CONFORMED COPY Public Disclosure Authorized

CREDIT NUMBER 2195 LSO

(Industrial and Agro-Industries Development Project) Public Disclosure Authorized between

INTERNATIONAL DEVELOPMENT ASSOCIATION

and

CENTRAL BANK OF

Public Disclosure Authorized Dated February 4, 1991 CREDIT NUMBER 2195 LSO PROJECT AGREEMENT AGREEMENT, dated February 4, 1991, between INTERNATIONAL DEVELOPMENT ASSOCIATION (the Association) and CENTRAL BANK OF LESOTHO (the Central Bank).

WHEREAS (A) by the Development Credit Agreement of even date herewith between Kingdom of Lesotho (the Borrower) and the Association, the Association has agreed to make available to the Borrower an amount in various currencies equivalent to fifteen million one hundred thousand Special Drawing Rights (SDR 15,100,000), on the terms and conditions set forth in the Development Credit Agreement, but only on condition that the Central Bank agree to undertake such obligations toward the Association as are set forth in this Agreement;

Public Disclosure Authorized (B) by a subsidiary loan agreement entered into between the Borrower and the Central Bank, the proceeds of the Credit provided for under the Development Credit Agreement will be relent to the Central Bank on the terms and conditions set forth in said Sub- sidiary Loan Agreement; and WHEREAS the Central Bank, in consideration of the Association’s entering into the Development Credit Agreement with the Borrower, has agreed to undertake the obligations set forth in this Agreement;

NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I Definitions Section 1.01. Unless the context otherwise requires, the several terms defined in the Development Credit Agreement and in the General Conditions (as so defined) have the respective meanings therein set forth.

ARTICLE II Execution of the Project Section 2.01. The Central Bank declares its commitment to the objectives of the Project as set forth in Schedule 2 to the Deve- lopment Credit Agreement and, to this end, shall carry out and cause the Participating Banks to carry out Part A.1 of the Project described in said Schedule, and in accordance with the Schedules to this Agreement with due diligence and efficiency and in conformity with appropriate administrative, financial, investment and banking practices, and shall provide, or cause to be provided, promptly as needed, the funds, facilities, services and other resources required for Part A.1 of the Project.

Section 2.02. (a) The Central Bank shall execute Participat- ing Bank Agreements with each Participating Bank, pursuant to Sec- tion 3.01 (b) of the Development Credit Agreement, to enable Participating Banks to make Sub-loans to Investment Enterprises for Investment Projects as provided in Part A.1 of the Project described in Schedule 2 to the Development Credit Agreement. The terms and conditions of the Participating Bank Agreements shall be approved by the Association and shall conform to the terms and conditions stipulated in Schedule 2 to this Agreement.

(b) No withdrawals shall be made by a Participating Bank from the Credit Account unless: (i) the appropriate Participating Bank Agreement has been duly executed on behalf of the Central Bank and the Participating Bank; and (ii) said Participating Bank Agreement has been approved by the Association.

(c) Without prejudice to the provisions of paragraph (a) of Section 2.06 of this Agreement, no withdrawals shall be made by a Participating Bank from the Credit Account pursuant to para- graph 3 (c) of Schedule 1 to the Development Credit Agreement, unless such Participating Bank shall have submitted to, and obtained the approval of, the Association of the first three appraisal reports prepared by said Participating Bank for Investment Projects.

Section 2.03. (a) The Central Bank undertakes that, unless the Association shall otherwise agree, any Sub-loan will be made on terms whereby the Central Bank shall cause the appropriate Participating Bank to obtain, by written agreement or other appropriate legal means, rights adequate to protect the interests of the Association, of the Central Bank and the Participating Bank, including the terms and conditions and the rights set forth in Schedule 1 to this Agreement.

(b) The Central Bank shall cause each Participating Bank to exercise its rights in relation to each Investment Project in such manner as to: (i) protect the interests of the Association, of the Central Bank and of the Participating Bank; (ii) comply with its obligations under this Agreement, the Development Credit Agreement and the appropriate Participating Bank Agreement; and (iii) achieve the purposes of the Project. Section 2.04. The Central Bank shall: (i) cause Participating Banks to calculate financial rates of return of Investment Projects for which Sub-loans are made or proposed to be made in amounts exceeding $100,000; (ii) ensure that Participating Banks will not make Sub-loans in an amount exceeding the equivalent of $500,000 in respect of any one Investment Project or any single Investment Enterprise. Section 2.05. (a) The Central Bank shall cause Participating Banks to submit to the Association, from time to time at the Association’s request, appraisal reports prepared by the Participating Banks for Investment Projects. The number of such appraisal reports shall be determined by agreement of the Associa- tion, the Central Bank and the Participating Banks.

(b) The Central Bank shall cause Participating Banks to make improvements or adjustments in their appraisal methodology and practices as may be reasonably recommended by the Association.

