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DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION

Public Disclosure Authorized Not For Public Use

Report No. P-1494-CE

REPORT AND RECOMMENDATION Public Disclosure Authorized OF THE

PRESIDENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

Public Disclosure Authorized TO THE

REPUBLIC OF SRI LANKA

FOR A

PROGRAM CREDIT Public Disclosure Authorized August 26, 1974

This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRENCY EQUIVALENTS (as of July 1, 1974)

Parity Rate

US$1 = Rs 6.47 Rs 1 = US$0.155 Rs 1 million US$155,000

FEEC Rate

US$1 = Rs 10.68 Rs 1 US$0.094 Rs 1 million = US$94,000

The Sri Lanka Rupee, which had been linked to the U.S. Dollar from November 6, 1971, was re-linked to the Pound Sterling from July 10, 1972 onward at a parity rate of 4 1.00 = Rs 15.60. Parity,rates with all other currencies are determined from time to time by the Central Bank.

The Central Bank of Ceylon makes foreign exchange available for certain categories of imports through purchase of Foreign Exchange Enti- tlement Certificates (FEECs) for which a premium is charged. The same premium is offered to exporters on foreign exchange earnings from the sale of non-traditional goods. The net revenue from the sale of FEECs is credited to the Government's Revenue Account. The premium is presently fixed at 65 percent of the Rupee parity rate and results in an exchange rate of Rs 10.68 = US$1. This rate currently applies to about 20 percent of merchandise exports, about 60 percent of merchandise imports and to most invisible transactions with the exception of aid receipts.

FISCAL YEAR

January 1 to December 31 L'TTLI?RNATIOWAL DEVELOPr E'.T ASS OCIATION

REPORT A1ND RECOM§ZENDATIO,N OF TIIE PRESIDENT TO TI-E EXECUTIVE DIRECTORS Oi' A PROPOSED CREDIT TO THIE REPUBLIC OP eRI LAMIKA FOR A PROGRAM1 CREDIT

1. I submit the following report and recommendation on a proposed development credit to the Republic of Sri Lanka for the equivalent of US$15 million on standard IDA terms to help finance imports required for expansion of industrial and agricultural production and for improvement of selected services.

PART I - THE ECONOMY

2. The latest economic report, "Recent Economic Developments and Prospects for Sri Lanka" (Report No. 407-CE of April 15, 1974), was distributed to the Executive Directors on April 22, 1974. Country data are provided in Annex I.

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3. The economic difficulties that have beset Sri Lanka since the late 1950's can be traced principally to two basic characteristics of the country's economic and social system: first, the specialization of production in three export crops - tea, rubber and coconut - which at the time of independence (1948) directly contributed nearly 40% of GNP and which has since declined to 13% in 1973; second, a political commitment to the welfare state which was made possible by the economic benefits derived from that export specialization. This commitment found its expression in two policy tenets which for the past quarter century all governments have fol- lowed in varying degrees: the supply of mass consumption goods, principally food and textiles, at low prices, and the provision of public services - mainly education, health and transport - free of charge or substantially below cost.

4. Sri Lanka's progress in social fields has been commendable. Health services are free except for a token contribution for out-patients visiting health centers and the health network is well developed. Educa- tion is provided free; however, the system is not geared to the country's needs. Sri Lanka has also tried to achieve a more equal distribution of income by enforcing policies aimed at the promotion of high wages, subsidi- zation of services, and the distribution of food below cost, or even free. The welfare state, however, was based on the prosperity of the external sector. Even if the terms of trade had remained in Sri Lanka's favor, it would have been increasingly difficult for the export sector to generate the foreign exchange resources and government revenues required to extend the benefits of the Government's social policy to a population which nearly doubled in 25 years. Unfortunately, Sri Lanka experienced a pronounced weakening in the market of two of its major exports, tea and rubber, beginning in the mid--fifties and, in addition, there was hardly any increase in the volume of exports between 1955 and 1970. As a result, there has been little growth in the economy over the last ten years. This stagnation has led to insufficient employment opportunities being created, so much so that in 1971, about 800,000 workers, or 18 percent: of the labor force, were unemployed. Even more striking is that nearly two-thirds of these had been educated beyond the ninth grade of schooling, a consequence of the extensive education facilities. It was very largely this situation that provoked the insurgency in April 1971 which posed a real threat to the stability of the country.

5. Economic policies to date have done little to offset the impact of the declining fortunes of the major export crops. Indeed, policies have been dedicated to maintaining welfare services despite the inadequacy of resources. A plethora of regulations and price controls has created serious disincentives as has been demonstrated by the failure over many years of domestic agriculture to replace imported products. However, the recent success in allowing market prices to stimulate production of a limited number of vegetable products provides an interesting contrast to the lack of performance under earlier policies.

6. It is against this background that Sri Lanka has now to face the twin shocks of sharply escalating costs for imported food, which are expected to absorb 60 percent of the country's export earnings in 1974, and a doubling of the oil import bill. Thus, Sri Lanka emerges as one of the LDCs most severely affected by the recent worldwide price inflation.

7. In these circumstances, the Government responded last fall by doubling the price of petroleum products, raising transport tariffs by 50 percent or more and making adjustments in the amount and price of food supplied at subsidized rates so that the cost of subsidies to be borne on the budget would be reduced. In the event, and as described later, the food subsidy adjustments have not proved adequate to offset the sharp increase in worldwide commodity prices. Nonetheless the members of the Aid Group meeting in Paris in May 1974 noted that the policies behind these measures constituted an important contribution towards improving the Gov- ernment's budgetary position. The members also recognized that immediate support was essential, and the Association urged that quick disbursing assistance should be provided. The purpose of this credit is to complement the Aid Group's efforts.

Developments in 1973 and 1974

8. Agriculture. Agriculture accounts for 33 percent of the GDP and employs about 2 million people or 50 percent of the total labor force. Tea, rubber and coconuts are the principal crops, contributing 80 percent of the value of exports and 25 percent of total employment. Any substantial increase in foreign exchange earnings will have to come from exports of these products. There are no serious long-term demand constraints on the export of rubber or coconut products, although prices have proved to be quite vola- tile in reaction to short-term market conditions. For tea, prices have been depressed for many years on accourt of slow growth in demand and further expansion is expected to continue at only about 2 percent annually. Sri Lanka's tea production has been stagnant over the past decade, but with improved productivity Sri Lanka could increase export earnings by securing a share of this world expansion in demand. However, the production of these three crops has been adversely affected by Government policies; in particular, profit margins have been continually squeezed through tax and pricing policies with the result that investment, productivity and quality have declined. An Agriculture Sector Mission visited Sri Lanka during July to review the sector's prospects with the Government.

9. During 1973, export prices of rubber and coconuts rose sharply as part of the worldwide price escalation, although the price of the former is beginning to move down from the peak reached in March 1974; tea prices showed only a small gain. But, the costs of production also increased sharply, especially fertilizer. In addition, the FEEC system (the details of this system are explained in the frontispiece) prices many input requirements at a premium but does not offer the same benefit to export selling prices. Al- though there are various Government subsidy schemes for replanting and fertilizer, the net effect of the all round increase in prices has been only some limited improvement in the profitability of rubber. In the case of coconuts, production was depressed because of continued drought and disease, which led to the banning of exports for a period. In the case of tea, the combined effect of only a marginal increase in price and high costs of production led to yet further declines in profitability.

10. The Government has made attempts over the past few years to increase domestic production of food crops, especially rice. Paddy production reached a peak of 1.3 million tons in 1970, but has been sharply down since then largely on account of drought from 1971 to 1973. A renewed drive to raise production was initiated in 1973. Priority has been given to the supply of inputs and the procurement price of paddy has been raised progressively from Rs 18 per bushel in April 1973 to Rs 33 per bushel by July 1974.

11. Special efforts have been directed towards irrigation and coloni- zation programmes. Hitherto, inefficient use of water and inadequate maintenance of facilities have hampered the expansion of production, especially in the dry zone, where potential for raising crop yields and double-cropping is considerable.

12. The production of certain vegetable crops, such as onions, pota- toes, and chillies, has been greatly stimulated through the ban,ning of imports. Initially, prices rose very much, but a reasonable balance between supply and demand has evolved, with the country now being self-sufficient.

13. Industry. The manufacturing sector contributes about 14 percent of GDP and provides employment for about 420,000 people or about 11 percent of total employment. During 1973 growth in the sector was negligible and, what is most disturbing, there was very little new investment. An important factor, apart from the shortage of foreign exchange for equipment and the slow growth in the economy, has been the uncertainty surrounding the role of private ownership and the curbs on income. The sector has also been plagued by low capacity utilization of the order of only 30-50 percent for many industries, because of the chronic shortage of raw materials and spare parts. In these circumstances, it is difficult to assess the efficiency of industry although the results of a series of plant visits set out in paragraphs 39 to 49 provide some insight into the potential of this sector.

14. Industrial activity is primarily directed towards meeting consumer demand and to supplying a modest range of engineering goods. More recently exports have assumed some importance. The consumer goods industry is important not only as a means of providing incentives for wage labor but also of providing employment. In the latter context, textiles are significant as this industry provides about 25 percent of employment in the sector. As export sales of textile manufactures, especially garments, are expanding, this industry is of added importance to the economy.

