Colombia - Agricultural Diversification Project

Document Of The World Bank FOR OFFICIAL USE ONLY 0/k' 2 8E-3- co Rest N.6 P-3846-CO REPORT AND RECOMIENMTtO-I PRESIVENC OF HE INMEML&TIONAL BAZI F(FR REComma=CTOf AND DEVELOPMfENT TO THE EECUTIVE DIRHTORS ON A PROPoDD LOWN isAN AmOUMNr EQuivALENT TO uSt0.o MILLroN TO THE NATlIONAL FEDERATION OF COFFEE GROWERS OF COLOIBIA WIH THE GuARANrEE (F TRE REULIC OF COIDMBIA FOR ME AGRICULTURAL DIVERSIFICATIOLR FROJHET June 7, 1984 This _wmntb resiem dbrbi zd ma be wed yrcpmtol nteprf-rme of tber o Xie dumIs contnsa not dwiw be disclsd wd Wol Bm sdrmi  CURRENC EOIlE Currency Unit - Colombian Peso (ColS) &verage Calendar 1982 Average Calendar 1983 uSS I ColS64.102 US$S I CoIS78.857 ColSi = USSO.0156 ColSI - USSO.0127 Exchange Rate Effective March 15, 1984 USS 1.00 -ColS93-48 Col$1.00 - USSO.0107 WEIGETS AND MESURES metric Sys tem ABIREVIATIONS Caja Agraria - Agricultural, Industrial and Mining Credit Bank (Caja de Credito Agrario, Industrial y Minero) FEDERACAFE - rLational Federation of Coffee Growers of Colombia (Federacion Nacional de Cafeteros de Colombia) PRODESA3ROLLO - Coffee Zones Development and Diversification Program, A Department within FEDERACAFE (Programa de Desarrollo y Diversificacion de Zonas Cafeteras, Departamento en FEDERACAFE) FFAP - Agricultural Financing Fund (Fondo Financiero Agropecuaric) FFI - Industrial Financing Fund (Fondo Financiero Industrial) ICA - International Coffee Agreement GOVERNN TUQ OF COLOMBIA FISCAL YEAR January 1 - December 31 NATIONAL FEDERATION OF COFFEE GROWERS OF COLOMBIA FISCAL YEA- January 1 - December 31  LORt OFFICL USE ONLY COLOMBIA AGRICULTURAL DIVERSIFICATION PROJECr LOAN AND PROJECr SUReRY Borrover: National Federation of Coffee Growers of Colombia (FEDERACAFE) Guarantor: Republic of Colombia Amount: US$50.0 million equivalent, including capitalized front-end fee. Terms: 17 years, including four years of grace, at the standard variable interest rate. Project Description: The project vould support the Government's and FEDERACAFE's policy of diversifying agricultural production in the coffee areas through increased production, marketirg and processing of non-coffee commodities. This strategy would lead to substantial increases in food production and a reduction in the economy's vulnerability to price changes and market constraints on coffee, thereby assisting the country In reducing overproduction and costly stock build-up of coffee. The project vould accelerate significantly the borrower's ovgoing diversification efforts and help make diversification a more self-sustaining process through provision of: (a) credit for agricultural production, processing, and marketing; and (b) related support services, Including technical assistance, applied agricultural research and a price and marketing information system. As a result, the share of crops other than coffee in the land-use pattern would increase from about 10% to approximately 20%. Incremental annual production at full development would be about 3% of the value of national agricultural production in 1983. Direct project beneficiaries would be some 13,600 farmers whose income is expected to increase by about 50% at full development, about 40 private agroilndustrial enterprises, anA about 170 marketing entities in the coffee areas. Project Risks: There would be little technical or managerial risks, since FEDERACkFE, a private producer organization, is efficient and commands a vell developed physical and organizational infra- structure in the proposed project area, which would be suitably strengthened for meeting the needs of the expanded diversification effort. Also, the principal banking windows Th1 document has a rticted distribuio ad may be used by recipients only in the performance or their offical duties lt contents may oot otherwe be diseiod without Wodd Bank authoriztion  - 1i - under the proposed project, Banco Cafetero and Caja Agraria, have consistently performed well in granting credit and should have no difficulty in providing the banking services required under the project. However, the pace of project execution would criticallv depend on (a) efficient marketing of project output and Cb) the Government continuing to maintain reduced incentives for coffee production, which is its declared policy. These two aspects vould be monitored tbrough FEDEPAC&FE's marketing intelligence system to be strengthened under the project and the introduction of a review mechanism regarding diversification incentives. Local Foreign Total -(UsS Mfillion)- Estimated costs Credit 189.2 47.1 236.3 Support services 12.1 2.0 14.1 Subtotal 201.3 49.1 250.4 Contingencies: a/ Physical 1.2 0.2 1.4 Price 1.0 0.6 1.6 Total project cost 203.5 49.9 253.4 _b Front-end fee - 0.1 0.1 Total financing required 203.5 50.0 253.5 Financing plan Beneficiaries 53.8 - 53.8 FFAP 90.1 - 90.1 FFI 6.5 - 6.5 FEDERACAFE 53.1 - 53.1 Bank - 50.0 50.0 Total flnancing 2D3.5 50.0 253.5 Estimated --------------USS Millions Disbursements: Bank FT 1985 196 1987 1988 1989 1990 1991 Annual 5.0 9.5 10.5 10.0 7.5 4.5 3.0 Cumulative 5.0 14.5 25.0 35.0 42.5 47.0 50.0 at Applied only to support services. b/ Including local taxes of US$7.4 dillion.  