Colombia - Trade Policy Loan Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 9528 PROGRAM PERFORMANCE AUDIT REPORT COLOMBIA TRADE POLICY AND EXPORT DIVERSIFICATION AND TRADE AND AGRICULTURAL POLICY LOANS (LOANS 2551-CO AND 2677-CO) APRIL 26, 1991 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ACRONYMS CAT - Tax credit for exporters OED - Operations Evaluation Department PCR - Program Completion Report PPAR - Program Performance Audit Report TAP - Trade and Agricultural Policy Loan TPED - Trade Policy and Export Diversification Loan CURRENCY EQUIVALENTS (period averages) Currency Unit M Colombian Peso (Col$) 1984 Col$ 100.8 US$1.00 1985 Col$ 142.3 - US$1.00 1986 Col$ 194.3 US$1.00 1987 Col$ 242.6 US$1.00 1988 Col$ 299.2 US$1.00 1989 Col$ 382.6 US$1.00 FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 043 U.S.A. Offioe of Dirctor-General Operatione Evaluation April 26, 1991 HEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Program Performance Audit Report on Colombia -, Trade Policy and Export Diversification and Trade and Agricultural Policy Loang (Loans 2551-CO and 2677-CO Attached, for information, is a copy of a report entitled "'rogram Performance Audit Report on Colombia - Trade Policy and Export Diversification and Trade and Agricultural Policy Loans (Loans 2551-CO and 2677-CO)" prepared by the Operations Evaluation Department. Attachment This docmeant has a restricted distribution and may be used by recipients only In the performance of their offiel dmlles. its contents may not otherwise be disclosed without World Bank authorialon. FOR OFFICIAL USE ONLY PROM nEFOM==C MUIT REMOR TRADE POLICY AND EXPORT DIVERSIFICATION AND TRADE AND AGRICMULTuaAL.LaZ LOANs (LOANS 2551-CO AND 2677-CO) TABLE OFCONTENTS Page No>. PREFACE ........ .... ........... ...... .. BASIC DATA SHEET ................................................... iii EVALUATION SUMMARY ................................................. vil I. BACKGROUND .................................................. I Economic Developments Leading to the 1982-84 Criuis *....... I Early Response to the Crisis ............................... 4 II. THE LOANS AND POLICY DIALOGU ................................ 5 Bank-Country Interaction .......................... ...... S Bank-Fund Coordination ....... ..........*...*.....0........ 8 III. IMPLEMERTATION AND OUTCOME ..... ..... ........ .......... .... 9 Introduction ...o...........................t.... ........... 9 The Macroeconomic Framework Supporting the Two Loans ....... 9 Changes in Foreign Trade Policy ............................ .11 Changes in Agricultural Policies ........................... 14 Overall Evaluation of Loan Design and Implementation ....... 16 IV. SUSTZINABILITY .................... ...... ...oo.............. 18--o i PROGRAM COMPLETION REPORT ........................................... 21 PART 1: PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE ................. 23 A. Program Identity ..*0..... ............................... 23 B. Background .............................. 23 C. The Medium Term Adjustment Program ........................... 24 D. Bank Support for the Adjustment Program ... ................. 25 E. Role of the Bank ............................................ 25 F. Accomplishments of the Adjustment Program .................... 26 0. Achievement of the Objectives of the Loan e.................... 29 H. Implementation and Monitoring of the Adjustment Programs ..... 32 I. Lessons Learned .............................................. 33 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TABLE OF CONTENTS (cont'd.) PaRe No. PART IIs PROGRAM REVIEW FROM THE BORROWR'S PERSPECTIVE ............ 35 1. Introduction ...... .......................................... 35 2. Background ................................................... 36 3. Trade Policy and Export Diversification Project (TPED) ....... 41 4. Trade and Agricultural Policy Project (TAP) .................. 43 5. Final Observations .......................................... 47 Current Import Policy (Annex) ...0........................... 48 Annex 1 Summary of Objectives and Achievements under TPED and TAP Loans ........................ .................. . 59 Tables 1. COLOMBIA - Economic Performance and Adjustment, 1970-1986 .... 64 2. COLOMBIA - Real Exchange Rate and Domestic Terms of Trade 1975-1987 ............................................ 65 PART III: STATISTICAL INFORMATION .................................. 67 Trade Policy and Export Diversification Loan (Ln. 2551-CO) ...... 67 Trade and Agricultural Policy Loan (Ln. 2677-CO) ................ 68 PROGRAM PERFORMANCE AUDIT REPORT COLOMBIA TRADE POLICY AND EXPORT DIVERSIFICATION AND TRADE AID AGRICULTURAL POLICY LOANS (LOANS 2551-CO AND 2677-CO) PREFACE This Program Performance Audit Report (PPAR) covers both the Trade Policy and Export Diversification Loan and the Trade and Agricultural Policy Loan. The principal objectives of these two loans were to support the Government's efforts for economic stabilization in the wake of serious imbalances in both the external and fiscal accounts; induce international commercial banks to maintain required capital flows into the country; and finance the continuous smooth functioning of foreign trade, threatened by an acute international liquidity crisis. The PPAR consists of the Program Performance Audit prepared by the Operations Evaluation Department (OED) and the Program Completion Report (PCR) prepared by the Latin America Regional Office of the Pink (Parts I and III) and the Borrower (Part II) . The PPAR is based on th -.ztached PCR, the President's Reports, sector and economic reports, lo"n documents, the existing regional project files, and discussions wit'. Bank staff. In adeition, an ORD mission visited Colombia in May 1990 and discussed the perceived effects of the two loans, and current Bank-country relations, with former and present Government officials and business leaders. Their contribution to the preparation of the report, by means of -weserved cooperation, insight and comments was essential and is gratefully acknowledged. The PCR provides a satisfactory account and assessment of the program experience and discusses the performance of the Bank and the Govern- ment, with specific emphasis on foreign trade and agricultural policy conditionality. The PPAR elaborates on particular aspects such as the preceding policy dialogue, preparatory work and design of the program, and its sustainability. The draft PPAR was sent to the Borrower for comments, but none were received. PROGRAM LEOMICE AMIT REMOR COLOM"BI TRADE POLICY AND EXPORT DIVERSIFICATION AND TRADB AND AGRICULTURAL POLICY LOANS (LOANS 2551-CO AND 2677-CO) BASIC DATA SHERT LOAN POSITION (Amounts in US$ Million) As of Feb. 28. 1991 Original Disbursed Cancelled Repaid Outstanding Loan 2351-CO 300.0 299.5 0.5 34.6 264.9 Loan 2677-CO 250.0 249.2 La - 9.1 240.1 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS Loan 2551 FY85 FY86 Appraisal Estimate (US$ N) 150.0 300.0 Actual (US$ M) 150.0 299.5 Actual as % of Appraisal (2) 100.0 99.8 Date of Final Disbursement: October 26, 1988 Loan 2677 2F8 PY88 FY89 Appraisal Estimate (US$ N) 125.0 250.0 250.0 Actual (US$ M) 125.0 248.0 249.2 Actual as Z of Appraisal (%) 1002 99.2% 99.7Z Date of Final Disbursementt November 15, 1989 PROGRAM DATES Loan Z551 Original Actual Initiating Memorandum 10/111/84 10/11/84 Letter of Development Policy 05/02/85 05/02/85 Negotiations 04/12/85 04/12/85 Board Approval 05/23/85 05/23/85 Signing 05/29/85 05/29/85 Effectiveness 06/14/85 06/14/85 Loan Closing 12/31/86 06/30/88 L& $0.8 million outstanding for technical assistance component still to be disbursed. -iv - EROGLpYAT.- (cont'd.) Loan 2677 Original AmAl Initiating Memorandum 05/13/85 05/13!05 Letter of Development Policy 03/18/86 03/18/86 Negotiations 12/11/88 12111/88 Board Approval 04/15/86 04/15/86 Signing 05/27/86 05/27/86 Effectiveness 06/23/86 06/23/86 Loan Closing 06/30/88 12/31/89 STAFF INPUTS (staffveeks) Loan 2551 FY84 FY85 FY86 Y88 EL_ Total Preappraisal 31.2 66.8 1.4 - - 99.4 Appraisal - 58.4 - - - 58.4 Negotiations - 25.9 - - - 25.9 Supervision - 6.7 33.1 37.6 0.4 77.8 Other 0.3- 0.3 Total 31.2 158.1 34.5 37.6 0.4 261.8 Loan 2677 FY85 FYYB8 ni F8 Total Preappraisal 45.2 15.9 - - 61.1 Appraisal - 34.9 - * 34.9 Negotiations - 28.2 - - 28.2 Supervision -A,AM- i 72.1 Total 45.2 83.5 63.9 3.7 196.3 MISSION DATA Ne of No. of Staff Date of Loan 2551 Month/Year Weeks Persons Weeks Report Identification 06/84 2.5 6 15.0 08/02/84 Appraisal 11/84 2.5 9 22.5 01/30/85 Supervision I 08/85 3.0 3 9.0 -- Supervision II 09/85 1.0 1 1.0 10/16/85 Supervision III 01/86 1.0 1 1.0 03/28/86 Supervision IV 04/88 2.5 3 7.5 05!12/88 -v - MISSION DATA (cont'd.) No. of No. of Staff Date of Loan 2677 MonthlYear W _eeks Persons Weeks Report Preappraisal 06/85 2.0 7 14.0 \ 08/85 Appraisal 09/85 2.5 1 2.5 10/85 Post-Appraisal 01/86 2.5 3 7.5 03/86 Supervision I 11/86 1.0 3 3.0 11/20/86 Supervision II 02/87 2.0 7 14.0 04/06/87 Supervision III 03/87 2.0 2 4.0 04/10/87 Supervision IV 11/87 1.5 1 1.5 12/10/87 Supervision V 04/88 1.0 1 1.0 05/02/88 Supervision VI 08/88 1.0 1 1.0 09/27/88 Supervision VII 05/89 1.0 1 1.0 -- OTHER PROGRAM DATA Borrower/Executing Agency: Republic of Colombia Follow-on perations: Operation: Power Sector Adjustment Amount: US$300.0 million Loan No. 2889-CO Board Date: December 8, 1987 PROGRAM PERFORMANCE AUDIT UM?0T TRADE POLICY AND EXPORT DIVERSIFICATION AND TRADE A1D AGRICULTURAL POLICY LOANS (LOANS 2551-CO AND 2677-CO) EVALUATION SUMMARY 1. In the early 1980s Colombia devaluations and . sonomic contrac- suffered a serious balance of pay- tion in Colombia's major Latin ments crisis which threatened to American trading partners; and t.a plunge the economy into d%ep reces- foreign debt problems of other Latin sion and reproduce the dismal American countries, which led for- economic record of the majority of eign commercial banks, by a process Latin American countries during the of association, to shrink credit and 1980s. Foreign exchange reserves harden loan terms for Colombia, sank from about US$5.5 billion in despite the latter's relatively low 1980-81 to about US$1.8 billion in foreign debt and traditionally pru- 1984 (equal to 4 months' imports). dent economic management. At the some time, GDP growth fell from 5.5% in 1976-1980 to 1.3Z in 3. At that critical juncture the 1982-1983 and 3.1% in 1984. Unem- World Bank intervened decisively and ployment doubled between 1982 and constructively. Firstly, in the 1984. And the Government abruptly context of the long tradition of reversed a 15-year policy of moving Bank influence in Colombia's eco- towards trade liberalization, by nomic policy making, Bank staff imposing quantitative restrictions encouraged the Government's economic and controls on most imported items. team to design appropriate policy responses to the crisis. Secondly, 2. The negative factors leading to the Bank decided to accelerate dis- this situation were of both internal bursements from existing loans and and external origin, and to some to step up its lending to Colombia, extent were mutually reinforcing. subject to adoption by the Govern- Lulled by the coffee boom of the ment of a strong adjustment program. second half of the 1970s, the Thirdly, the Bank used its good Government had allowed the exchange offices with the commercial banks rate tio appreciate significantly. and the IF for an agreement for a Parallel to this, lax monetary sul_Seneris Monitoring Arrangement policy let foreign exchange earnings between the IMF and Colombia, in be translated into high money lieu of the usual Stand-by Agree- growth. And the long, but limited %eatr the latter was demanded by the and vacillating drive towards trade ommercial banks and insisted upon liberalization, starting in 1967 and #y the IMP, but strongly resisted by culminating in 1981, had failed to the Government. produce the expected results of making the economy more independent 4. The Monitoring Arrangement from the effects of the coffee agreement was identical to a Stand- cycles. The main external factors, by in terms of follow-up of economic on the other hand, were the strong developments in Colombia on the part -viii- of IMF staff but without the pur- major factor in persuading the com- chase of Fund resources; it was maercial banks to continue their concluded in principle in April long-term lending to Colombia 1985, with strong support from the (although, for the most part, for U.S. Treasury and Federal Reserve purposes of amortization of existing Board. The agreement was vital for loans), thus averting a major for- the success of the adjustment pro- eign liquidity crisis. Also, it was gram, since it was the main precon- instrumental in securing foreign dition set forth by the foreign exchange for financing export-bound commercial banks for their share of imported inputs. This prevented financing Colombia's external bor- further detertoration of the balance rowing requirements. Its basis was of payments, probable deep economic essentially the adjustment program recession, and possible long-term adopted by the Colombian Gover-ment retreat behind protectionist since the middle of 1984, in cooper- barriers. Furthermore, the agreed ation with successive IMF and World changes in administrative arrange- Bank missions. The program included mente regarding. imports and exports reduction of the pu"lic sector resulted in increased efficiency. deficit, slowdown in monetary e-ian- In broader terms, the Government was sion, full correction of exchange able to implement the adjustment rate overvaluation, liberalization program agreed with the IMF and the of trade restrictions (in the Bank almost in its entirety. limited sense of gradually lifting quantitative restrictions anJ prior 7. The second major Bank operation licence controls on imports, but was the Trade and Agricultural without exposing local producers to Policy Loan (TAP), approved in May foreign competition), and scaling 1986. TAP was intended as a supple- down of (global) external borrowing ment of TPED in terms of supporta.ng targets. the Government's macroeconomic adjustment program and of financing 5. The first major Bank operation imports used as inputs in exports, in the context of stepped up but with the added policy component lending, and in conjunction with the of correcting the major policy IMF Monitortng Arrangement, was the deficiencies of the vital coffee and Trade Policy and Export Diversifi- agricultural sectors. It was cation Loan (TPED), approved in May approved for the most part in the 1985. TPED's conditionality form of a replica of TPED with the paralleled that agreed in the con- macroeconomic emphasis, supplemented text of the Monitoring Arrangement, by important understandings on although it laid specific emphasis coffee policy and by agreement for on financing Colombia's return to a modest reform measures for the agr.- more open foreign trade regime. By cultural sector. Several of the its policy content, it should have latter were not implemented in time, rather been labeled a SAL. Beyond either totally or in part: the main mere semantics, this would have reason for this was the resistance probably improved the understanding of agricultural policynakers to the of what this (and the next) loan idea of having the Ministry of were really about, and thereby pre- Finance change sectoral policies, in vented some subsequent cooling in the context of a World Bank loan, Bank-country relations (para. 12). without the usual long process of consensus building, characteristic 6. This Loan can be considered a of Colombian policymaking. major success in the history of the Bank's structural adjustment opera- 8. As with the TPED, however, tions. By most accounts, it vas a understandings -- not stated in the -ix loan documents -- were important to deficit fell from nearly 62 of GDP the design of the TAP. Most impor- to less than 12 between the same tant, agreements, embodied in period.. The exchange rate was letters from the Coffee FQderat;Lon depreciated by about !1% in real to the President of the World Bank, terms by 1987-88 compared to the indicated that coffee price 1983-84 level. Liberalization of increases would be contai.ted, diver- tha trade regime (irs the limited sification encoura$-ed and fertilizer eenso described above) vas achieved subsidies eliminated. A second as .greed. Public investment was agreement concerned increases in the increased from 8.42 of GDP in 1983 real interest rates to positive to 92 in 1987, within a framework of levels and the freeing of thrie key careful monitoring of the rationale rates -- contained in a letter from %d profitability of new investment * the Finance Minister to the Bank projects. Moreovert the GDP growth President. Third, ,here were un- rate increased from 2.52 in 1983-84 written agreements to depreciate the to 4.52 in 1987-88, and uuemployment * real exchange rate. All these reduced from about 142 to about 10%. actions were taken and were funda- The one notable exception to this mental to the implementation of the consistent record of success in TAP. economic management has been infla- tion, which has persisted at about 9. The urgency for following up 25Z during 1987-88 despite the small TPED with TAP, however, was even- public sector deficit, moderate GDP tually weakened on account of two growth, and practically balanced considerations. First, sharp external accounts. increases in the world price of coffee in 1985 rapidly improved the 11. The effects of the adjustment balance of payments and the economic program have also been remarkably outlook. The TAP loan was, never- durable. The public sector and theless, necessary in the view of external accounts have been main- the commercial banks -o indicate tamed in near balance until now, continue, Bank suppor. for the and the economy has continued to Colombian pro3ram. Second, the grow at positive per capita rates Bank's increased exposure (its share even after the 1985-1986 coffee of Colombia's lEng-term external boom. A telling sign of durability debt increased from 17.4% in 1984 to is that, since the start of 1990, 25.4% in 1988) reduced its future the Goverment has decided to push room for maneuver and continuous for a more liberal trade regime, high-intensity involvement. Even that would expose to serious foreign though the TPED and the TAP had been competition many local producers for presented as parts of the same the first time, confident that after package to the commercial banks the adjustment efforts of 1984-1989 during the discussions leading to a more open economic system can be the 1985-86 agreements, as it turned sustvined. out the TAP came at a time when the balance of payments was improving. 12. It is unfortunate that, despite the overall successful results of 10. Most basic economic indicators these two operations, they did not improved following the two loans. lead to closer relationships between Thus, the overall public sector the Bank and the Colombian authori- deficit fell from over 7% of GDP in ties. On the contrary, various 1983-84 to 1.4% in 1987; the Central developments combined to produce a Government deficit fell from over 4% notable cooling of the Batk-country in 1983-84 to less than 1% in relations until a new Administration 1d87-88. The current account took over in Colombia in 1990. Sx- First, there was a virtually com- time (see para. 5). Having success- plete turnover of Bank staff fully substituted long-term Bank involved with Colombia operations resources for shorter-term Fund during the 1987 reorganization, resources, the Colombian authorities coinciding with the second tranche expected the Bank to reproduce this discussions for the TAP. The change pattern even in normal times, when in personnel meant a change in per- no acute crisis was present. The spective and emphasis on implementa- Colombian authorities persistently tion of sector adjustment measures, urged the Bank to release resources which was especially problematic not tied to specific projects and/or because many of the policy measures to strict conditionality. However, were based more on tacit under- Bank staff after the reorganization standinS rather than loan agreement felt that it was in Colombia's clauses. This factor alone led to interest for the Bank to continue to some tension in the Bank-country push for trade liberalizations the relationship. However, a second and new Colombia team in the Bank began more enduring development was the to apply normal Bank standards for creation, among Colombia's economic sector adjustment lending, focussing team, of the expectation that the on the unfinished agenda at the Bank could be a continuing and ready sectoral level. Specifically, the source of noa-project, policy-based Bank took the view that additional lending. This was in part the con- adjustment lending could only be sequence of the fact that, while the justified by significant sectoral primary focus of the loans was policy reform within the context of clearly macroeconomic adjustment, an adequate medium-term macro- they were, presumably because economic framework. These dif- Colombia did not reach a Standby- ferences set the tone for the Bank's Agreement with the IMF, labelled relations with Colombia for some sectoral operations with some but time and were successfully resolved limited sectoral objectives. This only in mid-1990. mislabelling was a mistake on the part of the Bank which created dif- ferent expectations of the Govern- ment officials and Bank staff over TRADE POLICY AND EXPORT DIVERSIFICATION AND TRADE AND AGRICULTURAL POLICY LOAS (LOANS 2551-CO AND 2677-CO) Aconomic Developments Leading to lhe 1982-84 Crisig 1.01 The Colombian economy experienced sustained growth between 1960 and 1980, although at fluctuating rates, in response to external circumstances and changing domestic policies. The principal sources of output were agri- culture, manufacturing and trade (comprising commerce, banking, finance and insurance). This experience is summarized in the following tables Table 1: CONTRIBUTION OF SIECTED SECTORS TO GRONTH. 1960-81 (in percentage) Growth Rate Contribution to Growth* Period Ag Ic MLnuf. Trade GDP ArIC. Trade gWP 1960-64 3.1 5.9 6.0 4.8 21.1 20.2 20.0 100.0 1964-67 2.9 5.1 4.7 4.6 19.3 18.8 16.9 100.0 1967-74 4.3 8.6 8.3 6.7 18.0 23.1 21.4 100.0 1974-78 4.5 5.2 7.4 5.4 21.9 18.0 25.5 100.0 1978-81 3.2 1.5 2.7 3.7 22.2 7.3 13.8 100.0 1960-81 4.2 6.4 6.8 5.7 205 20.0 21.2 100.0 *(Sector share in GDP) x (eectoral growth rate)/(GDP growth rate). The strategy for growth and diversification of the economy until the mid- 1960s focussed on import substitution for manufactured products. But by 1965 this strategy had about exhausted its potential and growth rates had started sagging, pushed downwards further by an overvalued exchange rate and declining coffee prices. It became clear that a drastic change in orien- tation was needed. 