Document of FIL E U- '2iThe World Bank

FOR OFFICIAL USE ONLY

Report No. P-2455-CY

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO

THE REPUBLIC OF CYPRUS

FOR THE

VASILIKOS-PENDASKINOS PROJECT

FOR WATER RESOURCES DEVELOPMENT

January 24, 1979

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Cypriot Pound (Ch)

1 CL = 1,000 Mils1 CL 2.6 US Dollars (US$)

1 US$ ' 0.385 C61 US$ = 385 MilsCL Million US$2.6 Million

Fiscal Year - January 1 to December 31

ABBREVIATIONS

CCB - The Cooperative Central BankDA - Department of AgricultureMANR - Ministry of Agriculture and Natural Resources

MCM - Million Cubic MetersPAC - Project Advisory CommitteePPCC - Project Policy Coordinating Committee

WDD - Water Development Department

FOR OFFICIAL USE ONLY

CYPRUS

VASILIKOS-PENDASKINOS PROJECT FOR WATER RESOURCES DEVELOPMENT

LOAN AND PROJECT SUMMARY

Borrower: Republic of Cyprus.

Amount: US$11 million equivalent in various currencies.

Terms: Fifteen years, including three years grace, at 7 percent per

annum.

ProjectDescription: (a) The project is part of Cyprus' program to develop the

island's scarce water resources in an integrated manner

to promote more flexibility in water utilization and

reliablility of supplies. An additional 16.8 million M3

(MCM) of water would be provided annually, 9.6 MCM for

irrigation schemes in the Vasilikos and Pendaskinos areas

of southern Cyprus and 7.2 MCM for domestic use by the

Greek Cypriot and Turkish Cypriot populations in the

Nicosia, Larnaca and Famagusta areas.

(b) Project components include: (i) two dams and a diversion

system to capture and integrate the flows of the Vasilikos,

Pendaskinos and Maroni rivers; (ii) distribution works and

other facilities to irrigate 1,160 ha, including a canal,pipeline, storage reservoir and irrigation distribution

systems up to the farm gate, to convey surface water to

1,055 ha in the Vasilikos and Pendaskinos areas, and two

tubewells in a groundwater aquifer to develop groundwaterfor 105 ha in the Vasilikos area; (iii) land consolida-

tion, including farm road development, for about 1,055 ha

in the project to be irrigated from surface water sources;(iv) provision of bulk water supply outlets for 7.2 MCM

of water per year for domestic use, through existing water

transmission facilities for Larnaca and Famagusta and

those now being constructed for Nicosia; and (v) a small

agricultural research substation to carry out applied

research in the project area and an operation and main-tenance headquarters building.

(c) Project benefits include development of intensive fruit

and vegetable growing in a previously rainfed area, bene-fitting a farming population of 1,650 persons; ninety

percent of these are estimated to be in the relative

poverty target group, whose farm incomes are expected to

increase six to eight fold. Other benefits include theaddition of 470 full-time farm jobs in the project area

and provision of scarce potable water to the Greek Cypriot

I This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

- ii -

and Turkish Cypriot populations in the cities of Nicosia(210,000, including 30,000 commuters), Larnaca (85,000,

including 35,000 in the surrounding area) and Famagusta(15,000).

(d) Two technical risks, fully studied during project prep-aration, involve earthquake potential at the Kalavasos

damsite and seawater intrusion into the Gypsum aquifer.

These studies indicate that earthquake potential is low

and the dam design appropriate for prevailing seismic

conditions. Although the development of two tubewellsis not expected to result in seawater intrusion, water

extraction from the aquifer will have to be monitored on

a regular basis. There is also some risk of delays in

establishment of projected citrus plantations, should

farmers initially favor larger vegetable cropping to build

up early cash flows. However, in view of the high returnsfrom citrus over the long-term, any such delay is expected

to be only temporary.

Estimated Costs: Local Foreign Total

-------(Us$ million)-------

Kalavasos Dam 3.8 4.5 8.3Dhypotamos Dam 2.8 3.2 6.0

Maroni Diversion 0.6 0.6 1.2

Irrigation Schemes 1.3 2.1 3.4

Land Consolidation 0.2 0.2 0.4

Buildings, ResearchStation and Equipment 0.1 0.3 0.4

Administration andEngineering 1.1 1.1 2.2

Physical Contingencies 1.2 1.8 3.0

Price Increases 2.7 2.5 5.2

Total 13.8 16.3 30.1

Financing Plan: Local Foreign Total--------(US$ million)------

Bank - 11.0 11.0Other Potential External

Sources, or Government - 5.3 5.3Government 13.8 - 13.8

Total 13.8 16.3 30.1

EstimatedDisbursements: IBRD FY 1980 1981 1982 1983 1984 1985

------------(US$ million)--------------

Annual 0.7 2.6 3.2 3.7 0.6 0.2Cumulative 0.7 3.3 6.5 10.2 10.8 11.0

Rate of Return: 15%.

Estimated CompletionDate: June 1985.

Appraisal Report: Report No. 2254-CY, dated January 10, 1979,Regional Projects Department, EMENA.

REPORT AND RECOMMENDATION OF THE PRESIDENTOF THE IBRD TO THE EXECUTIVE DIRECTORS

ON A PROPOSED LOAN TO THE REPUBLIC OF CYPRUSFOR THE VASILIKOS-PENDASKINOS PROJECT FOR

WATER RESOURCES DEVELOPMENT

1. I submit the following report and recommendation on a proposed loanto the Republic of Cyprus for the equivalent of US$11.0 million, to helpfinance a portion of the foreign exchange costs of the Vasilikos-PendaskinosProject for Water Resources Development. The loan would have a term of 15years, including three years of grace, with interest at 7 percent per annum.Co-financing for part of the project is currently being sought from the KuwaitFund for Arab Economic Development.

PART I - THE ECONOMY

2. The last economic report on Cyprus (1151-CY) was circulated to theExecutive Directors in May 1976. Visits by the country economist in April1977 and June 1978, to update the information and analysis, included discus-sions with Turkish Cypriot officials and visits to the economically importantareas in the northern part of the island. Since sufficient reliable data arestill not available for the northern area, it has only been possible tomeaningfully review the economic situation and prospects for the southernGovernment-controlled part of the island. Findings of the June 1978 visit arereflected below.

General Background

3. Cyprus' economy grew at 7 percent per annum between 1960 and 1973,despite tension between the Greek Cypriot and Turkish Cypriot communities.The major factors contributing to this growth were: a competent publicadministration, dynamic entrepreneurs, a high rate of investment especiallyin the private sector, a rapid increase in agricultural exports contributing

to strong overall balance of payments, and flexible fiscal and monetarypolicies, which helped to stimulate growth while maintaining domestic pricestability.

4. The unprecedented drought of 1973 caused serious economic difficul-ties, and the subsequent hostilities in July/August 1974 had a drastic impacton the economy. Since then, Cyprus has de facto been divided into two partsby a ceasefire line, with little movement of people or goods between them.The southern part, under the Government's control, constitutes 64 percent of

the area of the island; the northern part, 36 percent of the land area, isunder Turkish Cypriot control. About one-third of the total population wasdisplaced, with over 150,000 Greek Cypriots moving south and approximately45,000 Turkish Cypriots moving north. The displaced population has, in goodpart, been resettled with humanitarian assistance provided largely through theUN. In 1977, the Government-controlled area had an estimated 524,000 people,while an estimated 145,000 live in the area under Turkish Cypriot control.Pending an island-wide political solution based on the principle of a federa-tion, and within that anticipated framework, the Turkish Federated State of

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Cyprus was proclaimed in February 1975. UN-sponsored intercommunal talkstowards such a possible solution have been held intermittently, but have sofar not been productive.

5. The de facto division of Cyprus into two communal zones has resultedin significant structural changes for the island's economy. Immediately fol-lowing the events of July/August, 1974, with the massive displacement of popu-lation and severance of sectoral linkages, GNP per capita dropped by some 19percent and the unemployment rate jumped to approximately 25 percent of thelabor force in the Government-controlled area. The northern part of theisland faced a similar loss in income and surge in unemployment. In addition,the balance of payments position was affected, as both exports and imports ofthe area under Government control fell by about 55 percent in the second halfof 1974. The drop in export earnings in the Government-controlled areareflected the loss of over 47 percent of Cyprus' cultivated land area in thenorth (including areas which produced over half the island's agriculturalexports). This area has only partially been exploited since 1974 by theTurkish Cypriots.

Recent Developments

6. The Government, through bold measures, succeeded in arresting, andin 1976 reversing, the economic decline in the area it controls. Two Emer-gency Economic Action Plans were adopted for 1975-76 and 1977-78. Theseplans consolidated initial measures for economic recovery and focused on theobjective of reactivating industry and agriculture, and reducing unemploy-ment. Investments in labor-intensive, export-oriented industries, as wellas increased utilization of existing capital, led to a rapid recovery of GDPand employment in 1975 and 1976. In 1976, GDP at factor cost grew by about17 percent. This growth was stimulated primarily by unique external oppor-tunities, as resourceful Greek Cypriot entrepreneurs managed to export anunusually large amount of agricultural goods to drought-affected countries inEurope and also expand their market share in the Middle East because of thedisturbances in Lebanon, and continued to win contracts in the Middle East,giving rise to export of unemployed labor and significant worker remittances.The strong export-led recovery in 1976 resulted in a turn-around in thebalance of payments after three years of increasing deficits. Receipts frommerchandise exports soared 76 percent, mostly from agricultural produce forthe United Kingdom, and cement, clothing and footwear for the Middle East andEastern Europe. Receipts from tourism and worker's remittances also roseconsiderably. Therefore, even though payments for merchandise imports roseby 40 percent as a result of economic reactivation and export production, thecurrent account deficit was marginal in 1976. Despite these achievements,however, investment, employment and GNP per capita in constant prices (of1967) had still not regained their pre-1974 levels by the end of 1976.

7. During 1977, these external factors had greatly diminished in scope,except for the growth of workers remittances. Instead, the main impetusbehind expansion of production was the rapid growth of aggregate domesticdemand. It grew twice as rapidly as output in 1977, as the effects of theGovernment's expansionary policies took hold. On the supply side, expansion

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was made possible by the utilization of idle land, labor and machinery,although by the end of 1977, full capacity utilization had been achieved inmany subsectors and together with export of labor for construction contracts,the unemployment rate had declined to 3 percent from 16 percent in 1975. Thebudget deficit declined by 15 percent in 1977 but remained high in relationto the deficits prior to the events of 1974 as the Government continued itsefforts to stimulate recovery and meet the needs of refugees. Private con-sumption in 1977 rose by 19 percent. Gross domestic investment increasedby 38 percent and fixed capital formation by 45 percent, with most of theincrease accounted for by private investment in manufacturing and construc-tion. GDP at factor cost grew by an additional 12 percent in 1977. However,the rate of growth in merchandise exports slowed down to 20 percent from theunusually high rate of 73 percent in 1976, reflecting an abatement of theunusual external factors which had spurred growth in 1976.

8. With the more rapid growth of domestic demand relative to output,the rate of inflation also increased, but remained modest. It was 7.6 percentin 1977, more than double the rate of 1976. The inflation rate was restrainedby a substantial rise in the supply of imported goods. As a result, the cur-rent account deficit grew from $10.4 million in 1976 to $95.6 million in 1977.A portion of this deficit was covered by direct foreign investment, and theremainder by $65 million in external public borrowing (including a $30 millionEurocredit loan) and $6 million in short-term borrowing. At the end of 1977,reserves stood at $332 million, equivalent to nearly six months' imports ofgoods and non-factor services.

9. In 1978, the GDP growth rate in southern Cyprus is expected todecelerate, but should still be a relatively high 7 percent. The merchandisetrade deficit, however, is expected to increase further due to the more rapidrate of import growth relative to exports. Despite an expected improvement intourism and workers remittances, the current account deficit is projected towiden to $148 million, to be covered by a corresponding inflow of medium tolong term private and public capital (including a $40 million Eurocredit loansigned in July 1978), and a slight draw-down of reserves to the equivalent offive months of imports of goods and non-factor services.