Rate of Return: 23-25Z.I/ Staff Appraisal Report: Report No. 4966-CO, June 5, 1984 IBRD MAP: No. 18034 1/ On the basis of illustrative investment uodels for farm development, and marketing and agricultural processing sub-projects.  REPORT AND RECOHMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE NATIONAL FEDERATION OF COFFEE GROWERS OF COLOMBIA FOR THE AGRICULTURAL DIVERSIFICATION PROJECT 1. I submit the following report and recommendation on a proposed loan to the National Federation of Coffee Growers of Colombia for the equivalent of US$50.0 million, including capitalized front-end fee. to help finance the agricultural diversification project. The loan would have a terms of 17 years, including four years grace, at the standard variable interest rate. PART I - THE ECONOH!1/ 2. An economic mission visited Colombia in July 1982 and its report (4464-CO) was distributed to the Executive Directors in August 1983. This mission was followed by a small updating mission which visited the country in February 1984. Also, a mission to review the external sector and agriculture visited Colombia during April/Hay 1983 and its report (4981-CO) was distribu- ted to the Executive Directors in April 1984. This section reflects the major findings of these missions. Country data sheets are presented in Annex I. Background 3. The Colombian economy has become more resilient to external shocks as a result of the structural changes that have occurred over the past thirty years. Rapid economic growth has resulted in a substantial structural trans- formation of the country from a predominantly rural and self-contained eco- nomy to a more diversified urban, industrial, services and open economy. Colombia has reached a point where population pressure on land no longer increases much, if at all. Public sector investment and output now play a greater role, primarily as a result of increased activity on the part of decentralized agencies and public enterprises. Also, non-coffee exports, particularly exports of manufactured goods, expanded rapidly and the range of products sold abroad widened considerably. The growing urban-industrial- services oriented economic activity and a rapid expansion of surplus labor in rural areas attracted by higher wages and better services in the cities has given rise to rapid rural-urban migration. This phenomenon, together with the increased participation of women in the labor force, has been instru- mental in reducing poverty and improving income distribution over time. Financial and capital markets have evelved pari-passu with the growing needs of the economy, and Colombia has become an active participant in interna- tional capital markets. 1/ This section is an updated version of Part I of the report for the Power Development Finance Project (No. P-3750-CO of larch 8, 1984).  - 2 - 4. Real CDP per capita rose by about 2.ZZ on average during the 1950-83 period, with each succeeding decade registering greater gains in per capita income. This was the result of lower population growth, which after having remained in the 3.0O to 3.5% range during the 1950s and early 1960s, declined dramatically after 1965 as a consequence of a sharp fall in the fertility rate. Greater economic and educational opportunities for women, rapid rural-urban migration, rising per capita income and increased effec- tiveness of family planning programs contributed to the decline in fertil- ity. colombia's population is presently growing at an annual rate of 2.0%. As a result of the high proportion of women now entering childbearing years, this rate of population growth is likely to continue until the early 1990s. 5. The combination of rising per capita income and expanded public services has brought about a significant improvement in the welfare of the poorest, in absolute anai relative terms. As a result of increased sanitation control, improved diets and better health care, the crude death rate fell by about 50% and life expectancy rose from 48 years in the early 1950s to 63 years currently. The child mortality rate declined from 11 per thousand in the early 1960s to 3.5 per thousand in the late 1970s. Infant mortality fell to 55 per thousand in the late 1970s, from about 124 per thousand in the early 1950s. School enrollment ratios have increased substantially at all grade levels since the 1960s and, by the late 1970s, 79Z of urban children aged 7 to 14 were enrolled in school. The poorest income groups have experi- enced the greatest increases in electricity and water services in recent years and have benefitted more than the average of the population from services of the national health system. In spite of this progress, Colombia remains largely underdeveloped, with a relatively small modern sector super- imposed on a broad, traditional and economically poor base. Development has been concentrated in relatively few areas of the country, noblic services are still not available to many of the rural and urban populations and unemploy- ment and underemployment are relatively high. The coverage of health care and water supply requires further improvement, and adequate housing is not available to a substantial portion of the population. Rapid migration to the large and medium-sized cities has created urban development problems, with attendant social difficulties. Moreover, in spite of the steady increase in ner capita income over the past 30 years, substantial efforts are still required to improve and extend the benefits of development to the poorest income groups. 