Section 2.06. (a) The Central Bank shall promptly transfer to the Borrower all payments received from Participating Banks under Participating Bank Agreements.

(b) Notwithstanding the provisions of paragraph (a) of this Section, the Central Bank may utilize part of any amounts received from a Participating Bank under a Participating Bank Agreement for loans to be made to Participating Banks for Sub-loans, provided that such amounts are not immediately required by the Borrower to fulfill its obligations specified, inter alia, in Sections 2.05, 2.06 and 2.07 of the Development Credit Agreement.

Section 2.07. The Central Bank shall cause Participating Banks to carry out the obligations set forth in Sections 9.03 through 9.08 of the General Conditions (relating to insurance, use of goods and services, plans and schedules, records and reports, maintenance and land acquisition, respectively) in respect of the Central Bank Project Agreement and Part A.1 of the Project.

Section 2.08. The Central Bank shall duly perform all its obligations under the Subsidiary Loan Agreement. Except as the Association shall otherwise agree, the Central Bank shall not take or concur in any action which would have the effect of amending, abrogating, assigning or waiving the Subsidiary Loan Agreement or any provision thereof.

Section 2.09. (a) The Central Bank shall, at the request of the Association, exchange views with the Association with regard to the progress of Part A.1 of the Project, the performance of its obligations under this Agreement and under the Subsidiary Loan Agreement, and other matters relating to the purposes of the Credit.

(b) The Central Bank shall promptly inform the Association of any condition which interferes or threatens to interfere with the progress of Part A.1 of the Project, the accomplishment of the purposes of the Credit, or the performance by the Central Bank of its obligations under this Agreement and under the Subsidiary Loan Agreement.

ARTICLE III Management and Operations of the Central Bank Section 3.01. The Central Bank shall carry on its operations and conduct its affairs in accordance with sound administrative, financial and banking practices under the supervision of qualified and experienced management assisted by competent staff in adequate numbers. Section 3.02. The Central Bank shall take out and maintain with responsible insurers, or make other provision satisfactory to the Association for, insurance against such risks and in such amounts as shall be consistent with appropriate practice.

ARTICLE IV Financial Covenants Section 4.01. (a) The Central Bank shall maintain records and accounts adequate to reflect in accordance with sound accounting practices its operations and financial condition.

(b) The Central Bank shall: (i) have its records, accounts and financial state- ments (balance sheets, statements of income and expenses and related statements) for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Associa- tion; (ii) furnish to the Association as soon as available, but in any case not later than six months after the end of each such year, (A) certified copies of its financial statements for such year as so audited, and (B) the report of such audit by said auditors, of such scope and in such detail as the Association shall have reasonably requested; and (iii) furnish to the Association such other information concerning said records, accounts and financial statements as well as the audit thereof, as the Association shall from time to time reasonably request. ARTICLE V Effective Date; Termination; Cancellation and Suspension Section 5.01. This Agreement shall come into force and effect on the date upon which the Development Credit Agreement becomes effective.

Section 5.02. (a) This Agreement and all obligations of the Association and of the Central Bank thereunder shall terminate on the earlier of the following two dates:

(i) the date on which the Development Credit Agree- ment shall terminate in accordance with its terms; or (ii) the date fifteen years after the date of this Agreement. (b) If the Development Credit Agreement terminates in accordance with its terms before the date specified in paragraph (a) (ii) of this Section, the Association shall promptly notify the Central Bank of this event.

Section 5.03. All the provisions of this Agreement shall continue in full force and effect notwithstanding any cancellation or suspension under the General Conditions.

ARTICLE VI Miscellaneous Provisions Section 6.01. Any notice or request required or permitted to be given or made under this Agreement and any agreement between the parties contemplated by this Agreement shall be in writing. Such notice or request shall be deemed to have been duly given or made when it shall be delivered by hand or by mail, telegram, cable, telex or radiogram to the party to which it is required or permitted to be given or made at such party’s address hereinafter specified or at such other address as such party shall have designated by notice to the party giving such notice or making such request. The addresses so specified are:

For the Association: International Development Association 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: INDEVAS 248423 (RCA) Washington, D.C. 82987 (FTCC) 64145 (WUI) or 197688 (TRT) For the Central Bank: Central Bank of Lesotho P.O. Box 1184 Maseru 100 Lesotho Telex: 4637 LO Section 6.02. Any action required or permitted to be taken, and any document required or permitted to be executed, under this Agreement on behalf of the Central Bank, or by the Central Bank on behalf of the Borrower under the Development Credit Agreement, may be taken or executed by the Governor or such other person or persons as the Governor shall designate in writing, and the Central Bank shall furnish to the Association sufficient evidence of the authority and the authenticated specimen signature of each such person.

Section 6.03. This Agreement may be executed in several counterparts, each of which shall be an original, and all collec- tively but one instrument.

IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names in the District of Columbia, United States of America, as of the day and year first above written.