Short and Medium-Term Outlook

10. The pace and shape of future economic development will dependlargely on the political situation. The thrust of the proposed Third Emer-gency Economic Action Plan (1979-81), now being finalized, seems sound interms of general objectives and strategy, given the assumption of a continua-tion of the political status quo. The Government intends to systematicallyexploit the limited natural resource base of that part of the island under itscontrol. It envisages a 6 to 7 percent per annum growth in GDP. The invest-ment program will be on the order of $750 million for these three years, with15 percent of the investment directed to agriculture, 25 to 30 percent tomanufacturing, a similar amount to construction and tourism, and the remainderto other sectors. However, as the underutilized pool of labor available,during the Second Plan, has diminished considerably, the investment program islikely to become gradually more capital-intensive as growth will have to come

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from increasing productivity. Therefore, during the Third Plan period, Cypruswill need to: (i) accelerate the modernization of agriculture, extend irriga-tion, expand the production of new exportable crops and provide a bettermarketing and transport system; and (ii) broaden its manufacturing base andgradually transform some of its export industries, to create larger, moreefficient and competitive enterprises, as well as modernize small-scale unitswhich currently dominate the industrial sector. It also needs to lessenincome disparities stemming from the events of 1974.

11. Cyprus can count on several favorable factors to sustain economicgrowth. These are: some unutilized water resources, although these aredifficult to harness; dynamic and resourceful entrepreneurs; skilled labor;lower wage levels than in continental Europe; and favorable location inrelation to Middle Eastern markets.

12. The average 6-7 percent GDP growth rate expected to be incorporatedin the Third Plan may be feasible. However, its achievement will be con-tingent upon a rapid expansion of exports and an investment rate that wouldrequire a substantial rise both in domestic savings and capital inflow. Overthe medium-term, a five to six percent per annum growth in output appears morelikely, given the good prospects for export expansion particularly to Middle-Eastern countries, the gradual re-establishment of the tourist industry andthe substantial inflow of capital. In the longer-term, growth in export-oriented manufacturing and agriculture, will depend on achieving efficiency,competitive prices, and consistently high quality. To ensure this, it willbe necessary to selectively restructure industry over the medium-term, anddevelop agriculture export capabilities on a systematic basis.

13. Given the capital requirements to achieve these aims, and despitegood prospects for export growth, the overall balance of payments outlook overthe medium and longer-term will depend on the country's ability to furtherincrease its level of external borrowing, while maintaining a more ample levelof reserves than is currently normal elsewhere, which in Cyprus' specialpolitical circumstances appears to be prudent.

14. Cyprus' recent experience in mobilizing external resources, giventhe uncertainties of its political situation, has been rather encouraging. Ofparticular note has been its success in undertaking Eurodollar borrowings:the first in late 1977 for $30 million, followed in July 1978 by a $40 millionloan; both were syndicated by Chase Manhattan. The country is also beginningto attract significant export and supplier credits. These forms of externalborrowing are perhaps indicative of the future, since access to long-term con-cessionary bilateral and multilateral support is expected to continue to belimited. Despite the gradual resumption of German (KfW), UK (ODM) and Councilof Europe assistance, three quarters of future public external borrowings tocover the projected current account deficits will have to come from commercialsources in the form of export or supplier credit and commercial bank loans.Bank efforts to date have not only been directed towards encouraging Cyprusto diversify its sources of official aid, but also to use Bank projects ascatalysts to attract other external support, including possible co-financingwith commercial banks. Thus, Cyprus has obtained cofinancing from the Kuwait

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Fund for the Nicosia-Limassol Highway Project (Loan No. 1344-CY), and it isconsidering similar financing for the proposed project; financial assistancefrom the Council of Europe filled the external financing gap in the PitsiliaRural Development Project (Loan No. 1483-CY); export or supplier creditfinancing in the procurement of selected equipment in the Second Ports Project(Loan No. 1540-CY) may become available because of the Bank's financing ofthat project. Despite these successes in mobilizing external resources,Cyprus' access to external funds is expected to be much more limited than itsneeds or that demanded by its considrable economic potential because of thecurrent political situation. As a result medium term growth after 1978 islikely to remain at a moderate level, and below the rate of growth attained inthe 1960's and during the recent recovery period.

15. Cyprus' external debt has remained low, because of the Government'spast policy of financing development from internal resources and its limitedborrowing ability in the present political context. Total long-term publicdebt outstanding and disbursed was $162 million as of December 31, 1977.Public debt service was only 3 percent of exports in 1977. Given the pos-sibility of increasing reliance on relatively hard commercial financing anddespite an expected significant growth in exports, debt service is projectedto rise to about 12 percent of goods and non-factor services by the mid 1980s.The Bank's share of debt outstanding and disbursed declined from 51 percentin 1974 to 25 percent at the end of 1977. Its share in debt service declinedfrom 45 percent in 1974 to 35 percent in 1977. The Bank's financial supporthas helped Cyprus overcome its relative inability to borrow abroad during the1960s and early 1970s. The Bank's exposure, although still high, is reason-able, and is expected to continue to decline steadily as Cyprus continues todiversify its sources of external borrowings. Given Cyprus' low external debtand debt service ratio, as well as the Government's record of excellent eco-nomic management and policy of maintaining ample reserves, the country iscreditworthy for additional Bank borrowing.

PART II - BANK GROUP OPERATIONS IN CYPRUS

16. Bank lending to Cyprus began in 1963. As of December 31, 1978, itcomprised fourteen loans totalling $104.5 million (net of cancellations), ofwhich $88.3 million was held by the Bank. These include four power loans($31.6 million), two highway loans ($15.4 million), two loans to the CyprusDevelopment Bank ($8.9 million), two sewerage loans ($4.6 million), an irri-gation loan ($14.0 million); an integrated rural development loan ($10.0million), and two loans for port development ($20.0 million). Details of Bankloans to Cyprus are given in Annex II.

17. The events of 1974 caused a temporary break in Bank operationsuntil June 1976, and resulted in delays in the execution of some projects.In particular, the execution of the following projects was affected: ti)the sewerage project in Famagusta, which lies entirely in the area con-trolled by the Turkish Cypriots; and (ii) the construction of the Nicosia-Morphou highway, the alignment of which coincides with the cease-fire line.

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(This latter loan was amended at the request of the Government in November1976, to make available the balance of uncommitted funds for constructionof the new Nicosia-Limassol highway financed by Loan No. 1344 approved bythe Executive Directors in December 1976.) The Nicosia Sewerage Project,which straddles the Greek Cypriot and Turkish Cypriot areas of Nicosia, isalso not yet completed, mainly because of work needed to complete the treat-ment plant located in the Turkish Cypriot part of Nicosia. However, as aresult of the initiative of the UNDP and the Bank, cooperation was elicited onthat issue from the Greek Cypriots and Turkish Cypriots, and a formal agree-ment was reached in September 1978, on the basis of which this project,should now be completed over the next 18-month period with the benefits topeople of both communities living in the capital city. This development,which will need careful nurturing by both sides, offers some promise forfurther cooperation by both communities with respect to other ongoing proj-ects. The Bank, together with UNDP, will continue to make sustained effortsto find ways of promoting such cooperation.

18. The Bank's objectives in Cyprus are to finance projects to meet theneeds for higher productivity, employment and exports; to invest in essentialinfrastructure which can be justified in the context of the whole island; tocooperate in attracting long-term development capital from other sources; andto accelerate the recovery of the Cypriot economy and standard of living tothe level prevailing before the events of 1974. When a political settlementis reached, the Bank would seek: to help both communities through support ofprojects developed to improve living standards of those groups left out of thegrowing prosperity prior to 1974; to encourage development of a national waterpolicy; and to develop resources on which both communities are dependent. Inaddition to the proposed project, a third development finance project throughthe Cyprus Development Bank is being prepared for FY80. Other projects forwhich preparation has advanced in different degrees, include further supportfor power system development and projects to promote fruit and vegetableexports and upgrade the island's road network.

19. IFC's first investment in Cyprus was in a cement company in 1972.The company has since become a leader in the country's successful exportdrive. IFC has most recently invested in an asbestos cement pipe plant andis currently exploring opportunities for further investment on the island.As of December 31, 1978, gross commitments totalled $3.6 million, of which$2.4 million are still held by IFC. Details of IFC investments in Cyprusare given in Annex II.

PART III - AGRICULTURE SECTOR AND WATER RESOURCES DEVELOPMENT

Agriculture in the Economy

20. Agriculture in Cyprus is primarily rainfed. Its share in output inthe 1970's has varied between 13 and 17 percent. Livestock-related activitiesand forestry are negligible. Prior to 1974, agriculture contributed about60 percent of all commodity exports, and employed about 35 percent of the

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island's labor force. The events of 1974 had a profound effect on the sector.With the de facto division of the island 80 percent of the irrigated citrus

plantations, 65 percent of the dry-land cereal growing areas, 45 percent of

the olive and 30 percent of the carob trees are now under Turkish Cypriotcontrol, while the whole of the vine-growing area, and most of the potato-growing and deciduous fruit areas are in the south under Government control.The large scale displacements of population included thousands of farmingfamilies of both communities.

21. To meet this situation, the First Emergency Economic Action Plan(1975-76) provided for expanded financial assistance on concessionary termsto farmers to promote employment, absorb displaced persons and accelerate

efforts to increase production in the agriculture sector. Priority was given

to the completion of on-going agriculture development projects, includingutilization of marginal lands and completion of distribution networks for

irrigation from existing dams and boreholes. These efforts were continuedunder the Second Emergency Economic Action Plan (1977-78), with additionalemphasis being placed on promoting more intensive cultivation and expanding

land under irrigation. A similar strategy is expected to be incorporated inthe Third Emergency Economic Action Plan (1979-81), which is being finalized.

22. These Government policies have met with considerable success.Despite the loss of productive agriculture resources in the north, and the

growing importance of industry in the economy of the south, agriculture has

continued to make a substantial contribution to the economy since 1974. It

produces 40-46 percent of total merchandise exports and employs 24 percent ofthe labor force in south Cyprus. Nevertheless, while agriculture is expected

to continue to play a major role in the economy, its future growth is con-strained by the very limited amount of water and availability of good quality

land. Growth will therefore largely depend on efforts to integrate anddevelop these scarce water resources, expand irrigation, introduce more

intensive methods of cultivation, and carry out land consolidation.

23. The pattern of land tenure in Cyprus is a product of tradition,inheritance laws, and population density. About 60 percent is privatelyowned, 39 percent state-owned, and the remaining 1 percent communally-owned.Holdings are small, averaging about 5 ha., often jointly owned and highlyfragmented. To mitigate this problem, the Government established a LandConsolidation Authority in 1972 to carry out land consolidation activities.This program has been effective in reversing the trend towards extreme

fragmentation.

Water Resources

24. Rainfall is low, occurring mostly between November and March. Thetotal water supply of the island is estimated at 960 MCM (million M3) per

annum, of which 610 MCM runs off in the form of surface water and 350 MCM isavailable from groundwater resources. At present, about 398 MCM is regulated,with 358 MCM used for irrigation and 40 MCM for domestic supplies. Up to now,water resource development has emphasized the exploitation of limited ground-water resources. As a result, virtually all important aquifers are now being

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overpumped, and many are suffering from sea water intrusion, such as in Morphouin northern Cyprus. Since prospects for further development of minor aquifersare limited, and there is little scope for artificial recharge, surface waterutilization and storage is becoming increasingly important for both irrigationand potable uses. However, surface water development is difficult and expen-sive, because of the steep topography, unfavorable geology and irregular riverflows requiring high storage capacities. Total existing surface water storagecapacity in Cyprus is about 65 MCM, to which the proposed project would add anadditional 32 MCM. Exploitable surface water flows lie on both sides of thedivided island, thus calling for integrated development to maximize the bene-fit of this scarce resource for all inhabitants of the island.

25. Against this background the Government, with UNDP and FAQ assis-tance, has been carrying out detailed water resource studies since the early1960's as part of a program to develop the overall surface water resources ofthe island in a coordinated and integrated manner. The proposed project con-stitutes a preliminary phase of a larger program being developed to collectsurplus water from all rivers in the wetter mountainous part of southwestCyprus and, after storage and regulation at suitable reservoir sites, toconvey it to the drier areas along the southern coast and in the center ofthe island. Ultimately, this conveyor system would recharge a large aquifersouth of Famagusta, which is used for irrigation of 10,000 ha and is alreadybeing over-exploited. This Southern Conveyor Scheme is expected to be carriedout in several phases over the next 10 to 20 years; when completed, and to-gether with another water resource development proposal in the northern andwestern parts of the island, it will add substantially to total water avail-ability for the entire island.

