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         Integrated Agricultural Export

The Hungary Integrated Agricultural Export project, supported by Loan 3229-HU for US$100 million equivalent, was approved in FY90 and closed on June 30, 1996, six months later than originally planned. The European Union (EU) also supported the project by parallel financing of technical assistance. AnThe undisbursed amount of US$790,000US$790,000 was canceled. The Europe and Central Asia Regional Office prepared the Implementation Completion Report (ICR). The borrower’s assessment is appended to the ICR. The EU was not formally requested to review the ICR.

The project aimed to increase the efficiency of Hungary’s agriculture by facilitating the transformation from a centralized, planned, and target-oriented agriculture to a private, market-oriented sector based on private ownership. In particular it was designed to encourage development of relatively small, private farms. (Notwithstanding the project name, exporting was not a project objective.) The project aimed to provide quality food products for export and to make agricultural producers more efficient by providing additional financial resources to private, small-scale farmers and by improving agribusiness methods and practices of managers of large-scale farms.T To realize these objectives, the project had three components. First, the central bank administered a credit line to participating commercial banks which were to lend the entire loan proceeds to farmers and rural entrepreneurs for farm inputs, equipment, and construction materials. Second, institutional development supported institutions basic to a market economy, including improving price information for agricultural products, setting up a commodity exchange, developing trade organizations for poultry, maize, fruits, vegetables, and other crops, and training (particularly for farm managers) in modern marketing techniques and management. Third, a policy reform component aimed at subsidies to be reduced by at least a third, the value of land to be included in farm accounting and land to become a “mortgageable” asset, and tariffs to substitute for quantitative restrictions (QR) on food imports.

Bank supervision concentrated on the credit line. By volume, over 73 percent of the 1,446 loans went to private operators, most of whom were small farmers. Rural cooperatives and state farms borrowed 24 and 3 percent, respectively. The ICR estimates an average real financial rate of return of 16 percent to the subloan portfolio. To accelerate disbursement, the central bank allocated funds to each bank in the amount requested, but these banks were then required to pay the commitment fee on their undisbursed allocations. Slow disbursing banks later transferred project funds to the quick disbursers. To encourage entrance into family farming, the government used budget resources to finance rebates on small-farm loans of up to half the interest costs. Local tax offices made the rebate against loan documentation and it did not penalize participating banks. These incentives help explain why the loan disbursed rapidly during a period of depression and economic uncertainty.

Poland-Hungary Assistance for Recovery (PHARE), a technical support program of the European Union, financed the institutional development as a completely separate project. The Bank did not supervise it. As TThe institutions to be supported by PHARE are now well established. Presumably agricultural marketing has become more efficient, while educational institutions have improved their training in agribusinessagrobusiness subjects.

Results on policy reforms are good. Agricultural subsidies have been brought down from 8 percent of the gross domestic product in 1988 to less than 2 percent since 1990. Most farm land is now in private hands and can be freely bought and sold. The ICR states that the law to make land fully mortgageable is to be put before the parliament in 1997. QRs on agricultural imports have been converted into import tariffs.

Above all, farming in Hungary is more efficient. From 1989 to 1996, agricultural labor decreased by two-thirds. But total agricultural output in 1996 was about ten percent above the trough of 1993 and at three-quarters of the peak production of 1989. Agricultural exports are about a quarter higher than in the late 1980s. The use of fertilizer per hectare cultivated decreased by more than half over the same period, but yields per hectare are now about 90 percent of those of 1986–89.

The Operations Evaluation Department confirms the ratings in the ICR. Project outcome and Bank performance are rated as satisfactory and sustainability as likely. Institutional development impact is rated as modest.

The ICR is satisfactory. The borrower did not include a plan for future operation, but continues to support the institutions assisted under the project. Participating banks are expected to onlend recycled funds from repayments of the subloans for the purposes specified under the project.

The key lesson is government ownership. The project was demanding and complicated and could have been appraised as three projects. Any of the three—the credit line, institution building, or policy reforms—could have gone awry. Government designed and supported the project as part of its radical transformation of the Hungarian economy. Its commitment—as reflected in the good performance of the National Bank of Hungary, and of the Ministries of Agriculture, Trade, and Finance—was a necessary condition for project success.

No audit is planned.

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