Colombia - Second Cordoba Agricultural Development Project

CIRCULATING CopY FILE COPY I RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use CIRCULATING COPY Resport No. P-1655-CO TO BE RETURNED TO REPORTS DESK REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA FOR THE CORDOBA 2 AGRICULTURAL DEVELOPMENT PROJECT June 9, 1975 rhis report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the iccuracy or completeness of the report.  CURRENCY EQUIVALENTS (as of April 30, 1975) Currency Unit - Colombian Peso (Col$l) US$1 - Col$30.24 Col$1 - US$0.331 Col$1 million - US$33,100  INTERNAT:IOXN BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND REGOMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A P[OEIOSED LOAN TO THE REPJRLIC OF COLOMBIA FOR THE CORDOBA 2 AGRICULTURAL DEVELOPMENT PRJECT 1. I submit the following report and recommendations on a proposed loan to the Republic of Colombia for the equivalent of US$21 million to help finance an agricultural development project in the Cordoba Department. The loan would have a term of 30 years, including six years of grace, with interest at 8-1/2 percent per annum. A portion of the Bank loan would be used to provide investment credit to farmers on five- to 12-year terms, at 16 percent interest per annum. PART I: THE ECONOMY 2. The Bank's most recent economic report (Economic Position and Prospects of Colombia 696-CO) was distributed to the Executive Directors on May 28, 1975. Country data sheets are provided in Annex I. 3. Since 1967 Gross Domestic Product has increased by an average 6.5 percent per annum in real terms, well above the historical average of less than 5 percent (1950-67), and real per capita GNP has increased by an average annual 3.2 percent. During this period, substantial structural transforma- tion has taken place in the Colombian economy, and the country is now well advanced in the transition from a predominantly rural,.agricultural, and largely self-contained economy to an urban industrial economy, more oriented towards expanding international trade. Broadening of the country's pro- ductive base has been accompanied by development of a modern sector which relies to a considerable extent on imported inputs. Merchandise exportshave increased three-fold since 1967 and, most significantly, non-traditional exports have become a more important source of foreign exchange earnings than coffee, increasing from 27 percent of merchandise exports to over 50 percent in 197h. Such improvements are very much needed in order to accel- erate employment generation and to raise per capita income, currently US$500, one of the lowest in Latin America, to a more acceptable level; despite the rapid development of Colombia over the past seven years, it remains essen- tially a poor country with a relatively small modern sector superimposed on a large, traditional, and poor base. 4. Colombia also needs to spread the benefits from growth more widely in order to surmount problems of poverty and population pressures in both rural and urban areas. Concentration of land ownership, technical backward- ness, and under-employment characterize most rural areas. In urban areas, pressures of population growth, compounded by heavy migration from the country- side, have generated serious unemployment and a severe housing deficit. Pros- pects for coping with these problems seem brighter as a result of the accel- erated growth upon which the Colombian economy has embarked in the past several years.  5. Recent Government administrations have reacted to rural poverty and urban unemployment in a more systemtic fashion than in the past, but much remains to be done. In spite of the passage of an Agrarian Reform Law and the creation of an Agrarian Reform Institute (INCORA) in 1961, only modest results have been achieved in alleviating rural poverty. Additional legislation has been enacted which lays a better basis for land reform but much remains to be done to raise income in rural areas. In recognition of the problems of urban concentration and unemployment, Colombia's previous Government placed greater emphasis on urban development, particularly in the housing field, but despite such action unemployment continued to increase in most of Colombia's major urban centers. The new Government, which took office in August 1974, is striving to sustain a high rate of economic growth while simultaneously attempting to achieve a more equitable distribution of its benefits, inter alia, through expansion of employment opportunities and increased investment in education, health and agriculture. There is more emphasis on the development of agriculture and industry, and less reliance on the urban construction sector to provide a stimulus to economic growth. Export diversification continues to be a major component of development strategy and the Government is currently rationalizing the export promotion system. 