Irrigation Development

26. Given the relatively low rainfall, generally hot, dry summers, andperiodic droughts, irrigation is essential to obtain optimum yields for wintercrops and introduce perennial fruit and seasonal crops. Land available forirrigation is limited however. Of the total land area of Cyprus of 925,000ha, only about 424,000 ha can be cultivated, of which about 17 percent, or74,000 ha, is suitable for irrigation. Since 1946, about 46,000 ha or 62percent of this land has been brought under irrigation. The proposed projectwould bring an additional 1,160 ha under irrigation. Bank support for irri-gation development is already being provided under two ongoing projects inthe agriculture sector. The first such project, which initiated Bank lendingin the sector with a $14 million loan signed in January 1974, provides forirrigation of about 5,000 ha in the Paphos area along the southwestern coast(Loan No. 960-CY). A second project, for which a $10 million loan was signedin August 1977, provides for irrigation of 1,150 ha as part of an integratedrural development project to upgrade incomes and quality of life in thedepressed Pitsilia region (Loan No. 1483-CY).

27. According to existing laws, all unused surface water and all ground-water, except for wells registered before 1928, is the property of the State.Utilization of water supplied by projects built by the Government does notentitle the users to private water rights, but only 'use permits'. Such use

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permits are also granted to private individuals for groundwater development,

but these rights cannot be sold or transferred and regulations are imposed on

extraction and utilization.

Domestic Water Supply Development

28. Supplies from local groundwater sources have proven insufficient

to meet increasing demands for domestic water in major urban areas. As a

consequence, the Government is carrying out a program to augment these local

supplies.

29. In the Larnaca and Famagusta areas, water availability was sub-

stantially increased during the 1970-75 period, with the provision of addi-

tional surface and groundwater supplies. These sources are considered

adequate to meet the estimated future demand for the areas as a whole, at

least through 1982 and possibly longer, depending on the extent to which

future population shifts may take place. In the meantime, since the Greek

Cypriot population, and tourists who used to go there, are presently excluded

from Famagusta, there is a current surplus of supply. The total population

of the Larnaca-Famagusta area is about 100,000, of which 50,000 are in the

Larnaca area, 15,000 in Famagusta, and 35,000 in refugee camps and villages.

30. The capital city of Nicosia is divided into two zones, the Greek

Cypriot and Turkish Cypriot zones, having a total population of about 210,000,

including about 30,000 commuters. It presently has sufficient water to meet

only about 75 percent of the estimated demand of 12.0 MCM per annum. As a

result, strict water rationing is in effect. The Nicosia water system is

an interconnected one, serving both the Greek Cypriot and Turkish Cypriot

sides. About 50 percent of the water is supplied to the city by the Turkish

Cypriots from the Morphou aquifer in north Cyprus. The balance comes from

groundwater sources around the city, both in north and south Cyprus. As the

increased pumping from Morphou is resulting in added salinity, which will

affect agriculture, and other groundwater sources are also being overpumped,

the Government is currently carrying out plans to transfer surplus water from

the Larnaca-Famagusta system to meet the minimum needs of Nicosia's population

which increased after the events of 1974. This diversion of water would be

temporary, pending completion of the Bank project.

Institutional Framework

31. The two institutions most directly concerned with agriculture and

water resources development are the Ministry of Agriculture and Natural

Resources (MANR) and the Cooperative Central Bank. The Ministry has six well

staffed functional departments and is fully competent to implement the pro-

posed project. The various departments are: (i) Agriculture, which includesthe Extension Service and the Soil Conservation Division; (ii) Water Develop-

ment (WDD) responsible for planning, designing and implementing water resource

development projects; (iii) Geological Survey; (iv) Meteorology; (v) the Land

Consolidation Authority; and (vi) the Agricultural Research Institute.

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32. Until the events of 1974, the Greek Cypriot and Turkish CypriotCooperative Banks had developed as the core of a network of credit societieswhich existed in virtually every village in Cyprus. These local cooperativesare able to satisfy the farmers' short and some of their medium term creditneeds, and currently lend at an interest rate of between 7 and 8 percent.Medium and long-term credit needs are largely satisfied through Government orGovernment guaranteed programs, with funds made available by the Loan Commis-sioners (a Government committee operating through the Treasury) at an interestrate of 4.5 percent. This rate has remained constant, despite variations inthe annual rates of inflation estimated at 3.4, 7.6 and 8.3 percent respec-tively for the years 1976, 1977 and 1978 (or an annual average of 6.4 per-cent), and which are expected to gradually decline to 8, 7 and 6 percentrespectively for the years 1979, 1980, and 1981. The Government has retainedthe 4.5 percent rate on the grounds that the long-term infrastructure improve-ments (including land consolidation and soil conservation) provide benefitsbeyond the immediate users which are difficult to quantify; and that thereare no alternative sources of credit for these purposes from the commercialbanking system. Farmers often supplement credit requirements from their ownresources. The appropriateness of these relatively low interest rates forlong-term credit is currently being reviewed under a Bank financed studyincluded in the Pitsilia Rural Development Project. This study is expected tobe completed in early 1979 and after subsequent review with the Bank, itsrecommendations will be implemented nation-wide by July 1, 1980.

PART IV - THE PROJECT

Project History

33. The project was proposed for Bank consideration in October 1977,after WDD completed a feasibility study to augment and integrate waterresources in the Tremithinos-Vasilikos river basin, both for irrigationpurposes and to increase potable water supplies to Nicosia, Larnaca andFamagusta. Bank missions visited Cyprus in December 1977 and April 1978 toreview the feasibility work. The project was appraised in June 1978. Nego-tiations were held in December 1978. The Cypriot delegation was headed byDr. A. Papasolomontos, the Director General of the Ministry of Agricultureand Natural Resources, and included representatives of WDD, and the Bureau ofPlanning.

Project Objectives and Area

34. The primary objective of the proposed project is to develop andaugment scarce water resources in south Cyprus, and integrate them to theextent possible to enhance flexibility of utilization, conservation andreliability of supplies, for both irrigation and potable water consumptionby people of all communities in Cyprus.

- 11 -

35. This is the kind of project which enables a national resource, on

which both communities are interdependent, to be developed, and which, des-

pite the present political situation, can be undertaken by the Cyprus Govern-

ment for the benefit of both communities. It will annually add 9.6 million

m3 (MCM) of scarce water for irrigation to help promote intensive agricul-

tural development in the Vasilikos-Pendaskinos region and another 7.2 MCM for

domestic use by both communities in the Nicosia, Larnaca and Famagusta areas.

36. The Vasilikos-Pendaskinos region, located in the southern part of

the island between Limassol and Larnaca, consists of the Pendaskinos river

watershed with a 167 sq km catchment area on the east, the Vasilikos river

watershed with a 146 sq km catchment area to the west, and the Maroni river

watershed with a 102 sq km catchment area in between. The project area to be

irrigated covers 1,160 ha net on the coastal plain between the Pendaskinos and

Vasilikos rivers. It includes 18 villages with a population of about 8,400,

of which 400 farm families (about 1,650 persons) are engaged in farming on a

full or part time basis. The remaining population is engaged principally in

industry, fishing, construction, and tourism. Most of this farming popula-

tion falls at, or below, the current relative poverty level (US$513 in 1977).

Although the primary crops today include cereals, carob, and olives, with

citrus, grapes, and vegetables limited to a few small scattered areas already

under irrigation, cropping patterns will consist primarily of higher value

export-oriented citrus, grapes, and vegetables when the project is completed.

The Project

37. The project consists of: (i) the construction of the Kalavasos

multipurpose dam on the Vasilikos River with an initial reservoir capacity

of 17 MCM, and the Dhypotamos multipurpose dam on the Pendaskinos River with

an initial reservoir capacity of 15 MCM; (ii) a diversion system to convey

excess flows of the Maroni River to the Dhypotamos reservoir; (iii) a 10 km

Vasilikos Main irrigation canal and Tokni night storage reservoir to deliver

water from Kalavasos to 830 ha of land in the Vasilikos area; (iv) a 19 km

Pendaskinos main pipeline to deliver water from the Dhypotamos dam to 225

ha of land in the Pendaskinos valley; (v) two tubewells to extract water

from the Gypsum Aquifer to irrigate about 105 ha of land in the Vasilikos

area; (vi) irrigation distribution systems up to the farmgate for project

lands; and (vii) provision of bulk water supply outlets from the intercon-

nected Kalavasos and Dhypotamos dams for supply of domestic water for use

in Nicosia, Larnaca and Famagusta. The project also includes purchase of

vehicles and equipment needed for project construction, operation, and

maintenance, as well as construction of a headquarters building and work-

shops near Khirokitia, together with a small research sub-station. Details

of the project are given in the attached Loan and Project Summary. A Staff

Appraisal Report entitled Vasilikos-Pendaskinos Project (No. 2254-CY), dated

January 10, 1979 is being distributed separately.

38. As ownership of lands in the project area is severely fragmented,

the project also provides for application of the Government's on-going land

consolidation program to about 1,055 ha of project land. This program will

facilitate construction of optimum water distribution systems and provide

- 12 -

better access to farm plots, including provision of farm roads as required.The project area includes a small amount of land owned by the Turkish Cypriotvillagers who left the area following the 1974 hostilities. Such TurkishCypriot owned land will not be subject to consolidation, in accordance withGovernment policy established prior to initiation of the land consolidationprogram in 1972. However, assurances were obtained from Government thatpersons owning agriculture land in the project area but who may have leftafter July 1974, may resume farming of such lands whenever they may wish todo so, and that any other person farming these lands in the meantime, will doso only temporarily, with no transfer of ownership taking place, except bysuccession from or agreement by the owners concerned. In the event any ofthese absentee owners ultimately decide not to return, the Government willmake appropriate arrangements to safeguard their ownership rights or disposalthereof within the context of a general settlement of such matters in Cyprus(Supplemental Letter on Land Consolidation). These arrangements are similarto those made in the amendment to the 1974 Paphos Irrigation Project (LoanNo. 960-CY) after the events of 1974, which was approved by the ExecutiveDirectors in September 1975 (Presidential Memorandum No. SecM75-576, datedAugust 4, 1975).

39. On-farm development, including purchase and installation of on-farmirrigation and production facilities, will be carried out separately fromthe proposed project, either directly or on a contract basis by farmers. Toassist farmers in financing these necessary parallel investments, the agri-cultural credit system is expected to on-lend the equivalent of about $3.9million over a seven-year period. The Government will ensure that theCooperative Central Bank (CCB) and Department of Agriculture (DA) providethe short and medium term credit required in a timely manner (Loan Agreement,Section 3.10). On-farm works will be designed and their construction super-vised by the Water Use Section of DA. The credit machinery has worked satis-factorily in the past and is considered adequate to meet development needsunder the project.

40. In parallel with the proposed project, the Government has alsoconfirmed that it intends to carry out certain complementary investments toutilize bulk water to be provided by the proposed project and to augmentpotable water supplies for consumers in the Nicosia, Larnaca and Famagustaareas. These complementary water supply works will be constructed in twophases: Phase I, already being carried out by the Government, to meet thecurrent critical water needs of Nicosia, consists of pipelines, storagetanks and a pumping station to transfer currently excess treated water fromthe existing Larnaca-Famagusta pipeline to greater Nicosia. Phase II, to beconstructed concurrently with the proposed project, by the Government with itsown resources, includes: (i) a new treatment plant at Kornos and a pumpingstation, to supply water from either the Lefkara or Dhypotamos reservoirsthrough the Phase I pipeline to Nicosia; and (ii) a pumping station, pipelineand storage reservoir to convey water from the Kalavasos reservoir to theKhirokitia treatment plant to augment supplies for the Larnaca and Famagustaareas. Construction of the above water supply works are expected to be com-pleted no later than December 31, 1982, unless otherwise agreed with theBank. This is essential so as to permanently augment the supply to Nicosia

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and the Larnaca-Famagusta areas, with bulk water that will be provided bythe project, and to end the temporary utilization of water from the Larnaca-Famagusta system (Loan Agreement, Section 3.08). The Government has providedassurances that it will continue to supply domestic water to the TurkishCypriots in all these areas on an equitable basis, to the extent this istechnically possible, and bearing in mind the needs of the population as awhole.