1.02 The Government which was elected in 1966 instituted during the following year a number of reforms that provided incentives for outward- looking growth. The 1967 reforms included the adoption of a crawling exchange rate peg -- coupled with the determination to raise it effectively in order to push the exchange rate towards an equilibrium position; a variety of export incentives, including a tax credit for exporters (CAT); and the reduction of import restrictions on imported inputs and capital goods used in the production of exports. *2* 1.03 The shift in economic policies, although falling substantially short of a genuine liberalization of the foreign trade regime, produced handsome results, as shown in Table 1. The real growth rate of GDP jumped from 4.61 per annum in the period 1964-67 to 6.72 per annum in 1967-74; manufacturing growth accelerated from S.11 to 8.6% per annum between the ease two sub- periods. Increased coffee prices played a role in the Improved performance of the 1967-74 period. It should be noted, nevertheless, that accelerated growth was sustained even during the later years of that period, when coffee prices declined again. Part of the explanation for this was the increased emphasis on construction as a leading sector after 1971. An Important role was played also by the booming International economy in the late 1960s and early 1970s. 1.04 Economic growth started slowing down again after 1975, despite rapidly increasing coffee prices (whose level almost doubled in international markets during 1976 and 1977) and the beginning of massive inflows of foreign receipts from illegal drug sales. The main causes of reduced growth were the Government9s contractionary measures designed to stop increasing inflation (apparently resulting from the authorities' neglect to prevent monetization of foreign exchange inflows) . The specific measures adopted by the Govern- ment were the reduction of public expenditures (including public investment) coupled with significant increases in taxation, and deceleration in the application of the crawling peg (the exchange rate was allowed to appreciate by 17% between 1974 and 1977). Inflation fell from 241 p.a. in 1974 to 181 p.a. in 1975, but non-conventional exports, both agricultural and manufac- tured, were hit hard by these measures. The situation was made votee by the effect of public sector tightening on foreign sector incentives (the CAT was reduced from 15% to 5%, import tariffs were sharply increased, and granting of import licenses was restricted). 1.05 The Administration taking office in 1978 reversed several policy measures of its predecessors. Concerned about deteriorating capital infra- structure, it decided to increase public investment. At the same time, ceding to the pressure of various interest groups, it reduced taxation, with the result that the public sector deficit was increased. Also, encouraged by the continued good state of the balance of payments, it proceeded to liberalize substantially the foreign trade regime, particularly imports (but it did little to promote export expansion). 1.06 The principal achievement of these policies, in addition to building up infrastructure, was their counter-cyclical effect in the face of the worsening international economic outlook. Even so, economic growth fell to 2.3% in 1981 (from about 4% in 1980). On the other hand, the main costs were the stubbornly high inflation rate, which remained at about 25% p.a., and the absence of significant structural transformation which, at the actual stage of development of Colombia's economy at the beginning of the 1980s had to come about mainly by opening up the external sector (and supporting this opening up by vigorous promotion of non-traditional exports). 1.07 In general, the economic developments of the two decades between 1960 and 1980 had several positive effects. GDP per capita grew by over 31 p.a., allowing living standards to almost double for the average citizen. Furthermore, the fruits of growth were widely spread among rural and urban inhabitants alike. The main means by which this distribution of benefits was - 3 - achieved were rapid urbanization of the population (in 1960, about 45% of the total population of about 16 million lived in urban areas, while in 1980 about 65% of a total population of about 26 million lived in urban areas), and the ability of the economy to provide increased employment opportunities to a rapidly growing labor force. 1.08 On the negative side, economic diversification vas slower than one might expect in view of rapid economic growth. Thus, the share of manufac- turing in GDP remained practically constant; while coffee made up on the average 50% of total commodity exports -- with wide gyrations around that number, depending on international price movements. Probably the most impor- tant factor of slow structural change was that the economy remained essen- tially behind protectionist barriers, despite sporadic attempts to promote exports since 1967, and some lowering of import tariffs in 1979-81. 1.09 Within this economic setting, the situation started deteriorating rapidly after 1980. As mentioned earlier, the rate of GDP growth fell from about 4% in 1980 to 2.3% in 1981. Depressed economic conditions continued in 1982 and 1983, with GDP growing by 0.9% and 1.6%, respectively (implying a slight reduction in per capita GDP). Following on the slackening economic activity, unemployment almost doubled between March 1982 and March 1984, with the unemployment rate reaching 14%. Both the fiscal and external accounts developed serious disequilibria, and for a time in 1984 threatened to get out of control. 1.10 The Central Government's savings on current account turned negative in 1982, for the first time in two decades, while the deficit reached a level equal to 4.5% of GDP in 1984, compared to 0.4% on average for 1976-80. The deficit of the broader public sector (including decentralized public entities) exceeded 72 of GDP. On the other hand, the current account of the balance of )ayments swung into deficit in 1981 for the first time since 1975, and this deficit grew to over US$2.8 billion in both 1982 and 1983, equal to about 7.3% of GDP. Correspondingly, foreign exchange reserves fell from US$5.5 billion in 1981 to US$1.8 billion in 1984, or about 4 months of imports. In 1984, the prospect of payments default and debt rescheduling appeared as a distinct probability (and weighed heavily on a country proud of its record on external debt servicing). 1.11 Finally, the trade regime, already characterized by substantial protectionism, was given an orientation further isolating the economy from the rest of the world. Between 1980 and 1984, items whose import was prohibited went from 0% of the t3tal to 16.7%, items subject to prior license went from 31.4% to 82.9% of the total, and items free of import restrictions went from 68.4% to 0.4% of the total. During the same period, the average nominal tariff rate was increased from 26% to 40%. 1.12 Several concurring factors accounted for the rapid and steep worsening of economic conditions, some of which have already been mentioned before. Firstly, the Administration taking office in 1982 inherited from its predecessor a significantly overvalued exchange rate (taking the real exchange rate of 1975 as equal to 100, the real exchange rate in 1982 stood at 73.4), the overhang of the coffee and illegal drugs boom of the late 1970s. Secotdly, the international price of coffee fell steeply in the early 1980s. In 1981, it was almost one third its 1977 level, in real terms, i.e., - 4 * adjusted for movements in the general price level. Thirdly, the world recession breaking out at the beginning of the 1980s dampened the demand for Colombia's non-traditional exports, both agricultural and manufactured. A special feature of this phenomenon was the negative effect of developments in Colombia's Latin American neighbors on the country's balance of payments. Exports to Venezuela, Ecuador, Mexico, Argentina, Brazil, Costa Rica and Chile fell significantly after 1982 as the result of economic recession, major devaluations and import restrictions in those countries. For example, Colombia's foreign receipts from Venezuela fell in 1984 to less than a sixth their 1982 level. Fourthly, the availability of foreign credit shrank and loan terms and conditions hardened, due to a combination of external and internal causes. International commercial banks, concerned about the fast breaking debt crisis in Latin America, tried to reduce their exposure in the region indiscriminately, disregarding that Colombia had a relatively low foreign debt and an uninterrupted good record of servicing its foreign obligations. But, in addition, the problem was exacerbated by the country's excessive legal requirements leading to delays in utilizing existing loans and obtaining new ones; and by difficulties faced by several private sector firms and banks in servicing their external debt. Early Response to the Crisis 1.13 Soon after the change in Government in 1982, the incoming Admin- istration took various measures in an effort to reverse the developing economic deterioration. In general, for the first two years of its term the emphasis of these measures was on short-term growth rather than on estab- lishing a firm basis for sustained economic expansion over the long run. 1.14 In late 1982 the Government introduced the strategy of using con- struction (especially for education, health and low-income housing) and exports as leading sectors for economic growth. The main thrust of this strategy was directed towards arr.sting the rapid deceleration in economic activity. It was to be combined with measures promoting the growth of agri- culture and agroindustries, the capital goods industry, and small and medium- sized industrial enterprises. 1.15 Stimulation of construction activities was to be achieved by means of the financing mechanism of indexed savings and mortgages. On the other hand, export growth was to be achieved mainly by means of accelerated crawling peg adjustments in order to regain the country's eroded interna- tional competitiveness. 1.16 At the same time, the new Government emphasized the need to reverse the inflationary expectations that had been growing since the mid-1970s. The main means employed at that time were the improvement of the regulatory func- tions of the financial system and the provision of incentives for increasing private sector savings and resource mobilization. Furthermore, a fiscal reform aimed to raise revenues by means of reducing inequity and tax evasion, resolving collection problems, and increasing the elasticity of the tax system. The reform also aimed at reducing public expenditures by curtailing transfers to decentralized public entities. 1.17 These measures succeeded in stimulating somewhat economic activity. As mentioned earlier, GDP grew in 1983 by 1.6%, as opposed to 0.9% in 1982. -5- There was a further modest improvement in 1984, with GDP growing by 3.12. The measures also succeeded in averting an immediate financial sector crisis, and in reducing inflation (from 252 in 1982 to 202 in 1985). On the other hand, because of delays in Congress, the Government was not able to take immediately the announced revenue raising measures, with the result that the public eactor deficit increased beyond targetted levels. Also, the adjust- ment of the exchange rate proved insufficient to expand exports and growth. On top of that the Government, under mounting pressure to intervene in order to stimulate economic activity, moved after a while to more expansionary fiscal and monetary policies and increased protection of domestic industry from imports. The results werb predictable and dismals The overall public sector deficit reached 7.3% of GDP in 1984, and the excess liquidity of the economy increasingly became translated into import payments (despite the increased controls) and capital outflows. Coupled with the drying up of external commercial credit, these factors placed the economy in an untenable position. It became clear that a much more disciplined and coherent set of economic policies was necessary on the part of the Government, combined with increased external support, in order to prevent the economy from getting into a tailspin. II. THE LOANS AND POLICY DIALOGUE Bank-Country Interaction 2.01 The World Bank has had a long involvement in Colombia, both as a policy advisor and a lender. By the end of 1983, when the economy started showing signs of getting out of control, the Bank had granted 103 loans and 1 IDA credit to Colombia, of a total value of US$3.74 billion. Debt out- standing at the time was slightly over US$1.5 billion. 2.02 Parallel to lending activity, Bank staff kept in close contact with the authorities, and also monitored constantly new economic developments and updated its policy advice. For example, at least four major analyses by Bank staff were published in 1983 and early 1984.1 Equally important to long-time lending activity and high-intensity monitoring and policy advice were the practically identical views held by Bank staff and Colombia's economic team regarding the nature and causes of the problems, and the required remedies. 2.03 As a result of the above, the Bank found itself working closely with the Government in finding appropriate responses to the crisis. As mentioned already, it was thought that such responses should necessarily include increased inflows of capital from external sources. 2.04 A new economic team was appointed in Colombia in July 1984. Its principal objectives were to push for stronger economic remedies domes- tically, and to attract foreign assistance, multilateral as well as from 1/ Colombia: Manufacturing Sector Developments and Chanyes in Foreign Trade and Financial Policies, January 1983; Colombian Agriculture: Selected Issues and Some Directions for Strategy, January 1983; Colombia Economic Development and Policy under Changing Conditions, August 1983; Colombia: External Sector and Agriculture Policies for Adjustment and Growth, April 1984. -6- commercial sources. Domestic measures included fiscal tightening (increases in gasoline prlces, temporary increases in import tariffs, a freezing in hiring public sector employees, reduction of public sector salaries in real terms, reduction in the public sector investment program, postponement of new large projects, increases in real tariffs of public utilities, less auto- maticity for transfers to regions and public entities via funds earmarking, partial freeing of earmarked revenues, a surcharge on income tax), and adjustment in the external sector (28% annualized crawl of the exchange rate, increased rates and coverage of the tax credit to exporters, the temporary increase in import tariffs mentioned above, liberalization of imports needed for export activities, increases in export subsidies). The set of fiscal measures was expected to lower the Central Government's deficit from 6% to about 3% of GDP by 1985. 2.05 Regarding the search for increased inflows of external resources, the main challenge for the new economic term was to persuade the interna- tional commercial creditors of Colombia to grant new loans, or at least to stop their efforts for reducing their existing credit exposure in Colombia. The most serious handicap to these efforts was Colombia's traditional reluctance to enter into a formal Stand-by Agreement with the IMF -- and the Commercial banks' inflexible position that a Stand-by Agreement was a pre- requisite for any accord guaranteeing continued credit flows to Colombia. 2.06 The Colombian authorities argued, perhaps not very plausibly, that a Stand-by Agreement with the IMF would not be very useful at that specific moment, as the country was not so much in need of balance-of-payments support, but rather of long maturity external loans required for productive investment. They buttressed this position by further arguing that their economic austerity program, recently put in place, and their past record of prudent economic management, warranted a "good performance" certificate from the IMP even in the absence of a formal Stand-by Agreement. 2.07 The discussions leading to a resolution of this difference in basic position lasted from July 1984 (indeed, earlier than that) until early 1985. On one side, the commercial banks demanded (although not unanimously) an IMP Stand-by Agreement as a precondition for their continued commitment of resources in Colombia. And the IMF showed great reluctance to deviate from the standard instrument of a Stand-by Agreement for analyzing, and giving its approval to, the Government's stabilization program. On the other side, Colombia found a powerful r .1y in the U.S. Government (in particular, the Federal Reserve Board and the Treasury). There has been no consensus as to the reasons of this support. Mention has been made, among others, of the favorable impression created by the professionalism of the Colombian team; of the political support generated for a beleaguered Administration facing at the same time a guerrilla insurgency as well as illegal drug trafficking; and of economic interests of powerful U.S. corporations who saw large planned investments in Colombia in jeopardy as the result of the threatened unravelling of the economy. The fact remains, however, that constant lobbying of the Foderal Reserve with the commercial banks and the IMF persuaded both to accept in April 1985 a two-year (1985-86) Monitoring Arrangement in lieu of a Stand-by Agreement. This Monitoring Arrangement, identical to a Stand-by in terms of follow-up of economic developments in Colombia on the part of IMF staff but without the purchase of Fund resources, -7- was also hased on the agreement that Colombia would formally request the IMF for a Stand-by Agreement if the economic program did not produce the expected results. 2.08 Following upon the MonitqAing Arrangement agreement, the Government was able to negotiate a "jumbo" loan of US$1 billion with its creditor banks in 1985 (followed later by a "Concorde" loan in 1987). The critical period of international liquidity squeeze was coming to an end. 2.09 The Bank provided decisive support to the Colombian Government throughout this period of negotiations with the IM and the commercial banks. As mentioned earlier, this support was based on the constant monitoring of . economic developments and the largely identical opinions of its staff and the Government's economic team regarding the causes of the crisis and the required remedies. 2.10 Firstly, in collaboration with the Government, the Bank facilitated the acceleration of disbursements from existing loans. Secondly, the Bank decided to step up its lending to Colombia, confident of the country's ability to overcome the crisis and re-establish long-term growth. Loan commitments went up from US$73 million in 1983 to US$533 million in 1984, and US$703 million in 1985. Thirdly, the Bank committed itself in advance to stepped up lending as a means of persuading the commercial banks to maintain their presence in Colombia. It also offered to present a statement on behalf of Colombia testifying to sound economic management, during the negotiations between the Government and the creditor banks. Fourthly, the Bank went even further and offered to substitute for the IMF in monitoring economic develop- ments in Colombia, if monitoring by the IMF (of the Stand-by type or other- wise) could not be finally agreed upon. This last offer was however rebuffed by the commercial banks on the grounds that World Bank exposure in Colombia was of such magnitude that its stance could not be neutral or =.partial. 2.11 The two centerpieces of the Bank's stepped up lending tz .Aombia during that period were the US$300 million Trade Policy and Export Diversifi- cation Loan (TPED), approved in May 1985, and the US$250 million Trade and Agrir;ultural Policy Loan (TAP), approved in May 1986. These two loans were central to the Bank's strategy of strong support to Colombia during a period of crisis not only because of their size. More importantly, they codified the content of the agreement between the Bank and the Colombian authorities regarding the necessary action for stabilizing the economy and resuming long- term growth. 2.12 These two loans are also credited by most accounts as having played a catalytic role in attracting commercial bank resources, which were crucial for preventing a long and deep economic recession. It appears that creditor commercial banks, applying the pari passu principle, had let it be known that they would not maintain their exposure in Colombia unless the multilateral banks increased their own commitments.2 The Bank's positive response satisfied also this demand. I/ Some comments on this and related matters are given in Section III below. -8- Bank-Fund Coordination 2.13 As explained in the previous section, the involvement of both the IMF and the Bank in helping resolve the difficult situation was effected under rather unusual circumstances. With regard to the IMP, the aversion of Colombia to entering Stand-by Agreements with the Fund, dating back to 1967 (although there was a little discussed formal agreement in 1970), led the country alcag various unorthodox paths at a time when its economy was in urgent need of fresh external resources. Eventually, with the active inter- vention of the Federal Reserve Board, an almost unique Monitoring Arrangement was arrived at. 2.14 The Bank, on the other hand, found itself testing unfamiliar territory, by even offering to substitute for the IMF in monitoring the macroeconomic performance of the Government. The Bank also found itself urging the Fund to accept the Monitoring Arrangement proposed by the Colombian Government, even though the Fund management and Board had serious misgivings about deviating from standard procedures. 2.15 Despite these potential points of friction, cooperation between the Bank and the Fund was very close throughout that exercise. In the end, the Fund emerged with its traditional role of monitor of macroeconomic perfor- mance reaffirmed, despite the absence of a formal Stand-by Agreement. Furthermore, the Fund saw its relations with the Colombian authorities sig- nificantly improved, following the long period of dealing at arm's length, imposed by successive Governments' determination to avoid "IMF interference." 2.16 The Bank also saw its stature increase, at least in the short run,?, from the close coordination of its policy dialogue with the Fund. The policy package agreed in the context of TPED and TAP carried additional weight by being identical with that recommended by the Fund -- and also with that pursued by the Government team. 2.17 Of interest here is the question of why these two loans were labeled trade operations. (The interest arises from the repercussions that this label has subsequently had on Bank-country relations, discussed in Section III.) In reality, they were Structural Adjustment Loans, granted in support of a program aimed at correcting serious imbalances in the external and fiscal accounts. As mentioned earlier, the program included measures for immediate stabilization of the economy, and also for structural improvement in economic performance. Within this context, trade liberalization played a rather limited role, although the program supported important reforms. There were good reasons for this, such as the precarious situation of tue balance of payments, and the threat posed to public sector revenues from a drastic reduction in tariff rates (tariff receipts make up between 151 and 202 of total tax revenues). 2.18 The most plausible answer seems to be that the Bank had set a rule that SALe would be granted only to countries for which a Stand-by Agreement with the Fund had already been concluded. In the absence of such an Agree- ment, the Bank chose to emphasize sectoral policies in trade and agriculture, 1 For long-run effects, see Sections III and IV. -9- despite the fact that the real thrust was on macroeconomic adjustment. One result of this, presumably welcomed by the Government, was that Colombia wae able to receive substantial amounts of long maturity external resources in support of a stabilization cum structural adjustment program, instead of the normal mixture of long-term funds from the Bank and balance-of-payments support from the Fund. III. IMPLEMENTATION AND OUTCOME Introduction 3.01 Two copects of the policy dialogue between the Bank, the IMF, and the Government stand out in this analysis of the design and implementation of the 1984-86 adjustment program. One is the macroeconomic framework within which policy adjustment took place. This was designed by the Government's economic team, and as it turned out was monitored by the Fund. It fell therefore outside the Bank's principal responsibility. Nevertheless, the Bank played an active and constructive role in assisting the Government to put the macroeconomic framework in place. More importantly, the macro- economic policies of the Government were of fundamental importance for the design and implementation of the trade, fiscal and agricultural policies that became the imediate responsibility of the Bank. The second aspect is the design and implementation of TPED and TAP. The discussion here centers on the degree to which the two operations helped reduce the anti-trade biases built into Colombia's commercial policies long before the 1981-84 crisis broke out. It also addresses the question of whether the changes in agricul- tural policies agreed in the context of TAP had the highest economic priority. The Macroeconomic Framework Supiportins the Two Loans 3.02 The Government's program of macroeconomic adjustment was specified in the letter sent to the IMF, prior to concluding the Monitoring Arrangement agreement. The thrust of the program was in the fiscal, monetary, foreign exchange, and foreign trade areas. 