15. The Government's policy towards industry is based upon defining the respective roles of public sector corporations and of the private sector. The Government has decided that the public sector should under- take those projects which are likely to dominate the local market. In view of the small size of Sri Lanka's economy, this means that public sector ownership is quite widespread with 33 percent of value added in the sector coming from this source. In aggregate terms, the return achieved by these corporations has been fair, but there is of course some variation among enterprises. Petroleum, chemicals, paper, steel and ceramics have generally been profitable while the multi-product engineering group, State Hardware Corporation, has incurred substantial losses.

16. The role of the private sector has been primarily to produce consumer goods for domestic consumption. The Government has placed emphasis upon the use of local raw materials, employment generation and location in backward areas. More recently the private sector has been encouraged to produce for export. However, a plethora of regulations to control the private sector has, in many instances, acted as a serious disincentive for private business to fulfill this role. Consumer goods production is dominated by textiles which have faced grave difficulty in obtaining sufficient raw materials to operate at much above 30 percent utilization. Exports of textiles, largely in the form of made up garments, have expanded rapidly over the past three years, and even though the import content is about 75 percent, the employment generated is an important factor in the Sri Lanka context. At the same time the requirements for processing export and other crops has led to the establishment of a competent engineering goods industry. The manufacture of agricultural processing equipment, in particular tea machinery, is quite competitive by international standards, but export potential has been severely hampered by shortage of raw materials and by uncertainty over allocations of foreign exchange. - 5 -

17. In addition to textiles, the private sector has been expanding exports of small consumer items, leather and rubber products, and most notably gems. Overall, the value of industrial goods exports went up by 30 percent in 1973, while during 1974 it is expected to be double the level of 1972. In particular earnings from gems have gone up rapidly from US$2 million in 1972 to an expected US$19 million in 1974.

18. Exporters receive considerable tax incentives. They are also allocated a small percentage of their earnings to use freely for imports of consumer items or manufacturing requirements; in the case of gems, the allocation is more liberal. In addition, they receive a premium of 65 percent under the FEEC system on all foreign exchange earned which more than offsets the cost of their imports for which the 65 percent premium also has to be paid. This incentive package has undoubtedly provided a considerable stimulus to exporters, but one serious problem remains. An exporter has no way of knowing what raw material imports he may be allowed and hence he has grave difficulty in bidding for an export order until he has secured his imported raw material allocation.

Short Term Prospects

19. Prospects over the next twelve months, July 1974 to June 1975, are very mixed. In agriculture, rice production is likely to show some increase following the good Maha harvest (spring harvest which usually accounts for three quarters of total production). Of the export crops, tea production is likely to be 6 percent lower than 1973 as production has been adversely affected by weather conditions. Exports of rubber should improve, while the resumption of coconut exports will make a substantial contribution to foreign exchange earnings, although these exports will be well below the volume achieved prior to the drought in 1972/73. Export prices for rubber and coconuts rose sharply during 1973 and early 1974 but the extent to which these prices will be maintained is problematical.

20. In industry, prospects depend in large part upon the availability of imported raw materials. Present indications are that availability may not be appreciably more over the period 1974/75 than during 1973/74, on account of the large amount of foreign exchange required for imports of food and fertilizer.

21. On the budget, the Government announced proposals in October 1973 for reducing the cost of food subsidies. In particular, apart from the free rice ration, rice supplies were to be charged at cost, while the prices of flour and sugar were also to be increased. However, the price of imported commodities rose so sharply in late 1973 and early 1974 that instead of these measures resulting in a reduction of the food subsidy, it is now expected to be approximately double the amount forecast in the 1974 budget. In an effort to cope with the situation, the Government introduced further fiscal measures on July 10 and July 31. Flour prices have been increased to the point that flour is no longer subsidized, the subsidy on fertilizer supplied to paddy growers has been removed and the guaranteed price of paddy - 6 -

has been increased from Rs 30 per bushel to Rs 33 to offset the loss of the fertilizer subsidy. The retail price of rice distributed by the Government, however, has been slightly lowered. The Government also anticipates substantially higher receipts from the ad valorem export tax on tea, arising from increased tea prices, and seeks to stimulate rubber replanting by increasing the replanting subsidy by about 33%. The combined effect of these changes is estimated to produce a current account deficit of about Rs 9 million as compared to the budget forecast of a surplus of Rs 229 million. Overall, the budget deficit, originally forecast at Rs 900 million, is now estimated to be about Rs 1,400 million.

22. Regarding the balance of payments, the deficit on current account is expected to increase from US$183 million estimated early in 1974 to US$235 million, as compared with $38 million in 1973. This deterioration is largely on account of the unexpectedly high import cost of food and the further price increases of oil and fertilizer. However, prospects for higher aid disbursements and other receipts have been improving with the result that despite the larger deficit on current account, the overall financing gap is expected to be reduced from US$125 million forecast in April at the time of the Economic Report to the more recent estimate (August) of US$79 million (Annex IV). The improvement in receipts is attributable in considerable measure to an increase in grants, notably for food, and in supplierst credits. It is also due to the fact that, more recently, Sri Lanka has been allocated about US$38 million by the IMF from the Special Oil Facility of which a drawing of US$13 million was approved on August 9. A decision on withdrawal of the balance has yet to be made.

Role of External Assistance

23. In the past, external assistance to Sri Lanka has been substantial with commitments averaging about US$7 per capita annually between 1966 and 1972. Total external public debt of over one year was US$713 million on December 30, 1973 including an undisbursed balance of US$237 million. Terms and conditions of aid have been improving over the past five years. Debt service payments amounted to US$54 million in 1973, to give a debt service ratio of about 12 percent.

24. At the Aid Group meeting in Paris in May 1974, the members gave indications which could result in commitments for 1974 amounting to US$163 million, which compares with commitments in 1972 of US$54 million and in 1973 of US$67 million. A substantial part of this increase, US$65 million, relates to financing of a proposed fertilizer plant and thus will not be fully disbursed until this project has been carried out. It is also expected that commitments totalling US$35 million will be proposed by the Bank Group in FY75, including this proposed credit. An important feature of Aid Group assistance in 1974 is the emphasis on quick disbursement, which has been an important factor in the expected doubling of gross disbursements from the Aid Group during 1974 (Annex V). - 7 -

25. Other sources of foreign exchange are the IMP, suppliers' credits and short term credits. In addition to assistance from the Special Oil Facility mentioned in paragraph 22, the IMF has approved standby arrangements resulting in a net gain of US$7 million. Suppliers' credits are expected to increase sharply from US$15 million in 1973 to US$42 million in 1974, while short-term liabilities (less than one year) may decrease mar- ginally. With Sri Lanka's current debt service ratio of about 12 percent, the increase in suppliers' credit is not unreasonable given the extremely difficult balance of payments situation which the country faces. However, the addition of large amounts of debt on hard terms, which includes both suppliers' credit and short-term credits, should be kept under careful control. In this context, the stabilization of indebtedness in respect of short term and suppliers' credits is an objective of the ceilings set by the IMF on this type of borrowing.

The Case for Non-Project Assistance

26. The case for non-project assistance stems from Sri Lanka's urgent need for a rapid transfer of resources, a need vastly aggravated by the deterioration of Sri Lanka's terms of trade, making Sri Lanka one of the countries most adversely affected by the recent worldwide inflation. The justi- fication for providing non-project assistance at this time is that, since last Fall, the Government has begun to show a new realism in dealing with its economic problems and political courage in introducing some unpopular fiscal measures. Further adjustments will have to be made and progress will be reviewed later this year. If progress is satisfactory, we may wish to propose a second program credit of US$10-15 million for presentation to the Executive Directors during the first half of Calendar 1975.

27. The Government made a substantial effort in the 1974 budget to improve performance and mobilize resources for development. Since then the unexpectedly large increases in import prices and the failure of tea, the main export earner, to benefit significantly from the general rise of world commodity prices, has, unfortunately, offset much of this effort. In particular, the measures proposed by the Government in October 1973 to reduce the cost of food subsidies have been frustrated by the exceptional increase in the price of imported food. Although there are indications that these prices may decline during the latter part of 1974 and early 1975 the Government felt impelled to secure the country's food supplies for 1974 and consequently concluded most contracts at the peak of the markets.

28. The Government introduced additional fiscal measures on July 10 and July 31 to reduce the prospective budget deficit (paragraph 21). How- ever, the presently estimated budget outturn for 1974 is a serious problem. The possibility of achieving a major improvement this year is limited. Of particular concern is the absence of public savings, the overall deficit and the increased use of expansionary borrowing from the domestic banking system. If prices of imported foodstuffs do not rise, the local prices of food distributed through Government channels and set in late 1973 and early - 8 -

1974 should cover the cost of supplies, thus there is a reasonable prospect that the budget requirements for meeting the cost of food subsidies in 1975 may be significantly reduced.

29. The need for non-project assistance also emerges from the balance of payments forecast which relies heavily on the assumption that aid disbursements during 1974 will accelerate. If this assumption does not prove correct, then the increased food, fertilizer and petroleum costs cannot be offset and as a result imports for industry will have to be compressed further. Over the past three years, there has been little or no increase in the value of imports allocated to the industrial sector with the result that, in real terms, the level of imports has been declining. Capacity utilization is around 30-50 percent for many enterprises and without further imported materials, the unemployment situation will be aggravated and essential consumer demand will not be met. Furthermore, Sri Lanka's net external reserves are negligible and thus there is no cushion to finance any shortfall in receipts.