Project Costs and Financing

41. The total project cost (including physical contingencies and priceincreases, but excluding interest during construction) is estimated at $30.1million. Of this, $16.3 million, or about 54 percent, is foreign exchange.Cost estimates are based on recent contracts for similar work in Cyprus andindexed to late 1978 price levels. All Government-developed projects arefree of taxes and duties. Price increases for local components are based onexpected cost increases of 9 percent per annum (1979), 8 percent (1980-81) and7 percent (1982-84). Price increases for foreign components reflect rates of6.5 percent (1979) and 6 percent (1980-84).

42. The proposed Bank loan of $11 million will finance 67 percent ofthe foreign exchange costs. The Government is seeking co-financing to coverthe remainder (US$5.3 million) and has requested the Kuwait Fund for ArabEconomic Development to consider providing it on a parallel-financing basis.The request is being reviewed by the Fund and a decision in principle shouldbe forthcoming shortly. If the decision is favorable, certain discrete por-tions of the project, which have a foreign exchange cost of about $5 million(such as the Dhypotamos Dam and the Maroni Diversion), would be financed bythe Kuwait Fund if it so desired. However, should such financing not mate-rialize, or should the Fund be unable to cover the entire foreign exchangegap, and the Government's efforts to arrange other suitable co-financing alsodo not materialize by the time the monies are needed, the Government hasconfirmed that it will cover the remaining foreign exchange requirementsitself. In view of the critical and high priority nature of the project, theGovernment is willing, and is able, to cover the foreign exchange gap.However, there are reasonable expectations that the envisaged co-financingwill materialize to avoid a corresponding diversion of resources from someother development projects in Cyprus. Besides this contingent contribution,the Government will also contribute $13.8 million equivalent to cover alllocal costs.

Project Implementation

43. The proposed project will be principally implemented by WDD underthe direct supervision of a Project Manager, with the assistance of two depu-ties. All three appointments are a condition of loan effectiveness (LoanAgreement, Section 6.01). One deputy would be an engineer for technicalmatters and civil works and the other an agricultural officer for agricul-tural matters. Groundwater development will be carried out by WDD with theassistance of the Geological Survey Department. Land consolidation will bethe responsibility of the Land Consolidation Authority, which will beginland consolidation activities in the project area on or before May 31, 1979,

- 14 -

with at least two full field crews being assigned to the area (Loan Agreement,

Section 3.09). WDD will engage a consulting firm experienced in dam and

irrigation system development, to assist in preparation of design and tender

documents and in the supervision of construction. The consultants will be

employed by July 31, 1979, with qualifications and under terms and conditions

satisfactory to the Borrower and the Bank (Loan Agreement, Section 3.02). In

addition, WDD will appoint a Panel of Experts to evaluate the designs, con-

struction activities and maintenance program for the dams and to make periodic

inspections during and after construction (Loan Agreement, Sections 3.06 and

4.03(b)). A separate unit within WDD will be established on or before June

30, 1985 to maintain and operate the project works after their commissioning

(Loan Agreement, Section 4.03(a)). The Department of Health will monitor theproject area for any incidence of malaria and take all necessary remedial

measures (Loan Agreement, Section 4.04).

44. Agriculture extension activities in the project area will be pro-

vided by DA through its Larnaca District office. To ensure sufficient per-sonnel to effectively introduce new technology to project farmers, the twenty

extension staff currently serving the Larnaca district will be strengthened by

the addition of seven new personnel. At least one supervisory specialist(Beat Officer) will be appointed by December 31, 1979 and the six remaining

new staff by December 31, 1981 (Loan Agreement, Section 3.07). Establishment

and operation of the research sub-station included in the project will be the

responsibility of the Agriculture Research Institute, whose staff would carry

out research in the project area in close cooperation with extension personneland project farmers.

45. In view of the direct and indirect involvement of seyeral differentdepartments and ministries, the Government has also agreed to establish a high

level Project Policy and Coordination Committee (PPCC) to ensure timely proj-

ect execution and establish relevant policies for land acquisition, support-ing services, cost recovery and other operational matters. The PPCC will

be chaired by the Minister of Agriculture and Natural Resources, and willinclude the Directors General of the Ministries of Agriculture and NaturalResources, Commerce and Industry, and Interior; the Director General of the

Planning Bureau; the Commissioner of Cooperatives; and the Director of WDD,

who will also serve as secretary. To advise the Project Manager on local

affairs and developments affecting the project, a Project Advisory Committee(PAC) will be established under the chairmanship of the District Officer in

Larnaca, and will include the District officers of WDD and DA, the Project

Manager, Land Consolidation Officer, Water Board Managers and two farmers'representatives. The proposed implementation arrangements are similar to

those followed for the Paphos Irrigation Project (Loan No. 960-CY), which have

proven effective. During negotiations, agreement was reached that the PPCCand PAC will be created by May 31, 1979, with the membership indicated above

(Loan Agreement, Section 3.01(a) A, B).

Procurement and Disbursement

46. Civil works contracts to be financed by the Bank will be awarded

after tendering under international competitive bidding (ICB) in accordance

- 15 -

with the Bank's procurement guidelines. The civil works components to befinanced by the Bank may be adjusted to suit the wishes of the co-financier,but are expected to include construction of the Kalavasos dam, and Vasilikosmain canal and distribution system (costing about $15.3 million includingabout $8.4 million in foreign exchange). Major equipment items and vehiclesfor project use (costing about $310,000) will also be procured under ICB.The project headquarters building and workshops, and research substationbuilding will be tendered under local competitive bidding, following proce-dures acceptable to the Bank, since their small size and low cost (about$180,000) would not be attractive to foreign bidders. Installation of themain Pendaskinos pipeline, costing about $300,000, will be carried out byforce account because of its low cost and irregular alignment through pri-vately owned lands. Installation of the two small ground water tubewellsand distribution system (estimated to cost $70,000 for civil works) and landconsolidation works (estimated to cost $450,000) will also be carried out byforce account. The pipes and fittings for the Pendaskinos system (estimatedcost $447,000), equipment for the two tubewells ($190,000), and other smallequipment items for project and operation and maintenance activities, (about$100,000), will be procured through local shopping, in view of the relativelysmall amounts involved, the variety of equipment required for which orderscould not be easily bulked, and the availability of sufficient local suppliersto ensure price competitiveness. Specifications and bidding documents forthose items procured under ICB and for contracts under local competitivebidding whose value exceeds $250,000, will be approved by the Bank beforetendering. Any components which may be financed by the Kuwait Fund would betendered under the procurement guidelines of the Fund. Civil works financedby Government would be tendered under Government procedures.

47. The proposed Bank loan will be disbursed over a six-year period,against (i) 100 percent of foreign expenditures for imported vehicles andequipment; (ii) 100 percent of expenditures for consultant services; (iii)85 percent of expenditures on supplies and equipment purchased locally inaccordance with procedures acceptable to the Bank; and (iv) 35 percent oftotal expenditures on all civil works contracts, representing their estimatedforeign exchange costs.

Water Charges and Cost Recovery

48. Users of the irrigation and bulk domestic water supplies will repaythe costs of the project through water charges on volumetrically measured sup-plies. Costs of the irrigation component will be recovered from beneficiariesin the project area through the Government's established system of chargesapplicable to Government constructed waterworks. Under the Water Works Law of1928, as amended most recently in 1977, the Government can recover from bene-ficiaries throughout the country: (i) the full operation and maintenancecosts, and (ii) from 40 to 65 percent of the weighted average of unit costsof all investments for dams and distribution systems constructed up to thepresent in the country, through volumetrically measured water charges. Atpresent the overall recovery percentage country-wide averages 40 percent ofall costs, resulting in an average water charge of 11 mil/m3. With the addi-tional water from the proposed project, the weighted average cost, as defined

- 16 -

above, increases to 47 mils/m3, of which 4 mils/m3 corresponds to operationand maintenance costs. Once water from the project is available, watercharges will be collected from project farmers utilizing water from surfacesources in an amount sufficient to recover the full operation and maintenance

costs of the project and at least 50 percent of the weighted average of theunit costs of all investments for major irrigation projects over a lifetime of40 years, at an interest rate of at least 9 percent per annum, such charges tobe reviewed every five years. Application of this formula, which was agreedduring negotiations, will result in a charge of 25 mils/m3 to project benefi-ciaries, which constitutes a 127 percent increase over the present averagecharge, but which is still consistent with maintaining sufficient farmerincentives (Loan Agreement, Section 3.11 (b)). Since groundwater developmentis less expensive, charges for groundwater from the Gypsum aquifer will be setso as to recover the full capital, operation and maintenance costs over theproject lifetime of 40 years at an interest rate of at least 9 percent perannum. Such charges may also be adjusted downwards to compensate for thelower quality of water supplied (Loan Agreement, Section 3.11 (a)). Annualwater charges at full development on a per hectare basis amount to $221 forvines, $440 for citrus and $374 for vegetables. The total water charges tobe collected for irrigation water supplied under the project will result ina recovery of 35 percent of the costs of the project attributable to theirrigation component. However, since project water charges will be recal-culated and increased as new and more costly irrigation projects are put intooperation, the 35 percent recovery ratio should increase over the lifetime ofthe project.

49. To ensure recovery of costs for the domestic water component, theGovernment has agreed that the sale price for domestic water supplied by theproject will be set at a level sufficient to recover: (i) over a period of40 years and at an interest rate of at least 9 percent per annum, the invest-ment costs of all facilities attributed to the supply of water for domesticuse, including the facilities constructed as part of the proposed project, andall complementary investments being undertaken separately by the Government,(ii) the full operation and maintenance costs of all these facilities, and(iii) a reasonable contribution to future annual investments required fordomestic water supply. The Government has also agreed to review the pricesfor the sale of water periodically, but not less than once every five years,and to reflect in the price any change in the operation and maintenance costs(Loan Agreement Section 3.12). Revenues to be collected from (i) chargespaid by project farmers for irrigation water, and (ii) tariffs to be paid byconsumers of project supplied domestic water, based on the existing tariffschedule, will be sufficient to recover all costs of project facilitiesfor supply of water for irrigation and domestic uses, as well as the comple-mentary investments for distribution and treatment of domestic water.

Benefits

50. The introduction of irrigation in the Vasilikos-Pendaskinos regionand the provision of proper agricultural inputs and investments, will bringmodern agriculture to 1,160 ha which have so far been subject to rainfed

conditions. The value of irrigated crops produced in the project would be

- 17 -

about $6.6 million in mid-1978 prices, compared with an annual value of $0.4million for rainfed crops. In view of the strong domestic and foreign demand,and the country's considerable experience in exporting to Europe, the U.K. andthe Middle East, no difficulty is expected in marketing the incremental pro-duction.

51. Other increases in the productive infrastructure include improve-ments in soil conditions through soil conservation work, reduction of landfragmentation through land consolidation, improvement of farmers' access tomarkets and inputs through farm roads to each individual farm, and vastlyimproved volume and security of water supplies for both agriculture and urbanareas. By providing economic incentives to farmers in the region, the projectwill induce young people and part-time farmers to look on farming in the areaas an attractive alternative to off-farm work in the cities. The project willalso provide an additional 7.2 MCM annually of needed potable water to theNicosia and Larnaca-Famagusta areas.

52. The economic rate of return is estimated at 15 percent. Sensitivityanalysis indicates that a rate of return of more than 10 percent would beobtained even if the project is delayed two years, or if all investments andoperating costs increase by 20 percent.

53. Direct beneficiaries of the project's irrigation component will besome 400 farm families (about 1,650 persons) whose farm income will increasesix to eight fold and be more evenly distributed throughout the year. Furtherbenefits will accrue directly to some 470 additional outside farm workers whowill be required, thus raising the number of direct beneficiaries, includingfamilies of such workers, to about 3,570 persons. The main indirect bene-ficiaries would include suppliers of goods and services to the project area.The main beneficiaries of the additional water supplies for domestic urban usewould be the Greek Cypriot and Turkish Cypriot populations of the Nicosia andLarnaca-Famagusta areas, particularly in Nicosia, where water is currentlystrictly rationed.