3.03 Fiscal adjustment comprised both revenue and expenditure measures. On the revenue side, it included a 502 increase in the stamp tax; an 8Z sur- charge on imports; limits to mortgage interest deductions for income tax purposes; elimination of exemptions to the value added tax; reduction of earmarking of revenues; monthly adjustments of utility charges to the infla- tion rate; and increases of gasoline prices beyond the rate of inflation. On the expenditure side, the principal measure was to limit average salary increases for public sector employees (including decentralized entities) below 11%, i.e., to reduce real salaries by more than 102. Regarding public investment, on the other hand, the decision was not to decrease its overall size as a proportion of GDP. The emphasis was rather on switching investment outlays away from bulky, long-gestation new projects, towards the social sectors and projects generating exports (such as coal and oil production). The combined result of revenue increases and expenditure cuts was expected to be a reduction of the public sector deficit from 7.6% in 1984 to 4.92 in 1985, with further reduction scheduled for subsequent years. - 10 - 3.04 Monetary adjustment was seen to a large extent as a by-product of fiscal tightening and external sector developments. Thus, Central Bank credit to the public sector was expected to fall from 155 billion pesos it, 1984 to 45 billion pesos in 1985. While continued lose of reserves was expected to play its own autonomous role in holding down domestic liquidity. On the other hand, credit to the private sector was planned to increase by 23%. As for interest rates, the Government reaffirmed its position of letting market forces set the level for the majority of them. Furthermore, for the few of them that were administered, it set the principle that they should be at least positive in real terms. 3.05 The target for foreign exchange adjustment was to 4evalue so that by end-1985 the real exchange rate reached its 1975 level. Once that level was achieved, the program called for its maintenance by devaluation equal to the difference between domestic and international inflation. 3.06 The other measures under the external sector adjustment program will be examined in greater detail in the following section. It is important to note here, however, that by-and-large changes in trade policy were still treated in their traditional role as a stAbilization instrument. Further- more, no significant change in the protectionist orientation of trade policy car be detected in the adjustment program under discussion. 3.07 The macroeconomic adjustment program was successfully implemented for most of its elements. For the consolidated non-financial public sector the deficit was reduced from 6.7% of GDP in 1984 to 4.2% in 1985, 1.4Z in 1987, and 2.6% in 1988. (It had a surplus of 0.42 in 1986.) 3.08 Interest rates for administared credit (representing about 20Z of total credit) have been hovering around 0% in real terms, implying an interest subsidy in excess of 10%. 3.09 Perhaps the most significant element in the adjustment program was the successful exchange rate policy, comprising an area of important, but unwritten agreements between the country and the Bank. Exchange rate depreciation was implemented more vigorously than planned. By the end of 1985 its level was close to that prevailing in 1975 in real terms, and during 1986-88 its level continued to depreciate -- by about 40% -- as the result of continued crawling peg movements. 3.10 The one notable failure in macroeconomic management has been con- tinued high inflation. Consumer price increases have been constantly, even though slightly, accelerating (from 20% in 1985 to 262 in 1989). This is a phenomenon with little economic justification, given that the overall public sector deficit is close to 22 of GDP, and the external accounts in near balance (in 1988 the current account ran a slight deficit of less than 12 of GDP, and foreign reserves were reduced by about the same amt-int). Further- more, inflation has been increasing (during 1985-89), at the same time thet the public sector deficit has been decreasing or kept constant as a per- centage of GDP. 3.11 This situation should reorient inflation analysis away from the traditional diagnosis that its principal cause is large public deficits. Probably more fruitful lines of analysis would identify institutional factors - 11 - as the root cause of rising money supply and credit, and consequently domestic prices. In other words, it is probable that for the political authorities participating in decisions on the rate of increase of money and credit (and for the economic and class interests represented by them), it is collectively more important to secure a rapid increase in credit availability than to reduce or eliminate inflation. In the case of Colombia, this is probably the result of the fact that the majority of the Junta Monetaria is made up of sectoral Ministers, while the Central Bank and the Ministry of Finance have only a minority vote. 3.12 It may be argued (and the behavior of Colombia's monetary authori- ties does in fact tacitly argue) that fully anticipated inflation, accom- panied by appropriate adjustments of the crawling peg, has very limited effects on the "real" economy. But since inflation in practice can never be fully anticipated, its persistently high rate does have significant negative repercussions. Among others, it puts in continued jeopardy the maintenance of fiscal discipline; it pressures downwards the savings rate; ani it intro- duces unnecessary uncertainty and rigidity into labor contracts and labor market mobility. For these reasons, the apparently placid current attitude towards high (even though not by the standards of most Latin American coun- tries) and rising inflation probably has significant costs in terms of economic stability and growth. Changes in Foreign Trade Policy 3.13 In addition to crawling peg movements that returned the exchange rate to its 1975 level, the changes in foreign trade policy followed within the adjustment program referred to both export promotion and import liberali- zation. 3.14 For export promotion, the program provided for the drastic reduction of export restrictions (applying to over 700 tariff positions at end-1984); reduction in the dispersion of export tax credit rates; securing financing for tariff exemptions and automatic import licenses to exporters for their necessary inputs; simplifying the criteria of eligibility to, and procedures of, "Plan Vallejo" (the scheme whereby exporters were granted automatic import tariff exemptions). 3.15 Regarding import liberalization, on the oth,.r hand, the program included an increase in the share of "free" imports, i.e., items imported without prior license, and a reduction in the share of items whose import was prohibited cr subject to prior license; and a reduction in the average tariff rate as well as in the dispersion of tariff rates. 3.16 The World Bank, in the context of TPED and TAP, undertook to finance adequate flows of imports used by exporters as inputs, and to monitor the implementation of agreed changes in the foreign trade area. 3.17 A review of these changes makes clear that their thrust was towards returning to the foreign trade regime of 1980, i.e., before the effects of the international economic crisis on Colombia's external accounts forced the Government to increase quantitative restrictions and tariff rates. And foreign assistance and financing (in which the World Bank took the lead role) - 12 - in this area aimed primarily to averting deep economic recession and per- manent retrenchment behind protectionist barriers, rather than initiating radical moves towards foreign trade liberalization. Talk of trade liberali- zation should be therefore In the limited sense of avoiding further deviation towards prG..ectionism, starting from a rather inward-oriented foreign trade regime. 3.18 For both export promotion and imports, the policies included in the adjustment program were existing ones (with the exception of modest improve- ments for speeding up approval procedures, etc.). The incentives for export promotion (Plan Vallejo, tax credit for exporters, subsidized credit for exporters) had been in place for a long time before the 1984-86 adjustment program. And comprehensive protection of Colombian manufacturing from foreign competition remained the basic orientation of import policy. This should be kept firmly in mind, particularly because Bank-country relations cooled somewhat subsequently, in part because of differences of opinion as to what kind of essistance from the Bank should follow TPED and TAP. 3.19 In these terms, then, i.e., of assisting Colombia to overcome a serious international liquidity crisis threatening long-term disruption of foreign trade and deep economic recession, TPED and TAP (but particularly the former, in which almost exclusive emphasis was placed on foreign trade policy) have been an outstanding success. Some Colombian critics argue that the unjustified reluctance of the Government to reach a Stand-by Agreement with the Fund, and the absence of structural reforms Ln the foreign trade area, should have kept the Bank from participating in this rescue operation. They believe that as the result of Bank assistance, further important reforms were unnecessarily delayed. Although it is difficult, of course, to predict what the outcome would have been in the absence of Bank participation, the results clearly vindicate the Bank's decision. 3.20 With Bank assistance explicitly targetted on financing imports used as inputs by exporters, both within and outside the Plan Vallejo Scheme, items whose import was prohibited (and whose number had jumped from 0 in 1983 to 828 in 1984) were reduced to less than 60 after 1986. Items subject to pri.or license were reduced from over 4000 in 1984 to about 3000 after 1986. And "free" Imports increased from 23 in 1984 to almost 2000 after 1986. Exports, which fell from US$4.3 billion in 1980 to US$3.1 billion in 1983, have exceeded USV5 billion since 1986. Imports, which fell from US$4.3 bil- lion in 1980 to US$4 billion in 1984, have recovered more slowly because of continuing controls. Still, they exceeded US$4.4 billion in 1988. 3.21 Furthermore, the Bank's commitmeut to assisting the country with additional resources during its time of acute liquidity crisis was iLnstru- mental, as mentioned already, in persuading Colombia's international creditor banks to maintain their own commitment. Most importantly, this prevented a severe contraction of public investment, especially in export-oriented projects (coal and oil), which would have predictable negative results on the level of exports and on GDP. 3.22 As the result of concerted action by the Colombian authorities, the IMF, international creditor commercial banks, and multilateral assistance agencies (among which the Bank played a decisive and constructive role), Colombia weathered the economic storm of the 1980s better than any other - 13 - Latin American country. GDP grew by 5.82 in 1986, 5.32 in 1987, and between 3.5% and 42 after that. For the decade of the 80s, Colombia grew around 3.22 p.a., i.e., between 1.0 and 1.52 p.a. in per capita terms. In the rest of Latin America, only Brazil had positive per capita GDP growth between 1980 and 1987. 3.23 A significant part of higher growth in 1986 was due to increased coffee prices and ewport shipments (the value of coffee exports increased from US$1.7 billion in 1985 to UR$2.7 billion in 1986). But the adjuatmaent program (and the international assistance it elicited) was the main factor supporting Colombia's unique record of growth (however modest) in the 80s among Latin American countries. For example, GDP grew by 5.3% in 1987, a year when coffee prices had retreated to pre-1985 levels. An important element supporting GDP growth in that year appears to have been increased exports of coal and oil, made in part possible by investments externally financed two years earlier. 3.24 The first priority in 1984-85 facing Colombian policy makers was to avert the fast approaching liquidity crisis and economic recession. And as already noted, the Bank acted constructively in deciding to participate in the effort by stepping up its lending and putting in place the TPED in support of continued financing of imported inputs for exports. (Some com- ments about the advisability of following up with TAP are given below.) However, this should not obscure the fact that the 1984-86 adjustment program had no intention of opening up the economy to external competition beyond the 1980 trade regime, and of providing additional in3entives to actual and prospective exporters for penetrating foreign markets. The PCR section prepared by the Colombian Government (PCR, p. 26) corroborates this point. 3.25 This being so, and given that opening up of the economy had become an essential requirement of any coherent strategy of long-term growth already since the mid-1960s, it is not surprising that Bank staff responsible for implementation of the TPED and the TAP tried to push their Colombian counter- parts towards managing the process of transition from the prohibited to the prior license, and from there to the "free" list in ways that would lessen protection accorded to Colombian manufacturing. These efforts were hindered by amiable resistance and foot-dragging from the Colombian authorities. 3.26 Subsequent work in this area4 has revealed that even the limited liberalization achieved in the context of TPED and TAP must be looked at carefully. Thus, the transition from the prior license to the "free" list, that would appear to signify movement towards greater liberalization, probably increased effective protection for the final goods. The argument is based on the obsetwation that most "freed" imports were capital goods and intermediate inputs, whose own protection declined. Thus, the costs to local manufacturers of final goods were reduced, while tariffs for competing final goods imports remained unchanged. In addition, the acceleration in the crawling peg has only partially succeeded in clearing the market for foreign exchange. The authorities still rely heavily on import licensing for balancing the external accounts. Also, the reduction in tariffe has been made up by uniform tariff surcharges (trade taxes made up 16.3% of all tax A/ Colombias Commercial Policy Survey, The World Bank, December 15, 1989. - 14 - revenues in 1986, a proportion higher than during 1982-84; almost half of trade taxes corresponded to tariff surcharges). These examples indicate that genuine trade liberalization is still an open agenda for the Colombian economy. Changes in Asricultural Policies 3.27 The second policy area in which the Bank intervened through specific conditionality (exclusively in the context of the Trade and Agricultural Policy loan) was agriculture. 3.28 The Bank had been following closely developments in Colombia's agriculture. Shortly before the culmination of the 1981-84 crisis and the ensuing concerted international assistance, the Bank had concluded two major reviews of the agricultural sector.5 In addition, for the first time since the basic economic report of 1970, the Bank carried out sector work on coffee policy and entered into an unprecedented dialogue with the semi-aut%nomous coffee authorities on this sensitive issue. The findings of these endeavors formed the basis for the agricultural policy part of TAP's conditionality. The main conclusion of these reviews was that distortions, inefficient policies, and required corrective actions could be detected in a number of areas in non-coffee agriculture. None of these distortions were so severe, however, as to be heavy obstacles to modernization and growth. Coffee policy, on the other hand, was meze critical. 3.29 The principal issues mentioned in these reviews were: The need for diversification and gradual reduction of coffee's dominant role in production and exports; lack of coordinated efforts for pramoting non-coffee exports; inefficient protection of local production of enveral staples (by means of, among others, global import quotas) not enjoying a comparative advantagel high cost of various inputs due to unwarranted protection of local producers and other trade policies; export controls on vatrious non-coffee exportables; inadequate public investment in the sei:tor; need to strengthen credit mechanisms, including reorganization of the pr= .ipal credit institutions, and elimination of subsidized interest ratt. and forced investment; dependence of several decentralized agencies on ge.1eral public revenues; and low quality of research and extension. 3.30 Out of this menu of issues, reform of cifee policy was agreed to but not included in the legal documents. A number of other agreements were reflected in TAP policy conditionality and legal documents: Review and approval of the overall public investment program for 1987-88 by the Bank (in the process the Bank would also satisfy itself that the share of investment directed to agriculture increased); reduction of direct state intervention in import and marketing of staples subject to global quotas; review of credit and maintaining competitive interest ratees improvement of decentralized agencies' financial efficiency; establishment of a national agricultural policy board; holding variations tu support prices for products subject to I/ Colombian Agriculture: Selected Issues and Some Directions for Strategy, The World Bank, 1983; and Colombias External Sector and Agriculture Policies for Adjustment and Growth, The World Bank, 1984. - 15 - global import quotao below the inflation rates and reorganization of OPSA, (the Planning Bureau of the Ministry of Agriculture) in order to improve its internal organizational structure and functioning. 3.31 Most of these changes were made conditions for second tranche release (the TAP, same as the TPED, was disburued in two tranches). Of the agreed changes, those that were unequivocally implemented were: Approval by the Bank of the public investment program (indeed an investment program for 1987-90 was drafted and approved) and increase in the share of agriculture in public investment (from 1% in 1986 to 2.6% on the average for 1987-90); holding variations in support prices subject to quota below the inflation rate; reorganization of OPSA; and, perhaps most importantly, understandings (not included in the legal documents) were reached on not raising the incentives for coffee production. Changes not instituted were te improvement of decentralized agencies' financial efficiency (if the term means reduction in the dependence of these agencies from general revenues);6 and the establishment of a national agricultural policy board. Finally, changes in marketing and distribution of imported staples and in agricultural credit, became the object of vigorous debate between the Colombian authorities and Bank staff. The Bank pushed for a more market-based system of import licensing and marketing, and for a reduction in the differential between interest rates charged to agricultural producers, and free market rates. The Government insisted on maintaining the status quo, at times on the grounds that legal restrictions did not allow the changes sought by the Bank, but mostly arguing that a strict interpretation of the legal documents supported their position. 3.32 The principal reason why this basic difference in positions could arise was the vague and complicated nature of the terms in which these condi- tions (but also others as well) had been formulated in the legal documents. In its turn, the main cause of the (previous) Government's insisting on generality rather than specific conditionality before and during loan negotiations, apparently was the resistance of the Ministry of Agriculture to having sectoral policies changed by the Ministry of Finance in the context of a World Bank loan, without the usual long process of consensus building, characteristic of Colombian policymaking. As for the Bank, it went along with vague formulation of policy conditionality probably because, in its judgment, the other objectives of the loan (support of continuation of the inflow of foreign resources in order to avert a liquidity crisis and economic recession, and financing of imported inputs for exports in order to prevent Colombia's further retrenchment behind protectionist barriers) were of para- mount importance at that time compared to additional modest policy measures in the agricultural sector. 3.33 In the end, the Bank released the second tranche of TAP, on the basis that most conditions contained in the legal documents had been met and that major actions committed to outside the legal documents had also been taken. 6/ Of the eight agencies in this group, four have continued until this year to rely exclusively on general revenues; for three of the remaining four, the share of own resources was reduced between 1987 and 1990, while for the fourth it stayed more or less unchanged. - 16 - Overall Evaluation of Loan Desan and Imalmentation 3.34 Following intense pressure on the balance of payments in 1981-84 and a threatened pull-out by international commercial creditors, the Bank committed itself to increased assistance to colombia. The principal instruments of the Bank's commitment were the Trade Policy and Export Diversification loan in 1985, and the Trade and Agricultural Policy loan in 1986. These loans were supplemented by other operations, mainly in the power and water supply sectors. 3.35 TPED can be rated as a very successful operation. Its principal objectives were achieved on time. With support from the Fund, international commercial banks, and multilateral assistance agencies (among which the Bank played a prominent role), the Government was able to put in place its adjust- ment program as planned, starting in the second half of 1984. Financing of imported inputs for Colombia's exports allowed the resumption of export growth. And the general consensus is that the Bank's unreserved participa- tion in this concerted effort was instrumental in persuading the commercial banks to maintain the level of their credit activities. Probably most important, Colombia has had the best economic growth record in the 1980s among all Latin American countries, as the result of the 1984-86 adjustment program. In the face of these results, opposing arguments that economic adjustment would have been faster and more thoroughgoing in the absence of World Bank "generosity", although not impossible, do not seem very well documented. The same can be said of the argument that, since Colombia chose to avoid entering a formal Stand-by agreement with the Fund, the Bank should have taken a less accommodating position. 