investments 3,594.1 3,611.5 4,236.5 5,279.6 6,584.1 8,155.7 Debenture Stcrk. Redemption Securities, at cost 155.5 254.8 361.6 476.4 599.8 732.4 Pixed Assets, at cost, less maounts written-off 3.8 18.8 15.0 11.2 7.4 3.6

TOTAL ASSETS 5,67. 7,52.256217.6 0222.

1 LIBILITIIS ._ D SItRC1OLDLfISECUITY Current I,lbilities Short-term and Time Deposits 97.0 - - - Accounts payable and Accrued Expensea 110.4 - - - - - Current naturities of long-term debts 202,0 238.9 220.9 203.6 249.8 294.9 Proposed Divildends 20.0 12.7 5.4 - 3.2 Taxes on Incoe - 20.6 27.3 40.5 51.2 72.2 Other 2.5 411.9 27P.5 260.9 249.5 301.0 370.3 Contincenoy Reserve & Proviaions 45.7 55.4 63.7 70.7 76.3 80.4 Long-term Debt Cyprus Govorn=ent Loant 1,924.8 1,074.3 679.6 348.8 145.2 - K59 I. 280.6 233.8 187.0 140,2 93.4 46.6 IBllD I. 1,039.4 996.5 927.2 838.9 745.2 642.4 llidland Bank 63.9 45.1 26.3 7.5 - - Unidentified foreign sources - - - - 400.0 700.0 oro II. - 400.0 1,000.0 1,510.0 1,600.0 1,600.0 YF17III. - - - - 400.0 1,000.0 IBPD II. - 150.0 600.0 1,440.0 1,983.2 2,004.0 IBRD III. - - - - - 900.0 3,308.7 5TW7 3,420.1 T;4 5.4 5.367.0 6,893.0 Less: Current aturities 202.0 238.9 220.9 203.6 249.8 294.9 Ou.ranteed Debenture Stocks 3,106.7 2,660.8 3,199.2 4,081.8 5,117.2 6,598.1 73- 1981-83 5oo.0 500.0 500.0 500 0 500.0 500.0 1985-87 1.000,0 1,000.0 1,000.0 1.000.0 1,000.0 1.000.0 1,500.0 1,500.0 1,500.0 1,500.0 1,500.0 1,500.0 Sharehg4 I0uit tkElidiag-shae ceital 1,000.0 600.0 600.0 600.0 750.0 6a0.0 preferesce share -1400.0 400.0 400.0 400.0 400.0 Resros iotlodseo0s 145.0 153.3 157.8 164.0 170.5 100.7 Ift Tatoeret Fod 180 36. 0 86.2 154.6 243.0 Total Shareholders' Equity 1,145.0 1,161.3 1,19-.8 1,250.2 1,475.1 ITh& TOTALLIABILITIES SHABEHOLDERSE'EQUITY 6.209.3 5,657.0 6,217.6 7,152.2 86469.6 10,222.5 EhENA/IC6DFC Nay 1976 ANNEX 20 TRE CYPRUS DE-VELOP34WIB LMITED.

PROJECTED SOURCES AND APPIICATIONS OF FUNDS (1976-1980) (ClE 000)

INF5fIES 1975 1976 1977 1978 1979 1980 ACTUAL Sources of Fnds

Nst Profit 4.1 36.3 45.2 61.8 74.9 101.8 KfW Interest Fund - (8.0) (28.0) (50.2) (68.4) (88.d) Depreciation .9 3.0 3.8 3.8 3.8 3.8 IEW loss 1.9 - - - - Midland Prprit (3.9) _ _ _ _ Provision written-baok (1.9) - - - Provisions 190.0 21.6 31.4 37.9 42.3. 47.3 Non-sh income (271.4) - - - - - Loan Coflections - Free ) 409.7 417.6 467.9 425.7 254.1.

- Occupied ) 177.1 8,2.6 333.3 320.6 282.4 256.3 -Re. ) - - - 10.6 96.5 220.7 Sundry Debtors _ 4.5 2.0 2.0 2.0 2.0 TIRD I. i83.0 - - - - - II. - 150.0 450.0 840.0 560.0 100.0

III. - - - - - 900.0 Rnr I. -----

II. - 0W0.0 6DO.o 510.0 90.0 - in. - - - 400.0 600.0 Midland .7 - - - - - tloidentified Foreigl Sources - - - - 400.0 300.0 Government Loan V. 752.0 - - V.A. - 248.0 D - _ - Deb-nture Stock 996,2 - - - -

Reduction in Accrued Income - 403.4 60.0 80.0 10.0 Issue of Capital - - - 150.0 100.0 Solo of Eq.ity _- - 5.4 5.4 5.4 Provision for Th,tion 220.6 27.3 40.3 51.2 1z.2

TOTAL INIS 2,028.7 2.501.7 1,942.6 2,330.3 2,525.8 2,875.2

.UTFIMS

Application of Funds

Diobur-rentat (Existing) 4i7.0 - - - - New - 707.3 1,337.9 1,738.2 2,077.7 2,461.9 Fixed Assets 1.2 18.0 - - - - Repayments: Sickina Fond - I.Btaients 125.1 84.0 84.0 84.0 84.0 84.0 Investeot 24.4 15.3 22.8 30.8 39.4 48.6