Risks

54. Two possible project risks involving earthquake potential at theKalavasos damsite and seawater intrusion into the Gypsum aquifer, were fullystudied during project preparation. These investigations indicate that theearthquake potential is low and the dam design suitable for the prevailingseismic conditions, provided normal construction methods are followed. Geo-logical and hydrological investigations also indicate that additional pumpingof groundwater from the gysum aquifer, and diversion of the Maroni river whichis its major source of recharge, should not result in seawater intrusion. Inthe event that some intrusion does occur, the amount of groundwater extractionwould need to be reduced. To avoid over-extraction, the Government willmonitor water extraction from this aquifer on a regular basis (Loan Agreement,Section 4.05). In view of the initial negative cash flows during the earlyyears of citrus plantation establishment, farmers could conceivably delay someof the projected citrus establishment in favor of larger vegetable croppingto build up early cash flows. However, given the high returns from citrus

- 18 -

over the long-term, and better utilization of family labor, any such delay isexpected to be only temporary.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

55. The draft Loan Agreement between the Republic of Cyprus and theBank, and the Report of the Committee provided for in Article III, Section4(iii) of the Articles of Agreement are being distributed to the ExecutiveDirectors separately. Special conditions of the project are given in SectionIII of Annex III.

56. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank.

'PART VI - RECOMMENDATION

57. I recommend that the Executive Directors approve the proposed loan.

Robert S. McNamaraPresident

AttachmentsJanuary 24, 1979Washington, D.C.

ANNEX I

Page 1 of 7

TABLE 3ACYPRUS - SOCIAL INDICATORS DATA SHEET

REFERENCE GROUPS (ADJUSTED AVERAGESCYPRUS ft

LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)TOTAL 9.3 SAME SANE NEXT HIGHERAGRICULTURAL 5.3 MDST RECENT GEOGRAPHIC INCOME INCOME

1960 Lb 1970 Lb ESTIMATE tb REGION /C GROUP Ld GROUP /e

GNP PER CAPITA (US$) 430.0 960.0 1740.0 1898.8 1796.4 2839.0

ENERGY CONSUMPTION PER CAPITA(KILOGRAMS OF COAL EQUIVALENT) 829.0 1380.0 1278.0 1869.3 1525.0 2376.4

POPULATION AND VITAL STATISTICSTOTAL POPULATION, MID-YEAR

(MILLIONS) 0.6 0.63 0.67URBAN POPULATION (PERCENT OF TOTAL) 36.0 39.1 48.1 43.0 52.2

POPULATION DENSITYPER SQ. KM. 62.0 68.0 72.0 80.4 27.6 55.8PER SQ. KM. AGRICULTURAL LAND 109.0 119.0 126.0 135.2 116.4 83.6

POPULATION AGE ST-RUCTURE (PERCENT)0-14 YRS. 36.7 31.8 28.8 26.2 34.8 40.0

15-64 YRS. 57.4 60.6 61.7 63.4 56.0 55.365 YRS. AND ABOVE 5.9 7.6 9.5 9.9 5.7 3.8

POPULATION GROWTH RATE (PERCENT)TOTAL 1.5 /f 1.1 /f 0.4 /f 0.8 1.6 2.9URBAN 4.2 1.9 2.4 2.2 3.4

CRUDE BIRTH RATE (PER THOUSAND) 26.6 24.2 22.2 19.2 27.0 31.7CRUDE DEATH RATE (PER THOUSAND) 7.5 7.4 6.8 9.0 9.9 7.9GROSS REPRODUCTION RATE 1.7 1.5 1.4 1.3 1.9 1.6FAMILY PLANNING

ACCEPTORS, ANNUAL (THOUSANDS) .. .. ..

USERS (PERCENT OF MARRIED WOMEN) .. .. .. 38.0 19.3*

FOOD AND NUTRITIONINDEX OF FOOD PRODUCTIONPER CAPITA (1970-100) 55.6 100.0 83.2 113.7 103.8 114.7

PER CAPITA SUPPLY OFCALORIES (PERCENT OF

REQUIREMENTS) 99.0 116.0 113.0 127.4 110.4 113.4PROTEINS (GRAMS PER DAY) 78,0 78.0 86.0 /g 92.8 77.7 89.9

OF WHICH ANIMAL AND PULSE ,, 33.01/ .. 39.3 22.2 48.0

CHILD (AGES 1-4) MORTALITY RATE 1.7 .. .. 1.6 1.9

HEALTHLIFE EXPECTANCY AT BIRTH (YEARS)' 68.1 70.2 71.4 68.9 63.0 60.2INFANT MORTALITY RATE (PERTHOUSAND) 30.0 29.4 28.4 34.5 38.2 22.1

ACCESS TO SAFE WATER (PERCENT OPPOPULATION)

TOTAL .. 95.0 95.0 68.3 67.7 83.0URBAN .. 100.0 94.0 74.3 83.5 100.0RURAL .. 92.0 96.0 64.4 41.5

ACCESS TO EXCRETA DISPOSAL (PERCpTOF POPULATION) l

TOTAL 95.0 95.0 94.0 70.3 57.8URBAN 100.0 94.0 94.0 90.7 99.3RURAL .. 92.0 95.0 93.0 38.3

POPULATION PER PHYSICIAN 1390.0 Li 1290.0 1160.0 686.5 1310.8 976.9POPULATION PER NURSING PERSON 1080.0 L 610.0 430.0 339.0 849.2 676.1POPULATION PER HOSPITAL BEDTOTAL 220.0 L i9o.o 200.0 178.0 275.4 325.8RURBANL. .. 70.0 129.9 250.0RURAL .. .. .. 1770.0 965.9 770.0

ADMISSIONS PER HOSPITAL BED .. .. .. 15.3 18.9 18.7

HOUSINGAVERAGE SIZE OF HOUSEHOLD

TOTAL 4.0 .. 3.9 3.9URBAN 4.0 . ..

RURAL 3.9 .. ..

AVERAGE NUMBER OF PERSONS PER ROOMTOTAL 1.5 0.9 0.9 0.9URBAN 1.3 1.0 0.8 0.8 0.8RURAL 1.6 .. 1.0 1.0 1.0

ACCESS TO ELECTRICITY (PERCENTOF DWELLINGS)

TOTAL 43.1 .. .. 57.5 59.2URBAN .90.4 *- 99.0 99.0 78.0RURAL 21.5 .. .. .. 12.5

ANNEX IPage 2 of 7

Pale 2

TABLE 3ACYPRUS - SOCIAL INDICATORS DATA SHEET

REFERENCE GROUPS (ADJUSTED AVERAGESCYPRUS - MOST RECENT ESTIXATE)

SAME SAME NEXT HIGHERMUST RECENT GEOGRAPHIC INCOME INCOME

1960 Lb 1970 /b ESTIMATE Lb REGION /c GROUP /d GROUP Le

EDUCATIONADJUSTED ENROLLMENT RATIOS

PRIMARY: TOTAL 102.0 82.0 a 71.0 Li 108.0 97.6 104.1FEMALE 101.0 82.0 a 72.0 ai 99.5 87.4 120.3

SECONDARY: TOTAL 48.0 52.0 60.0 J 62.8 47.8 44.7FEtlALE 39.0 50.0 59.0 i 63.6 42.6 46.0

VOCATIONAL (PERCENT OF SECONDARY) 4.0 10.0 /i 12.0 /I 28.2 22.7 18.7

PUPIL-TEACHER RATIOPRIMARY 34.0 30.01 27.0 /1 24.9 25.4 30.6SECONDARY 23.0 21.0 1± 20.0 a 17.3 24.9 16.3

ADULT LITERACY RATE (PERCENT) 76.0 85.0 .. 88.3 96.3

CONSUMPTIONPASSENGER CARS PER THOUSAND

POPULATION 48.0 88.0 107.0 90.4 32.3 53.4RADIO RECEIVERS PER THOUSAND

POPULATION 153.0 264.0 321.0 199.0 201.9 195.5TV RECEIVERS PER THOUSAND

POPULATION 3.0 78.0 133.0 132.5 97.9 108.4NEWSPAPER ("DAILY GENERALINTEREST") CIRCULATION PERTHOUSAND POPULATION 126.0 107.0 121.0 97.1 70.9 108.0CINEMA ANNUAL ATTENDANCE PER CAPITA 9.0 10.0 .. 6.6 4.4

EMPLOYMENTTOTAL LABOR FORCE (THOUSANDS) 235.0 265.0 280.0

FEMALE (PERCENT) 33.6 34.3 34.6 32.4 17.4 26.9AGRICULTURE (PERCENT) 40.0 36.0 34.0 32.8 38.4 25.7INDUSTRY (PERCENT) 27.1 27.7

PARTICIPATION RATE (PERCENT)TOTAL 41.5 41.9 42.9 39.1 33.7 40.1MALE 56.2 55.8 56.8 56.7 50.8 55.8FEMALE 27.2 28.3 29.4 29.7 12.6 24.7

ECONOMIC DEPENDENCY RATIO 1.0 0.9 0.9 0.9 1.4 1.6

INCOME DISTRIBUTIONPERCENT OF PRIVATE INCOMERECEIVED BY

HIGHEST 5 PERCENT OP HOUSEHOLDS .. 12.1 / .. 31.9 20.2HIGHEST 20 PERCENT OF HOUSEHOLDS .. 39.1 /k .. 59.7 47.9LOWEST 20 PERCENT OF HOUSEHOLDS .. 7.9 / .. 4.0 3.2LOWEST 40 PERCENT OF HOUSEHOLDS .. 19.6 k .. 12.9 13.7

POVERTY TARGET GROUPSESTIMATED ABSOLUTE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. ..

RURAL .. .. 376.7 194.9 157.9.

ESTIMATED RELATIVE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. .. 746.7 295.1 448.8

RUJRAL .. .. 512.7< 309.2 313.1

ESTIMATED POPULATION BELOW POVERTYINCOME LEVEL (PERCENT)

URBAN .. .. 37.0 18.2 23.2

RURAL .. .. 43.0 24.2 54.5

Not availableNot applicable.

NOTES

/a The adjusted group averages for each indicator are population-weighted geometric means, excluding the extremevalues of the indicator and the most populated country in each group. Coverage of countries among theindicators depends on availability of data and is not uniform.

/b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970. between 1969and 1971; and for Most Recent Estimate, between 1973 and 1977.

/c Europe; /d Upper Middle Income ($1136-2500 per capita, 1976); /e High Income (over $2500 per capita, 1976);If Due to emigration, population growth rate is lower than rate of natural increase; La Av. 1969-71;/h Av. 1964-66; /i 1962; Li Excluding Turkish schools; /k 1966, urban only.

September, 1978

ANNEX IDEFINITIONS OP SOCIAL INDICATORS

Page 3 of 7KWA:,i The,adju:sed,group average fo:r eahidctor are population-weightad geometric means, excluding the extreme values of thr Indictot- and tho ri-t

po pul1td coutry in ach grop Cvrag of tountriss among the indicators depends on availabillty of data end is not unifura. Duve to 1a-k of data,

group averags for Capital Surplus Oil Exporters and indicator. of actess to water and excrete disposal. housing. income distribution and p-orty -r

simple popul.tio-e-wighted geomestric means without the excluaion of e"treae values..