6. Colombia's post-war experience suggest that strengthening of the fiscal system is a necessary first step to achieving the Government's objectives. Shortfalls in revenues resulted in chronic public finance deficits which were major sources of inflation and impeded expansion of infrastructure investment and social programs vital to acceleration of de- velopment. Tax buoyancy declined sharply in the 1973-74 period as a result of the negative impact on Government revenue of the increased use of tax benefits for exporters and because of administrative deficiencies. With the exception of 1972, when there was a sharp jump in National Govern- ment investment spending made possible by a three-fold increase in external borrowing, deterioration of public finances has been reflected in a declining level of investment by the National Government which dropped from an average 4 percent of GDP in the 1967-72 period to 3.4 percent in 1973-7h. The de- terioration of the National Government's financial performance had been Accom- panied by weakening of the capacity of the rest of the public sector (depart- mental and municipal government and public enterprises) to mobilize domestic resources and execute investment. In order to overcome these problems, the new Government implemented a tax reform of major proportions in the last four months of 197h. The reform covers almost every important component of the tax system and represents a clear and significant improvement on nearly all counts. While the reform did not serve to purge the revenue system com- pletely of pre-existing defects, it stands as a landmark in the recent history of such undertakings, both among developing and developed nations. This is evidence that the rate of inflation, which averaged 25 percent in 1974, may now be declining somewhat. 7. The major immediate economic problem is the weakened export position. During 1970-73 Colombia had little difficulty in obtaining the foreign exchange necessary to finance its development from rising exports and a large inflow of foreign capital. In 1974, however, import payments increased sharply, world coffee prices fell, the external capi- tal inflow to the public sector was reduced and Colombia financed a portion of its external resource gap by drawing down its foreign exchange  -s_.-v- 0:. lal resseries decl ned by $87 iriL L>:n by year end, leavoinu .ne cc untry with reserves of $429 millior sufficient to cover about hz-e months of goods and non-factor servic_6 imports at the expected 1975 rate. Preliminary estimates for 1975 indicate a balance of payments deficit of some US$200 million which will require an increase in borrowing from foreign financial intermediaries. The Gove=-rent is aware of the danger posed by the weakening in the balance of payments, and since taking office in mid-August has more than doubled the rate of depreciation of the peso, under Colombia's flexible exchange rate policy, in an effort to hold down the rapid growth of imports and sustain adequate incentives to exporters. In addition the Government took measures to stabilize the economy inter alia by introducing a fundamental reform of the country's financial system, and is facing the need to strike a careful balance between faci- litating a reasonable level of imports and maintaining an adequate level of reserves without incurring too large a volume of suppliers' credits and other short- and medium-term financial obligations. The Government also recognizes that appropriate measures are required to increase petroleum production so as to reverse the recent trend toward Colombia's becoming a net importer of crude oil. 8. Management of the Colombian economy in 1975-76 will be a complex task, since there is the danger that contractionary forces already set in motion by the Government's stabilization program could be amplified by recessionary pressures from abroad. It is alread.- clear that GDP growth during this period will be below the average of 1970-7h and that the balance-of-payments situation will be considerably weaker. The new economic team is aware that the economy is going through a period of transition in which the situation could change rapidly, and is follow- wing policies aimed at reducing inflation, =inimizing the contraction in the rate of growth of output and employment, and protecting the level of foreign exchange reserves. In addition, the Government is anxious to step up its development effort. Simultaneous accomplishment of these goals would require increases in domestic saving and investment and substantial inflows of foreign capital. 9. The long-term development challenge as seen by the Government is to return the economy to the higher rates of growth achieved in the recent past and provide increased employment opportunities and a broader distribution of the benefits of economic growth to all segments of the population. The Government has already achieved considerable success in enacting fundamentel monetary and fiscal reform which should provide the framework for increased saving and a more efficient allocation of that saving into investment opportunities. It is now turning its attention to achieving the goals of rapid growth and a more equitable distribution of its benefits through initiation of a development program aimed at accelerating agricultural and industrial growth, at increasing the parti- cipation of the most deprived regions of the country in the development process, at improving the productivity of the poorest population groups through better education and nutrition, and at continuing the export diversification drive. Special emphasis is being placed on expansion of employment opportunities and increased investment in education, health,  -14- and nutrition programs aimed at benefiting the poorest 50 percent of the population. 10. Ln order to achieve the Pafore-mentioned objectives, Colombia will require, over the six calendar years 1975-1980, gross external official financing totalling about $4.5 billion, of which some $600 million will be disbursed from commitments made through the end of 1971X. The remaining $3.9 billion must be financed by new comiutments which should average about $900 million a year- Of the latter amount, about half would be obtained from suppliers' credits, foreign bond sales, and borrowings from comnercial banks, and the other half through loans from public bilateral and multilateral agencies. 