6. In large part, the achievements of the past 30 years were the results of government efforts to stimulate the productive sectors, provide the required economic and social instrastructure and establish an effective institutional base in the economv. In the 1950s and early 1960s, development policy favored import substitution supported by high tariff protection and the provision of economic infrastructure by the public sector. It was during this period that the country's major communication and transportaLion net- works were developed and the transformation to a semi-industrial economic structure began in earnest. By the mid-1960s, the prospects for further import substitution were substantially diminished, and the country was conr fronted with great economic uncertainty, arising from the fact that economic activity and the balance of payments were heavily influenced by developments in the world coffee market. In order to ease this constraint, during 1967 the authorities adopted an outward-looking development strategy, expanding and diversifying exports and, among the export markets, increasingly tapping  the Andean Group countries. Export promotion policies, including frequent small exchange rate devaluations, export tax rebates and other export incen- tives were i-tr^_ducd a.- t.F_ Otharltlas e 1...J c a s som- _ freeing capital markets from controls as means of raising efficiency and increasing the competitiveness of Colomhian goods in external markets. These measures were highly successful in relieving the foreign exchange constraint and stimulating growth and employment. However, by the mid-1970s the economy was once again experiencing difficulties caused primarily by the world recession and bv excessive Central Bank financing of the Central Government's overall fiscal deficit. Recent Economic Developments 7. In late 1974, the Government introduced a wide range of measures designed to correct the structural and policy weaknesses prevailing in the economy at that time. Before these reforms were fully effective, the economy was subjected to strong inflationary pressures arising from a sharp increase in world coffee prices. The increased receipts fron coffee exports, together with some official surrender of foreign exchange from illegal exports, caused a turnabout in the balance of payments. Incomes rose rapidly and stimulated aggregate demand; inflation accelerated. Economic growth also accelerated, and unemployment fell substantially, both in rural and urban areas. Largelv as a consequence of increased coffee tax revenues, the public finances generated overall surpluses averaging about 1 of GDP during the 1976-78 period and, by the end of 1979, net official international reserves had risen to about USS4.1 billion, equivalent to about 12 months imports of goods and non-factor services. 8. While beneficial in many respects, the foreiRn exchange boom had a somewhat negative impact on the evolution of the Colombian economy, largely as a consequence of the need for measures to stabilize the economy. Public investment was curbed, thereby delaying some badly needed additions to econo- mic and social infrastructure. The rate of currency devaluation was slowed, and the conversion of export receipts tnto pesos was delayed to moderate the growth of domestic demand, with adverse effects on export expansion and diversification. Also, the Government was compelled to maintain high reserve requirements and expand controls over credit thereby reducing, in real terms, the financing available to the private sector via the official capital market. 9. The stabilization measures were virtually unchanged from early 1977 through 1979 and were partially successful in restraining aggregate demand growth, but relatively high inflation persisted. In response to the effects of increasing restraint on aggregate demand and the troublesome financial market distortions caused by inflation and the extended period of monetary restraint, the authorities began in late 1979 to adjust the stabilization program. The rate of peso devaluation was advanced to increase export incen- tives and reduce borrowing abroad, and in early 1980, credit restraints were relaxed by lowering reserve requirements. At the same time, Interest rates on time deposits captured by commercial banks and development finance compa- nies--and on lending therefrom--were freed from controls. To offset the inflationary effects of these measures, the authorities further liberalized import payments and adopted the policy, supported by the emission of new short-term certificates, of not expanding the subsidized selective credit  - 4 - operations of the Central Bank in eccess of the resources captured from private savings for this purpose. The authorities also increased the sur- ve