LAND ARE.A (thousand eq. km) Population per hospital had - total_.urban. and rura - Populetioc(otl

Total - Total surface area comprisins land area and inland aeters. uchan. and rural) divided by their respectiv- number of hospital b.da

Agricultural - Most racent estimate of agricultural area ased temporarily available in public and Private general end epecieli.ed hospital und or-

or permanently for crop., pastures, market and kitchen gerdene or to habilitation centere. Hospitale are *mtabli.hments permanently staffed by

Ii. fallen, at l1ast One physician. Establishment. providing principally cuatodi.1care are not included. Rural hospitals, however, include health and medl-

CMIP PER CAPITA (US$) - GNP per capita estimates at current market prices. cal centers not permanently staffed by a physician (hut by a medical as-calculated by sems conversion method an World Bank Atlas (1975-77 basis); sistant. nurse, midwife, etc.) which offer in-patient accomo-dation and

1960. 1970. and 1977 data. provide a limited range of medical facilities.Admisson mar Ao"ital bed - Total member of admissions to or discharges

ENERG'f CONISUMPTION PER CAPITA - Annual consumption of coemercial energy fro hospitals dvided by the number of bade.(coal and lignite, petroleum, natural gas and bydro- , nuclear anA geo-thermal electricity) In kilograma of coal equivalent par capita. ROVsiN

Avarage ieis of household (paerons por household) - total, urban, and rural -

POPUL.ATION AltO VITAL. STATISTICS A household coneiste of a group of individuals who shore living quart.r.rTotal _opuation, mid-year, (millionsl - As of July 1; if not available, and their main meale. A boarder or loger may or may nor be included in

avrg a w nd -year estimates; 1960, 1970, and 1977 data, the housebold for statistical purposes. Statistical deflnitionn of house-

Urban population (peccent of total) - Ratio of urban to total popula- hold vary.tine; different definitions of urban areas may effect comparability Averagte number of paerons per room, - total, urban. end rural - Average u.

of dateaemong countries, her of person. per room in all. urban, and rural occupied cooventionelPopulation density dwellings. raepectively. Dwellings sexclude non-p rmasnent structures end

*Par en. km. - Midi-year population per square kilometer (100 hectares) unoccupied parts.of total area. Access to electricity (percent of dwellings) - total. urban, and rural -

Per mg. hm. agriculture lend - Computed as above for agricultural leand Conventional dwellings with electricity in liviog quartets as percentegoonly, of total, urban, and rural dwellings respectively.

Population a&.srutr accen t - Children (0-14 years), working-age(15-64 yrear), and ried(5 years and over) em percentage. of mid- EDUCATIONyear population. Adjusted enrollment ratios

Population growth rate (percent) - total, and urban, - Compound annusi Primary school - total. and female - Total and female enrollmen.t of all agesgrowth rates of total aud urban mid-year populations for 1950-60, at the primary level am percentages of respectively primary school-ege

1960-70, and 1970-75. populations; normally includes children aged h-1l years hut adjueted for

Crude birth rate (per, thousand) - Annual live birtbs par thousand of different lengtha of primary education; for coun.triea with universal edu-mid-year population: ten-year aritbetic averages ending in 1960 aud cation enrollment may exceed 100 percent since some pupil.aera halos or

1970 and five-year average ending in 1975 for most recent estimate, above the official school age.Crude d.ath rate (p-r tho...and) - Annual deaths per thousand of mid- Secondary school - total. and female - Computed ae above; secondary ed.ca-

year population; ten-year aritmeatic averages ending in 1960 and 1970 tion raquire.eat is...t four year. of approved primary intuto;pro-and five-year average ending in 1971 for most recent estimate. lid.. general vocational. or~ teacher training inetructi... for pupil.

Gross reproduction rate - Average number of daughtere a woman% will bear usually of 12 to 17 years of age; correspondence courses are generally

in hoc nrmaI ieproductive pariod if she experiemnes present age- excluded.apecific fertility rates; usually five-year average, ending in 1960, Vocational enrollment (Perccent of secondaryl - Vocational institutiona 10-

1970, and 1975. cude technical, Industrial. or other programs which operate independently

Family planning - acceptors, annual (thousands) - Annual number of or as dep.tatrtset of secondary inatitutions.acceptors of birth-control devices under auspices of national femily Pupil-teacher ratio - primary, and secondary - Total students enrolled inplanning program. poImery and secondary levels divided by numbers of teachers in the c-r-

Family planning - users (percent of maried wme)-Perceetaga of sponding levels.married women of child-bear.ing age (15-44 peace) who uae birth-control Adult literacy rate (percent) - Literate adults (able to read and write) adevices to all married women ins ame age group. a percentage of total adult population aged 15 years and over.

FOOD ANDO NUtTRITION CONSUMPTION

Indx of food p-oduction per capita (1970-100) - loden number of per Passenger care (per thousand population) - Passenger care comprise macor cern

capita annua production of all food commodities. seating Lees than eight persons; excludes anbul-ncen, hearuen end military

Per capita supply of calories (Percent of requirements) - Computed from vehicls..energy equivalent of net food supplies available in country per capita Radio re.neivers (per thocaaand populetion) - All typen of r-civera for radicper day. Available supplies comprise domestic production, imports lese broadcasts to general public per thousand of population; excludes nicce

exports. and changes in stock. Net supplies exclude animal feed, needs, receivers in countries and in pearm when registnrtion of radio mets was ir,quantities use d in food processing, and lossess in distribution. Re- effect; data for recent years mav not be comparable mince most coun.triesquirements were estimated by FAO based en physiological needs for no- abolished licensing.mel activity and hsalth considering envirooetal tamperature, body TV receiverm (per thousand populatinni - TV receivers for broadcast to genera

weights, ag.eand sex distributions of population, and allowing 10 per- public per thoueand population; excludes un1lcenoed TV receivero incu-cent for waste at household l1vel. tries and in years when regietrati.n of TV sara was in effect.

Per capita supply of protedin inrea pe day - Protein content of per Newspapercrulto (Per thousand popul.ti.n) - Sh.us th. .v-rgo i-1ul-

capit. net supply offoHerdy et supply of food is defined astin of "deily general Intereat newspeper". defined as a periodical pubh,-above. Requiremwents for all cmutitries established by UJSDA provide for cation devoted primarily to reco.rding general ne.n. It i. considered ii

afcmInmum allowace of 60 grema of total protein per day and 20 grama be "daily" If it appears at least four times a week.oenimal and pulse protein, of which 10 greatsehould be animal protein. Cinema annual attendance Per capita per year - Based on the numb-r of ticker,

These standards are lowr than those of 75 grama of total protein and sold during the year, including admissions to drive-in cinemas and mobile

23 graxo of animal protein as an average for the world, proposed by unite.PAO in the Third World Pond Survey.

Per capita protein supply from animal and Pule. - Protein supply of fond QWVMENTderived from animals end pulses in grama per day. TotaL labor force (thousands) - E-conmically active permons, including armed

Child (ages 1-i) mortality rate (per thousand) - Annual deaths per thous- forces and unemployed but excluding hoosewivn, students, etc. Defini-

and in age group 1-4 years. to children in this age group. tione In various countries are not comparable.Pena. (prcen) -Female laborf force ae percentage o f total labor forc..

HEALTH Aniurr prent) - Lbor force in fa rming, frestry, hunting and fishing

Lifeexpctat, t brth(yers)- Average number of peers of life as percentage of total labor force.remaining at birth: usually five-year averages ending in 1960. 1970, Industry (percet)t - Labor forte in mining, co... ructio.n manufacturing and

and 197). electricity, water and gas es percentage of total labor forc..

infant mortality rat (er hoad - Annual danchs of infatst under Participation rate (Percent) - total, pale, end female - Total. sale, sodone year of age per thousan.d live birhts. I -l- lebor force as percentages of the ir cespectrice populatIons

Acce.s to safe water (percent of population) - total, urban, and rural - These ere ILO'.sedjusted participation rstes reflecting so-eonNumber of people (total, urban, and rural) with reasonable access to structur of the Ppoplation, end mcig tine trend.safe water supply (includes crested surface waters on untreated hot tnoidenecyrio-Ratio of populatico under ii sod 65 and ove cc

uncootaninated water such em that from protected boreholes, springs, the labor force 1n age group of 15-hi yearn.and sanitary wells) as percentages of their reepective populations.In an urban area a public fountain or tradpoet loca.ted not more, INCOYqE DISTRInB.-TIONthac 200 meters from a house say he considered as being within re.- Percentage of Private iscoma (both in cash and bind) received bY rIchest Iaonable cce of that houae. In rural areas rexannable access would pecn. richest 20 pret ors 20 pecntend pors40 eco

imply tht the housewife or meber. of the household do not have to of hous.eholds.spend a disproportionate part of the day in, fetching the family'swater needa. POVERTY TARGET GROUIPS

Acceas to excreta disposal (percent of population) - total, urban, and Estimated absolute Poverty income level (1S) per cayita) - urban and r.t.1 rural - Number of peopla (total, urban, and rural) served by eacreta Absolute poverty income level is that Income level beloc which a mini-a

diepo..al as percentages of their respective populations. Excreta nutritionally adequate diet plus sesential non-food requirements is Oct

disposal may include the collection and disposal. with or without affordable.treatment, of h-. a xortcaend weete-tace by water-born systems Esftimated relative poverty income, level fill per capita) - urba.nsd -cr1-

or the use of pit privias end similar installations,. Relative poverty income level is that income level lees than one-third

Poplaetion per physician - PopulAtion divided by number of practicing per capita personal income, of the coun try.physicians qualified from a medical school at university Level. Estimated opoulati-n below poverty incom leve (percen.t) - arbas and rural-

Population per nursing person - Population divided by number of Percent of population (urban and rural) who are either 'absolute poor" npracticing male and fale. graduate nurs.es, practical macsea, and 'relative poor' whichever is greeter.

ass istant nurses.trono..ic and Social Eu- Div.isio

Ec-noic Analys1n and PecoosDeP.rt-ep

CYPRtUS UOCICOVEONN .I/2p 4of 7

Actu" Pro____________ell ____tea0 neWRj.,1977----------~~~'~~L........ .i5~~~. Proletled - T973' iS?'~191- 15/07- 19O1- Share

19731 197 11975 95 17 180 91 195 19 77 1978 1981 1985 of CII?A. NAI10lNAL, ACCOUNTS

(M IIIan at 1975 pricea)

CDP (M.. 1069.7 687.8 958.8 1023.1 1083.5 1147.5 1215.3 1517.3 18.1. 6.7 5.9 5.7 100.0Galns from Terns and Trade 20.8 .0 -4 3.3 7.5 11.5 9.4 6.9 - - - -

Gross Domestic Inco,m,, 1090.5 687.8 95. 1026.4 1091.1 1159.0 1224.7 1524.3 17.9 7.5 6.1 5.6 99.6E.poet. (g , ou) -Volume 566.2 275.3 480.5 477. 2 525.0 561.3 653.9 928.6 32.2 -0.6 11.0 9.2 50.1Exports (g + nf.f) .TT cd. 587.0 275.3 476.5 481.0 532.6 592.8 663.3 935.5 31.6 1.0 11.3 8.9 49.7Imports (g + nf,,) -136.6 -395.2 -647.8 -707:3 -751.7 -795.7 -844.6 -1091.3 28.0 9.2 6.1 6.6 67.6RIo...r.. gap - TT adj. 1419.6 119.9 171.3 226.3 219.2 202.8 181.3 155.9 - . - 17.8C.ns.mption 954.,6 685.7 895.4 102 1. 6 1079.1 1126.1 1165.5 1399.9 14.3 14.1 4.5 4.6 93.4Ln," ment ~ ~~~285.5 1.22.0 230.4 231.1 231.1 235.8 240.6 280.0 37.4 D.3 1.4 3.9 24.0D-er*ttc Savinga 135.8 1.1 59.1. 4.7 11.9 33.0 59.3 124.1 - - - 6.2HatLonal Savingu 167.3 84.8 143.1 96.i 96.5 109.7~ 127.8 169.5 - -- 14.9GDP (at current Us$2 959.1 687.8 989.2 1211.6 1398.6 1584.8 1779.0 2696.6 -

ShareB. SECTOR OUTpUr (fre.)~. at 1973 prlce. (Z) sector Groweth Rates f DShare__ __ ___of_ __ __ __ __ __ ofGO

Agriculture 13.3 16.8 14.9 14.2 13.7 13.2 12.6 11.6 8.3 i.o 2.3 3.0 14.9Iod,,stry_3 29.0 24.5 27.7 251.6 29.8 30.2 31.6 34.4 2 L.8 1.1.0 9.2 7.9 27.7Services 57.6 58.6 5 7.4 57.0 56.5 56.1 55.6 54.0 13.4 5.7 5.0 4.9 57.4

C. PRICES (1371-1.00)

Lxport Fr'ice Inde. /4 70.81 100.00 108.46 113.43 121.16 129.14 136.58 123.04 -Import Pri.e Indea 7 68.30 100.00 109.45 112.55 119.45 126.63 134.65 171.77 - -Tce.s of Trod,, 1al.~ nc / 103.67 1.00.00 99.09 100.78 101.44 101.98 101.44 100.374 -GDP (tro.p.) Deflator ii 75.23 100.00 109.17 118.24 125.08 131.10 146.28 177.74 - - -Average Exchange Rate (Ci 9 0.35 0.37 0.41 0.38D-L_L_L___T_______LA__R

Period Average

In-c.ent.1 C.Pit.1/outp.t R.tio ~ ~ ~~~~~~2.4 3.6 3.6 3.7 -Irrport Ala-ticity . . .. 1.55 1.3 7 1.04 1.16 Aver.80 National Savings gate.