3.36 TPED was implemented and disbursed mostly as agreed in the legal documents. One point of minor friction arose prior to second tranche release, regarding the agreed Action Program on trade liberalization. As the wording left some room for interpretation, Bank staff aware that trade policy in 1985-86 was less open than what it had been in 1980, tried to push the authorities to take some additional liberalization measures. This was resisted on the grounds of the precariousness of the balance of payments. The Government also argued that it could not very well commit the incoming administration to a specific and long-term Action Program on trade policy. At any rate, support for the macroeconomic program and for resumed export flows more were important at the time than trade liberalization per se. 3.37 In the minds of staff in charge of those loans, TPED and TAP were complementary structural adjustment operations, dovetailing into each other, supporting the macroeconomic adjustment program of the Government and financing vital imports that could prevent choking off exports. Beyond these paramount objectives, freer, i.e., more competitive, foreign trade, and modest improvements in agricultural policies were all to the good, but they were ancillary objectives. Also, apparently, assurances to international commercial banks of pari passu commitment of resources on the part of the World Bank had included both TPED and TAP. The IF also saw the two loans as complementary to its monitoring of the macroeconomic program. Accepting that the Bank's paramount objectives at the time were the correct ones, the TAP, especially its second tranche release, must still be examined critically. - 17 - 3.38 Firstly, by early 1986 it vas becoming clear that the Government had no plan for the time being for a major import liberalization. As for exports, no concerted plans were drawn or actions were taken for their promo- tion, beyond the decision to bring the exchange rate back to its 1975 level and subsequently adjust the crawling peg by the difference between domestic and international inflation. In practice, however, exchange rate deprecia- tion in real terms far exceeded the original (unwritten) understandiugs with the Bank. 3.39 Secondly, the improvements in agricultural policies that the Govern- ment proposed in the legal documents were very modest; furthermore, their complicated formulation in these documents, upon which the Government insisted, did not augur well for the implementation of even these modest improvements. On the other hand, agreements on coffee policy (not included in the legal documents) were adhered to, while the increase in real interest rates was another key measure. Nevertheless, approval of TAP had to rely more on the main objectives supporting the TPED, than on agricultural policy per se. Support for continued macroeconomic adjustment, in the absence of a formal Fund program, was one objective. Another was the continued catalytic role in facilitating financing by commercial banks, which was still a binding constraint. Yet, it can still be argued that the situation had changed significantly between late 1984, when TPED was initiated, and early 1986, when TAP was initiated. 3.40 Firstly, the Government's adjustment program was producing rapid results. The overall non-financial public sector deficit had fallen from 6.7Z of GDP in 1984, to 4.2% in 1985. For all of 1986, no deficit was expected (it actually turned out to be a small surplus, equal to 0.4% of GDP). Also, helped by large increases in international coffee prices and higher exports of coal and petroleum, the balance-of-payments deficit on current account was shrinking fast. It went from over US$2 billion in 1984 to about US$1.5 billion in 1985. A balanced account was expected for 1986 (it turned out to be a surplus of over US$0.5 billion). 3.41 Secndly, the Bank more than kept its commitment to increase lending to Colombia pari passu with commercial banks. In view of Colombia's relatively low debt to commercial sources, the Bank's exposure was obviously high. The Bank's share of Colombia's total debt went up from about 13.3% in 1984 to 17.0% in 1985, and 21.3% in 1986 (it increased further to 24.3% in 1987). Also, the Bank's share of long-term debt went up from 17.4% in 1984, to 21.7% in 1985, and 23.8% in 1986 (it rose further to 26.91 in 1987). Furthermore, the country itself debated whether it should go ahead with the TAP loan, in view of the resistance of the affected parties to deepening structural reforms. 3.42 Thirdly, the increasing exposure of the Bank, expressed as rapidly increasing its already significant share in Colombia's external debt, reduced its freedom of participating in development efforts of potentially greater priority in the future. The exposure issue, however, was fully discussed by the Bank's management and the position taken to wake the two loans after weighing pros and cons. 3.43 In retrospect, the TAP in Colombia is a good example of how changing circumstances may weaken the urgency and rationale of an otherwise well- - 18 - conceived and carefully designed operation. In the final analysis, the full justification of the TAP as well as the TPED (both loans were from the beginning presented as parts of the same package) remains as much in what was agreed to in the legal documents, as in what was understood and adhered to in the policy discussions -- in the areas of macroeconomic management, exchange rate policy, coffee policy; and, in the support the loans provided the country in avoiding a macroeconomic crisis and in gaining the financing from commercial banks, in the absence of a Fund program. In these respects, the two loans represent a major success in the Bank's involvement in adjustment lending. 3.44 Despite the overall success of these operations, the relationship between Colombia and the Bank subsequently deteriorated. Although a full expo6iLion of tLe evolution of the relationship during this period is beyond the scope of this PPAR, several developments related to these two loans should be noted. 3.45 One such development was the almost complete turnover of Bank staff involved in Colombian operations following the 1987 reorganization. An important result was that frmiliarity with counterpart staff and tacit under- standings were abruptly discontinued. This factor alone led to some tension in the Bank-country relationship. 3.46 A more enduring development was the creation, among Colombia's economic team, of the ezpectatien that the Bank could be a ready source of non-project, policy-based lending. Having successfully substituted long-term Bank resources for shorter-term Fund resources, the Colombian authorities expected the Bank to reproduce this pattern even in normal times, when no acute crisis was present. The Colombian authorities persistently urged the Bank to release resources not tied to specific projects and/or to strict conditionality. However, the Bank took the view that, especially in light of increasing concern about exposure in Colombia, additional adjustment lending could only be justified by significant sectoral policy reform within the context of an adequate medium-term macroeconomic framework. These dif- ferences set the tone for the Bank's relations with Colombia for some time and were successfully resolved only in mid-1990. IV. SUSTAINABILITY 4.01 All of the objectives of the adjustment program introduced in late 1984 have been achieved. As already noted, the fiscal deficit has been reduced from about 7% of GDP in 1984 to about 2% currently. The current account deficit of the balance of payments was reduced from 7% of GDP in 1983 to less than 1% of GDP currently. GDP growth, after jumping to 5.8% p.a. in 1986 in response to increased coffee prices, has been maintained at around 3.5 - 4% p.a. in subsequent years. Unemployment fell from 14% in 1984 to 10% at present. Exports, after falling from US$4.3 billion in 1980 to a low of US$3.1 billion in 1983, have been in excess of US$5 billion since 1986. Finally, commercial banks have been induced, despite their overall policy of reducing their net positions in Latin America, to sign a series of new loans, including a US$1 billion "Jumbo" loan in 1985, a US$1 billion "Concorde" loan in 1987, and a US$1.6 billion "Challenger" loan in 1989. - 19 - 4.02 The question of how sustainable these developments are in the longer run is, of course, difficult to answer. An attempt to do so is made in the following, based on what are believed to be significant indicators. 4.03 Firstly, successive Colombian administrations, from either of the two main political parties, have proved to be able to design and implement successful programs of macroeconomic management. An i%portant factor of this impressive record appears to be the ability of the mainstream political system to close ranks at difficult moments and support necessary, even if harsh, economic remedies. There seems to be no reason to believe that this situation will change significantly in the future. The incoming administra- tion appears determined to keep control of economic management, despite serious difficulties created by the guerilla insurgency and illicit drug trade. 4.04 A serious qualification to this optimistic picture is the neglect of measures needed for containing inflation, and the threat this neglect poses for continued economic stability and long-term economic growth. Colombia's low public sector deficit, near balance in its external accounts, and moderate rate of growth simply cannot explain inflation on conventional grounds. It appears, therefore, that the source of high (and increasing) inflation is the power given, within the collective organs deciding the rate of expansion of money supply and domestic credit, to sectoral political authorities interested more in rapidly expanding credit availability than containing inflation. Hence, the system has apparently built-in destabilizing mechanisms that, unless corrected, may upset in th( future the hard-won stability of recent years. 4.05 Secondly, the model of growth based on import substitution exhausted its potential for Colombia at least 20 years ago. What has been required since is the introduction of a growth strategy relying heavily on export promotion. Yet, Colombia has continued to protect its existing manufacturing firms through tariffs and import licenses, regardless of whether they operate efficiently or not. Furthermore, it has failed to adopt an aggressive policy of export promotion, which has been a prerequisite of success for most of the new industrial exporters. It has relied instead on more modest "neutral" incentives such as adjusting the exchange rate for inflation and offering tariff exemptions for inputs used in exports. 4.06 The result of this overhang from an earlier period of industrial development has been lower growth. Econometric work suggests that a more open trade regime would lead to a long-term growth rate of about 5% (compared to 3.5 - 4% now). In those terms, the achievements of the adjustment program since 1984 are probably sustainable in the long run, but the growth rate actually achieved is lower than warranted by other productive factors, such as Colombia's endowment with relatively abundant natural resources. 4.07 An encouraging development in this regard started early this year, when the Goverinment announced a general intention to push for a more open trade regime. It accompanied this announcement with a number of liberalizing measures. Taking up this theme, the incoming administration has declared its commitment to more external competition. It appears therefore that condi- tions are maturing for the long awaited opening up of the Colombian economy. - 20 - 4.08 However, predictable reactions have already been voiced against the measures. Organized labor is openly against them. Industrialists, on the other hand, are more circumspect. While they recognize the need for greater efficiency, they demand from the Government assistance, mostly in the form of building up necessary infrastructure (ports, railways, etc.), and changing cumbersome administrative procedures. While these demands are logical, the necessarily long time it will take to satisfy them raises the question of how strong the professed support for the proposed reforms really is. The outcome of the ongoing debate, while probably not threatening seriously the sustain- ability of the achievements of 1985-90, will determine whether Colombia con- tinues along its present path of low per capita growth or a higher one. - 21 - PROGRAM COMPLETION REPORT COLOMBIA TRADE POLICY AND EXPORT DIVERSIFICATION AND TRADE AND AGRICULTURAL POLICY LOANS (LOANS 2551-CO AND 2677-CO) September 27, 1989 Trade, Finance and Industry Operations Country Department III Latin America and the Caribbean Region - 23 - POGRAM COMPLETION REPORT COLOMBIA TRADE POLICY AND EXPORT DIVERSIFICAT'ON AND TRADE AND AGRICULTURAL POLICY LOANS (LOANS 2551-CO AND 2677-CO) PART I - PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE A. Project Identity Project Names: Trade Policy and Export Divsrsification Loan Trade and Agricultural Policy Loan Loan Numbers: 2551-CO and 2677-CO RVP Unit: Latin America and the Caribbean Country: Colombia Sectors: Trade and Agriculture B. Background 1.01 Colombia has made significant progress since the 1950s evolving from a primarily rural and agricultural economy to a more integrated urban- industrial and services oriented one. In the 1950s and early 1960s, development was based on import substitution supported by high tariff protection. By the mid-1960s, the prospects for further import substitution were substantially reduced and the balance of paymenta was heavily influenced by developments in the world coffee market. In order to ease this constraint, beginning in 1967 a more outward-looking strategy was adopted with a series of policy measures to promote exports. These measures succeeded in relieving the foreign exchange constraint and stimulating growth and employment. However, by 1974 Colombia was again experiencing balance of payments difficulties caused primarily by the world recession and excessive Central Bank financing of the fiscal deficit. 1.02 Increased coffee exports beginning in 1975 caused a turnaround in the balance of payments. Incomes rose rapidly as did aggregate demand, unemployment fell substantially and inflation accelerated. La.:gely as a consequence of increased coffee tax revenues, followed by reduced public sector investment when coffee prices began to fall, Government surpluses averaged 1Z of GDP in 1976-1978, and by the end of 1979 international reserves had risen to the equivalent of 12 months imports. While beneficial in many respects, the foreign exchange boom led to an appreciation of the peso with adverse effects on non-coffee export expansion and diversification. The Government sought to control inflation by maintaining high reserve requirements and expaning controls over credit. The 1977-79 economic program was partially successful in restraining demand growth, but relatively high inflation persisted. 1.03 In 1981, the economic situation deteriorated and the problems continued through 1983. Real GDP growth, which had fallen to 2.52 in 1981 from 4Z in 1980 (and an average of almost 6Z since 1960), fell further to - 24 - about 12 on average in 1982 and 1983. Major reasons were the slowdown in world demand, the overvaluation of the exchange rate mentioned above, a major devaluation and import restriction- in a major trading partner (Venezuela), and the reduction of Colombia's coffee export quota in the International Coffee Agreement. A deficit of about US$1.4 billion emerged in the resource balance in 1981 and it increased to an average of US$1.8 billion in 1982-83. Unemployment increased from 72 at the end of 1981 to almost 142 in 1983, net foreign exchange reserves fell to about 6 months imports and the consolidated public sector deficit rose from 3.62 to 7.0% of GDP partly due to large infrastructure investments in energy and transport. 1.04 In 1983 the Government introduced policies to stimulate aggregate demand, expand and diversify non-coffee exports and resume growth. The rate of peso devaluation was accelerated, the housing construction industry was provided with incentives to increase resource mobilization, and selective credit to the productive sectors was expanded. Temporary import restrictions were introduced to arrest falling foreign exchange reserves and the Government adopted measures to reduce the fiscal deficit and ease distortions and restrictions in the financial system. However, a reduction in foreign credit lines and medium-term loans as a result of the debt crisis, contributed to further declines in foreign exchange res6rves in 1984 and to strains in the financial system. An analysis of economic developments since 1970 and associated external and domestic factors was given in the PR for the Trade Policy and Export Diversification (TPED) loan and is set out in Table 1. C. The Medium Term Adiustment Program 1.05 Starting in 1983, the Government undertook some macroeconomic adjustment measures. The crawl of the peso was accelerated, tax rebates on minor exports were increased and administered more flexibly, temporary import controls were introduced for balance of payments reasons and the income tax was reformed followed by a change in the application of the sales tax to a value added basis. In addition, utility tariffs and real estate taxes were increased, the gasoline price was raised 15% and a 25? temporary surcharge on import duties was introduced. However, despite an employment freeze, Government expenditures increased by 28?, partly due to excessive wage increases in early 1984 and, although Government revenues rose by 26% in 1984, the overall cash deficit increased to 4.5Z of GDP, most of which was financed by Central Bank credit. The 1985-86 program included additional revenue measures including the elimination of some deductions in the income tax, a broader base for the value-added tax, increase in stamp taxes and a further temporary 8% import tax. Government salaries approved for 1985 implied a reduction of about 10? in real terms, public sector transport subsidies were reduced and a scaling down of the investment program was begun and reoriented toward quick-yielding investments. As a result of these measures, the public sector deficit was projected to fall from an estimated 7.3? in 1984 to 4.6% in 1985 and 3.0? in 1986. 1.06 The Government also implemented some measures in the areas of monetary, export and import policy. Limits were placed on Central Bank financing of the deficit, the accelerated crawl of the peso was continued, - 25 - with the objective of restoring the mid-1970s exchange rate in real terms, efforts to promote exports were intensified and a phased elimination of import restrictions was planned, beginning with automatic access to inputs and intermediate goods for exporters. Also, an agreement was reached in principle between the Government and the commercial banks on 1985-86 financing and this program had the endorsement of the IMF's management. In order to support the expansion of the trade sector, it was also envisaged that the country would continue to have access to its short-term credit lines from its major external bank creditors at least at levels prevailing at the end of 1984. D. Bank support for the Adjustment Program 1.07 The TPED loan wb. processed concurrently with the formulation of a program of adjustment, with the loan constituting an essential element of the financial package which was presented to the leading commercial bank creditors of Colombia at the end of 1984. The Government was reluctant to go to the IMF for a stand-by operation and the Bank program was designed to achieve some of the adjustment objectives of such an operation as well as some trade reforms. The adjustment targets were developed jointly by the Bank and the IMF. The objectives of the program were: (i) to reorient export policies to reduce the discretionary element and provide automaticity and uniformity in the access to incentives and to eliminate restrictions to exporting; (ii) to help formulate an Action Pro-ram of trade policies for the longer term to be based on a more detailed study of the impact of incentives on export performance and to be implemented in a second phase of trade policy reforms and (iii) to help put together a financial package in support of Colombian export activities which when buttressed by the assessments of economic performance associated with the tranching of the loan, would foster the resumption of commercial bank flows to Colombia. 1.08 The Trade and Agricultural Policy (TAP) loan continued Bank support of the Government's macroeconomic and trade adjustment program. It was designed to help to extend the adjustment process in the trade and agriculture area. In addItion to adjustments in fiscal, monetary, exchange rate, investment and external borrowing policies, the following trade and agricultural areas were addressed: (a) import liberalization; (b) tariff reform; (c) export policy; (d) agricultural input trade policy; (e) agricultural output trade policy; (f) coffee policy; (g) credit policy; (h) public investment in the sector; and (i) institutional strengthening. E. Role of the Bank 1.09 Prior to the TPED loan, the Bank had been involved for some time with the Government in a dialogue on trade and financial polices, providing assistance in developing major individual export activities, and providing support to key institutions in these subsectors. In addition, a Bank Industrial Sector Mission which visited Colombia in 1981, focussed on the determinants of the export competitiveness of individual manufacturing subsectors and on trade policies. An economic mission visited Colombia in 1982 and an agricultural sector mission in 1983. A number of Bank missions visited Colombia in 1983 and 1984, initially with a view to preparing an export development project which was subsequently broadened to support macroeconomic and trade issues. Prior to the TAP loan, discussions with - 26 - the Government included issues affecting trade and agricultural development (Report No. 4981-CO dated April 20, 1984) and agricultural strategy (Report No. 4275-CO dated January 31, 1983). The TPED loan included a component to finance studies in the fields of export promotion and debt and budget management and to finance studies to help articulate the further stages of the export development program as the basis for the Action Program to be undertaken during the second phase of the program. The TAP loan included funds to finance studies on the responsiveness of the agricultural sector to economic incentives and policy, on the possibilities to increase the degree of self financing of entities ascribed to the Ministry of Agriculture, on the design of a marketing and agroindustrial credit line, on the cost of production of selected crops, and on the measurement of effective protection of selected manufactured inputs used in agriculture. F. Accomplishments of the Adjustment Program 1.10 The Board document on the release of the second tranche of the TPED loan dated March 28, 1986 concluded that domestic economic policies had produced a sharp and sustained adjustment in 1985, in the direction of a stabilization in the external and fiscal accounts, together with modest growth. The program targets were met, and a satisfactory program was put in place for 1986. Fiscal performance strengthened significantly with the overall public sector deficit falling from 7.3% to 4.6Z of GDP between 1984 and 1985. This was due to a sharp increase in revenues arising from the tax measures adopted in 1984 and 1985, and a decline in expenditures due mainly to a reduction in Government real wages. Public investment expenditures were held down to less than 10% of GDP as agreed, largely through the postponement of large and long-gestating investments cnd emphasis on quick yielding and foreign exchange earning projects with available external finance. The deficit in the balance of payments fell from 5.3% of GDP in 1984 to 4.0% in 1985. The real depreciation of the peso (by Dncember 1985, the real exchange rate index exceeded the 1975 base level by 72) and related export development policy actions contributed to a significant growth in the value of non-coffee exports in 1984 and substantial volume increases in 1985. 