11. Colombia's public external debt repayable in foreign currency amounted to US$2.8 billion at the end of 197h, or US$2.2 billion excluding undisbursed commitments. The Bank's share of this external debt (dis- bursed only) as of end 1974 was about 26 percent, but this share is ex- pected to decline to 22 percent in 1978 as Colombia relies to a greater extent on other external borrowing. Service on this debt was a modest 14 percent of foreign exchange earnings in 1974; exports have risen more rapidly than debt service in recent years, and there has been a decrease in the debt service ratio at a time when economic growth has accelerated. The debt service ratio is expected to rise moderately and peak in the early 1980's at about 20 percent as a result of greater capital inflows associated with a high growth rate. The Bank's share of total debt service is expected to peak at about 28 percent in 1975 and. is likely to decline to 18 percent by 1978. Should economic growth continue at a rapid pace, which appears feasible, and should that growth be accompanied by a further strong expansion of non-coffee exports and the maintenance of sound economic and financial policies, Colombia should find it possible to secure the amounts of external capital it needs and to service the indebtedness that this borrowing would generate. Some of this capital will have to be provided to finance local costs if total foreign assistance is to be large enough to enable the country to cover its resource gap on appropriate terms and maintain its rate of economic growth at an acceptable level.  PART II: BANK GROUP OPERATIOMJS IN COLOIBIA 12. The proposed loan--the 61st to be made to Colombia--would bring the total amount of Bank loans to Colombia to US$1,168.2 million (net of cancellations). Of the foregoing amount, US$881.1 million is now held by the Bank, excluding one loan of US$19.5 million which is not yet effective. IDA has made one credit of US$1965 million for highways in Colombia in 1961. 13. Disbursements have been completed on 33 loans and the one IDA credit. IFC has made effective investments and underwriting commitments in 21 enterprises in Colombia, totalling about US$30.2 million of which IFC now holds US$16.6 million. Annex II contains a sumnuary statement of Bank loans, the IDA credit, and IFC investments as of April 30, 1975, and notes on the execution of the 27 on-going projects. SMITORAT. COMThSTTTON OF BANK GROUP OPFR?ATTONS, TO MAY 31. 1975 (Amounts in US$ millions) Number Sector Share of Total of Total Sector Loans Amount _ _ Agriculture 9 100.3 8.3 Telecommunications 3 46.0 4.0 Education 3 33.8 2.9 Industry 8 226.8 19.8 Power 18 344.1 30.0 Transportation 12 229.6 20.0 Water Supply 6 158.6 13.8 Pre-Investment 1 8.0 0.7 TOTAL 60 1"14L.2 100.0  - 6 - 14. Since FY68, Bank lending in Colombia has become more diversified than in earlier -ears. All three loans in the education sector have been made since then as were five of the nine agricultural loans, five of the six loans in the water supply sector and four of the loans for industry. This compares with seven loans since FY68 in the sectors where the Bank has been traditionally active, i.e., power and transport. Bank efforts have been focused on production-oriented activities and activities which carry social as well as economic benefits. Projects being developed will seek to combine the objectives of increasing output and exports, with maximum benefits in terms of employment and improving the income of the poor, particularly in rural areas. 15. We expect over the next several years to make an increasing contribution to the agricultural and industrial sectors, with particular emphasis on projects involving small and medium size farmholdings and industrial enterprises. The other major focus of our activities would be in such social sectors as urban development and water supply. We would continue to support projects in the tradi-tional sectors of Bank lending--electric power and transportation--in those cases where support is required for necessary institutional development. Projects are currently in an advanced stage of preparation for industrial finance and agricultural credit. 16. Given the importance of sustaining a high growth rate in agri- culture and the magnitude of the rural poverty problem in Colombia, there is an urgent need for further Bank lending in the agricultural sector with the dual objective of increasing output and raising the productivity and income of small-scale farmers. We have moved increasingly into the agricultural sector in the recent past, and we expect to make a sub- stantial further expansion over the next few years, with perhaps as much as one-fourth of our total lending to be made in the agricultural sector. 17. The operations of external lenders in Colombia are shown in Annex I, pages 3-4. While IBRD, IDB, and AID provided about four-fifths of total external financing to Colombia in the 1961-72 period, their share has decreased since then. The IDB has assisted projects in low-cost housing, university education, agrarian reform, ports, electric power, water supply, transportation, and industry. AID had shifted the emphasis of its lending in recent years from program to sector loans, particularly for education, urban development, and agriculture. More recently it has moved in the direction of small project loans aimed chiefly at the improvement of income distribution.  -7 - PART III: AGRICULTURE IN COLOMBIA 18. An exceptional regional diversity in soils and climates enables Colombia to produce a wide range of agricultural commodities for home consumption and export. In recent years, Government policy has been successful in encouraging use of the country's potential to diversify agricultural production and reduce the excessive dependence on coffee. This, in turn, has contributed to the decline of coffee from about two- thirc to less than half of total exports. The overall rate of growth of the agricultural sector averaged 4.6 percent in real terms during 1965-73, as compared with 2.7 percent during the first half of the 1960's. 19. Despite the recent favorable growth performance, the sector is confronted with serious structural problems. Agriculture employs 41 per- cent of the Colombian labor force. While open unemployment in the sector has been estimated at no more than 4 percent, underemployment and seasonal unemployment together may raise the overall unemployment average for the sector to as much as 40 percent. Average per capita income in rural areas is only half the level of urban incomes, and rural income distribution is skewed, with the poorest 40 percent of the rural population receiving only 12 percent of total rural income. The distribution of income is related to the concentration of land ownership: the 1970 census showed that the largest 10 percent of farms accounted for 80 percent of al1 farm land, virtually the same as in 1960. 20. The Colombian authorities have recognized that the problems of rural poverty and unemployment cannot be solved without a change in the structure of the agricultural sector through a production-oriented agrarian reform. Government actions since the establishment of the Instituto Colombiano de la Reforma Agraria (INOORA) in 1961 have aimed at lessening the concentration of land ownership and income through resettlement on publicly owned lands and on unused private land which has been purchased by the Government; by providing irrigation and drainage in areas inhabited chiefly by small farmers; and by granting more land titles to small farmers. In its irrigation and drainage districts INOORA has attempted, with varying degrees of success, to impose legal ceilings on the amount of land that could be retained by one owner once project works were completed. Elsewhere there has been little outright redistribution of productive land, however. A new-phase of land reform policies was initiated by the agrarian reform act of 1973. This bill had two main purposes: first, to substantially improve compensation for expropriation of well-cultivated land and thus dispel insecurity among landowners able to embark upon agricultural invest- ment programs and, second, to make it easier for INCORA to expropriate.  21. As the agency responsible for agrarian reform, INCORA has granted about 135,000 titles to 3.8 million hectares of public lands and has acquired some 374,000 hectares of privately-owned land of which 190,000 hectares were redistributed to 11,300 families. The public lands are mainly in new frontier regions such as the Llanos and Caqueta. Sixteen irrigation and drainage projects, including some resettlement and small-farm improvement, have been initiated, covering some 500,000 hectares. In addition, amendment of the Agrarian Reform Law in 1968 made it possible for sharecroppers and tenant farmers to claim title to the land they farm, and nearly 8Q(X)0 of them have applied to INCORA. Of these, some 45,000 have had their claims recognized. 22. To raise the productivity of small hoLdings requires substantial inputs of technical assistance and credit. The IDB, through loans for the Instituto Colombiano Agropecuario (ICA), and AID, through its agricultural sector loans, have provided financing for improvements in research and extension services. AID also devoted a substantial portion of its agri- cultural sector loans to supervised credit for INCORA beneficiaries; while these sector loans have been discontinued, as noted above, the Bank is currently considering a loan for agricultural credit. Meanwhile, the Government has directed its agricultural credit policies increasingly -toward the problem of the small farmers. For example, an analysis of the lending activity of the Caja Agraria, by far Colombia's largest agricultural lending institution, shows that in recent years it has been relaxing collateral requirements and progressively lending more to small farmers. 23. The now Lopez administration is attempting to formulate policies which will give long-range direction to and be supportive of programs in the rural sector. A central part of this process is the development of a national nutrition plan which would project the nutritional needs of Colombia and translate them into commodity needs; a separate plan would delineate the agricultural export potential of Colombia. Together these plans will give focus to both rural development and crop diversification efforts.  - 9 - PART IV: THE PROJECT 2h. In September 1972, the Government and INCORA requested Bank assistance in financing the rehabilitation and completion of 16 irrigation and drainage projects begun in earlier years. The request reflected a Government decision that INCORA should bring ongoing land development projects to a satisfactory level of development before initiating new ones. Following discussions with the Bank, agreement was rea:ched in principle that the Bank would consider financial assistance for seven of these projects, and Cordoba 2 is the first that was appraised. The districts are named for the political jurisdictions in which they are located. The Department of Cordoba borders the Atlantic Ocean east of Panama and includes the Sinu River Valley. 25. Feasibility studies for Cordoba 2 were completed by Hunting Technical Services, Ltd., of England during 1969-71. The project was appraised by a Bank mission in February/March 1974. Negotiations were held in Bogota on June 3, 1975 with a Colombian delegation led by Dr. Cristian Mosquera, Director of Public Credit, Ministry of Finance. 26. A project appraisal report entitled "Colombia: Cordoba 2 Agricultural Development Project" (No. 596-Co, dated June 6, 1975 ) is being circulated separately to the Executive D