. .. . 1 3.6 9.4 9.7 11.0 rlargi.at 1National Savings arte 2 1.5 69. 169.4 .1.2L8

Iopr veto,/GDP 20.7 241 20. 5 16.9 -

R esource G ap/ GDP ~ ~~ ~~ ~ ~ ~~~~~~~~~15.0 2 3 .4 17. 5 1. L.7 -1. 1.ARO Po t 3FRF 973-1k 1975 1977 E. -PUBLIC FIN-ANCE 1973 1/ 19 75 1977

Labot Force (1000) 279.7 207.7 204.5 Ta`a. of GVP at turranL r.P.)tlne-PloYo,c- ('000) 3.3 33.5 6.2(3 (1.2) (16.1) (3.0) Current revenue, 16.2 19.2 20.6Employ .e.t ('000) 276.4 174.2 198.3 Current oxpendit,,r, 15.6 28.9 25.4Agric.ltore (34.0) (26.0) (23.2) . CVer1on,e,j lelpn1s - - 0.6 -4.6 -4.Industry .3 (20.1) (23.6) (25.6) DefciOopt/rpu cxod3ae .7 14.6 -. 2.ServIce, .~~~~~~~(39.9) _'(48.4) (30. 7)

/1 Data up to July 1974 refer to the whole of Cyprus; data thereaferefro ctCyo. nladaedeeornor directly comparable with those for earlier years.

72 R.- ,,or -tdd uo due to rounding errors.73 Include, eanufacturbeg, cocatruotlo,,, utilities, and mining.74 Nerch.odi-e trad-.

ASfNAtl'I IAc;tjober 31, 1978

CYPRUS: Import Detail /1 ANNIEX IPa8e 5 of 7

Growth Rates

Actual Est. Projected 1970MT - 797T- 1978- 1981-

1970 1973 1975 1976 1977 1978 1979 1980 1981 1985 1973 1977 1978 1981 1985

Constant 1975 Prices(Millions of Dollars)

1.1 Food 75.3 72.1 60.4 76.4 92.1 99.4 102.4 104.6 106.1 114.3 -1.4 23.5 7.9 2.2 1.9

1.2 Other Consumer Goods 60.7 105.7 32.9 55.6 82.0 92.8 98.5 102.0 108.9 162.1 20.3 57.9 13.2 5.5 9.5

2. Petroleum, Oil, Lubricanto 64.9 80.3 48.9 48.2 55.7 59.5 62.3 65.7 69.3 85.9 7.4 6.7 6.9 5.2 5.5

3. Other Intermediate Goods 137.7 302.2 127.2 179.0 218.2 241.0 266.5 291.8 319.6 438.8 30.0 31.0 10.4 9.8 8.2

4. Capital Goods 66.0 99.3 39.0 57.2 120.8 128.2 129.2 134.4 139.7 170.7 14.6 35.0 6.1 3.0 5.1

5.1 Total Goods (CIF) 404.5 659.6 308.4 416.4 568.8 620.9 658.9 698.5 743.6 971.8 17.7 35.8 9.2 6.2 6.9

6. Non-factor Services 38.0 77.0 86.8 76.2 78.9 86.5 92.8 97.2 101.0 119.5 26.5 -8.9 9.6 5.3 4.3

7. Total Goods and N8S 442.5 736.6 395.2 492.6 647.7 707.3 751.7 795.7 844.6 1091.3 18.5 28.0 9.3 6.1 6.6

Price Index (1975 - 100)

1.1 Food 51.41 91.44 100.00 97.60 99.77 80.91 78.17 77.63 82.08 105.52 - - _ _ _

1.2 Other Consumer Goods 65.91 74.84 100.00 95.72 102.53 105.49 111.79 117.93 125.69 160.57 - - - - -

2. Petroleum, Oil, Lubricants 25.90 31.13 100.00 135.37 154.83 162.37 177,40 192.43 203.74 257.42 - -

3. Other Intermediate Goods 66.39 66.58 100.00 104.50 112.98 120.90 128.67 136.47 144.60 182.58 - -

4. Capital Goods 73.91 79.82 100.00 92.84 94.24 101.17 107.30 113.80 120.58 152.26 - - - -

5.1 Total Goods (CIF) 58.27 68.30 100.00 104.03 109.45 112.03 _-118.72 125.85 133.91 171.14 - - - - _

6. Non-factor Services 58.27 68.30 100.00 104.03 109.45 117.00 124.66 132.22 140.09 176.89 - - - -

7. Total Goods and NFS 58.27 68.30 100.00 104.03 109.45 112.65 119.45 126.63 134.65 171.77 - - - -

9..i~

Current ValuesS fllion s of lars)

1.1 Food 38.7 65.9 60.4 74.6 91.9 80.4 80.1 81.2 87.0 120.6 19.4 23.4 -12.5 2.7 8.5

1.2 Other Consumer Goods 40.0 79.1 32.9 53.2 84.1 97.9 110.1 120.3 136.9 260.3 25.5 59.9 16.4 11.8 17.4

2. Petroleum, Oil, Lubricants 16.8 25.0 48.9 65.2 86.3 96.4 110.5 126.5 141.3 221.1 _ 14.2 32.8 11.7 13.6 11.8

3. Other Intermediate Goods 91.4 201.2 127.2 187.1 246.5 291.4 342.9 39813 462.1 801.2 30.0 39.2 18.2 16.6 14.7

4. Capital Goods 48.8 79.3 39.0 53.1 113.8 129.7 138.6 152.9 168.5 259.9 17.6 70.8 14.0 9.1 11.4

5.1 Total Goods (CIF) 235.7 450.5 308.4 433.2 622.6 695.6 782.2 879.1 995.8 1663.1 24.2 42.1 11.7 12.7 13.7

6. Non-factor Services 22.1 52.6 86.8 79.2 86.4 101.2 115.7 128.5 141.5 211.5 33.5 0.0 17.1 11.8 10.6

7. Total Goods and NFS 257.8 503.1 395.2 512.4 709.0 796.8 897.9 1007.6 1137.2 1874.6 25.0 33.9 12.4 12.6 13.3

/ Sums may not add up due to rounding errors. hERA CP EA -

October 31, 1978

CYPRUS: ExporL Detail Pogo 6 of 7

Growth latesActual Est. Proiected - 1975- 1977- 1 - 1981-1970 1973 1975 1976 1977 1978 1979 1980 1981 1985 1973 1977 1978 M91 1985

Constant 1975 Prices(Millions of Doll-rs)

1.1 Citrus 26.3 55.8 14.1 12.3 16.3 15.1 15.2 15.4 15.5 16.8 28.5 7.5 -7.3 0.9 2.01.2 Potatoes 32.3 47.5 20.9 32.4 41.9 33.0 33.4 33.7 34.0 36.8 13.7 41.6 -21.2 1.0 1.91.3 Other Agricultural Products 38.5 52.7 30.9 42.9 66.8 68.8 72.9 78.0 84.3 116.8 11.0 47.0 3.0 7.0 8.51.4 Textiles 2.2 6.9 9.3 19.4 26.7 23.9 24 2 24 4 24.6 25.6 46.4 69.4 -10.5 1.0 1.01.3 Cemert - 4 16.2 22.9 24.0 19.6 18.6 18.6 24.2 25.3 - 21.0 -183.3 7.3 1.12. _ _ewned Goods 5.0 6.6 14.6 24.5 33.2 33.4 35.2 An.9 .0 88.0 9.7 50.8 0.4 13.6 15.83. All Other Goode 4.3 39.0 36.0 72.1 73.7 69.9 79.5 87.4 96.8 143.0 42.9 -5.2 11 5 10 24. Total Goods (F.o.B.) 148.6 218.9 142.1 226.4 282.5 263.8 379.0 298.4 3Z-. 452.4 41.0 -6.6 7.5 8.3

5. Non-factor Services 207.2 347.3 133.2 172.8 198.4 213.9 286.0 282.9 325.3 476.2 18.8 22.0 7.8 15.0 10.06. Total Goods and NFS 355.7 566.2 275.3 399.2 480.8 477.7 525.0 381.3 653.7 928.6 16.8 32.2 -0.6 11.0 9.2

Price Index (1975 - 100)

I Citrus 65.81 82.97 100.00 101.24 100.06 108.30 112.20 110.20 116.77 147.211.2 Potatoes 48.34 51.84 100.00 133.46 113.70 133.03 i56.98 179.42 193.23 259.981.3 Other Agricultural Products 57.39 71.19 100.00 112.44 103.23 86.87 85.65 86.85 92.28 118.97 - - -1.4 Textiles 59.98 84.47 100.00 105.39 110.24 82.09 88.25 100.51 112.19 164.79 - - -1.5 Ceant - 69.11 100.00 97.56 108.93 109.84 110.94 .,12.05 99.17 111.73 - -

2. IMnufactured Goods 59.88 84.39 100.00 105.33 110.64J 118. 125.91 .133.53 11_ 63 178-663. All Other Goods 89.84 73.89 100.00 188.04 107.60 130.04 139.74 150.45 159.92 193.924. Total Goods (F.O.B.) 66.69 74.79 100.00 110.55 107.76 110.53 118.08 1126.22 133.19 .168.99 _ - _ _

5. Non-factor Services 58.27 68.30 100.00 104.03 109.45 117.00 124.66 132.22 140.12 176.896. Total Goods and NFS 61.79 70.81 100.00 107.73 108.46 113.43 121.16 129.14 136.63 173.04

Current Values(Millions of Dollars)

1.1 Citrus 17.3 46.3 14.1 12.5 16.3 16.3 17.1 16.9 18.1 24.8 38.8 7.5 0.0 3 6 8.21.2 Potatoes 15.6 24.6 20.9 43.2 47.6 44.0 52.4 60.5 65.7 95.8 16.4 50.9 -7.6 14.3 91.3 Other Agricultural Products 22.1 37.5 30.9 48.2 69.0 59.8 62.6 67.8 77.8 138.9 19.3 49.4 -13.3 9.2 15.61.4 Textiles 1.3 5.8 9.3 20.4 29.4 19.6 21.3 24.5 27.6 42.3 64.6 77.8 -33.3 12.1 11.31.5 Censor - .3 16.2 22.3 26.1 21.6 20.7 20.9 24.0 28.3 - u.2 -L22 3.6 4.2

3. MAnufactuere Good. 3. . 46 25.8 36.7 39.5 44.3 54.6 69.4 157.2 23i-. -0 73. AllOtherd Goods 39.8 43.6 36.1 77.9 79.3 90.9 111.1 131.5 154.8 2762. 4.2 .15.74. Total Goode (F.0.B.) 991 137 121 203 344 21. 2. 7. 3. 7. . 8.2 22f.4 1.799.1 16.7 142. 250.3 304.4 21.6 32.5 376. 437.4 764.5 18.2 46.4 -4.2 14.5 15.05. Non-factor Services 120.7 237.2 133.2 179.8 217.1 250.3 306.7 374.0 455.8 842.3 25.3 27.7 15.3 22.1 16.66. Total Goods and NFS 219.8 400.9 273.3 430.1 521.5 541.9 636.2 750.7 893.2 1606.8 22.2 37.6 3.9 18.1 15.8

1/ Sums may not add up due to rounding errors.