30. This credit is predicated on the assumption that the Government will persist in its efforts to implement economic reforms, in particular to permit greater play of market forces through more realistic pricing of agricultural products; to adjust welfare policies including food subsidies, so that adequate resources are available for investment; and to stimulate through incentives improvements in both agricultural and industrial productivity.

PART II - BM4K GROUP OPERATIONS IN SRI LANKA

31. Since the beginning of its operations in Sri Lanka in 1954, the Bank Group has made seven loans totalling US$73.5 million and six credits totalling US$34.6 million (net of cancellations) in support of twelve projects. About 80 percent of Bank Group assistance has been for power and irrigation, and the remainder for DFC operations, land reclamation, highways and, most recently, dairy development. Three early power projects and the first DFC project were satisfactorily completed and the loans fully disbursed by 1970. A credit for highways was cancelled in 1970, after disbursement of US$0.6 million, at the request of the Borrower following Government's decision to make major changes in the scope of the project. The remaining eight loans and credits have all been made since 1968. Implementation of ongoing projects has suffered delays, due in large part to the civil disturb- ances of 1971, but is proceeding satisfactorily at this time. IFC's only investment in Sri Lanka, US$3.25 million in Pearl Textile Mills, Ltd. (Cey- lon), was made in January 1970 but cancelled the same year at the request of the Company. Annex II contains a summary statement of Bank Group operations as of July 31, 1974 and notes on the execution of ongoing projects.

32. The Bank Group's strategy is designed to help alleviate the foreign exchange constraint by supporting measures to increase agricultural output, both for import substitution and export expansion, and to help stimulate industrial production and investment. In the immediate future, program lending as proposed under this credit is justified to finance imports of essential industrial and agricultural production inputs. A review (paragraph 26) will take place later in 1974 on the economic situation and on the implementation of policy measures, before a second program credit is presented. Proposals for agricultural sector lending will be considered after the Agricultural Review Mission, which visited Sri Lanka in July, has completed its report.

33. Project lending will also continue. A third project for the Development Finance Corporation of Ceylon for the financing of industrial and tourism sub-projects is scheduled for presentation to the Executive Directors in the second half of FY75. A project for irrigation rehabili- tation is being prepared with the assistance of the FAO/IBRD Cooperative Programme and is tentatively scheduled for presentation in early FY76.

34. The Bank Group presently accounts for about 11 percent (and the Bank alone for about 7 percent) of Sri Lanka's total external debt outstanding and about 8 percent (with IDA negligible) of debt service. In three years the Bank Group's share in total external debt is projected to rise to about 12 percent (and the Bank's share alone to fall to less than 6 percent), while the Bank and IDA shares in the debt service will remain at their current levels.

PART III - THE PROJECT

35. The Government of Sri Lanka has asked the Association for program assistance in order to achieve more efficient utilization of existing facilities in agriculture, industry and selected services through imports of raw materials, components and spares. Ihe Association agreed to appraise a credit of US$15 million for this purpose and a mission visited Sri Lanka from June 17 to 28. Negotiations were held in Washington on August 16, 1974. The Govern- ment was represented by Ambassador Kanakaratne. A Credit and Project summary is attached as Annex III.

36. The credit has been designed to assist Sri Lanka to finance urgently needed imports, which are based on the balance of payments forecast and foreign exchange availability. Eleven groups of manufacturing enterprises have been selected on the basis of their priority to the economy in terms of the need for particular products, export potential and employment generation (page 11). Total foreign exchange requirement for these enterprises for the period September 1974 to June 1975 is US$85 million (of which US$21 million is expected to be required between September and December 1974). About US$13 million is expected to be disbursed from the credit for the requirements of these enterprises. The credit will also finance spare parts for equipment operated by four different groups of users who have been selected on account of their importance to the economy and amongst whom users of transportation - 10 -

equipment figure prominently. About US$2 million is expected to be disbursed for this purpose.

37. The list of eligible groups, the estimate of foreign exchange requirements and IDA participation are summarized below. The proposed IDA allocations are only indicative so that actual disbursement will depend upon the flow of imports. The import requirements of the eligible sectors show wide diversity but steel, non-ferrous metals, chemicals, wood pulp, raw cotton and cotton yarn, engineering components and spares will be among the principal items to be financed from the credit.

US$ Million Total F. E. Requirements Proposed Percentage Sept 74 - June 75 Credit financed by IDA

Category A - Raw materials, components and spare parts for manufacture

1. Agricultural engineering 4 ) 2. Agricultural products ) processing 5) 3. Pulp, paper and paper ) products 5) 4. Packaging and containers 8 ) 5. Base metals and metal ) working 13 ) 13.0 6. Agricultural and Industrial ) Chemicals 4) 7. Cables and wires 2 ) 8. Auto ancillaries 2 ) 9. Leather products 1 ) 10. Mining 2 ) 11. Textiles 39 ) _

Sub-total, Category A 85 13.0 15

Category B - Spare parts for service sectors

1. Agricultural and irrigation ) equipment 3) 2. Commercial transport 5 ) 2.0 3. Heavy earth moving equipment 1 ) 4. Power generation equipment 1 )

Sub-total, Category B 10 2.0 20

TOTAL CATEGORIES A and B 95 15.0 16 - 11 -

38. The credit has been designed to permit rapid disbursement. About US$5 million should be withdrawn during the last quarter of 1974; the balance should be disbursed in the early part of 1975. A review of the principal manufacturing and service groups was carried out during appraisal and the results are summarized below. Annex IX shows some data obtained from a sample survey of eligible manufacturing enterprises.

Eligible Manufacturing Sectors

39. Agricultural engineering broadly comprises two groups, makers of production line items such as agricultural implements, pumps and sprayers, and jobbing metal workshops which serve the agricultural products processing industry. Many of the larger plants also make non-agriculture-related products. Among the agricultural implements, a type of hoe called a mam- moty is the main farming tool in Sri Lanka. The Products Division of State Hardward Corporation is the principal maker of mammoties, with an installed capacity of 360,000 units per year on 3 shifts. Production in 1973 attained 340,000 units, but quality improvement, especially with regard to the forging technology, is necessary. Production of all other farming tools such as axes and forks totalled around 50,000 units per year. Production of farm implements in the private sector is limited to small-scale blacksmith shop operations. Water pumps are produced by five private sector firms; their combined output in 1973 was under 5,000 pump sets, representing an average capacity utilization of around 30% on 2 shifts. Production in 1972 was even lower. Part of the problem is the high cost of imported engines and small imported parts. Several large metalworking complexes in the private sector have the capability to build complete lines of tea machinery for the modernization of tea factories as well as for export. They also make rubber rollers and coconut dryers. Engineering know-how is considerable. Capacity utilization is difficult to estimate, but is probably low largely on account of the shortage of raw materials and components; the shortage of foundry-grade pig iron and coke is particularly acute.

40. Agricultural products processing. Fruit canning, powdered milk processing, primary processing of tea, rubber, and coconuts as well as oils and fats processing are included in this category. This group is vital to the three major export crops and for processing local food requirements. Performance is rather variable as is capacity utilization. The group needs a variety of imported items including jute bags, cans, and chemicals. There is also a need for further resource development, such as development of vegetable-oil based products and industrial fibre development - possibly kenaf - for packing and pulping applications.

41. Pulp, paper and paper products. The Eastern Paper Mills, a state enterprise, is the sole producer of paper and paper board in the country, with capacities of 10,500 tons per year of printing and writing paper and 12,000 tons per year of paper board. The mills are operating near 90% of capacity on 3 shifts and output in 1973 totalled 19,000 tons valued at over Rs 50 million. A second -ntegrated pulp and paper mill is scheduled for completion in 1976 and will have an installed capacity of 15,000 tons per - 12 - year of printing and writing paper, raising the total annual capacity in this category to 25,500 tons. Although reliable market data are not available, there is a possibility of excess capacity in writing and printing paper, where- as an estimated 30,000 tons per year or more of industrial paper (for cement bags, etc.) and newsprint will still be imported. The advisability of incor- porating machinery at the new plant which will permit changes in the product mix should be considered. Paper products are made mostly by small firms in the private sector that get their paper and paperboard supplies from the mills and convert them into exercise books, bags and cartons. These and related downstream activities employ about 15,000 workers and the 1973 output was around Rs 40 million. At the paper mills, rice straw is the only indigenous pulping material used; it is a low grade short-fibre pulp and requires blending with imported long-fibre wood pulp. The extent of blending varies with the paper grade produced, but on the average, imported pulp accounts for over 50% by value of the total material cost. In 1973, almost Rs 20 million worth of imported pulp was used. The early development of an alternative domestic pulping material such as kenaf, banana stalk and bamboo to partially substi- tute for imported wood pulp should be given priority.

42. Packing and containers. The importance of this industry derives from its direct link with the agricultural products processing industry, particularly the export of tea. The principal products are tea chests made of plywood and various containers made of plastic, tin or paper. The Ceylon Plywood Corporation, a state enterprise, is the sole domestic supplier of tea chest panels. Its two fact:ories have a combined capacity of over 100 million square feet of plywood, but production in 1972 and 1973 was far below capacity at around 30 million square feet. An estimated 85% of plywood production goes into tea chest panels; in 1973, 1.6 million tea chest panel sets were produced which satisfied less than half the country's requirement. The balance was met from imports. There is a shortage of log supply, and supple- mentation with rubber wood has not proved satisfactory. Further, the conversion rate of raw timber into plywood is only about 30 percent. It is these factors which have largely affected production at the plywood factories. Plastic and tin containers are all made in the private sector, using imported raw materials. There are some eight producers of polyethylene films and bags and ten producers of tin containers. In addition, there are five suppliers of tea chest fittings made from imported tinplate waste. Most are small enterprises, the larger units employing about 100 workers. Capacity utilization declined in 1973 to less than 40% from an average of about 50% in the preceding two years due to raw material shortages. Their raw material situation reflects a worldwide trend of shortages and sharp price increases, but they are less able to cope with the situation than in many other countries since they cannot buy in quantity to secure price benefits and improve delivery schedules. The landed price of tinplate increased from an average of Rs 1520/ton in 1972 to Rs 2840/ton in 1973, and of polyethylene powder from Rs 1300/ton in 1972 to Rs 2630/ton in 1973.