1.11 As a result of understandings reached in the context of loan processing, external bank creditors maintained short-term credit lines at December 1984 levels. In addition, a commercial bank loan for US$1 billion in support of the 1986-87 program was signed in December 1985. Colombia's net international reserve position strengthened during 1985. Finally, the Government took a variety of actions in response to the serious difficulties experienced by the financial sector in 1984-85. The adjustment was achieved with real GDP growth of close to 32, only slightly below the 1984 level. 1.12 In the area of trade policy reform, actions were taken during 1985 to loosen the highly restrictive import regime. Free imports (imports for which import licenses must be granted) were increased from just over 30% of imports at the end of 1984 to 562 in December 1985, and to 672 in February 1986. The number of prohibited import items was reduced from 172 at the end of 1984 to 1.42 at the end of 1985. On January 1, 1986, the Monetary Board removed all foreign exchange control restrictions on the minimum repayment periods which were required to elapse between the shipment of imports and their payment in foreign exchange. The import tariff regime - 27 - was significantly rationalized in 1985 through the reduction of peak tariffs and the elimination of many ad hoc tariff discounts, thereby reducing tariff dispersion and the average tariff level. 376 of the 550 export items which had remained subject to prohibition or prior approval were freed from restrictions, leaving no prohibited items, with the bulk of the remaining items subject to prior approval on non-economic grounds related to the environment, national security, cultural heritage, etc. Major reforms and administrative improvements significantly strengthened the operations of the export promotion schemes. Given the improvement in the export climate effected by these administrative reforms and the significant real depreciation of the exchange rate, the Government lowered the average rate of tax incentivds applicable to exports at the end of 1985. 1.13 It was envisaged that, prior to second tranche of the TPED loan, the Government would present an Action Program of Trade Policies which would extend beyond the specific commitments of the loan. The Government provided a statement to the Bank on Trade Policy setting forth guidelines for the longer-term which would be in line with the broad objectives underlying the loan, but emphasizing gradualism and continuity. They also agreed to accelerate the import liberalization slightly by achieving a 67% share for the value of free imports by February 1986 compared with 632 by March 1986 required by the loan, and extending this target to 69% under the then forthcoming TAP loan. The Government also undertook to manage the budget for prior approval exports more liberally. 1.14 The TAP loan of US$250 million was approved on March 27, 1986. The Board document for the release of the second tranche dated June 5, 1987 concluded that considerable progress was achieved during 1986 in stabilizing the economy, in sustaining growth, and in implementing the trade and agricultural policy reforms proposed by the loan. With respect to the overall macroeconomic program, the maintenance of the 1984-85 economic stabilization and adjustment program through 1986, together with the boom in coffee prices, produced a substantial improvement in the external and fiscal accounts, together with significant growth. In line with understandings reached under the loan, the Government's coffee policy during the coffee boom in 1986 helped to effect adequate resource transfers to the Central Government and public sector enterprises, to improve the finances of the National Coffee Fund and to assure an adequate balance of incentives between the coffee and non-coffee sectors. The 1986 program targets, including the stabilization targets which the IMF had agreed to monitor through the fourth quarter of the year, were amply met. Adjustment was achieved with real GDP growth of 5% in 1986, compared to slightly less than 3% in 1985. A satisfactory program was put in place for 1987. 1.15 With respect to the Public Sector Investment Program, investment was constrained to 7.1% of GDP in 1986, well below the 8.92 in 1985, in line with the stabilization objectives. Moreover, the Government proposed an investment program for 1987-90 which was consistent with sound macro- economic management and sectoral objectives. 1.16 With respect to trade policy, in line with recommendations of studies undertaken by the Planning Department and under the TPED loan, an increase in transparency was to be effected by the end of 1987 through a major revision of tariff exceptions and exemptions. Additionally, - 28 - modifications of the tariff structure were envisaged, both to increase the :verall uniformity of tariffs and to allow the selective use of temporary taAffs to protect ite-s being phased out of the prior license import regime, thus enabling tariffs to become the major instrument of protection in the long term. The foreign exchange budget for 1987 reimbursable imports was increased by US$150 million and the share of the budget allocated to free position imports was increased to reflect the increase in free positions. 1.17 During 1986, the Government moved further to liberalize its import licensing regime. In the closely sequenced second tranche of the TPED loan and first tranche of the TAP loan, the Government moved to the free list items equivalent to about 14? of import values, so as to attain by April 1986, a 69Z share for the value of free imports. The number of prohibited items was also reduced during 1986 from 69 to 56 and the authorities undertook to increase the reimbursable foreign exchange budget available for 1986 by 25% relative to 1985 availabilities. By end-June 1987, the authorities moved an additional 80 import positions, equivalent to US$100 million or 2.12 of benchmark imports, from the prior license to the free list. Moreover, to reduce discretionality and introduce greater transparency into prior lien,.e administration, the authorities undertook to adopt before the end of 1987, a system of annual import programs to facilitate approvals for large importers, to enhance the access of new importers to prior licenses, and to rationalize and strengthen the global licensing system for proj.ct imports. Further reforms of the export incentive system were undertaken during 1987, including the impr.t duty exemption/drawback plan, the tax rebate system and increased access to export credit. 1.18 With regard to agricultural policy reforms, the loan sought to improve the competitiveness of the agricultural sector through (a) the liberalization of remaining export restrictions administered by the environmental agency and the Ministry of Agriculture, particularly on agricultural products; (b) actions to enhance the competitiveness of the food distribution system controlled by the Government's marketing agency; (c) measures to constrain domestic prices of import-competing food crops by curbing support price increases; (d) reductions of distortions associated with agricultural interest rate and forced investment policies; and (e) the upgrading of public investments in agriculture through an appropriate mix of projects and the strengthening of public sector agencies. 1.19 Prior to release of the second tranche of the TAP loan, the administration of the "non-economic" restrictions on exports was streamlined so that approvals wo-ld take only one day. Although a market- based system of import rights allocations was not developed, the Government's marketing agency attempted to improve competition and efficiency by resorting to the commodity exchange to distribute imports. In order to constrain price increases of agricultural commodities for which price supports were in place and move domestic prices down to the level of [ border prices, variations in support prices and wholesale prices were generally held below the inflation rate for the 12 months ending March 1987. During 1986, agricultural interest rates, almost all of which were positive in real terms, were moved closer to market rates. Moreover, the Government was committed to reducing th,; dispersion of agricultural interest rates through the elimination of activity-specific rates and to - 29 - assuming through the budget interest rate subsidies assumed by financial institutions. Finally, it was agreed that the proposed National Agricultural Policy Pard was no longer considered necessary because the Ministry of Agriculture had taken a number of measures to strengthen policy formulation and coordination. G. Achievement of the Objectives of the Loan 1.20 In retrospect, the macroeconomic component of the adjustment program supported by the Bank with the TPED and TAP loans was successful. Annex 1 summarizes the objectives and achievements of the TPED and TA loans. During 1980-84, domestic absorption grew more rapidly than domestic output, resulting in deficits in the current account which averaged 5.2Z of GDP. The deficit was reduced to 0.3Z of GDP in 1985 and in 1986 and 1987 there were current account surpluses of 1.5Z and 2.72 of GDP respectively. The budget deficit was reduced steadily during the adjustment period and the growth rate of GDP increased from 3.12 in 1985 to 5.12 in 1986 and 5.4Z in 1987 compared to an average of 22 p.a. in 1981-84. Moreover, Bank (as well as IMF support) was instrumental in providing comfort to the commercial banks to assure the maintenance of short-term credit lines at end-1984 levels and a loan of some US$1 billion in support of the 1986-87 program. However, the success of the other components of the program supported by the Bank loans is less clear. Although minor exports increased after 1984 they did not reach the levels attained in 1980-81. This was true both for agricultural and manufactured exports. Significant export diversification was achieved, principally in petroleum and coal exports, but this diversification was independent of the adjustment program. 1.21 A number of studies were financed under the loans and other studies were carried out on the evolution of trade policy in Colombia. Their findings were reviewed and additional analysis was carried out by Bank staff which is contained in Bank Report No. 7510-CO,*Colombia - Commercial Policy Survey. Some of the main findings in that report, which relate directly to the accomplishments of the objectives of the two Bank loans discussed here, are summarized below. 1.22 One of the principal elements of the adjustment program was a devaluation and maintenance of a competitive exchange rate. Table 2 shows movements in the real exchange rate between 1975 and 1988. In 1984, the Government devalued the peso and announced it would use a crawling peg to maintain the real exchange rate at the level which prevailed in 1975 when the external accounts and export incentives were considered to be satisfactory. This objective was reached at the end of 1985 with a subsequent additirnal real depreciation of 152. Howevyr, while this was a significant achievement of the reform program, there remained excess demand for foreign exchange which necessitated the continued use of import licenses to ration it. Moreover, for a trade reform program to increase and diversify exports, it must change the relative prices of traded and nontraded goods. An analysis of the domestic terms of trade showed that the relative price incentives to export were below those which prevailed in 1975. A likely cause of this is that the equilibrium exchange rate has changed aince 1975. The underlying structure of the Colombian economy has undoubtedly changed since 1975 and there has been a marked expansion in ' coal and petroleum exports which would also affect the equilibrium exchange rate. Other factors affecting the rate would be the significantly higher foreign debt which would increase the demand for foreign exchange and a change in the volume and composition of illegal exports with different levels of repatriation of foreign exchange. - 30 - 1.23 A second key element of the reform program was the elimination of selected import and export restrictions. One of the major features of the reform was the removal of items from the prohibited and prior license lists and expansion of the free list (basically to the levels of 1981). Also, the foreign exchange budget was increased and import licenses in 1987 were increased by 37% in nominal terms over the 1984 levels and the procedures for granting licenses were improved so that importers were able to plan more effectively. However, it is clear that moving commodities from the restricted to the unrestricted list does not per se constitute liberalization if these are the goods which would have received licenses automatically if the foreign exchange budget was increased. To the extent that increased imports represent non-competing items real trade liberalization is not carried out. Moreover, the largest percentages of freely importable items were intermediate inputs, raw materials and capital equipment while the most tightly restricted groups were finished goods and foods and agricultural products. This reduced the cost of inputs for domestic producers without simultaneously reducing the prices of competing final goods thereby increasing the rate of effective protection. 1.24 A third element in the reform program was the reduction of the average tariff and of the dispersion among tariff rates. During the reform both tariff rates and their standard deviation were reduced sharply. Tariffs remain lowest for pharmaceuticals, inputs and capital goods and highest for finished goods and food and agricultural products. The correspondence between the licensing regime and the tariff regime is clear and tariffs are higher for commodities subject to licensing requirements than for freely importable commodities. The high tariffs on licensed commodities allows the Government to capture the rents which would otherwise accrue to recipients of licenses. The tariff reform program has lowered tariff rates for all classes of goods, inputs as well as consumer goods and this has reduced protection. However, licensing requirements continue to restrict the importation of many competing goods so that tariff rates may be irrelevant. Where licenses remain the binding constraint on consumer goods, tariff reform causes the cost of inputs to fall while the price of competing imports remains unchanged, with the net effect that protection of the final good is increased. Moreover, the 18Z surcharge has, on average, more than offset the reductions in tariff rates, and average tariff collections as a percentage of imports rose between 1981-84 and 1985-86. Since most imports are inputs, the surcharge will raise their cost and reduce protection. However, since quantitative restrictions provide open-ended protection which can vary unpredictably, it cannot be determined on strictly I Rriori grounds whether the net effect of the reforms has been to reduce or increase the average level and dispersion of protection. 1.25 The final element of the reform program was the change in export incentives. The three major elements are the system which provides exporters with duty-free imported inputs, the indirect tax rebate scheme and the subsidized credit scheme. Under the adjustment program, the Government made a number of changes in the procedures and requirements in order to improve each of these schemes and the incentives they provided to exporters. However, an analysis of the anti-export bias by sector showed that, for the export promotion measures to offset fully the bias provided by the protective regime they would have had to be of the order of five times as large as they were. - 31 - 1.26 The expected effects of the Adjustment Program as spelled out in the PR for the TPED loan were improvements in growth and employment, a reorientation towards tradeables, and related balance of payments effects. As spelled out above, growth did improve and the balance of payments improved, but principally by a coffee boom in 1986, export diversification in petroleum and coal, largely unrelated to the adjustment program, and a growth in exports of chemicals, ferronickel, bananas, shellfish, and flowers due, at least in part, to the real devaluation and other steps taken in the adjustment program. However, as explained above, at least until 1987, the expected shift to tradeables had not occurred to the extent expected (see Table 2). It was also expected that the growth rate of the agricultural and industrial sectors would increase from 1.6% p. a. in 1981-84 to 4% p. a. in 1985-1987. Industrial output grew by 2.3% in 1986 and by 4.0% in 1987. Agricultural production grew by 1.6% in 1985, 3.3Z in 1986 and by 5.8Z in 1987. 1.27 With regard to the agricultural policy changes under the TAP loan, the accomplishments are mixed. The Government did implement simplified import procedures for agricultural exporters. However, IDEMA (Instituto de Mercadeo Agropecuario), the parastatal with an import monopoly on a number of basic foodstuffs, did not introduce an auction system for import licenses. Moreover, while IDEMA did increase import quotas of foodstuffs to prevent their real domestic prices from going up during the period between Board and second tranche release, they subsequently reduced them in an attempt to induce self-sufficiency. As a result, in 1988 60? of the increase in the Consumer Price Index was caused by increases in the prices of foodstuffs. As required, the Government eased import restrictions on fertilizer, pesticides and agricultural machinery and, as mentioned above (para. 19), agricultural interest rates were moved closer to market rates. With regard to institutional strengthening, while the National Agricultural Policy Board was never established, the Government did improve policy coordination in agriculture through the reactivation of the Interministerial Council for Agricultural Policy. The commitment to improve the financial efficiency of the decentralized agencies of the Ministry of Agriculture was partially met, as two of the five decentralized agencies had improved their financial programming and control systems by second tranche release. However, the study on cost recovery was not carried out by second tranche release and there have been no major changes in the cost recovery policies of.the Ministry of Agriculture's decentralized agencies. 1.28 The expected results of the second stage of the adjustment program as spelled out in the TAP loan were: (i) lower farm costs; (ii) increased agricultural production and employment; (iii) lower food prices; and (iv) an increase in the agricultural sector's net contribution to the balance of payments. It was also expected that the effect of the reforms on the poor would be positive. An ex-post assessment of whether the expected effects have materialized is extremely difficult. For example, data on the evolution of farm costs over time are not readily available, and in any case it would be risky to attribute any changes in farm costs to the policy changes since farm costs are also affected by many other variables. As mentioned above, agricultural production, as measured by sectoral value added in real terms, grew by 1.9% in 1986, 5.52 in 1987 and about 3% in 1988. Again, it would be exceedingly difficult to ascertain the extent to - 32 - which this growth was due to the policy measures. Lower food prices have not materialized, and in fact food prices increased as the policy balance between protecting domestic producers of foodstuffs and ensuring fair food prices for consumers has been shifting toward the former (see para. 27 above). The sector's net contribution to the balance of payments is also difficult to measure, because many agricultural inputs are not readily identifiable in the trade statistics. The value of agricultural exports increased from about US$3 billion in 1985 to about US$3.6 billion in 1986, but subsequently fell to US$2.1 billion in 1987 and US$2.. billion in 1988. These fluctuations were mainly caused by changes in the world coffee market. Finally, the effects of the policy changes on the poor could not be assessed. Such an assessment would have required a very elaborate monitoring system which was not provided under the loan; and even if one had been provided, the methodological difficulties would have been formidable. 1.29 In summary, one can conclude that, while the two Bank loans supported a sound macroeconomic and debt management program which has brought an impressive export recovery in recent years, it appears to have come primarily from petroleum and coal and from increased utilization of existing capacity. Little real trade liberalization was achieved and the agricultural policy reform measures in the TAP loan were only partially successful. Maintaining recent growth will require investment in export oriented sectors. The Government can move toward a more outward-oriented trade regime by extending the reform program it began in 1984. Further measures will involve use of the exchange rate as the principal instrument of protection and export promotion, replacement of import licenses with moderate tariffs, and elimination of export subsidies. Tariff exemptions should be retained for the system which provides exporters with access to duty-free imports and for Andean Pact imports. Finally, to assure uniform treatment, the customs administration should be improved. H. Implementation and Monitoring of the Adiustment Programs 1.30 Considerable staff effort was dedicated to the supervision and monitoring of both loans with a number of supervision missions and communications with the Government. Each loan included a nu0jer of studies. In the case of the TPED loan, the program of studies was destined to provide a basis for further policy measures, some of which were expected to be included in the action program to be agreed between the Government and the Bank prior to the release of the second tranche of the loan. As it turned out, these studies could not be completed in time for their results to be taken into account for such purposes, although the Bank sent a special mission to Colombia in September, 1985 to assess the bias against export production and in favor of domestic import-competing activities as the basis for policy recommendations designed to strengthen Colombia's commitment to export promotion and to evaluate the reasons for recent export performance. As it turned out, the time remaining prior to second tranche release was not sufficient to complete and review the findings of the mission and, in any case, the period that had elapsed since the trade policy measures were taken was inadequate for measuring their impact. The - 33- Bank had therefore to be satisfied with the Government's undertaking on further trade liberalization spelled out in paragraph 13 above and in the program of action just agreed under the TAP loan. 1.31 While there was considerable difficulty with the TPED loan in the beginning In obtaining appropriate supportiGg documentation in order that the Bank could disburse from the special account, these difficulties were finally resolved after considerable effort by the resident mission and the Bank's disbursement department. There were no difficulties with procurement. Also, there were some delays in getting external audit reports as the responsibility for carrying out such audits was shifted from the Contraloria General de la Republica, which was initially to be responsible for the audits, to a private auditing firm. Finally, there was considerable delay in carrying out some of the studies financed under the loans, with some of the studies under the TAP loan still under preparation. I. Lessons Learned 1.32 In retrospect, it is clear that the principal focus of the two loans under review was macroeconomic adjustment rather than trade reform. A major part of the conditionality in the TPED loan related to reduction of the public sector deficit, the exchange rate, monetary policy and domestic resource mobilization, and the policy letter received by the Bank from the Government reflects this emphasis. The adjustment measures were taken and the objectives of the loan in this regard were met. The TAP loan continued this emphasis, although a considerable share of the conditionality in this loan related to agricultural sector policy measures, only some of which were implemented. Moreover, the trade policy measures focused principally on a reform of the export regime, to promote exports and offset to some degree the anti-export bias of the trade regime, and to reduce import controls and take some initial steps to reduce tariff levels and tariff dispersion. However, these measures were not taken as the first steps in a coherent program of trade reform which had predetermined goals which would have demonstrated a real commitment to trade reform and would have given the program credibility. It has been demonstrated in subsequent Bank loans in support of trade liberalization, that a public, prior announcement of the reform program within a sound, multi-year program is extremely important to make trade reform credible and sustainable. Moreover, it is equally important to develop a clear index of liberalization based on an objective, measurable program. In the Colombian case, somewhat more real trade liberalization might have been achieved if the removal of import restrictions had been based on an index of production coverage rather than on imports. It would then have been difficult to concentrate the expansion of freely imported items on intermediate inputs, raw materials and capital equipment and continue to restrict imports of finished goods thereby increasing effective protection as apparently happened. 