EMEMA CP IIA

October 31, 1978

ANNEX IPage 7 of 7

CYPRUS: Balance of Payments and External Assistancel-

Actual Est. Proiected Growth Rates1973 1975 1976 1977 1978 1979 1980 1981 1985 1970-73 1975-77 1977-85

Summary of Balance of Payments

1. Exports (Including NFS) 400.9 275.3 430.1 521.5 541.9 636.1 750.7 893.1 1606.8 37.6 15.12. Imports (Including NFS) 503.1 395.2 512.4 709.0 796.8 897.9 1007.6 1137.3 1874.7 33.9 12.93. Resource Balance -102.2 -119.9 -82.3 -187.5 -255.0 -261.8 -256.9 -244.1 -267.9 25.1 4.6

4. Net-factor Service Income 6.6 10.6 11.2 19.1 28.9 32.4 33.4 36.0 45.Z 34.2 11.44.1 Net Interest Payments 5.1 -.2 -5.9 -11.5 -9.9 -16.3 -22.7 -28.4 -53.0 - 21.0

of which on pub M&LT loans -3.0 _4.9 -5.3 -8.6 -11.4 -16.1 -21.0 -25.2 -52.2 32.4 25.34.2 Direct Investment Income .0 .0 .0 .0 -1.4 -1.6 -1.8 -2.1 -3.7 - -4.3 Workeru Remittance (Net) 1.5 10.8 17.1 30.6 40.3 50.3 57.9 66.5 101.8 68.3 16.2

5. Current Transfers (Net) 14.9 72.1 60.7 72.8 78.0 73.0 68.0 60.0 35.0 0.5 -5.46. Balance on Current Account -80.7 -37.2 -10.4 -95.6 -148.0 -156.3 -155.5 -148.1 -187.7 60.3 8.8

7. Private Direct Investment 26.5 11.0 37.8 23.9 27.5 31.6 36.3 41.8 73.1 47.4 15.0

Public and M&LT Loans:8. Disbursements 22.0 9.8 27.3 65.5 68.2 84.7 90.6 118.8 222.7 258.5 16.59. Amortization -5.3 -5.1 -9.3 -7.0 -12.3 -22.4 -41.5 -59.2 -137.7 17.2 45.110. Net Disbursements 16.6 4.7 17.9 58.5 55.9 62.3 49.1 59.6 85.0 352.8 4.8

11. Use of IMF Resources .0 2.1 40.4 .0 .0 .0 .0 .0 .0 - -12. Short-term Capital Transactions 20.9 -4.3 -12.7 5.6 7.5 8.0 8.5 9.0 15.7 - 13.813. Capital Transactions NEI 3.8 -27.5 44.1 47.6 30.0 34.5 39.7 45.6 66.8 - 4.314. Change in Reserves (- = increase) 12.8 51.2 -117.1 -40.0 27.2 20.0 21.9 -7.9 -52.9 - 3.615. Net Foreign Exchange

Reserves (end of period) 306.8 215.2 291.9 332.2 305.0 285.0 263.1 271.0 468.7 24.216. Exchange Rate ($/CL) 2.86 2.72 2.44 2.45 2.61 2/- - - Actu-Al -

2/ ~~~~~1 97T3 19 75 1976 1r97-7Grant and Loan Commitments Debt & Debt Service-

1 Total Public M&LT Loans 16.8 7.0 52.0 70.0 Total Debt Outstanding (DOD1.1 IBRD 5.4 .0 16.0 10.0 end of period) 57.3 76.3 94.4 162.31.2 Other Multilateral .0 5.6 24.0 5.2 Public Debt Service 8.3 10.1 14.6 15.61.3 Governments .0 .0 10.4 8.2 of which Interest (3.0) (4.9) (5.3) (8.6)1.4 Suppliers 3.4 1.4 .0 16.9 Debt Service Ratio 2.1 3.7 3.4 3.01.5 Financial Institutions 2.9 .0 1.4 30.0

Int. on Total DOD/Total DOD 5,3 6.5 5.6 5.3Memorandum Items Total Debt Services/Total DOD 14.J5 13.2 15.4 9.6

1. Grant Element of Total IBRD Disb./Gross Total Pisb. 44.7 2P.4 11.0 5.0Commitments 15.8 7.8 17.0 8.8 IBRD DOD/Total DOD 52.9 51.0 42.1 24.9

2. Average Interest (percent) 6.7 8.1 7.1 7.8 IBRD Debt Service/Total Debt3. Average Maturity (years) 14.4 6.6 12.5 9.0 Service 34.5 47.0 34.4 34.8

1/ Data up to July 1974 refer to the whole of Cyprus; data thereafter refer to southern Cyprus only and are therefore notdirectly comparable with those for earlier years. EMENA CPIIA

2/ Yearly information on private debt is not available. However, total private medium and long-term debt outstanding is very October 31, 1978small as a result of the 1974 events. Total short-term debt outstanding was $58 million at the end of 1976.

ANNEX IIPage 1 of 4 pages

THE STATUS OF BANK GROUP OPERATIONS IN CYPRUS

A. STATEMENT OF BANK LOANS(As of December 31, 1978)

US$ MillionsAmount

LoanNumber Year Borrower Purpose (less cancellations) Undisbursed

Six loans fully disbursed 46.0

729 1971 Sewage Board Sewerageof Nicosia System 2.7 0.3

730 1971 Sewage Board Sewerage andof Famagusta Drainage System 1.9 0.5

904 1973 Republic of Highway ICyprus 5.4 3.7

960 1974 Republic of PaphosCyprus Irrigation 14.0 10.2

1278 1976 Cyprus Develop- DFCment Bank 6.0 1.4

1344 1976 Republic of Highway IICyprus 10.0 10.0

1483 1977 Republic of RuralCyprus Development 10.0 10.0

1540 1978 Cyprus Ports Ports IIAuthority 8.5 8.5

Total 104.5of which has been repaid 16.2

Total now outstanding 88.3

Amount sold 2.3of which has been repaid 2.3

Total now held by Bank 88.3

Total undisbursed 44.6

ANNEX IIPage 2 of 4 pages

B. STATEMENT OF IFC INVESTMENTS(As of December 31, 1978)

Amount of US$

Year Obligor Type of Business Loan Equity Total

1972 Cyprus Cement Company cement 2.3 0.6 2.9

1977 Cyprus Pipes Industry constructionmaterial 0.5 0.2 0.7

Total gross commitments 2.8 0.8 3.6

Less cancellations, salesterminations and repayments 1.1 0.1 1.2

Total commitments now held by IFC 1.7 0.7 2.4

Total Undisbursed - 0.1 0.1

ANNEX IIPage 3 of 4

C. PROJECTS IN EXECUTION 1/

Loan No. 729 - Nicosia Sewerage Project: US$2.7 million loan of April 5,1971. Effective Date: July 16, 1971. Closing Date: (original) March 31,1975; (current) September 30, 1979.

The system was largely completed in July 1974 when construction wasinterrupted. After prolonged negotiations, a mutually acceptable solutionwas reached between the Turkish Cypriots and the Nicosia Sewage Board, andarrangements were formally agreed upon in September 1978 to complete thefinal stages of the project. A Canadian consulting engineering firm and Bankmission representatives visited Cyprus at the end of October 1978 to reviewprogress, estimate costs, and schedule construction of remaining projectcomponents. Construction is now expected to begin again in early 1979, withcompletion tentatively planned in 1980.

Loan No. 730 - Famagusta Sewerage Project: US$1.9 million loan of April 5,1971. Effective Date: July 16, 1971. Closing Date: (original) March 31,1975; (current) March 31, 1979.

The project was about 90 percent complete by July 1974, when con-struction was interrupted. The project site lies completely in Famagusta,which is under the control of the Turkish Cypriot administration. Completionof this project therefore depends on a political settlement. Following thevisit of a UNDP representative in September 1977, the Famagusta Sewage Boardhas requested the assistance of UNDP to initiate maintenance operations onthe equipment and machinery already installed. The Sewage Board is alsoin the process of negotiating a solution to the outstanding claims of thecontractor, CYBARCO, Ltd. The closing date has been extended to March 31,1979, pending further progress towards a settlement.

Loan No. 904 - First Highway Project: US$5.4 million loan of June 12, 1973.Effective Date: September 12, 1973. Closing Date: (original) December 31,1976; (current) December 31, 1979.

The construction element of this Loan, a new four-lane dividedNicosia-Morphou highway, was interrupted by the events of July/August 1974shortly after its start in May 1974. The Bank has agreed to the Government'srequest to a change of loan description that allows the use of up to US$3.6million to make up the foreign exchange shortfall for the construction ofa new Nicosia-Limassol highway under the Second Highway Project, Loan 1344-CY. Amendments to the Loan Agreement were concluded in 1977.

1/ These notes are designed to inform the Executive Directors regarding theprogress of projects in execution, and in particular to report any prob-lems which are being encountered, and the action being taken to remedythem. They should be read in this sense, and with the understandingthat they do not purport to present a balanced evaluation of strengthsand weaknesses in project execution.

ANNEX IIPage 4 of 4

Loan No. 960 - Paphos Irrigation Project: US$14.0 million loan of January 30,1974. Effective Date: October 10, 1975. Closing Date: June 30, 1982.

Engineering of project works is nearing completion. Work on themain canal has been completed and the contract for construction of theAsprokremos Dam has been awarded. Land consolidation is progressing satis-factorily and training of farmers at the "Farmers Training Center" is con-tinuing with high farmers interest and participation. Overall progress issatisfactory.

Loan No. 1278 - Second Cyprus Development Bank Project: US$6.0 million loanof June 3, 1976. Effective Date: October 1, 1976. Closing Date: June 30,1981.

The loan was essentially fully committed by the end of 1978, withthe remaining uncommitted balance, a small portion of the $0.75 million smallscale industry component, expected to be committed early in 1979. Disburse-ments are expected to be completed well ahead of the Closing Date. The man-agement and expanding staff of CDB are capable and have developed an excellentproject appraisal and supervision capability.

Loan No. 1344 - Second Highway Project: US$10.0 million loan of December 31,1976. Effective Date: October 11, 1977. Closing Date: April 30, 1982.

Evaluation of bids for the main construction contract have beenreviewed by the Bank and the contract is expected to be awarded in early 1979.Consultants to assist in supervising construction have been appointed.

Loan No. 1483 - Pitsilia Integrated Rural Development Project: US$10.0million loan of August 18, 1977. Effective Date: November 7, 1977. ClosingDate: June 30, 1983.

Preparation of designs and tenders for project components is pro-gressing steadily. Preliminary designs for a portion of the village roadscomponent have been completed and approved by the Bank. Plans and equipmentlists for the rural health component have also been finalized, with tendersexpected to be issued early in 1979. Contracts for two of the small irriga-tion water storage ponds have been awarded. The study on financing of agri-culture investments is being revised to take into account the Bank's commentsand is expected to be completed early in 1979.

Loan No. 1540 - Second Ports Project; $8.5 million loan of April 12, 1978.Effective Date: August 11, 1978. Closing Date: June 30, 1982.

Tender documents are under preparation and are expected to beissued in early 1979.

ANNEX IIIPage 1

SUPPLEMENTARY DATA SHEET

Section I - Timetable of Key Events

(a) Time taken by country to prepare Two yearsproject: (November 1975 - October 1977)

(b) The agency which has preparedthe project: Water Development Department,

Ministry of Agriculture andNatural Resources, Cyprus

(c) Date of first presentation toBank: October 1977

(d) Date of departure of appraisalmission: May 29, 1978

(e) Date of completion ofnegotiations: December 15, 1978

(f) Expected date of loaneffectiveness: April 30, 1979

Section II - Special Implementation Action by Bank

None

Section III - Special Conditions

A. The appointment of the Project Manager and his two deputies are condi-tions of effectiveness (para 43).

B. The Government has agreed that:

1. Water charges for use of surface water will be collected fromproject beneficiaries and will be reviewed periodically, butnot less than once every five years, so as to recover (i) thefull operation and maintenance costs of project facilities,and (ii) 50 percent of the weighted average of the unit costsof all investments for major irrigation works over a lifetimeof 40 years, and at an interest rate of at least 9 percent perannum (para 48).

2. Water charges for ground water from the Gypsum aquifer will beset at a rate sufficient to recover the full capital, operationand maintenance costs over the project lifetime of 40 years, atan interest rate of at least 9 percent per annum (para 48).

ANNEX IIIPage 2

C. The Government has provided assurances that:

1. Persons owning agriculture land in the project area who mayhave left after July 1974, may resume farming of such landswhenever they may wish to do so, and any other person farmingthese lands in the meantime will do so only temporarily,with no transfer of ownership taking place, except by suc-cession from or agreement by the owners concerned. In theevent any of these absentee owners ultimately decide notto return, the Government will make appropriate arrangementsto safeguard their ownership rights or disposal thereof,within the context of a general settlement of such mattersin Cyprus (para 38).

2. Domestic water will continue to be supplied to the TurkishCypriots in the Nicosia, Larnaca and Famagusta areas on anequitable basis to the extent this is technically possible,and bearing in mind the needs of the population as a whole(para 40).

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