43. Base metals are dominated by two state corporations, Ceylon Steel and the foundry division of State Hardware. These enterprises mainly produce materials for construction and public works, and are weakly linked to the - 13 -

manufacturers of engineering products. The Ceylon Steel Corporation has an installed capacity of 72,000 tons in its rolling mill and 12,000 tons in its wire mill, and produces angles, reinforcement bars and wire products from imported billets. Production attained a high of 40,000 tons in 1972, but declined to 29,000 tons in 197`. For the current year, as of June 1974, 12,000 tons of billets were received and 15,000 tons are on order for the balance of the year, which is considerably below the requirement to maintain production even at the 1973 level. However, aside from the import question, the market should be studied to determine the extent of market constraint on production at the steel plant. The State Hardware Foundry began operation in 1969 with an installed capacity of 9,000 tons on three shifts. Production in 1973 attained 4,000 tons, but 90% of output was cast iron spun pipes, pipe fittings and manhole covers for urban drainage and water distribution systems. Only about 400 tons were ingots sold to local industries or exported. In the private sector, there are captive as well as small independent foundries producing industrial castings including machinery parts. All are cupola operations, which require good-quality pig iron and coke. Because of shortages, variable quality and high costs of these inputs, the operations are subject to excessive casting defects and high conversion costs. The first steel foundry in the country is operating on a pilot scale at Ceylon Steel, and is expected to be fully operational by the end of 1974.

44. Agricultural and industrial chemicals. The chemical industry in the private sector is comprised of producers of consumer end-products. Soap is the largest production item at over Rs 50 million in annual output. Paints and pharmaceuticals are next at around Rs 20 million. Other products include cosmetics, matches, toothpaste, inks and candles with a total value of Rs 10 million, or below. Linkages back along the processing chain are limited to only caustic soda, liquid chlorine and hydrochloric acid produced from salt by the state-owned Paranthan Chemicals Corporation. In agro-chemicals, the country is totally reliant on imports; there are half a dozen producers of pesticides and insecticides, but they are formulation plants that import and simply blend the active ingredients.

45. Cables and wires comprise three firms in the private sector with combined employment and output in 1973 of 240 and Rs 12 million respectively. Capacity utilization declined in 1973 to considerably below 50% due to shortages of copper and aluminum. Generally, the electrical products sector of Sri Lanka is at an infant stage, with production limited to small household items such as fans, bulbs and lighting accessories. The first plant to make electrical motors began production of units up to 15 HP in April 1974 with an initial target of 3,000 units per year; all electrical components will be imported with the exception of wires.

46. Auto ancillaries serve largely the domestic repair and replace- ment markets. The more significant products of this industry are tires and battery containers which use locally produced rubber. In truck and auto tires, the state-owned Sri Lanka Tyre Corporation enjoys a monopoly in the sizes which it makes. Production in 1973 totalled 100,000 tires, corresponding to a capacity utilization of 75%, which was a drop from the - 14 -

1972 high of over 110,000 tires. Part of the reason is that although local rubber is used, imported materials including tire cord and chemicals account for over 80% by value of the raw material costs, and procurement of imported materials fell short of consumption by 20 to 30 percent in 1972 and 1973. Product quality and cost should also be improved. Auto batteries are produced by six private sector enterprises for the domestic market as well as for export. However, because the advantage from having local rubber available is of considerably less significance in the finished product, the supply of battery containers to overseas makers of batteries could be more competitive for Sri Lanka than the direct export of batteries. Springs and other parts are also produced in the private sector.

47. Leather and leather products. The Ceylon Leather Products Corpora- tion, a state enterprise, operates the principal tannery in the country. It supplies roughly 50% of finished leather for the domestic market, the balance being supplied by eleven tanneries in the private sector. Leather production in 1973 totalled around Rs 15 million. The state tannery has been operating at, or near, full capacity on a one-shift basis, and it is planned to expand production in the near future by operating two shifts, when new machinery has been acquired. Import requirements are mainly chemicals and machinery parts, with the value of chemicals comprising about 50% of the direct material costs. This is a primary export item for Sri Lanka, but the quality of raw hides needs to be improved. Cattle hides are mostly collected from small suppliers and they tend to be marred so that, on the average, only about 20% of available hides are usable and only 3 to 4% are of export quality. Foot- wear and other leather goods are made by the state enterprise as well as some 70 private sector firms. Output in 1973 totalled Rs 60 million. To achieve any significant export of finished goods the manufacturers would require access to updated designs, since the products are fashion-sensitive.

48. Mining industry covers the extraction of minerals such as graphite, ilemnite, and rutile as well as gems. Local graphite is of a very high quality and it is all exported. The gem industry includes not only mining but also finishing and polishing; gems have become a major export item with earnings having gone up from US$2 million in 1972 to US$18 million in 1973. Im- port requirements are for explosives, drills, bits and chemicals.

49. Textile industry comprises National Textile, a state corporation, with its two operating mills and a third under construction, and a large private sector that includes modern integrated mills. It relies on imported cotton and synthetic yarn, chemicals and spare parts. Nevertheless, it provides a substantial amount of employment, over 100,000 jobs or 25 percent of employment in the industrial sector. In addition there is export potential especially for made-up garments. Capacity utilization although still low at 30 percent or so for some mills, has been improving but mills using syn- thetics suffered a setback in 1973 from a shortage of imported fibres. - 15 -

Eligible Service Sectors

50. Transportation services have been most adversely affected by the lack of spare parts. While the life of trucks and buses has been extended with great skill and ingenuity, the majority of vehicles will need additional spares if they are to be kept going. The railways and ports face similar difficulties and so without an injection of the most urgently needed spares, transport services will deteriorate further at great cost to the economy.

51. Agricultural production is dependent upon keeping the existing stock of tractors, pumps, and irrigation machinery in service, and the lack of spares is affecting the effective utilization of investment not only in agricultural machinery but also in civil works, especially irrigation systems, and in inputs such as fertilizer.

52. Power generation is largely hydroelectric, but there is one major thermal plant and a number of small plants, most of which are operating well below capacity for lack of spares.

Administration of the Credit

53. The Financial Regulations (1966) of the Government require, for public sector corporations and agencies, international competitive bidding procedures that are consistent with the Bank Group's guidelines for procurement. However, the Regulations also provide for flexibility where international competitive bidding is not appropriate. Under present international trading conditions for commodities, this flexibility is highly desirable. Consequently, under this credit, public sector corporations and agencies would be required, in respect of orders for more than U.S.$50,000 for goods other than spare parts, to invite offers from at least three suppliers and award the contract to the lowest evaluated offer (Schedule 3 of the Devel- opment Credit Agreement). Spare parts for existing equipment will be purchased through normal commercial channels. Goods to be bought by private enterprises will also be procured through normal commercial channels. The Central Bank of Ceylon will retain all documentation relating to bidding and award of contracts by public sector corporations and agencies for review by the Association during supervision missions.

54. The proceeds of the credit will be disbursed against the CIF cost of imports. Withdrawal applications will be prepared by the Central Bank of Ceylon and forwarded to the Association. In accordance with Bank Group procedure, withdrawal applications will be accompanied by shipping documents, supplier's invoice and evidence of payment. In the case of withdrawal applications for procurement by public sector corporations and agencies for goods other than spare parts, the Central Bank of Ceylon will also submit a statement that the purchasing corporation or agency has certified that procurement has been in accordance with the Procurement Schedule of the Development Credit Agreement (Schedule 3 of the Development Credit Agreement). - 16 -

55. Eligible enterprises and organizations have on order goods which have been procured in accordance with the procedures proposed under this credit. Those orders on which payment is made after the signing of the credit will be eligible for reimbursement under this credit. Disbursement of about one third the credit amount is expected by December 31, 1974; the balance should be disbursed over the succeeding six months. However, to make allowance for possible delays in delivery, the closing date has been set 15 months after signing of the agreement.

Counterpart Fund

56. The Government has agreed to the creation of a Counterpart Fund, within the Central Bank, using rupee proceeds obtained from the sale of foreign exchange provided for the purchase of items financed from the credit (Section 4.02 of the Development Credit Agreement). The Fwnd would be used exclusively for development expenditures shown in the 1974 and forthcoming 1975 budgets. The Central Bank would maintain an account for the Fund and a monthly statement of expenditures would be prepared and submitted, within two weeks after the end of each month, to the Association for review.

PART IV - LEGAL INSTRUMENTS AND AUTHORITY

57. The draft Development Credit Agreement between the Republic of Sri Lanka and the Association, the Recommendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement, and the text of a draft resolution approving the proposed credit are being distributed to the Executive Directors separately.

58. Features of the Development Credit. Agreement of special interest are referred to in paragraphs 53, 54 and 56 of this Report.

59. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association.

PART V - RECOMMENDATION

60. I recommend that the Executive Directors approve the proposed credit.

Robert S. McNamara President by William S. Gaud

August 26, 1974 SRI LANKA

PROGRAM CREDIT

ANNEXES

ANNEX NO. TITLE

I Social and Economic Indicators

II The Status of Bank Group Operations in Sri Lanka

111 Credit and Project Summary

IV Balance of Payments Summary

V Aid and Debt Service, 1969-1974

VI Import Summary

VII Volume Indices of Production

VIII Employment by Sectors

IX Survey of the Industrial Sector

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ECONOMIC INDICATORS

GROSS NATIONAL PRODUCT IN 1973 ANNUAL RATE OF GROWTH (%, constant 1959 prices)

US $ Mln. % 1960-65 1965-70 1973 1/

GNP at Market Prices 2579 100.0 3.9 5.0 3.5 Gzoss Domestic Invest. 403 15.6 -2.0 14.1 7.1 Gross National Saving 365 14.2 -1.2 13.2 Current Account Balance - 38 -1.5 Exports of Goods, NFS 416 16.1 2.3 0.8 3.1 Imports of Goods, NFS 437 16.9 -4.3 -2.0 6.4

OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1973 2/ Value Added Labor Force- V.A. Per Worker US $ Mln. % (00T) % US$ % of Average

Agriculture 771 33 2098 54.8 367 60 Industry 365 16 419 11.0 871 120 Services 1205 51 1307 34.2 922 150

Total/Average 2341 100 3824 100.0 612 100

GOVER1MENT FINANCE Central Government sMjin.) % of GDP 1973 1970-72 1973

Curr-ent, Receipts 3638 21.6 21.7 Current Expenditure 3590 21.8 21.4 Cur-rent Surplus - 2 _1.1 - 8-ital Expenditures 920 6.7 5.5 External Assistance (net) 255 1.9 1.5

MONEY, CREDIT AND PRICES 1966 1969 1970 1971 1972 1973 (Million Rs Outstanding End Perid )

Money and Quasi Money 2202 2301 3061 3379 3917 4117 Bank Credit to Public Sector 1769 2334 2571 2724 2900 2676 Bank Credit to Private Sector 872 1470 1617 1760 2187 2165

(Percentages or Index Numbers) 3/ Money and Quasi Money as % of GGPJ 28.5 21.4 26.0 28.3 3Q05 24. 6 General Price Index (1952=100) 112.3 130.5 138..2 141.9 150.8 165.4 Annual Percentage Changes in: General Price Index .. 5.1 5.9 2.6 6.3 9.7 Bank Credit to Public Sector .. 10.1 9.6 6.0 6.4 -7.7 Bank Credit to Private Sector .. 19.0 10.0 8.8 24.0 -160

1/ Provisional 2/ Does not include unemployed who are estimated to number about 800,000 in 1973. / GDP at current market prices. Not available . Not applicable August 15, 1974. ANNEX I Page 3 of 3

EGONOMIC INDICATORS

BALANCE OF PAYMENTS MERCHANDISE wXORTS (AVERAGE 1969-73) 1969 1970 1973 (US $ Mln.) U$ln. k Exports of Goods, NFS 345 362 427 Tea 179.4 _-4-.7 Imports of Goods, NFS 456 400 448 Rubber 64.4 19.6 Resource Gap (deficit = -) -111 -36 -21 Coconut Products 36.4 11.2 All Other Commodities 47.6 14-5 Interest Payments (net) -18 -21 -17 Workers' Remittances - 1 - 2 - Total 327.8 100.0 Other Factor Payments (net) -12 -10 - Net Transfers - - - EXTERNAL DEBT, DECEMBER 31, 1973/2 Balance on Current Account -142 -71 -38 US $ Mln. Direct Foreign Investment - 3 - 1 2 Net MLT Borrowing 48 31 30 Total Outstanding 713.3 Disbursements (61) (50) (52) Total Outstanding & Amortization (13) (19) (22) Disbursed 476.0 Sub-total 30° 32 Capital Grants 8 13 13 DEBT SERVICE RATIO FOR 1973 Other Capital (net) 31 26 4o Other items n.e.i. 4 -19 _5 Total Outstanding & Increase in Reserves (+) -54 -21 42 Disbursed 12

Gross Reserves (end year) 63.3 67.6 126.1 Net Reserves (end year) -122.0 -107.8 5.3

1970 1972 1973 (US $ Kln.)

Fuel and Related Materials

Imports 10 29 43 of which: Petroleum 9 28 43 Exports 7 14 21 of which: Petroleum 7 11 17

RATE OF EXCHANGE IBRD/IDA LENDING, JULY 31.1974 (us$ Mln.)

Through 1967 Foreign Exchange Entitle- IBRD IDA ment Cert. (FEEC) Rates US$1.00 = Rs.5.95 Outstanding & Disb. 32.3 17.7 Rs 1.00 = US$0.21 1968 US$1 = Rs 8.57 (44% FEEC),Undisbursed 19.4 7.9 1969- Outstanding incl. 1971 US$1 = Rs 9.22 (55% FEEC) Undisbursed 51.7 25.6 1968-71 1972 US$1 = Rs 9.92 (55% FEEC) 1973 US$1 = Rs1O.76 (65% FEEC) US $1.00 = Rs 5.95 Rs 1.00 = US$0.17 1972 US $1.00 = Rs 6.40 Rs 1.00 = US$0.16

1973

US $1.00 = Rs 6.52 RS 1.0O = Us$0.15

/1 Repayable in foreign currencies and with a maturity over one year.

August 15, 1974

ANNEX II Page 1

THE STATUS OF BANK GROUP OPERATIONS IN SRI LANKA

A. STATEMENT OF BANK LOANS AND IDA CREDITS (as at July 31, 1974)

Loan or US$ Million Credit Amount (less cancellations) Number Year Borrower Purpose Bank IDA Undisbursed

Four loans and one credit fully disbursed 39.5 0.6 - 121 1968 Sri Lanka Irrigation 2.0 0.8 634 1969 Development Finance Industrial 3.0 0.9 Corp. of Ceylon Finance 636 1969 Ceylon Electricity Power 16.5 4.5 Board 168 1969 Sri Lanka Land Reclamation 2.5 0.9

653 ) 1970 Sri Lanka Irrigation/Power 14-5 14.0 174 ) 14.5 0.4 372 1973 Sri Lanka Power Transm. 6.0 5.8

Total 73.5 25.6 27.3 of which has been repaid 21.8 -

Total now outstanding 51.7 25.6

Amount sold 3.6 of which has been .-epaid 3.6 -

Total now held by Bank and IDA /a 51.7 25.6

Total undisbursed 19.4 7.9 27.3

/a Prior to exchange adjustment.

Note: A Credit of $9 million for dairy development was approved on July 11, 1974 and signed subsequent to the above Statement A; it is not yet effective.

B. STATEMENT OF IFC INVESTMENTS (as at July 31, 1974)

N O N E ANNEX II Page 2

C. PROJECTS IN EXECUTION -

Cr. No. 121 - Lift Irrigation Project; US$2 million of June 19, 1968; Original Closing Date: June 30, 1973, Revised Closing Date: December 31, 1975

Construction is about two years behind the appraisal schedule, but most problems causing the delay - government change, reorganization, insurrection in 1971, strikes in 1972 and inadequate repair facilities - have been solved since 1973 and little further slippage is expected. In particular, problems of maintenance and repair of machinery and equipment are considerably reduced, since the repair shops recently completed are now operational. Savings from the disbursement category for civil works have recently been reallocated to allow purchase of additional vehicles for irrigation and agricultural staff in order to improve supervision and operation of the project. The project is now expected to be completed by the end of 1974 and the credit fully disbursed and the area fully ir- rigated by the revised Closing Date of December 31, 1975.

Ln. No. 634 - Second Development Finance Corporation Project; US$3 million of July 18, 1969; Original Closing Date: December 31, 1973, Revised Closing Date: December 31, 1975

Because of the slowdown in economic activities, there were delays in committing funds and the original Closing Date of December 31, 1973 has been postponed for a second time from December 31, 1974 to December 31, 1975, to allow sufficient time for presentation of new sub-projects to the Bank and the completion of disbursement. Helped by Government's policy to encourage tourism and non-traditional exports, commitments under the loan picked up in 1973 and were completed by last December. Loan disbursements are expected to be completed by the revised Closing Date.

Ln. No. 636 - Maskeliya Ova Power Project, US$16.5 million of July 28. 1969; Original Closing Date: September 30, 1973, Revised Closing Date: December 31, 1974

The first unit of 50 MW was commissioned in February 1974, about 1-1/2 years later than originally estimated. The second unit is expected to be commissioned shortly. Delays were caused mainly by problems associated

1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the un- derstanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. ANNEX II Page 3 with the appointment of acceptable consultants, landslides in the penstock area and various strikes in manufacturers' factories. Site work has in general been carried out satisfactorily. There may be some savings in foreign exchange costs which the Ceylon Electricity Board, the beneficiary, wishes to utilize for financing the first stage of a much needed system control center. Details of the equipment required are being prepared by CEB. The original Closing Date of September 30, 1973 has been extended to December 31, 1974, but a further extension may be required to allow for completion of disbursements, including retention payments for major equipment and for the control center.