1.33 The dual objectives of the TPED and TAP loans focusing on both macroeconomic and sectoral policy measures diluted the focus of the loans on sectoral policy issues. Given that the focus of the Government was primarily on the macroeconomic component of the loans, it probably would have been difficult to obtain a real commitment to trade liberalization. Given that environment, it was probably unfortunate that these loans were labelled "trade" adjustment operations. If trade reform is to be achieved - 34 - it must be the principal focus of the loan, within a sound macroeconomic program, and not the reverse as occurred in this case. 1.34 In the TAP loan, as explained in para. 1.28 above, many of the agricultural policy measures could not be monitored, and it is therefore difficult to determine to what extent the objectives of the project were achieved. It is important in a loan of this type to design a set of easy to monitor goals to help to indicate to what extent project objectives are being achieved. 1.35 Finally, the TPED loan included a set of studies, the findings of which were to be used as the basis for identifying future policy measures to be taken under the loans. This is clearly not an effective approach in lending operations where second tranche conditions must be met usully within months of loan effectiveness. Measures should not be based on studies, unless studies are well advanced and agreement on the measures has been substantially reached, except for some minor elements being reviewed in the study. - 35 - PART II - POGRAM REVI[ =RM THE BORROER'S PERSPECTIVE 1. INTRODUCTION At the request of the World Bank, this aper has been written in accordance with the following terms of reference:- "The second section (Part II) is prepared by the Borrower. It should provide an analysis of key issues related to the project, and give a retrospective assessment of project implementation from the Borrower's perspective. The purpose of a separate Part II is to ensure that the Borrower conducts an independent analysis of lessons learned from the operation. and reflects on the performance of the Bank, the project management agency, and such other agencies, institutions, and personnel as may have been involved in project preparation and implementation..... "Part II would be prepared by senior staff with detailed knowledge of the projects.'94 The authors' treatment of the problem addressed here is designed to help clarify the relations between the Bank and the Colombian authorities, which have been clouded for some time now, largely because of mistaken perceptions regarding the true nature and scope of the two Loan Agreements in question. The great majority of assertions made here can be supported with documentary evidence, which will be made available in detail if required at some future point. Some cannot, however, but it would be appropriate to regard them as working hypotheses, formulated by the authors on the basis of certain factors they were aware of by virtue of their long association with the Bank at many different levels. They are included because even as working hypotheses they have a substantial bearing on the proper understanding and evaluation of these lending arrangements. A particular reuson why relatively accurate assessment of the scope and significance of these two loans is difficult is that they were colored by three major processes that essentially affected the Bank, namely: -1' Taken from a letter dated March 27, 1989 from the Division Chief, Country Department II, Latin America and the Caribbean Region, to Oscar Marulanda G6mez, Economic Adviser to the Ministry of Finance and Public Credit. A' The authors, Luis Jorge Garay S. and Oscar Karulanda G., Economic Advisers to the Ministry of Finance and Public Credit, were mainly responsible for these two borrowing operations, particularly during the preparation phase. - 36 - - the process of learning along the way in all areas of design and management of "policy-based" loans; - the process of expansion and extension of duties and responsibilities within a particular field of institutional specialization, in order to ensure appropriate cooperation between the Bank and the Fund;.' - the process of internal reorganization of the Bank. On the Col3mbian side, the two operations took place at a time when a process of macroeconomic adjustment was being initiated and consolidated, against a background of very valuable cooperation from both Bank and Fund based on special agreements made necessary by the specific nature of the case. The following observations, framed in the general terms appropriate in an introduction, may be made: - In the history of Bank and Fund cooperation with member countries, there are few cases that provide a better example of such cooperation than these two loans, articularly as far as its character and scope are concerned.- - In the history of Bank cooperation with Colombia, there are few cases of lending operations that have achieved their real objectives as fully as these two loans. - In the history of Bank policy-based lending, there are few cases that show a more satisfactory level of fulfillment of the commit- ments agreed on between the parties, especially as regards policy application. 2. BACKGROUND In 1983, the Colombian Government and the Bank began preparation of a lending operation to be based on agreements on international trade policy. Toward mid 1984, on the occasion of a periodic Article IV visit (by a Fund mission), it became clear that there were marked disequilibria in both ' Given the rapidly-growing overlap in the activities of the two institutions, a consequence of massive demand for financing and of the adjustment requirements of member countries in the late 70s and throughout the 80s, this process went ahead in practice, but against a background of principles framed in terms so general as to lead to a collision of jurisdictions. ' This applies particularly to Bank-Fund cooperation up to that point in support of stabilization and/or structural adjustment. - 37 - the balance of payments current account and the fiscal accounts of the consolidated public sector. These disequilibria threatened to lead in the short term to an exchange crisis essentially fiscal in origin, which would have to be forestalled by introduction of an integrated package of macroeconomic measures. The Bank accordingly notified the Colombian authorities that the lending operation then in preparation would be suspended, at least temporarily, until the Government had taken steps to correct the disequilibria that had developed on the exchange and fiscal fronts especially. Chiefly as a result of the problems of over-indebtedness affecting the majority of the Latin American countries, highlighted in mid 1982 by Mexico's suspension of payments, Colombia not only saw its lines of short-term credit for trade financing reduced but was also confronted with a drastic restriction on continued access to commercial bank credit. In the circumstances, and given the difficulties affecting the Colombian external sector, the commercial banks took the stance that capital flows into Colombia's economy would be restored only if its macroeconomic performance were closely monitored by the Fund and if certain structural reforms, agreed on with and supported by the Bank, were.introduced. The Government's new economic team, on taking office early in the 1984 second half, devoted almost all its attention to formulating and instituting a macroeconomic adjustment program focused essentially on avoiding the looming exchange crisis and rectifying the imbalances in the major macroeconomic aggregates. The Colbmbian Government placed special importance on both the political and social acceptability of the program, convinced this was essential if both its short-term feasibility and medium- and long-term sustainability were to be assured. Particular attention was therefore paid to: - designing a program which without being recessionary in character would stimulate the economy in the short term and thereby allow a quick return to what, in the light of experience over the previous few decades, could be considered normal levels; - creating the conditions for gradual, measured adjustment, rather than the standard shock treatment; - assigning priority to stabilization efforts, even at the cost of postponing the structural reform process for a time..' .' Until the stabilization could be consolidated through suitable measures, mainly in the exchange, fiscal, monetary and external financing spheres. - 38 - To some degree, this influenced the nature of Colombia's relations with the Bank and the Fund at this particular point. The U.S. Federal Reserve and Treasury played a very important part in ensuring that the Colombian Government's concerns in the areas indicated above were given adequate consideration at the highest levels of the management and Executive Boards of the Bank and the Fund. A great many of the economic actions that in one way or another were significant determinants of the behavior of the Colombian economy cannot be analyzed unless account is taken of an important contribution which at different moments and in different ways (some more successful than others) the Government sought to make in order to fit the application of those actions to institutional and social realities. Concretely, attempts were made to promote, and to a certain extent to determine, within the context of agreements -- which meant that arduous international negotiations became a frequent requirement -- the use of innovative, imaginative and generally prudent approaches to advancing the process of change. The fundamental intention was to keep to a minimum the instability any process of this type tends to generate, a move regarded as essential if there were to be guarantees that change would prove both feasible in the short term and sustainable over the medium and longer terms. In this regard, Colombia has to the highest degree provided a typical example of what could be considered circumspect management, simultaneously heterodox and conservative, of the economy. The fact that the experience produced favorable results has been largely respoisible for the judicious and increasingly wider realization on the part of international agencies like the Bank and the Fund of the importance of: - Recognizing the wisdom of sponsoring the temporary application of transitional policies in the course of adjusting developing economies..L - Using practical experiencet' as the point of departure for formulating a theory and a practice (incorporating some rules) on such transitional policies and the modes of institutional cooperation best suited to the processes of structural adjustment and reform. ' For instance - and hence the relevance of making the point explicitly - the lending operations examined in this paper. L Obviously without losing sight of the problem of incorporation into an international economy possibly in a state of balance-imbalance or in transition between alternative states. ~' By successive approximations and/or by trial and error, and realistically. - 39 - - The heterodoxy in question was not without frictions or temporary misunderstandings that from time to time hindered Colombia's relations with the international financial system. In the long run, however, results have been positive on balance, since recognition of the chosen method of managing economic policy and support for its continued use have become increasingly clear and firm. On this score, evidence of its relative success can be seen in the following facts, among others: - Few countries can claim an economic growth record with a long-term. average annual figure in the vicinity of 5% and which has varied relatively little over time. - Likewise, few countries can claim an economic growth record free of years marked by negative growth rates. - The average level of inflation has been relatively low, especially by comparison with levels in non-industrialized countries. - Equally low has been the relative varf.ability of the growth in the level of prices. In the context described above, members of both Bank and Fund operations staff worked together to help the Colombian Government's economic team fine-tune the design of the macroeconomic adjustment plan to be put into effect in late 1984. Bank personnel took a part in this technical assistance exercise that was notable, not only because of their professional qualifications but also because they possessed the appropriate analytical background. Some of them had contributed to "Colombian Agriculture: Selected Issues and Some Directions for Strategy," a publication put out by the Bank's Colombia Division in 1983 in the course of its regular lending operations. .It is relevant to note explicitly here that the agriculture sector policy analysis given in that document laid particular emphasis on the interconnections between strictly sectoral policies and macroeconomic policies, and that the macroeconomic policy issues it examined weighed heavily in the choice of the orientation given to the macroeconomic adjustment program formulated in the second half of 1984. As indicated earlier, the key objective of the macroeconomic adjustment program was to create conditions of stability within the short term so as to prevent the economy from being precipitated into an exchange crisis. The goals of the program the Colombian authorities adopted were: - drastic reduction of the fiscal deficit in the consolidated public sector; - more rational monetary expansion; - 40 - - return of the exchange rate to levels of competitiveness considered acceptable in light of experience gained in reinforcing the dynamics of expansion of non-traditional export activity. Analysis of the basic characteristics of the external financing required to back up the program led to a conclusion that, in addition to balance of payments dupport, credit resources would have to supplement budget financing consisting of local currency funds generated through the monetization of foreign exchange. The first consequence of that conclusion was that resources obtained from the Fund could not be allocated to balance of payments support, since they would not serve the required twofold purpose - which, however, could be achieved by borrowing from the Bank, whose loans were quick-disbursing and policy-based. A second consequence was that the grant of Bank resources in support of a macroeconomic adjustment program consisting of policy measures in the fiscal, monetary, exchange and external financing spheres that were relevant to the goal of stabilization was tied to the initiation of a process of structural reform in those areas where the institution's Articles of Agreement gave it competence - areas for the most part important in creating the right conditions for achieving sustained growth. This being so, priority was assigned to action in the interests of: - rationalization of the existing system of trade;II/ - rationalization of public investment plans, by scaling them back to a point consistent with the resources available and reorienting them as far as their content was concerned.1-V Regarding the programming of exchange adjustment, it is important to call attention to the fact that, rather than attempting to achieve a real exchange rate that would prove stable over the long term - impossible, in practice, to identify a priori in any rigorous fashion - the Government opted for gradual approximation to a certain real exchange-rate level, which from the country's own experience (during the first half of the 70s) had proved to foster increased non-traditional export activity. On this aspect of the program, central to the thesis advanced in this paper, refer to the Annex. ILI' The chief concerns were to: (a) achieve a rapid increase in output; (b) support reorientation of the local production base toward exports and efficient import substitution; (c) support investments in rapidly-maturing infrastructure, particularly where use would be made of existing facilities; (d) support greater efficiency in domestic resource mobilization; (e) reduce investment demand per unit of work; and (f) reduce import demand per unit of irvestment. - 41 - A third consequence of the same conclusion was that, since there was no need for a stand-by agreement with the Fund, and the commercial banks required execution of the macroeconomic adjustment program to be monitored more strictly than was the norm under t.e usual Article IV visits, the Fund would have to consent to exercise its supervision function under a special arrangement. Not without difficulties, its Executive Directors were persuaded to approve a sul generis arrangement for monitoring program execution in 1985 and 1986. Against this background, the management and Executive Boards of both Bank and Fund, acting on the recommendation of their staff specialists, agreed that special importance was to be given to negotiating quick-disbursing loans . from the World Bank as a means of re-establishing adequate levels of international reserves promptly and providing budget financing to supplement that constituted by current domestic savings. In this way, it was hoped to . encourage the rest of the international financial sector to commit additional credit resources that would make up the total external financing needed to . ensure the viability of the macroeconomic adjustment program. A primary function of the Bank resources in this instance was to * serve as a catalyst and, in the face of a clearly adverse situation on the international capital market, to facilitate the gradual reincorporation of the Colombian economy into that market, but not only on the strength of credits from the multilateral banks. From the outset, the Bank's policy-based loans were viewed as contributing to this end, by virtue of: - their positive demonstration effect on governmental lending agencies, especially as far as cofinancing operations were concerned; - their provision of satisfactory support for the commercial banks, by increasing Bank exposure in Colombia as an integral part of economic policy agreements viewed as tending to guarantee a strengthening of the payment capacity of its economy and, hence, of its cxedit status. 3. TRADE POLICY AND EXPORT DIVERSIFICATION PROJECT (TPED) Since the financial support associated with the macroeconomic adjustment program was clearly targeted almost exclusively on guaranteeing achievement of stabilization objectives, it was recognized that the type of financing required (as balance of payments support and budget funding, simultaneously) meant that quick-disbursing Bank loans were needed. However, this created two additional problems: - Identification of policy spheres which, as already indicated, had to fall within the Bank's jurisdiction, given the division of labor mandated between Bank and Fund, and at the same time would allow policy commitments consistent with the character of the resources to be utilized. - Identification of a set of policy actions corresponding to those spheres which, in keeping with the medium- and long-term orientation - 42 - of the development strategy chosen, would serve to consolidate an economic and institutional environment in which, at a later stage, a process of gradual, continuous and sustainable structural reform could be initiated. Since a central element of the medium-term strategy was "orientation toward the exterior," the best way to arrive at a lending operation with the required features appeared to be to revive the trade loan the preparations for which had been suspended in mid 1984. In view of the desirability of tying the mechanics of disbursements to increments in imports, and considering both the policy agreement and the requirements for its implementation, the TPED lending operation, in the specific arena of international trade, was based on the following principles: - Recognition of the need to supplement the incentive effect of exchange rate adjustment on export activities by expanding and extending the drawback scheme (Vallejo Plan) and by removing barriers to exports. - Recognition of the importance c! maintaining - temporarily - the quantity restrictions on imports as a control mechanism through which to avoid dangerous declines in the levcl of international reserves, as recovery in this area was both an integral part and a central goal of the macroeconomic adjustment program. - Rationalization of the existing import control system through measures to improve its efficiency, the major ones being transfer of non-competitive domestically produced goods to the list of free imports and initiation of the first phase of tariff rationalization. By acting as a catalyst for the flow of resources from other lenders, TPED played a crucial role in assuring the financing required to support the macroeconomic adjustment program. In this regard, the success of the loan was undeniable -- as two Bank staff writers pointed out: "Following the restoration of these lines of credit, the term facility of $1 billion was subsequently negotiated with commercial banks for 1985-86, to be disbursed in six quarters beginning with the third quarter of 1985 and ending with the fourth quarter of 1986. Conditions of the initial loan drawdown were confirmation by the Fund that th 1985-86 progrp,: would qualify for a stand-by arrangement had one been requested, and meeting of the target agreed with the Fund for end-June 1985. Subsequent quarterly drawdowns required Fund certification of satisfactory performance in the previous quarter. Disbursements in 1986 were also subject to Fund approval of the 1986 economic program and compliance with quarterly targets, as well as release of the World Bank's second tranche of the TPED loan. (This schedule, however, was delayed because the signing of the $1 billion loan took place at the end of 1985, and the financing became available for 1986.) The first Bank review was held in February 1986 and satisfactory performance enabled the - 43 - release of the second traiche of the TPED loan. The rcview took into account the findings of the Fund, which conducted its review of the program at the same time." The loan was equally successful as regards the Government's meeting of its commitments with respect to macroeconomic policies themselves and to policies in the areas of trade and public investment. This was duly certified and documented at the time by both the Bank and the Fund in their respective jurisdictions. 