World Bank Document

RESTRICTED FILE COPY R.to. Public Disclosure Authorized This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMEN1 Public Disclosure Authorized REPORT AND RECOMMENDATIONS of the PRESIDENT Public Disclosure Authorized to the EXECUTIVE DIRECTORS on a LOAN TO THE BANK OF FINLAND March 16, 1955 Public Disclosure Authorized REPORT ANM RECMIUNDTTONS OF THE ?RSID&iT TO THE EXECUTTVE DIPECTORS 9N A LQAN TO THE BANK OF FINLAND 1. I submit the following report and recommendations with regard to an application by Finland for a loan in various currencies equivalent to $12 million. PART I - HISTORICAL 2. The Bank has already made four loans to Finland totalling $38.3 million. One loan was made to the Republic of Finland and three to the Bank of Finland, vith the guarantee of the Republic of Finland. The loans have made a significant contribution to Finland's postwar recovery. It has been estimated that without the projects which they helped to finance, Finland's export capacity would have been about 10% less than it actually is. 3. The Finnish obligations now held by the Bank total !32.9 million: of the total amount originally lent, SO.2 million has been cancelled, and $5.2 million repaid (including a prepayment of $0.9 million due in 1956). 4. The proceeds of the loans have been relent to various companies: $25.8 million have been allocated for projects in the woodworking industries; $11.3 million for electric power projects and $1.3 million for agricultural projects, 5. Various proposals for further loans have been made over the last two years, and in the spring of last year the Bank agreed to send a mission to investigate loan possibilities. 6. The mission was in Finland from April 19 to May 19, 1954. After reviewing the Finnish economy and studying the leading industries, the mission concluded that the Bank would be justified in making a loan of between $10 and 015 million for the electric power and wooeworking industries. 7. Finnish representatives were in hashington in September for tech- nical discussions about the projects which might be included in the loan and after further study of the projects final negotiations were opened in Washington in February 1955. PART II - DESCRIPTION OF THE PROPOSED LOAN Borrower 8. -The Borrower would be the Bank of Finland. -2- Guarantor, 9. The Republic of Finland would guarantee fully the payment of principal, interest (including commission) and other charges on the loan, and all other obligations of the Borrower under the Loan Agreement. Purpose 10. The proceeds of the loan would be used to assist in financing im- ported equipment required in specific projects for the extension of the electric power system and for the expansion and modernization of the woodworking industries. Amount 11. The loan would be in the amount of $12 million, mainly in European currencies. According to present estimates, the proceeds of the loan would be disbursed as follows: For Purchases in: Equivalent Denmark $ 60,000 France 120,000 Germany 5,320,000 Sweden 1,700,000 Switzerland 1,650,000 United Kingdom 50,000 United States 2,650,000 Unallocated 450.000 $12,000,000 The Danish crowns, French francs, Swiss francs, sterling and U. S. dollars are available out of 18% releases and borrowed funds. Germany has re- leased D 20 million ($4.76 million) and the balance required will be pur- chased with borrowed Dutch guilders. A release of Swedish crowns has been requested. Terms of the Loan 12. The loan would be repaid by twenty-five semi.-annual payments of which the first would be due on April 15, 1958 and the last on April 15, 1970. On and after April 15, 1958 the sum of interest and principal due each half year would be about $640,000 equivalent. 13. The loan would bear interest, including 1% commission, at the rate of 4-5/8% per annum. A commitment charge of 3/4% per annum has been pro- vided for.. - 3,- PART III - APPRAISAL OF THE LOAN The Finnish Economy 14. A report entitled "The Economy of Finland" (E.A. 41-a). was circu- lated to the Executive Directors on October 12, 1954 (R.833). Annex I is a note on recent economic developments. 15. Finland has largely-recovered from the war. Reparations and other payments to Russia are at an end, the productive assets lost in the terri- tories transferred to Russia have been replaced and the Karelian refugees have been absorbed. 16. - The gross national product in real terms is about 40% above the prewar level, the increase in per capita product being about 25%. The output per worker in industry has risen by 32% and in agriculture by 15%. Owing to industrialization, the econor is now more diversified than be- fore the war, but it is still heavily dependent on foreign trade. 17. The industrial sector is dominated by the woodworking industries and the metal working and engineering industries. The woodworking industries had to replace the mills lost to Russia and have only recently re- gained their prewar level of output. They provide the most important source of foreign exchange earnings, accounting for more than three-fourths of total exports. The capacity of the metal working and engineering industries had to be doubled to produce reparation goods required under the peace.treaty with Russia. Since the completion of reparations in 1952 these industries have been able to develop some commercial export trade with the Soviet bloc, but as a rule they are not able to compete in western rarkets. The overwhelming part of Finland's total trade, however, is still with the West. 18. To maintain political and social peace, wages and farm incomes were steadily raised after the war at the same time as the country was being re- built. As a consequence there was a heavy inflation. In 1951, when the wood products boom was at its height, wages and farm incomes were stabilized but at the same time linked to the cost-of living, resulting in an inflexible income structure high in relation to those of competing countries. Internal inflationary forces were still latent, however, and it was only with the help of declining import prices and some subsidies that a further major rise in the cost of living and a subsequent rise in Tages could be avoided. In the fall of 1954 labor and farm interests again pressed for an improvement in their real earnings. By introducing new subsidies and abolishing the sales tax on certain goods it was possible to bring the cost of living index back to slightly under the 1951 level. The price paid was a deterioration in the budget situation. , 19. While Finland has thus lately reversed the direction of her previous progress towards a freer economy, the authorities recognize that any in- creases in the living standard of the population must be kept within the -4- limits set by the ability of the export industries to compete on the world market. Actually, with the help of a strong demand for Finnish export goods, Finland's foreign trade (including reparations) has yielded a surplus throughout the postwar period, except in 1952. Al- though there may well be temporary setbacks, the long-run outlook for Finnish export trade appears to be good. The Projects 20. The projects are described in detail in Annex II ("Appraisal of Power and Woodworking Industry Projects in Finland" - T.0. 73-a). 21. Of the total of P12 million, about one-third would be for the electric power projects and about two-thirds for the woodworking projects. The funds to be made available by the loan would represent about one-fifth of the total cost of carrying .out the projects, and the Bank of Finland would obligate itself to make available all the remaining currencies needed, local and foreign, if they should not be otherwise available (Annex III). 22. The separate projects summarized below have been selected because of the substantial contribution they may be expected. to make to the de- velopment of the Finnish economy. They are all technically and finan- cially sound and of high priority. Orders for the main items of equipment have been placed on the basis of competitive international bidding. 23. The power projects consist of the Petajaskoski hydro plant with an allocation of $3,350,000 and the Vaasa thermal plant with an allocation of $850,000, a total of 4,200,000. The Petajaskoski hydro plant will have a capacity of-100,000 kw and will- be located on the Kemi River in northern Finland. The Vaasa thermal plant will have a capacity of 30,000 kw and will be located in Vaasa in western Finland. 24. The hydro plant will be directly connected to the national power grid and will help to meet the estimated increase in demand for electric power by industrial and domestic consumers. The thermal plant will ini- tially be connected to a regional network and will provide a supply of power to industrial and domestic consumers in the Vaasa area. At a later stage the plant will be connected to the national power grid and provide an addition to the reserve of thermal generating capacity in Finland required in years of water shortage. - 25. The projects of the five woodworking companies to be included in the proposed loan are the following: Project Aprroximate Allocation Enso-Gutzeit Qy Expansion of sulphate pulp mill $ 1,480,000 Iymin 0y Modernization of pulp and paper mills 2,890,000 W.

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