IBB.D I. 9.2 42.9 69.3 88.3 93.7 102.8 II. - - _ - 16.8 79.2 lII. - -. _ _ _ _ KFP I. 47.2 46.8 46.8 46.8 46.8 46.8

II. - - _ - _ HtI. ------Midland (9CGD) 19.4 18.8 18.8 18.8 7.5 Governr,ant Loans: I. 66.8 - - - TH. 58.8 32.1 237.4 _ - _ III. i6.1 17.0 17.9 18.9 19.9 145.2 IV. 50.2 27.2 28.7 294.0 - - IV.A. 15.3 i6.i 17.0 17.9 183.7 - IV.B. - 6.1 93.7 V. 752.0 _ _ _ _ V.A. - 248.0

Debenture Rode.ption (61% Stock 74/75) 204.3 - _ _

lTie and Short-Tenr Deposits 533.1 97.0 Accounto Panyble and Accruals 172.5 112.9 - - - - Soodry Debters 9.2 - - - - -

Incone T.l . 20.6 27.3 40.5 51.2

TOTAL OUT0flOW8 1.789.8 2.241.5 1.994.9 2.365.0 2,610.0 3.019.7

Snrpluei/eficit 238.9 260.2 (52.3) (34.7) (84.20) (144.5) Dividend Payable - - (20.0) (12.7) (5.4) - Cah at B-ginnins 89.6 328.5 508.7 516.4 469.0 379.4 CASH AT RNr OF £AR 328.5 588.7 516.4 469.0 379.4 234.9

EMEIA/ilC&DFC May 1976 ANNEX 21

THE CYPRUS DEVELOPMENTBANK LTD.

FinancialIndicators, 1973-1975 (actual), and 1976-1980 (Projected)

73 74 75 76 77 78 79 80 Profitability

Net Profit _/as % of net worth 3.2 0.0 0.0 3.1 3.8 5.1 5.5 6.5

Earnings before tax as % of average net worth 5.6 0.0 0.4 4.9 6.2 8.4 9.3 11.0

Operations

Gross income as % of average total assets 8.3 7.2 8.6 7.9 8.1 8.2 8.3 8.4 Admin. expenses as % of average total assets 1.2 1.1 0.9 1.2 1.3 1.3 1.2 1.0 Financialexpenses as $ of average total assets 4.5 4.9 5.5 5.3 5.0 4.9 5.1 5.0 Dividend 4ncome as % of equity portfolio 4.1 5.3 1.5 1.5 1.5 8.0 8.0 8.0

Financial Structure

Debt/equityratio /1 3.3 4.0 4.0 3.6 3.9 4.1 4.6 4.8 Total debt/year-endnet worth 3.3 4.0 4.4 3.8 4.2 4.7 4.8 5.0 Provisionfor possible losses as % of loans & equity 2.2 3.8 5.0 5.7 5.5 5.2 4.8 4.4 Current ratio 1.2 0.7 3.1 6.3 6.1 5.5 4.6 4.0

/1 As defined in Bank's loan agreement:

- debt are those maturing more than one year after the date on which its is originallyincurred.

- equity is: unimpairedpaid-up capital, surplus and reserves.

A/ Net profit, inclusiveof KfW interest fund.

EMENA/IC &DFC May 1976 AliNEX 22

THE CYPRUS DEVELOPMENT BANK LIMITED

Interest Rates in Cyprus (January, 1976) Rates p.a.

Central Bank Discount Rate 6%

Central Bank Loans to Government Agencies 6%

Government Treasury Bills 5 1/2%

Seven-day Deposits with Central Bank 4 1/2%

One-month Deposits with Central Bank 5%

Current Accounts 4%

Minimum Reserve Ratio Account 5 - 5 1/2%

Banks

Demand Deposits For balances up to Ci 1,000 No interest For balances over CE 1,000 2%

Savings Deposits 4%

Time Deposits

Up to seven days' notice For balances up to CE 5,000 4 1/2% For balances over CE 5,000 4 3/4%

Over seven days' notice but less than three months'notice For balances up to CE 5,000 5% For balances over CE 5,000 5 1/4%

Over three months' but less than twelve months' notice For balances up to CE 5,000 5 1/2% For balances over CE 5,000 5 3/4%

Twelve months' notice and over For balances up to CE 5,000 6% For balances over CE 5,000 up to CE 10,000 6 1/4% For balances over CE 10,000 up to CE 20,000 6 1/2% For balances over CY 20,000 up to CE 50,000 6 3/4% For balances over CE 50,000 7%

Advances and Loans Up to 9%

EMENA/IC&DFC January 1976 Annex 23

CYPRUS DEVELOPMENTBANK LIMITED

ProjectedDisbursement Schedule Under The Proposed Loan

(in '000US$)

Normal SSI Operation Component Total

1976 Third Quarter 191 20 211 Fourth " 191 40 231

1977 First " 204 45 249 Second " 255 50 305 Third " 255 60 315 Fourth " 434 65 499

1978 First " 459 70 529 Second " 560 80 640 Third " 665 90 755 Fourth " 458 80 538

1979 First " 382 65 447 Second " 382 50 432 Third " 309 25 334 Fourth " 255 10 265

1980 First " 250 -- 250

5250 750 6000

EMENA IC & DFC May 1976