4. TRADE AND AGRICULTURAL POLICY PROJECT (TAP) As the goals set in those macroeconomic policy spheres most directly related with the Bank's field of action had been met, and as the continuity of macroeconomic adjustment under the monitoring arrangements agreed on with the Fund was guaranteed, the Colombian Government asked the Bank to focus its support efforts on ensuring availability of the financing required to consolidate the macroeconomic adjustment process, although not through a formal structural adjustment loan like the TPED but rather by seeking to make the adjustment more far-reaching through policy commitments possibly embodied in a sectoral adjustment loan. No L,icific sectoral policy that dovetailed with and supplemented macroeconomic policy could be closer to hand and more in accord witl the quick-disbursing requirements imposed by circumstances than that developed for the agricultural sector. The importance of that very sector was not the only factor accounting for this; there were also -- as already noted - the factors examined in the Bank publication "Colombian Agriculture: Selected Issues and Some Directions for Strategy," in addition to the degree of relevance given to agricultural sector policy when the 1985-86 macroeconomic program was being formulated. This further loan was therefore designed originally to be quick-disbursing and based strictly on policies directed toward the non-coffee agricultural sector. Nevertheless, as external loan funds were intended primarily for macroeconomic purposes (balance of payments support and budget financing), the sector authorities were by no means happy that agreements would have to be reached on the introduction and application of specific policies in their area of competence. To the detriment of the timing dictated by macroeconomic program funding needs, this situation meant in practice that it became evident what difficulty there Iould be agreeing with the sector authorities on a policy package significant enough to be regarded as a counterpart to approval of an adjustment loan. 12/ SCHLOSS, Miguel, and THOMAS, Vinod, "Adjustment with Growth: Colombia's Experience," mimeograph, August 25, 1986. - 44 - Consequently, the Bank staff responsible for the negotiations indicated that the commitments on sector matters needed to be broader and to be supplemented by policy agreements on the expansion and extension of the reforms already launched in the trade sphere. At this point, the operation which had initially been classified as an agricultural sector adjustment loan came to be classified as a trade and agricultural policy loan. In order to persuade the sector authorities to formulate policies in some areas relevant to the agricultural sector and schedule their execution, with the consent of the Bank, agreement was reached on some earmarking of the foreign-currency proceeds of the loan. The underlying economic aim here was to restore the level of the agricultural sector capital budget significantly - vith the term "agricultural sector" being defined broadly (for instance, tp include other types of investment in rural areas). As in the case of the TPED, the understanding with the Bank and the Fund regarding the TAP provided that on the macroeconomic policy level the* Government would meet the targets agreed on with the Fund; in the context of the monitoring arrangement the Fund had consented to, this was intended to facilitate re-establishment and gradual normalization of Colombia's relation. with the international financial community, particularly the commercial banks. As a matter of nuance, it may be noted that whereas the TPED was designed as a loan to support the launching and implementation of the 1985-86. macroeconomic adjustment program, the TAP was designed essentially to support consolidation of that adjustment. Like the TPED, the TAP -- against the background of a policy directed at securing the financing needed to allow satisfactory execution of the macroeconomic program -- was designed principally to serve as a catalyst for funding from other sources. Again like the TPED, the TAP was also to provide resources with special features, in the sense that it was to make timely balance of payments support available while helping simultaneously to fund the budget. .As far as the policies that affected the Bank's mandated sphere of action were concerned, the understanding reached with the Government on policy measures in the trade arena provided for: (a) incremental advances in import deregulation (explicitly, transfer of goods from the prior-license list to the free list), in line with the measures previously introduced under the agreements linked to the TPED and with use of the same methods of identifying items for transfer and setting quantity limits;-" (b) specific measures on imports and exports directly related with the agricultural sector; (c) drawing up - as a prerequisite for the second disbursement of proceeds -- of a Medium-Term Trade Action Program, subsequent implementation of which would be supported by further Bank loans. S'~ The agreements under this loan, unlike those linked to the first, also stipulated that items to be transferred to the free imports list were to be identified prior to loan signature. - 45 - The agreements entered into on the subject of public investment were directed toward rationalizing the levels and composition of capital spending in the sector. As to agricultural policy, the agreements reached covered actions in respect of: (a) credit; (b) support prices; (c) marketing; and (d) institu- tional reforms. The difficulties met with in the preparation and development phase of the TAP, particularly in negotiating agricultural policy agreements with sector authorities, delayed entry of the loan into effect. This interfered to some degree with the smooth history of the operation by holding up support for sector investment, which, as already noted, was to be the stimulus for the introduction and implementation of sector policy measures. The fact that loan proceeds could thus not be disbursed on schedule affected budget funding for the agricultural sector significantly, which in turn lessened the interest on the part of the sector authorities in pushing ahead with policy application in their area of competence. This had the accompanying effect of delaying the second and final loan disbursement. The macroeconomic adjustment policies programmed for the 1985-86 period were followed out satisfactorily, and in fact many of the quarterly targets agreed on with the Fund were exceeded - with the result that the performance of the economy continued to show clear improvement, particularly where strengthening of the external sector was concerned. In this regard, the impact of the TAP in securing the external financing needed to fund implementation of Colombia's macroeconomic policy program supplemented that of the TPED, and, like the latter, it was clearly successful as a catalyst in attracting additional funding from other sources of credit. The commitments made in connection with import deregulation were fulfilled strictly in accordance with the provisions of the Loan Agreement. Transfer on schedule of previously identified items to the list of free imports guaranteed that targets were met not only in terms of the number of items affected but also in terms of the value of deregulated imports (by reference to the pattern observed over a base period selected for purposes of monitoring commitment performance). Both before and after the change of government in mid 1986, the Colombian authorities made it clear to the Bank's representatives that extension of the import deregulation process, in line with the provisions of the TAP, would be carried out with particular caution, given the direct implications for domestic output. Any eventual advance would depend on careful analysis so that possible adverse effects could be kept to a minimum. Special concern was expressed regarding the impact the process might have in the short term on the already delicate employment situation, open unemployment rates at the time being high (slightly over 15% on average in the country's seven major cities). - 46 - As far as the trade agreements were concerned, the budget allocation for imports on the prior-license list was increased beyond the point agreed on with the Bank, in step with a quicker than expected improvement in the country's foreign exchange position. The Medium-Term Trade Action Program, approved by the Bank as drafted, spelled out*the policy orientations that were to provide the setting for future action in the trade sphere, on the understanding -- as indicated already -- that its implementation would be supported by new Bank loans. 14' Owing to the delays caused by alteration of the timetable for disbursements under the TAP and their effects on agricultural sector budget programming, there was some slippage in keeping up with public investment commitments. In the end, however, they were carried out prior to the final disbursement -- which, at all events, was conditional on their completion. In the agricultural policy arena, a number of difficulties were certainly encountered, with the result that it cannot be stated that the agreements reached were carried out satisfactorily. There were two major reasons for these difficulties: - The slow pace with which policy agreements were implemented (a matter already discussed here); this was compounded by delays in carrying out the sector capital spending program, themselves attributable to - among other things - the fact that disbursements fell behind schedule. - A lack of precision in specifying the commitments that applied in this policy area, with the result that the scope and importance of commitment conditions were open to various interpretations. The studies associated with this loan constituted another area where problems arose. For the most part, these were caused by what could be qualified as an error in formulating the role they were to play in the loan execution process. With hindsight, it is clear there should be no assumption that in a time period as short as that between the initial and final disbursements of a quick-disbursing loan there will be sufficient opportunity to conduct studies whose results can provide a basis for identifying policy agreements that are to be reached prior to the final disbursement. .L4 A number of factors coalesced to cast doubt on the validity of the Trade Action Program as a platform for action to be backed with Bank resources. They were: the Bank's own experience with later policy-based lending associated in one way or another with trade matters in various countries; the maturity gained in the practical application of policies in this sphere; and the radical changes in both the organizational placement and the staffing of the Colombia Division as part of the restructuring of the Bank. Given the repercussions of this situation on Bank-Government rclations as of 1987, it merits special attention; however, the subject is beyond the scope of this paper. - 47 - 5. FINAL OBSERVATIONS - It is clear from the material in the preceuing sections of this paper that both the TPED and the TAP were lending operations designed essentially to support sound macroeconomic management closely linked with external borrowing strategy. The two loanr in question played a major role in that strategy because of their effect as catal!rsts in attracting funding from other lenders. - It is equally clear that despite the titles given to the two loans they cannot be regarded to any substantial degree as operations intended to help make Colombia into an outward-oriented country in the economic sense. - There is still less reason to regard them as such if the opening up of an economy is defined in terms of import deregulation and measured as the ratio of market share held by foreign competition to market share held by domestic producers -- and all the more since import deregulation for purposes of these two loans was solely a matter of transferring goods to a free imports list. - The changes that have taken place within the Bank, especially since 1987, in the way a process of opening up to the exterior is conceptualized and put into operation are indicative of the advantages afforded by the learning process the Bank has put itself through as far as the design and management of policy-based lending operations is concerned. - But the positive side of such operations notwithatanding, there is a likelihood of erroneous interpretations if they are analyzed out of the context in which they were designed. When the actual context is ignored, the learning process mentioned is a poor tool with which to make ex-post judgments on lending operations designed from other perspectives and for other purposes, since its misapplication can seriously damage the relationship between a country and the Bank. ---0--- - 48 - ANNEX CURRENT IMPORT POLICY I/ A. A Rational Approach It is vital to clarify certain aspects of current import control mechanisms. First, it must be pointed out that these are not market mechanisms, and therefore the types of approaches incorporating them are quite often characterized by distortions in the allocation of resources, in contrast to those approaches that are strictly market-based. This is partly because such quantitative controls operate in parallel to the price system as such. In addition, administrative control, by its very nature, almost inevitably involves some exercise of discretionary power by the authorities supervising and implementing it. Nevertheless, in addition to their importance as a means for avoiding imminent exchange crises, quantitative controls can provide undeniable benefits for newly developing and imperfect markets, although we must also acknowledge that, by their very nature, they can foster certain inequities and inefficiencies, and consequently cannot be advocated unreservedly. Therefore, in order to ensure that government import controls provide the desired economic and institutional advantages and to minimise the system's vulnerability, it is absolutely essential to provide for a progressive rationalization of such measures at all stages, from decisions on selection criteria to the practical application of the controls. In Colombia, the context for this rationalization has included consideration of the following types of economic criteria and principles: (1) The number of tariffs subject to the prior license regime must be kept small enough to be efficiently manageable (experience in Colombia indicates that the maximum should be about 3,500 items). (2) Although the existence or otherwise of domestic production of goods was the main criterion by which this number was established, ongoing reviews must be made of all existing and foreseeable balance of payments restrictions, and of the structure of effective tariff and paratariff protection, so that import liberalization can be adjusted in a timely manner to whatever level is considered desirable for the economy as a whole. (3) The establishment of systems supplying timely and appropriate information makes it possible to proceed with the implementation and consistent and sustained application of an organic set of procedures or regulations for assigning quotas to sectors and importing enterprises, so as to minimize.the danger not only of shortages on the domestic market, but also of the development of I/ From an internal document prepared for the Ministry of Finance and Public Credit by advisers Luis Jorge Garay S. and Cscar Marulanda G., Bogota, November 28, 1986. - 49 - discriminatory monopolies, with all the undesirable inequities that this entails. These measures would be a prerequisite for any introduction of "market solutions". In procedural terms, implementation of the proposed scheme must take account of the behavior of an import over the last few years (at both product and importer levels), since this is an important consideration in the allocation of quotas. So far, the selection process has accepted the allocation of equal shares that has been operated in the past. Although this acceptance of past conventions does have certain undeniable advantages, it also gives rise to limitations and problems that must be alleviated through the adoption of further criteria that will allow any new situations that are of obvious significance from the viewpoint of import demand to be properly taken into consideration. Further elements that have been incorporated into the system are the consultative agreements between INCOMEX (the Colombian Institute of External Trade) and private entrepreneurs regarding arrangements for the import by a small number of importers of certain types of specified goods not produced in Colombia but necessary for the country's productive activities.. Such agreements have also proved advantageous in the case of particular goods imported by a large number of importers. In these cases, bottlenecks are avoided if the individuals' applications are consolidated into a single import license - or a small number of licenses in the names of a few of the importers, who are then responsible for distributing the imports among their fellow applicants. Before any further steps are taken toward liberalizing imports, the fundamental criterion for allocations - i.e. whether the goods in question are domestically produced - must be gradually made more flexible, so that the effective protection provided by the prior license regime can be progressively rationalized. In this way, pressures can be reduced gradually, and progress can be made in opening up the domestic market to some extent, with imports of priority goods increasing before they are transferred to the free import regime. The purpose of this is to allow domestic production to adapt to external competition. This policy of transferring goods from one regime to another must be accompanied by a tariff policy that both avoids drastic reductions in protection and guarantees that the rents and/or "premium" provided for importers benefiting from the quota system will accrue to the State. Besides helping cushion the effects of the move from the prior license regime to the free import regime, tariffs should also be used for rationalizing the level of effective protection provided for domestic production. During the process, exchange policy must seek to maintain a positive real exchange rate. In order to guarantee a certain desirable level of equity in the operation of import controls and in the application of the accepted criteria, an attempt must be made at the initial stage to achieve at least a minimum of equity in providing access to prompt consideration of applications (even if these are subsequently rejected in light of those criteria). This form of equity must not be confused with that governing effective access to import quotas, since the latter should be a clear reflection of the policy priorities - 50 - for allocation. In addition to the observations already made regarding the treatment of "special cases", it should also be pointed out in this regard that, in a system which is characterized by a limited budget and operates on the basis of cumulative allocations provided under the available quota, the order in which items enter the system and applications are considered is a crucial factor, and one which can be seriously impaired and distorted by any proliferation of "special cases". Because the Government's import policy should promote a greater rationalization of administrative controls and a gradual liberalization of the economy, steady (though cautious) progress must continue to be made in broadening those areas of tariff control subject to increased external competition. The process must be properly sustained by detailed studies of each tariff item, with special attention to points such as the following: * confirmation that the goods are produced domestically, and data * regarding the scale (e.g. in value) of domestic output and consumption; - concentration of production; - unit costs of production and degrees of international competitiveness (e.g. the opportunity cost of the resulting import substitution); - quality and promptness of supplies to the domestic'market; - the level of total effective protection (i.e. tariff and paratariff); - effective export capacity. Because in macroeconomic terms an import policy such as that outlined above shares some common ground with the policy applied in the recent past in Colombia (at least with respect to some of its basic principles), we have seen fit to present below a brief summary of the Colombian approach. B. The Government's Import Control Policy (1) Objective Current import policy seeks to rationalize the Government's control and management, for the following purposes: (i) to ensure adequate and timely supplies of raw materials, intermediate goods and capital goods that are not produced in Colombia but are required for the normal operation of domestic production; (ii) to provide "reasonable" levels of effective protection for domestic productive activities, in light of the technical and economic characteristics of each. - 51 - (2) Strategy Within this frame of reference, the strategy for liberalizing imports was to be characterized by a gradual, selective, determinable and controllable opening up of the economy to external competition. This process would provide both an appropriate level of protection for domestic production, and the means to achieve the maximum possible degree of automation, standardization and speed in the processing of import applications. (3) Approach Such a deregulation strategy calls for the following measures: (i) a gradual and discretionary transfer of goods from the prohibition regime to the prior license regime, and from the latter to the free import regime; (ii) a selective and differentiated application of the prior license regime, providing for "desirable" levels of effective protection for the various sectors of production. (4) Implementation Practical application of the Government's policy was intended to have the following consequences: (i) classification as free imports of at least all goods not produced domestically, and those goods in which the country has an obvious comparative advantage on the international market; (ii) gradual and discretionary reduction of the degree of pressure for administrative approval of import licenses for those goods receiving more than a "desirable" level of effective protection or goods insufficiently available on the domestic market to reasonably satisfy demand (e.g. with regard to quantity, quality and technical specifications). (5) Intensity The "intensity" of the liberalization policy is directly and closely linked to the scope of the free imports regime, and to the degree to which, over the medium term, the existing and "desirable" structures of protection