Cr. No. 168 - Land Reclamation and Drainage Project; US$2.5 million of November 13, 1969; Closing Date: December 31, 1974

Construction is about two years behind schedule (for the same reasons as under Credit 121 above), but all necessary equipment is now on order and no further delays are anticipated. The project is expected to be completed by December 1976, which would necessitate extension of the Closing Date. Allocation of the proceeds of the credit has recently been modified to permit purchase of additional equipment and vehicles to improve engineering and agricultural supervision in the widespread project area.

Ln. No. 653 and Cr. No. 174 - Mahaweli Ganga Development Project (Irrigation/Power); US$14.5 million each, botn of January 30, 1970; Closing Date: June 30, 1976

The expected date of first water deliverv is now one and a half years behind the appraisal schedule and overall completion of the project is expected to be November 1975, nearly a year behind appraisal target. Delays were due mainly to foundation problems at Polgolla power house and a slow start at Bowatenna diversion dam. Construction is now progressing satisfactorily. Good progress has been recorded to date on agricultural extension and research in the project area. Total project costs have increased by about 10% largely as a result of rising costs for electro- mechanical equipment. Cost overruns are being met by reallocation from the Unallocated category of disbursements. The Loan and Credit are expected to be fully disbursed by the Closing Date.

Cr. No. 372 - Power Transmission and Distribution Project; US$6.0 million of April 18, 1973; Closing Date: December 31, 1976

Preparation for construction is proceeding satisfactorily. Bids for imported equipment and materials have been received and bid evaluation has been cleared by the Association for the award of contracts to the value of about ITS$5 million equivalent. Bids for remaining items are expected to be received by the Association shortly. ANNEX II Page 4

Cr. No. 504 - Dairy Development Project; US$9.0 million of August 9, 1974; Closing Date: December 31, 1980

This credit is not yet effective. ANNEX III Page 1

SRI LANKA

PROGRAM CREDIT

CREDIT AND PROJECT SUIMARY

Borrower: Government of Sri Lanka

Beneficiaries: Approximately 120 enterprises in selected high priority industries

Amount: US$15 million

Terms: Standard

Project Description: The project will finance imports of raw materials, components and spare parts in order to assist Sri Lanka in efficient utilization of existing facilities in agriculture, industry and selected services.

Project Cost: 1JS$ Million Sectors Total F.E. Proposed Percentage Requirements Credit financed by IDA

Category A - Raw materials, components and spare parts for manufacture

1. Agricultural Engineering 4 ) 2. Agricultural products processing 5 ) 3. Pulp, paper and paper products 5 ) 4. Packaging and containers 8 ) 5. Base metals and metal working 13 ) 13.0 6. Agricultural and Industrial Chem. 4 ) 7. Cables and wires 2 ) 8. Auto ancillaries 2 ) 9. Leather products 1 ) 10. Mining 2 ) 11. Textiles 39 ) _

Sub-total, Category A 85 13.0 15 ANNEX III Page 2

Project Cost US$ Million Total F.E. Proposed Percentage Sectors Requirements Credit financed by IDA

Category B - Spare parts for actual users

1. Agricultural and irrigation equipment 3 ) 2. Commercial transport 5 ) 3. Heavy earth moving equipment 1 ) 2.0 4. Power generation equipment 1 )

Sub-total, Categorv B 10 2.0 20

TOTAL CATEGORIES A and B 95 15.0 16

Estimated Disbursement: About US$5 million between September and December 1974 and about US$5 million each quarter there- after.

Procurement Arrangements: Private sector enterprises will procure their requirements through normal commercial channels. Public sector corporations and agencies will procure in accordance with the Government of Sri Lanka's Financial Regulations (1966) which require international competitive bidding or exception- ally thorough international shopping when appropriate, except in the case of spares u.hich will be purchased through normal commercial channels.

Counterpart Fund: A counterpart fund will be created, within the Central Bank, using rupee proceeds obtained from the sale of foreign exchange provided for the purchase of items financed from the credit. The Fund would be used exclusively for development expenditures shown in the 1974 and forthcoming 1975 budgets. The Central Bank would maintain an account for the Fund and a monthly statement of expenditures would be prepared and forwarded, at the end of each month, to the Association for review. SRI LANXA

PROGRAM CREDIT

BALANCE OF PAYMENTS SUMMARY (US $ million) 1974 Estimates 1970 1971 1972 1973 Made in: 1. CURRENT ACCOUNT April June A. Receipts 382 380 362 437 636 643 Exports (f.o.b.) 339 324 30 3 5 Other 43 46 54 69 68 75 B. Pa)nents 453 434 410 475 819 878 Imports (cif) 392 372 v9 1 v Other 61 62 61 60 61 66 Current Account -71 -54 -48 -38 -183 -235 II. CAPITAL ACCOUNT A. Net Private -1 -4 -6 -2 B. Net Official g § 7 90 m Commodity and Project Aid ; E 3 3 7Y 102 9 Suppliers and Private Bank Credits 1 8 - 15 - 42 Short-term creditsva/ 25 -2 - 25 -3 -8 IMF Transactions -14 -7 2 -3 -17 20Y C. Net External Assets 21 -26 -1I -42 - - e/ Capital Account 7_ 5 X X5_ 5

Errors and Omissions -5 -1 +3 +2 - - Forein Aicchange Gap 125 79

Source: 1970-1973 Central Bank of Ceylon Annual Report. 1974 Central Bank and Mission estimate.

Includes short-term credits of under one year. b/ Ecxcludes possible disbursements from new aid commitments made in 1974. c_/ Includes disbursements from new commitments made by the end of June 1974, or expected over the balance of the year. Includes US $13 million (SDR 11 million) out of a total of US $38 million (SDR 31.5) e/ Special Oil Facility allocation of the IMF. No allowance has been made here for the drawing down of external assets which is anticipated by the Central Bank.

August 1)4, 1974.

SRI LANKA PROGRAM CREDIT AID AND DEBT SERVICE 1969-1974 US Million Est. 1969 1970 1971 1972 1973 1974

A. LOANS: I. Aid Group 1/ 2/ Disbursements 47.5 37.9 37.7 47.8 43.3 87.5 Debt Service 15.6 17.7 18.4 23.9 25. n.a. t/ Net Transfer 31.9 20.2 19.3 23.9 17.9 II. Other Aid Donors / Disbursements 16.7 13.8 29.7 7.1 7.3 0.3 Debt Service 4.4 7.2 8.5 8.3 9.2 n.a. 4 Net Transfer 12.3 6.6 21.2 - 1.2 - 1.9

III. Supplier's Credits Disbursements 20.2 7.9 14.1 12.0 24.0 66.8 Debt Service 11.0 11.5 13.0 17.3 18.3 n.a. 4/ Net Transfer 9.2 - 3.6 1.1 - 5.3 5.7

IV. Private Banks Disbursements -- 1.7 4.9 7.2 5.9 1.6 Debt Service -- -- 0.5 0.9 1.4 n.a. i/ Net Transfer -- 1.7 4.4 6.3 4.5

V. Total Loans Disbursements 84.4 61.3 86.4 74.1 80.5 156.2 (Principal 21.2 24.9 29.3 36.6 39.0 51.0 Debt Service (Interest 9.8 11.5 11.1 13.8 15.3 20.9 Net Transfer 53.4 24.9 46.0 23.7 26.2 84.3 B. GRANTS: DISBURSEMENT 7.7 127 7 TT 7 13.0 7:;9

TOTAL NET TRANSFER 61.1 37.5 63.6 39.3 39.2 123.2 j Includes: Australia, Canada, France, Germany, Japan, U.K., U.S.A., and multilateral agencies (IBRD/IDA and As.D.B.) as full members and Denmark, India, Italy and Sweden as observer participants. 2/ Includes only US$5.0 million disbursements from the proposed US$15.0 million IDA program credit. / Includes official assistance from Czechoslovakia, East Germany, People's Republic of China, Poland, Romania, USSR and Yugoslavia. / Debt service is included in the total figure shown.

SOURCE: l969-1973: External Debt Table 2 (TBRD). 1974: Revised Foreign Exchange Budget, June 4, 1974, Ministry of Planning and Economic Affairs. August 19, 1974 ANNEX VI

SRI LANKA

PROGRAM CREDIT

IMPORT SUMMARY (US $ Million)

Estimates 1968 1969 1970 1971 1972 1973 1974

Food 164 153 181 140 151 215 348

Petroleum 21 29 10 33 29 43 151

Fertilizers 18 18 17 15 10 17 73

Textiles 25 35 21 27 8 9 22

Pharmaceuticals 5 6 5 6 7 6 8

Industrial Imports 36 45 29 30 31 23 90

Transport Machinery and Equipment 61 107 95 83 70 71 75

Other 63 53 33 39 43 48 45

Total Imports 393 446 391 373 346 432 812 (c.i 0 f.)

Source: 1968-1973 Central Bank of Ceylon Annual Report (1970-73). 1974 Import Program estimated by the Ministry of Planning and Economic Affairs.