INTERNATIONAL DEVELOPMENT ASSOCIATION

By /s/ Edward V.K. Jaycox Regional Vice President Africa

CENTRAL BANK OF LESOTHO

By /s/ T. W. van Tonder Authorized Representative SCHEDULE 1 Terms and Conditions of Sub-loans 1. Sub-loans shall: (a) have maturities ranging from two to twelve years including grace periods of up to three years; and (b) be at the market rate of interest, which shall be adjusted annually. 2. Existing Investment Enterprises shall contribute a minimum of 10% of subproject costs and new Investment Enterprises shall contribute at least 20% of such costs. 3. Sub-projects of existing Investment Enterprises shall have a debt service ratio of not less than 1.2:1, while sub-projects of new Investment Enterprises shall have a debt equity ratio of not less than 1.4:1. 4. Investment Enterprises shall carry out initial preparation of sub-projects. Each PB shall review the sub-projects in accordance with their own loan analysis procedures. The appraisal evaluation shall cover relevant information about the enterprise and proposed investment, including inter alia, its technical soundness, financial viability, economic efficiency and managerial capacity as well as loan security requirements. 5. Except as the Association shall otherwise agree, Sub-projects shall meet the following criteria:

(a) not exceed $500,000 equivalent; (b) appraisal of the enterprise/project technical viability, market analysis, managerial capacity;

(c) incremental cash flow analysis leading to a financial internal rate of return of not less than the on the loan contract;

(d) a summary cash flow analysis to indicate the firm’s viability and ability to service debt; and

(e) for sub-loans of more than $100,000 equivalent, current and projected balance sheets and income statements as well as financial ratio analysis, including liquidity, debt service coverage, leverage and earning ratios. 6. (a)No expenditures for goods or services required for an Investment Project shall be eligible for financing out of the proceeds of the Credit unless such expenditures shall have been made not earlier than ninety days prior to the request for authorization to make withdrawals from the Credit Account in respect of a Sub- loan.

(b) Requests for authorization to make withdrawals from the Credit Account in respect of a Sub-loan shall be presented to the Association on or before December 31, 1994. 7. Sub-loans shall be made on terms whereby the Participating Banks shall obtain, by written contract with the Investment Enter- prise or by other appropriate legal means, rights adequate to protect the interests of the Association, the Central Bank and the Participating Banks, including, in the case of any Sub-loan and, to the extent that it shall be appropriate, in the case of any Investment, the right to:

(a) require the Investment Enterprise to carry out and operate the Investment Project with due diligence and efficiency and in accordance with sound technical, financial and managerial standards and to maintain adequate records;

(b) require that (i) the goods and services to be financed out of the proceeds of the Credit shall be purchased at a reasonable price, account being taken also of other relevant factors such as time of delivery and efficiency and reliability of the goods and availability of maintenance facilities and spare parts therefor, and, in the case of services, of their quality and the competence of the parties rendering them, and (ii) such goods and services shall be used exclusively in the carrying out of the Investment Project;

(c) inspect, by itself or jointly with representatives of the Association if the Association shall so request, such goods, works, plants and construction included in the Investment Project, the operation thereof, and any relevant records and documents;

(d) require that (i) the Investment Enterprise shall take out and maintain with responsible insurers such insurance, against such risks and in such amounts, as shall be consistent with sound business practice, and (ii) without any limitation upon the foregoing, such insurance shall cover hazards incident to the acquisition, transportation and delivery of goods financd out of the proceeds of the Credit to the place of use or installation, any indemnity thereunder to be made payable in a currency freely usable by the Investment Enterprise to replace or repair such goods;

(e) obtain all such information as the Association, the Central Bank or the Participating Banks shall reasonable request relating to the foregoing and to the administration, operations and financial condition of the Investment Enterprise and to the benefits to be derived from the Investment Project; and

(f) suspend or terminate the right of the Investment Enterprise to the use of the proceeds of the Credit upon failure by such Investment Enterprise to perform its obligations under its contract with the Participating Bank.

SCHEDULE 2 Terms and Conditions of Participating Bank Agreements 1. Participating Banks shall repay the Central Bank the principal amount of loans made under Participating Bank Agreements in accordance with Schedules conforming with the amortization schedules of sub-loans made by each Participating Bank. 2. Subject to any review that may be made by the Central Bank, Participating Banks shall pay interest at the prevailing average cost of term deposits in the banking system. 3. Participating Bank Agreements shall specify: (a) the establishment within a Participating Bank of a project unit with at least one staff qualified in project appraisal techniques; (b) the sub-project appraisal and portfolio management and selection criteria; and (c) availability of staff training in project appraisal, portfolio management techniques as a contribution to the development of Project-based lending capability. 4. The first three sub-projects from each Participating Bank shall be submitted to the Association for prior review and approval. Thereafter the Association shall only review a sample of sub- projects on an ex-post basis.