for the various sectors match (whether expressed in cardinal or ordinal form). (6) Measurement The degree to which an economy is open to external competition is measured by calculating various alternative statistical indicators, which complement rather than duplicate one another, such as the following: (i) the number of tariff items classified as free imports, both in absolute terms and in relation to the number of goods not - 52 - produced domestically and the number of goods having an international competitive advantage; (ii) the absolute value of imports in the free regime and/or their percentage share of the total value of imports over a given period; (iii) the absolute value and share of imports not subject to administrative decisions (as in the case of nonreimbursable imports by government agencies using external credit, goods imported under special liberalization schemes - e.g. ALADI and the Andean Pact, imports obtained through special import/export arrangements, and goods from free ports); (iv) the differences and resemblances (in absolute and relative terms) between existing and "desirable" structures of effective protection, as regards levels and distributions within individual sectors; (v) the proportion (of the value) of imports in (the value of) total "apparent" supply or in (the value of) domestic output, at aggregate and/or sectoral level. Similarly, it is possible to quantify the rate at which the economy opens up, and therefore the rate at which an import liberalization policy is progressively implemented over time, by means of intertemporal changes in the degree of openness. Thus, for example, one indicator of this rate would be the percentage increase in the number of items (or of the value of imports) subject to the free import regime over a given period of time. Another would be the percentage increase in the value of imports subject to regimes other than prior license, and another would be the percentage change in the share of the value of imports in apparent supply or domestic output, whichever is relevant. (7) Reference Base In order to calculate the rate of import liberalization, it is obviously essential to establish a base period to which reference can be made. Selection of the reference base is crucially important for establishing the specific liberalization targets that government policy must achieve by the end of a certain period. In fact, because the level of imports over a particular period depends not only on the composition and coverage of the free import regime and administrative flexibility in the processing of prior licenses, but also - and very significantly - on market forces (both domestic and international), the only feasible way of seeking to achieve a certain degree of openness over a particular time frame is to use a reference period for projecting the effects of liberalization as measured by changes in 6!e value of those imports that are to be liberalized or transferred to the free import regime. - 53 - In other words, because the purpose of such projections is to avoid uncertainties over how the value of free imports will behave in the future, is must be taken for granted that such future behavior will be no more than a repetition of past performances, regardless of any changes in exogenous factors that might have a major impact on them. This is precisely the sort of procedure that must be used in establishing agreements and commitments regarding how far an economy is to be be opened up over a specific length of time, as in the case of the import liberalization agreements resulting from the World Bank sector loans. C. Conditionality in the Import Liberalization Policy In order to arrive at a clear assessment of the conditionality applicable to commitments regarding the degree to which the economy should be opened up (established in the TPED and TAP sector loans), these should first be viewed in an operational context and quantified, and then reviewed in light of the import liberalization measures adopted by Colombia since the beginning of the past decade. (1) The Commitments in an Operational and Quantifiable Context In accordance with the analytical and empirical methodology presented above, the commitments to liberalization referred to in the TPBD Loan relate to the number of tariff items to be transferred from the prior license regime to the free import regime, and the percentage share (via-k-via total value) of imports in classifications other than the prior license regime (in the strict sense), the basis for comparison being the import position in 1984 (annual equivalent). (a) Number of positions in the free import regime: A schedule was drawn up for incorporating into the free import category four sets of tariff items which would be guaranteed not to include goods produced in Colombia (as distinct from those with a clear international competitive advantage). Table I shows the total number of positions to be liberalized in 1985, together with a quarterly schedule, as agreed under the World Bank TPED loan. This shows that, by the end of 1985, 1,160 items would be in the free import regime, i.e. 23.3% of items subject to tariffs would be liberalized, (b) Value of imports governed by arrangements other than the previous license regime: The other statistical indicator used to provide an operational definition of import liberalization commitments was the percentage share of total value accounted for by imports governed by arrangements other than the previous license regime. To this end, a given period was used as a reference for determining the relevant values, and these were used for quantifying compliance with commitments. - 54 - For these purposes, "free imports" were defined as follows: (i) tariff items in the free imports regime; (ii) imports governed by special import/export arrangements (the Plan Vallejo Scheme and SIEX); (iii) goods freely imported from member countries of the Andean Pact and the rest of ALADI, but not included in the general list of free imports; (iv) imports under free ports regimes, in accordance with the quota assigned to them; (v) ECOPETROL reimbursable gasoline imports; (vi) all nonreimbursable imports. In order to calculate the "expected/projected" percentage value of free imports (as defined above) vis-A-vis total 1985 imports, the 1984 * figures were used for each of six groups of imports within the "free" category (as indicated). In this way, a value was set for the commitment to liberalize, in terms of an "annual equivalent to the base year." For 1985, the degree of liberalization (in terms of value) agreed with the World Bank under the TPED loan was an annual 58% with respect to 1984. Agreement was reached with the Bank to adjust some of the 1984 values, particularly that for nonreimbursable imports, which - at the time of negotiations (March 1985) -- had been expected to exceed US$900 million in 1985 (because of a significant increase in official imports), as compared with the 1984 figure of US$520 million. Obviously, this adjustment increased the share of free imports (by 10%), and consequently facilitated compliance with the commitment, without jeopardizing the basis of the Government's import policy. The following liberalization agreements were made with respect to the TAP loan: (i) to maintain the definition of free imports; (i) to adopt 1985 as the base year; (iii) to adjust the 1985 value of imports of capital goods and raw materials not produced in Colombia but which were to be liberalized during the year and would show an "artificially" low level if compared with other years in the decade (because of the restrictive policy applied in 1985). 1/ As regards the liberalization target, it was agreed that at least 67% (as an annual equivalent to 1985 as base year) should l/ For cases in which such adjustments were justified, it was decided to adopt the average annual value for the 1980-82 period (instead of the 1985 value). - 55 - be achieved before June 1986, this being a condition of the first tranche of the loan, and that any possible subsequent increases would be discussed and agreed with the appropriate representatives of the incoming Government. (2) Scope of the Commitments There is no doubt that compliance with the liberalizatOn commitments agreed in the context of the trade policy loans did not conflict either in whole or in part - with the basic purposes of the Government's import policy (described in Section 8). On the contrary, this compliance made a considerable contribution toward progressively refining and improving the liberalization policy initiated in April 1985. Consequently, the following points should be emphasized: (i) Not only were the 1,136 planned items not (sic) liberalized in 1985, but also a further 203 items were liberalized on December 23 of that year, as a result of a decision to advance the liberalization schedule for the final two groups of positions. As of December 31, therefore, 1,360 items were on the free import list (i.e. 27.11 of all positions), instead of the originally agreed 1,164. (ii) Commitments regarding the percentage value of free imports (as defined above) were fulfilled by a wide margin in 1985, to such an extent that the 57% target can be said to have been achieved even if 1985 itself is taken as the base year instead of 1984 (see Table 2). In turn, it was implicit in the same commitment that the value of items in the free imports regime (in the narrow sense) woeld be 11.3% of the total value; in fact, this share was doubled (i.e. 24.4%). In the TEDP Loan Agreement, the liberalization target for biach 1986 was an annual 63%, taking 1985 as the base year. As indicated in Table 2, showing values of 1985 imports by category, this commitment meant an annual value of imports under the free regime (in the narrow sense) of about US$1.335 billion for the current year (base year = 1985); i.e., in order to achieve this, it was necessary to transfer a sufficiently large number of positions to the free imports regime for its 1986 value to be increased by US$235 million over the base year (1985). As a result, the value of the free imports regime became 33.6% of the total. It must be noted that an annual liberalization target of 67% over the 1985 base year - as agreed for 1986 as part of the TAP Loan - implied an annual value of imports (base year = 1985) under the free regime of about US$1.515 biliion, and an approximately 33.6% share for this regime in the total value of imports. In such a case, annual imports under the free regime would have to be increased by about US$180 million over the value resulting from meeting the 63% target previously referred to. - 56- M The scale of the additional liberalization effort entailed can be properly visualized only if the following points are taken into consideration: (i) the existence of about 10 positions that were deemed suitable for transfer to the free imports regime (in the narrow sense) once their technical specifications and customs description had been examined (equivalent annual value = about US$150 million); (il) the existence of an adequate margin for additional liberalization, since it was found feasible to transfer about 500 items to the regime (as mentioned above). In addition, it should be noted that liberalization of these 500 items would bring the percentage for the free imports regime (in the narrow sense) to 37%. In any case, an aspect of the matter that certainly was seriously questionable (for reasons that lie beyond economic considerationi, and were clearly presented throughout the discussions with the World Bank concerning the TAP loan) was the acceptance of any form of * conditionality with regard to an increase in liberalization, however advisable this might be, once the measures for transferring items to the free imports regime had already been adopted. Not only does such conditionality involve serious problems with regard to the presentation of the issues to public opinion - possibly even creating obstacles to the necessary implementation of import liberalization -- but also, in formal terms, it would appear as if the World Bank were imposing the adoption of such measures (even if these were strictly consistent with the Government's import policy). TABLE 1 AGREED SCHEDULE OF IMPORT LIBERALIZATION: 1985 Regime lt Quarter 2nd Quarter 3rd Quarter 4th Quarter From "prohibition" to "prior" 350 items l/ 354 items 2/ From "'prior" to "free" 350 items 354 items 200 items 200 items and and 14 items 3/ 18 items 4/ 1/ Equivalent to an annual value of US$60 million (base year - 1984). 2/ Equivalent to an annual value of US$27 million (base year = 1984). 3/ Equivalent to an annual value of US$290 million (base year - 1984). 4/ Equivalent to an annual value of US$150 million (base year = 1984). - 57 - TABLE 2 VALUE AND BREAKDOWN OF IMPORTS (EQUIVALENT: BASE YEAR = 1985) 1/ Value (in millions of US$) A. Reimbursable (approved under regimes other than "prior"): 1. "Free" regime (1,360 items as of December 31, 1985) 1,100 24.4 2. Gasoline 260 5.8 3. Plan Vallejo Scheme and SIER 140 3.1 4. Andean Pact and ALADI (prior license regime 140 3.1 items) 5. Free ports 60 37.9 Subtotal 1,700 37.9 B. Nonreimbursable: 1. Plan Vallejo Scheme 28 0.6 2. Other 872 19.4 Subtotal 900 20.0 C. Reimbursable approved under prior license: 1,900 42.2 TOTAL (A+B+C): 4,500 100.0 1/ Preliminary data based on INCOMEX estimates. - 59 - ANNEX 1 Page 1 of 5 COLOMBIA Summary of Objectives and Achievements under TPED and TAP Loan Objectives Achievements TPED Loan (Loan 2551-CO) 1. Assessment of Macroeconomic Program Satisfactory progress in carrying out Macroeconomic adjustment targets for the program of macroeconomic and 1985 on balance of payments, reserves, trade policy reforms and with the real exchange rate, fiscal deficit updating of the medium-term public and monetary indicators, were fully sector investment program, financing met and trade policy measures and borrowing plan. satisfactorily implemented. The public sector investment program was updated and extended to 1987, and satisfactory financing and borrowing plans were adopted for 1986 and 1987. Satisfactory Trade Policy actions The Bank was satisfied that overall, (described below). the measures taken were satisfactory. 2. Trade Policy Measures Decrease in the share of free Import permits were eliminated imports. initially for 718 items (before board) and subsequently 418 (Second Tranche) to enable the free import equivalent to reach about 572 of 1984 imports. In October/November 1985 418 items were moved from prior license to free regime and a further 653 items were moved to the free list in December 1985 - February 1986 to bring share of free imports to 67Z. Reduction of import prohibitions. Initially 709 prohibited items were transferred to prior license followed by an additional 50 import items ($80 million worth of imports). - 60 - ANNEX 1 Page 2 of 5 Reduce import tariffs. Peak tariff were cut to 802, tariff exemption were eliminated except for those imposed by international or regional agreements, and lower tariffs were raised to achieve lower dispersion. Elimination of export controls Restrictions were removed imposed on economic grounds on 230 items with controls on (395 items) and non-economic economic grounds as a condition of grounds (333 items). Board presentation. All other items were subsequently reviewed and restriction removed on a further 376 cases in October 1985 leaving no items prohibited and 175 that required prior approval. Rationalize tax exemptions The Bank agreed that the system not for exporters (base tax incentive be changed on the grounds that on value added rather than on total ell-mination of import content export value). from value base would require extensive changes in statistical systems of Government Agencies and represent an unwarranted reduction in export incentives. Improve access to foreign exchange Effective January 1, 1986, the for import payments. minimum period for access to foreign exchange for financing of imports was eliminated for all imports. Strengthening of export schemes. Criteria for eligibility and procedures were simplified, exporters with prior export record were given automatic access to import licenses and duty exemption procedures for first time exporters were improved. Ensure complementarity of external Import components were excluded financing with PROEXPO's peso from subsidized peso financing. financing. - 61 - ANNEX 1 Page 3 of 5 Agreement on and implementing an Import permits were reduced as Action Program to further required in February 1986 and restructure tariffs to reduce agreed to achieve a 692 their dispersion and level, to share for free imports by April reduce import permit requirements 1986. Considerable further so that 632 of 1985 imports could tariff reform was achieved and be freely imported; reduce the Government confirmed trade effective protection and policy in agreed direction for rationalize export incentives 1986 and outlined policy further. guidelines for the longer-term. A detailed medium-term trade program was expected to be agreed in November 1986 with the new administration and prior to second tranche of the TAP Loan. TAP Loan 1. Assessment of Macroeconomic Program Satisfactory progress in carrying out Macroeconomic adjustment targets the program of macroeconomic were met for 1986 regarding policies and public sector balance of payments, reserves, 'investment program. real exchange rate, fiscal deficit and monetary indicators. The Bank assessed as satisfactory the public sector investment program and associated financing plan for 1987-90. Satisfactory trade and agricultural The Bank was satisfied that overall sector policies, the measures taken were satisfactory. S. Trade Policy Measures Increase in the share of free The share that was brought to 67Z imports. under the TPED loan was increased to 692 in April 1986. Increase amount of foreign exchange The foreign exchange budget was for imports under licensing. increased by US$150 million as a condition of second tranche release. - 62 - ANNEX 1 Page 4 of 5 Reduce import tariffs. Weighted average of import tariffs was reduced from 36Z to 28Z. By the end of 1987, a major revision of tariff exceptions and exemptions was envisaged as well as further measures to improve overall uniformity and to allow the selective use of tariffs to protect items being phased out by the prior license regime. 3. Aaricultural Policy Actions Reduce export restrictions. The administration of the 114 export restrictions retained by the environmental agency was streamlined so that approvals take only one day. Four of the 31 items subject to Ministry of Agriculture approval were removed from the list and expected to remove 15 more during 1987. Liberalize imports of agricultural IDEMA (Instituto de Mercadeo Agrope- commodities. cuario) liberalized imports of wheat, barley and soybeans by permitting private sector imports, within global quotas. A market- based system for allocating quotas was not developed. However, IDEMA increasingly uses the commodity exchange to distribute imports. Liberalize imports of Most fertilizers are freely inputs. imported. Import duties on fertilizers were reduced from 232 to 132 and duties on pesticides from 29? to 232. Improve pricing policies by not Variations in support prices and allowing the variation in annual market wholesale prices the support prices and market for food crops were generally wholesale prices for food crops held below the inflation rate to increase above the inflation for the 12 months ending rate (except if the variation in March 1987 the production cost of the food crop has significantly exceeded the inflation rate). - 63 - ANNEX 1 Page 5 of 5 In view of the large recent This was done as a Board condition. increase in world coffee In addition, fertilizer subsidies prices, increase internal and subsidized credit for planting guaranteed price by about were eliminated and incentives for 35% in real terms. coffee stumping and diversification increased. A temporary variable bonus scheme was introduced. Review agricultural credit policies Rates charged by FFAP were raised to ensure an adequate supply of by 1.5Z on average and effective credit to the agricultural sector rates made positive in real terms and to maintain competitive as a condition of Board interest rates for agricultural presentation. Subsequently loans, agricultural interest rates moved closer to market rates, while adequate levels of agricultural credit were maintained. 4. Institutional StrenStheninu Strengthen agricultural planning. An interministerial coraittee was established to set guidelines, policies and programs for the agricultural sector. Strengthen financial planning and A program to augment funds for monitoring of agricultural 1986 and 1987 was agreed upon for institutions. specified institutions. Financial planning was strengthened in 5 agencies. 0. -d J 09 ^0a - -I i4 A 4 cl ~ 4 5t4 d d li] ]Pis 1 - 65 - Table 2 Page 1 of 2 COLOMBIA: REAL EXCHANGE RATE, DOMESTIC TERMS OF TRADE 1975 - 1987 TRADED/ REAL NON- EXCHANGE TRADED RATE GOODS (1980 = 100) 1975 120 133 1976 114 149 1977 103 133 1978 102 116 1979 98 115 1980 100 100 1981 98 93 1982 91 97 1983 88 95 1984 96 104 1985 109 125 1986 130 112 1987 133 111 Source: Banco de la Republica, Revista, Jan, 1989. ('OLOMBIA RELATIVE PRICE INDICES 1975 - 1987 160 -- 140 120 100 80 60 - 40 - 20 - 0 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 Real Exchange Rate ± Traded/Nontraded Gds (1980 = 100) - 67 - PART III - STATISTICAL INFORMATION TRADE POLICY AND EXPORT DIVERSIFICATION LOA14 (LOAN 2551-CO) LOAN DATA (Amounts in US$ Million) As of Aug. 31, 1989 Original Disbursed Cancelled Repaid Outstanding 300.0 299.5 0.5 - 299.5 PROGRAM DATES Original Actual Initiating Memorandum 10/11/84 10/11/84 Letter of Development Policy 05/02/85 05/02/85 Negotiations 04/12/85 04/12/85 Board Approval 05/23/85 05/23/85 Signing 05/29/85 05/29/85 Effectiveness 06/14/85 06/14/85 Loan Closing 12/3./86 06/30/88 Completion 12/31t86 06/30/88 CUMULATIVE LOAN DISBURSEMENTS FY85 FY86 Appraisal Estimate (US$ M) 150.0 300.0 Actual (US$ M) 150.0 299.5 Actual as % of Appraisal (%) 100.0 99.8 HISSION DATA No. of No. of Staff Date of Month/Year Weeks Persons Weeks Report Identification 06/84 2.5 6 15.0 08/02184 Appraisal 11/84 2.5 9 22.5 01/30/85 Supervision 1 08/85 3.0 3 9.0 -- Supervision II 09/85 1.0 1 1.0 10/16/85 Supervision III 01/86 1.0 1 1.0 03/28/86 Supervision IV 04/88 2.5 3 7.5 05/12/88 FOLLOW-ON ADJUSTHENT OPERATIONS Power Sector Adjustment, Loan No. 2889-CO, approved on December 8, 1987, in the amount of US$300.0 million. - 68 - TRADE AND AGRICULTURAL POLICY LOAN (LOAN 2677-CO) LOAN DATA (Amounts in US$ Million) As of Aug. 31, 19q9 Original Disbursed Cancelled Re.aid Outstanding 250.0 248.0 - - 248.0 /a PROGRAM DATES Original Actual Initiating Memorandum 05/13/85 05/13/85 Letter of Development Policy 03/18/86 03/18/86 Negotiations 12/11/88 12/11/88 Board Approval 04/15/86 04/15/86 Signing 05/27/86 05/27/86 Effectiveness 06/23/86 06/23/86 Loan Closing 06/30/88 12/31/89 Completion 06/30/88 12/31/89 CUMULATIVE LOAN DISBURSEMENTS FY87 FY88 Appraisal Estimate (US$ M) 125.0 250.0 Actual (US$ M) 125.0 248.0 Actual as % of Appraisal (%) 100% 99.2% MISSION DATA No. of No. of Staff Date of Month/Year Weeks Persons Weeks Report Preappraisal 06/85 2.0 7 14.0 08/85 Appraisal 09/85 2.5 1 2.5 10/85 Post-Appraisal 01/86 2.5 3 7.5 03/86 Supervision I 11/86 1.0 3 3.0 11/20/86 Supervision II 02/87 2.0 7 14.0 04/06/87 Supervision III 03/87 2.0 2 4.0 04/10/87 Supervision TV 11/87 1.5 1 1.5 12/10/87 Supervision V 04/88 1.0 1 1.0 05/02/88 Supervision VI 08/88 1.0 1 1.0 09/27/88 Supervision VII 05/89 1.0 1 1.0 -- FOLLOW-ON ADJUSTMENT OPERATIONS Power Sector Adjustment, Loan No. 2889-CO, approved on December 8, 1987, in the amount of US$300.0 million. /a Balance of $2 million outstanding for technical assistance component still to be disbursed.