Exchange rates used are: 1968-71, $1=Rs0 5.95; 1972-73, $1=Rs. 6.401974, $1=Rs.6.47

August 19, 1974 SaI LAL,iKA

PROGA

VOLUEi INDICES O2 PRODUCTJIO4 (198 = 100) ~

Agrieulture 1969 1970 1971 1972 1973 Tea 97.7 94.4 94.9 95.0 Rubber 101.5 107.1 y5.1 9 Coconut 92.6 107.8 115.6 123.9 Paddy 99.9 117.5 101.5 95.4 n.a. Highland crops 93.7 104.0 101.5 1i5,1 Livestock and livestock products 126.0 137.3 140.7 128.6 Minor export crops 105.0 96.5 98.3 11X.1 Overall index (revised) 102.9 110.2 107.5 106.1

Industry Manufacture of food, beverage 105.2 109.3 111.9 116.7 119.0 and tobacco Textile Weaving Apparel and 119.0 122.6 125.2 156.6 126.5 Leather Industries Manufacture of wood and wood 106.1 122.4 143.9 162.2 148.0 Products including furniture Manufacture of Paper and paper 114.1 116.2 118.3 129.3 166.0 Products Manufacture of Chemicals, Petro- 122.8 210.3 254.4 247.0 138.6 leum, Coal, Rubber and plastic products Manufacture of non-Metallic Mineral 132.7 145.4 174.4 166.0 196.0 Products except Petroleum and Coal Basic Metal Products 87.3 138.2 194.5 220.0 120.0 Manufacture of Fabricated Metal 135.2 149.0 150.2 162.5 188.4 Products, Machinery and Equipment Manufactured Products N.E.S. 357.1 671.4 785.7 1000.0 1557.1

Total 113.7 130.6 140.9 148.3 134.9

Source: Unpublished data from the Central Bank of Ceylon, Statistics Division.

August 20, 1974. SRI LANA

PROGRAM CREDIT

EMPLOYIMET BY SECTORS

1971 1972 1973 1974

Agriculture 1.988 2t027 2.098 2,161

Mining & Quarrying 17 17 20 22

Manufacturing 379 388 400 412

a) Food, Beverages & Tobacco - 52

b) Textiles & Apparel - 98

c) Leather, Rubber, Wood & Paper - 55

d) Non-metallic Products, Petroleum and Coal - 52

e) Machinery _ 40

f) Other 91

Construction 123 126 131 136 Trade & Commerce 405 415 428 441

Transport & Communications 169 173 179 184

Util-ities 10 1 1 1 1 1 1

Other Services 532 545 557 571

Total 3623 38712 324 3938

Note: Out of a total estimated labor force of 4.5 million, approximately 0.80 million are unemployed. The employment projections are based on 1971 Census and related to economic growth rates of i 2.9% and 3.5% for 1972 and 1973 respectively. (-) not available Source: Department of Statistics, Ministry of Planning and Economic Affairs. August 19, 1974 ANNEX IX Page 1

SRI LANKA PROGRAM CREDIT

SURVEY OF THE INDUSTRIAL SECTOR

1. As part of the appraisal of this credit, a sample survey of manufacturing enterprises in the eligible sub-sectors chosen for this credit was carried out in Sri Lanka from June 12-28, 1974. Data for 1973 were obtained on about 300 enterprises; these data are summarized in Table 1. A question- naire was completed by 35 of the major enterprises employing approximately 30,000 workers or 7 percent of total employment in manufacturing. Eighteen of these enterprises were visited. On the basis of this survey and discuss- ions with the Government, three major topics are discussed here, namely, the management and structure of the industrial sector, factors affecting production and export performance.

A. The Management and Structure of the Industrial Sector

2. The Five-Year Plan (1972-1976) contains a program for industrial development but hitherto there has been no comprehensive statement of industrial policy. Instead, policy has emerged from a series of pronounce- ments over time which have provided the basis for licensing and regulating industry. The government's main concern has been to define broad areas for public and private investment. The principal policies governing establishment of public sector corporations have been where:

(a) The economies of scale and the limited size of the domestic market mean that only one plant is likely to be economic (i.e. steel, petroleum, cement, paper and tires).

(b) The Government decides to take the lead in providing inputs for other manufacturing activities. The Government either operates a monopoly (i.e. oils and fats processing and chemicals) or enters into competition with the private sector (i.e. tanning, foundry work and metal fabrication).

(c) The Government wishes to expand output with particular concern for employment generation and in competition with the private sector (i.e. textiles and hardware).

(d) A foreign investor wants a joint venture with the Government for export-oriented production (i.e. ceramics); a fairly recent development.

3. The private sector has been encouraged to produce consumer goods for export. In addition, a variety of engineering goods are manufactured, primarily for the domestic market. Joint ventures with foreign firms for ANNEX IX Page 2 export-oriented production have been encouraged following a white paper prepared in 1972 (Policy of the Government of Sri Lanka on Private Foreign Investment).

4. Industrial policy has been concerned with the generation of employment opportunities, small scale units, minimizing foreign exchange costs, and regional dispersion. The large amount of unemployment has caused the Government to give high priority to creating new jobs.

5. Because Sri Lanka has very few industrial raw materials, industry in general has a high percentage of import requirements in relation to total raw material costs. For steel, textiles, engineering goods and tires, 80 percent of the raw materials used are imported. Although Sri Lanka produces rubber, tires are included in this group because the value of imported cord and chemicals is high. For leather and paper products about 50 percent of value of raw materials is imported, while for plywood and mineral prod- cts it is 20 percent or less. As Sri Lanka's terms of trade have deterio- 1ated progressively, industrial imports have been compressed, the principal cau3e of under-utilization of capacity. o. Finally, industry is heavily concentrated around Colombo with 90 percent of output being manufactured in this area. Although the Govern- ment is concerned about regional dispersion, no incentive schemes have been launched to encourage private investment in other parts of the island. The Government has established some plants in the more backward areas and it has been preparing a plan to convert the old naval base at Trincomalee into an export manufacturing zone.

7. The management of the sector is faced with formidable difficulties; the almost total lack of locally produced raw materials, a small market, a pressing unemployment problem, a chronic shortage of foreign exchange and an economy which, in real terms, has been declining. In these circumstances, it is surprising to find that there is no comprehensive statement of policy to promote industrial development. The weakness of the private sector stems .i! large part from the heavy disincentive of taxation and previous policies on investment which has led the public sector more and more to take the initiative. The private sector also operates in the knowledge that the Govern- ment has enacted legislation which inhibits expansion. For example, although the Business Acquisition Act of 1970 has only been invoked in isolated cases under rather exceptional circumstances, the fact is that this particular piece of legislation gives Government sweeping powers to nationalize private industry. Similar powers have been assumed in other sectors for other pur- poses (i.e. the Estates Transfer and Control Act of 1972 and the Land Reform Act of 1972) but which nonetheless have added to the general atmosphere of uncertainty about the place of private ownership and the role of entrepre- neurship. More recently, the Government has felt compelled to place a ceiling on incomes (The Ceiling on Incomes Act of 1973) which is likely to inhibit the mobilization of personal savings for investment in the private sector. ANNEX IX Page 3

8. Against these rather negative aspects, the Government has established an attractive incentive program for exports (paragraphs 13 to 16 below) and has taken considerable initiative in trying to encourage private foreign investment either in joint ventures with the government or with private Sri Lanka interests. Progress has been slow but the accelerating pace of hotel construction by foreign interests in response to tourist demand is a small but encouraging sign of increased foreign investment.

B. Factors Affecting Production

9. Raw Material Shortages. Most of the manufacturing enterprises in Sri Lanka are operating at well below capacity. 1/ Shortage of imported materials is the main reason, although the actual impact of the shortages is difficult to gauge. The performance of five state enterprises is shown in Table 2. These enterprises all have moderate to high import dependence and are either the sole or the dominant production unit in their respective industries. The values of imported materials used in manufacture have been estimated from the ratio of imported inputs to total materials used, the material component of production costs, and the output in a given year. In 1973, three enterprises operated at 75 percent of capacity, or higher. Of these Ceylon Steel and National Textile are almost totally dependent upon imported raw materials. Ceylon Tire is also heavily dependent upon imports, but rubber is, of course, available locally. Eastern Paper and Ceylon Leather Tannery are dependent upon imports for about half of their input needs, but they both had sufficient stock to maintain a high level of operation in 1973. The apparent drop in capacity utilization at the paper mill in 1972 was due to the addition of its No. 2 machine which began production in April 1973. As might be expected, manufacturers have been adjusting production programs to their anticipated foreign exchange allocations, while there is also evidence that they have been depleting the stocks built up earlier. This is fairly typical of the sector as a whole, although private enterprises have probably had greater difficulty in building up stocks and in obtaining replenishment, largely because, in a very tight foreign exchange situation, private sector operations have a somewhat lower order of priority.

10. In addition to shortages, prices of imported industrial raw materials have risen sharply over the past two years, reflecting a worldwide trend. Although other countries have also had to face this problem, industry in Sri Lanka is less able than many to cope with the situation because of deteriorating terms of trade and import capacity. The price trends of some major imported raw materials are shown below.

1/ See Table 1 for estimated capacity under-utilization of selected manufacturing industries. ANNEX IX Page 4

1972 1973 1974 (average) (average) (June)

Steel billets, E/ton, c&f 73 83 n.a. Tinplate, E/ton, landed 91 182 n.a. Heavy sheet steel, E/ton, c&f 78 130 200 Stainless steel, E/ton, c&f 345 800 1,200 Brass bars, E/ton, c&f 380 620 1,080 Zinc ingots, E/ton, c&f 160 200 750 Foundry coke, El/ton, c&f 47 50 93 Wood pulp, i/ton, c&f Bleached 71 144 n.a. Unbleached 61 75 n.a. Cotton, E/kg. FOB .40 .41 n.a.

So. .ace: Ministry of Industries and Scientific Affairs and IBRD Mission.

Labor Costs. Labor costs per unLt of output are not available but they are undoubtedly higher than they need be. This is because general -onccrr over employment has led to excessive labor forces in relation to output and because of the high rate of absenteeism at plants operating at relatively high levels of capacity. Thus, in general, labor discipline appears to be poor and production costs have been raised because of the compulsion to retain larger labor forces than are necessary.

C. Export Performance

12. Exports of industrial goods are expected to increase from US$15 million in 1972 to an estimated US$29 million in 1974. Although development has taken place from a small initial base, this performance is a reflection of the Government's efforts to stimulate exports.

13. Incentives for Export. Incentives are provided through various tax exemptions or reliefs, payment of FEECs, custom duty rebates, and import privileges. Tax holidays on profits from export sales are offered to both new enterprises (8 years) and existing enterprises (5 years). Export sales are exempt from the turnover tax and personal income receipts from export profits are excluded from the compulsory saving scheme. Export oriented investments are encouraged through large initial depreciation allowances (50-80 percent for machinery) and a development rebate (20-40 percent).

14. Exporters of industrial goods receive Foreign Exchange Entitle- ment Certificates (FEEC) which provide a premium of 65 percent over the parity exchange rate. To the extent that exporters have paid for their imported raw materials at the FEEC rate, the FEEC rate for exports will offset these costs. However, as the FEEC rate is based upon the total value ANNEX IX Page 5

of exports, the manufacturer receives the premium regardless of import costs. Thus, the FEEC rate offers a considerable cash incentive if the domestic input is high.

15. Custom duty rebates are offered on an assessed percentage basis which exporters receive directly from commercial banks upon producing evidence of sale and shipment.

16. Import privileges are of two kinds. First, export industries receive special allocations for imported raw materials provided that exporters can produce irrevocable letters of credit. However, for an exporter to obtain an irrevocable letter of credit, he must commit himself to fill an order which he may not, and often cannot, meet without assurance that his imported raw material requirements will be met. This poses a serious problem for exporters, especially as constraints have made the availability of foreign exchange very uncertain. A scheme for automatic replenishment of the import content of exporters needs early consideration. Secondly, exporters may utilize freely 3 percent of export earnings for any purpose they wish, including foreign luxury goods. In practice, enterpre- neurs have shown greater interest in using this concession for their busi- nesses than importing cars and other luxury items.

17. Export Performance. Details of the export of industrial goods, which include some processed agricultural and fishery products over the past three years, and the estimated import content, are shown below: ANNEX IX Page 6

1974 Estimated Import 1971 1972 1973 lst Qtr. Content (US$ Million)------…------

Total Industrial Goods n.a. 15.0 20.0 n.a. n.a. of which:

High Import Content

Naptha 1.0 1.9 3.6 2.0 100 Garments & Fabrics 0.7 0.9 2.4 1.1 70-80 Textiles n.a. n.a. 0.8 nil 85

Meditm Import Content

Rubber Products 0.1 0.3 0.6 0.1 40

Low Import Content

Engineering Goods 0.1 0.4 1.0 2.2 30 Vegetab,e Oil Products 0.9 0.9 1.5 0.7 20-35 Leather and Leather Goods 0.7 0.7 1.5 0.7 15-35 Seafoods 0.4 1.0 2.3 1.0 5 Mineral Products 1.9 2.4 2.8 0.4 5

Source: Ministry of Industries and Scientific Affairs.

18. For the three years, 1971 to 1973, and leaving aside sales of naptha, export production is largely concentrated in goods with low import content. The exceptions are textiles and garments for which employment considerations are very important. Although a certain amount of the improvement in foreign exchange earnings from industrial exports is attributable to price increases, volume has increased as well. Overall per- crmance has been reasonable and demonstrates that, in certain sub-sectors, such as textiles and garments, engineering goods, and leather products, rapid strides in expanding exports can be achieved. It is surprising to find such a small margin of foreign exchange earnings from rubber products, but the difficulty seems to be that most products have high value import requirements. The Government is examining prospects for rubber goods manufacture and clearly, maximizing value-added to the economy from locally grown rubber, has high priority. Mineral products are based upon extraction of graphite ilminite and rutile, with Sri Lanka's graphite being of especially high quality. So far only very limited processing of ores has taken place. The prospects for industries based upon these minerals, in particular graphite, have yet to be examined, but manufacture of a range of industrial goods might well prove feasible and certainly deserves further examination.

19. Future Prospects. Industrial export earnings in 1974 will be heavily influenced by world prices. Nonetheless, the first quarter shows ANNEX IX Page 7 some further real progress, especially in the export of garments and engineering goods. Leather goods are also likely to increase substantially by the end of the year. In order to lay the foundation for continuing export growth, the Government should give priority to those goods offering the highest return in terms of foreign exchange. At the same time, a more consistent system of allocating foreign exchange to exporters is required in order that they may know their imported raw material situation with cer- tainty, before they bid for orders. Further, technical know-how for development of the rubber and engineering goods industries is essential. In addition, improvement of leather quality has high priority.

SRI LANKA

PROCRAM CREDIT

SURVEY OF SELECTED ELIGIBLE MIAIUPACTuRNG INDUSTRTES, 1973

indusL1try No. of Establishments Emolomen=t- Capacity Utilization Production Export (Rs millioll Prinoin.1l lmpersc State Private State Private (no. of shifts) Quantitv Value(Rs million) Ion Manufacture 1, Agri. Ensineering Water Pumps - 5 - 470 25-35% (2) 4,800 units 8.9 none oEgines,electnic motors Agri. Sprayers - 3 - 120 n.a. man. n... none Poiyethylene,,brass rodo&tubes Mammoties 1 n.a. n.a. n.a. 95% (3) 340,000 onits* 7.0* neglipible Steel sheets

2. Agri. Products 7 250 11,000 n.a. n.a. n.a. 920.0 n.a. Chemicals,jute bags,cans & Processiag tin flats 3. Pulp &Paper Products I n.a. 2200 n.a. 85% (i)* 19,000 tons* SO.0* n0o0 Wood pulp,chemicals 4. Packaging &Containers Tea Chests 1 5 2460 140 30/ (3)* 1.6 ism. snits n a, none Glue,tin-plate waste Plastic Baga. - 8 - 210 40% (3) 2.6 mn. lbh. 7.0 negligihle Polythene

5. Metals Foundry Products I 11 400 230 20% (3) 4,000 tons* 3.6* negligible Foundry coke Stccl Products I - 1200 - 35% (3) 29,000 tons 53.0 2.0 StIel billets,wire rods

6. Agri. &Ind. Chemicals

Pesticides - 6 - 140 30% (1) n.s. n.a. onoe Active Lngredients,solvents

7. Cables &Wires - 3 - 240 40% (2) n.a. 12.2 negligible Aluminum &copper rods 8. Auto Ancillarics Batteries - 6 - 240 n.a. 54,000 units 11.0 n,a. Lead,antimony,coal dust Tires I - 1990 * 75% (3) 100,000 units 53.0 negligible Tire cord &chemeicals 9. Leather Products Tanning of Hides I 11 140 330 90% (1)* 1.5 n. sq. ft.* 4.0o 1.8* Chemicals Leather Goods 1 70 910 n.a. n.a. n.a. 60.0 2.2 hardware 10. Mining Ilm,enite I - 500 - n0a. 92,000 tens 3.1 7.3 Explosives,drill Graphite I _ bits 1540 - n.a. 7,500 tons n.a. 12,0 11. Testiles Cotton 1 4 6400 5000 30-60% (3) 10 m. lbs. spinning* 4.0 Raw cotten,dyesochemicals 11 mn. yds. weaving* 134.0* 25 mn. yds. finishing* Synthetic - 26 - 4800 50% (2) 12 mn. yds. rn.a. 1.3 Yarn,dyes,chemicals

*State enterprise only.

Source: Sample survey carried 0u1 by Bank Group Mission, June 18-28, 1974.

South Asia Department August 23, 1974. SRI LANKA

PROGRAM CREDIT 1 DATA ON CERTAIN PUBLIC SECTOR CORPORATIONS

Import Requirement Materiel Cost As 2/ As % of % of Production Value. Ex-Factory Cost of Imported Material Total Material Used Production Cost 1971 1972 1973 1971 1972 1973 (X) -- (I) (Rs. Million) (Rs. Million)

Ceylon Steel 100 77 51.8 66.1 53.2 39.9 50.9 41.0 (30) (45) (35) (41.8) (27.0) (45.0)

National Textile 94 45 46.8 82.0 134.4 19.8 34.7 56.9 (60) (45) (50) (13.1) (27.5) (43.1)

Ceylon Tire 82 46 34.4 58.9 55.4 13.0 22.2 20.9 (45) (80) (75) (13.6) (16.0) (16.4)

Eastern Paper 60 59 25.2 33.9 50.3 8.9 12.0 17.8 (85) (65) (86) (38.4) (8.4) (14.7)

Ceylon Leather Tannery 46 59 3.3 3.4 4.0 0.9 0.9 1.1 (90) (90) (100) (n.a.) (n.a.) (n.a.) 1

2/ Ministry of Industries and ScientificAffairs and IBRD Mission Sample Survey. K 2/ Values within parentheses are capacity utilization figures. 2/ Values listed are imported materials used in production. Values within parentheses are procurement figures for that year. Source: Ministry of Industries and Scientific Affairs July 29, 1974 IBRD-3839 R 1974 Ei' 8 JULY 80' ;a - . 6

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