Colombia - Second Agricultural Machinery Project

P-76 FffE Copy RESTRIC TED This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPME.NT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on the PROPOSZD LOAN to the CAYA DE CREDITO AGRARIO INDUSTRIAL Y MINERO OF THE REPUBLIC OF COLOMBIA FOR THE IDPORTATION OF AGRICULTURAL MACHINERY December 9, 1954  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECONMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE CAJA DE CREDITO AGRARIO INDUSTRIAL Y INIIT O OF THE REPUBLIC OF COLOMBIA FOR THE I1PORTATION OF AGRICULLTURAL MACHINERY 1. I submit herewith the following report and recommendations on a proposed loan of $5 million to the Caja de Credito Agrario Industrial y Minero of the Republic of Colombia to finance the importation of agricultural machinery. PART I - HISTORICAL 2. Early in 1949, a Bank mission visited Colombia to examine various development projects, one of which was a project for promoting the mechanization of agriculture by increasing the importation of agricultural machinery. 3. Following the missionts favorable report, the Bank made a loan of $5 million (18G0) on August 19, 1949, to the Caja de Credito Agrario Industrial y Minero, an autonomous official agricultural credit institution vfhich also is engaged in other agricultural development activities. The Colombian Government guaranteed the loan. Proceeds of the loan were used to increase Colombian imports of agricultural machinery, particularly of tractors and tractor-drawn implements. 4. Local currency funds received by the Caja from the sale of the Bank-financed machinery have been placed in 'a revolving fund. Until needed to purchase foreign exchange to service the loan, such funds have been used by the Caja to purchase foreign exchange to finance additional imports of agricultural machinery. The value of the machinery purchased by the Caja with the proceeds of the loan and with foreign exchange purchased with the revolving fund came to almost $20 million as of June 30, 1954. 5. Repayment of Loan 18CO began in May 1951 and should be completed by November 1956. As of November l5, 1954, $1,925,Ooo. of the loan was still outstanding. 6. Early this year the Caja requested another loan of $5 million to finance the importation of additional agricultural machinery needed to enable the mechanization of agriculture in Colombia to continue to expand. A Bank mission went to Colombia in June 1954 to investigate the results of the first loan and the need for a second one. The mission concluded that the project financed by the first loan had attained its main objectives, and that a second agricultural machinery loan was justified. 7. Formal negotiations for a loan opened in Washington on November 9, l195 with Dr. Misael Pastrana representing the Caja and Dr. Eduardo Zuleta Angel, the Colombian Ambassador to the United States, representing the Republic of Colombia.  -2- 8. If the proposed loan is made, it vwould increase the total aMount of Bank loans to Colombia to ;V4.28 million, net of cancellations. The Bank has already made the foUowing loans to Colombia: $5 miLlion 7-year 3k% loan of August 19, 1949 to Caja de Credito Agrario, Industrial y iinero for agricultural machinery-; reduced at request of borrower on April 2, 1951 to $4.9 million, which had been disbursed by February 1951. $3.53 million 20-year i% of November 2, 195O to Central Hidroelectrica del Rio Anchicaya, Limitada, for power development. $2*6 millionr 20-year 4L loan of December 28, 1950 to Central Hidro- electrica de Caldas, limitada, for power development. Fully disbursed by July 1953. $16.S million 10-year 3 7/8% loan of Pprill 10, 1951 for highwiay construction and rehabilitation. $2.h million 20-year 4i% loan of November 13, l951 to Central Hidroelectrica del Rio Lebrija, Limitada, for power development. S25 million 25-year 4 3VW loan of August 26, 1952 for construction of the Magdalena Valley Railroad and central repair shops, $k14.35 million 10-year 4 3a/% loan of September 10, 19'3 for higlhway rehabilitation and maintenance. Total $69.28 milltion, net of carcellations. PART TI - DESCRIPTION OF THE PROPOSED LOAN Borrower 9. The borrovwer would again be the Caja de Credito Agrario Industrial y linero. This institutions which has 191 branch offices, was established in 1931 to promote Colombian agriculture, mining and industry, particularly through the extension of credit. At present the Cajats activities are limited to agriculture. Tne resources and activities of the Caja have grown steadily during recent years and it is now the most important agency in Colombia for promoting the development and expansion of agriculture. Guarantor 10. The Guarantor would be the Repubic of Colombia, a member of the Bank.  -3- Amount 11. The Loan would be in an amount in various currencies equivalent to $5 million. Purpose 12. The proceeds of the Loan would be used to finance the importation of agricultural machinery, spare parts, and tools and other repair and mainten- ance equipment. Interest, Commission and Commitment Charges 13. The Loan would bear interest at the rate of 4 1/4% per annum, including the statutory commission of 1. The commitment charge would be 3/4 of l1 per annum and would accrue from the effective date of the Loan Agreement or sixty days after the Loan Agreement is signed, whichever is earlier. Amortization i4. The Loan, like the first Loan to the Caja, would be for a period of 7 years, and would include a period of grace until May 15, 1957. The Loan would be amortized by semi-annual payments of principal beginning May 15,1957 and ending November 15, 1961, as set out in Schedule 2 of the proposed Loan Agreement. Legal Instruments and Legal Authority 15. Drafts of Loan and Guarantee Agreements are attached as Appendix I and Appendix II, respectively. The followving provisions of the Loan Agreement are of special interest: (a) Section 5.09 which requires the Borrower to cause the proceeds of sale of the goods purchased with the Loan to be held in a fund for use either (i) to purchase currency required to service the Loan or (ii) in the financing of programs directly furthering the mechanization of agriculture. (b) Section 5.10 which requires the Borrower to take steps to ensure that the goods are not directed to non-agricultural uses and are adequately maintained and serviced, 16. General authorizations for the Caja to enter into the Loan Agreement and for the Government to guarantee the Loan are contained in the existing general legislation applicable to the Caja and in Law 90 of 1948. The latter law authorizes the Government to guarantee loans in an aggregate amount not exceeding $60,000,000 made by the Bank to official entities or to entities in which the State has an interest, including loans to the Caja.  Before the proposed Loan and Guarantee Agreements can be signed the newly created Consejo Nacional de Economia must give its favorable opinion. We expect to receive this opinion within the near future. 17. The report of the Committee provided for in Article III Section 4(iii) of the Articles of Agreement is attached as Appendix III. PART III - APPRAISAL OF THE PROPOSED LOAN Just&fication of the Project 18. A detailed appraisal of the Project (T.0.66a) is attached as Appendix IV. 19. The machinery imported under Loan 18 CO enabled Colombia to expand the area under cultivation, to increase the yield per unit of cultivated areas, and to reduce costs of agricultural production. 20. Despite the progress made, costs of agricultural production are high and increases in agricultural output have not kept pace with the growth in demand. Colombia needs to continue to expand the mechanization of its agriculture in order to maintain and accelerate the rate of agricultural development. 21. The resources of machinery dealers, supplemented by the local and foreign credits they can obtain should be adequate to finance the importa- tion of tractors and equipment needed annually to replace machines now in use as they wear out. The proposed loan would finance the additional imports of tractors and implements needed during 1955 and 1956 to permit the mechanization of agriculture to continue to increase at approximately its current rate. M4ethod of Procurement and Distribution 22.. The machinery to be purchased with the proceeds of the Loan would be imported by the Caja on request and behalf of established distributors of agricultural equipment, who would sell the machinery through regular channels to farmers or others engaged in agriculture. Under terms of the Caja's agreements with distributors, the Caja would retain ownership of the machinery until it has been sold but if the machinery has not been sold after one year, the distributor would purchase it from the Caja. The distributor's mark-up would be limited to provide a reasonable price to the buyer, a fair return to the distributor, and a percentage to the Caja to cover administrative expenses. Economic Situation 23. A detailed report on The Economy of Colombia (VW'.H.33a) was dis- tributed to the Executive Directors on November 4, 1954. This report  pointed out that the Colombian economy had made great strides in recent years as shown by the rise in agricultural and industrial output, the rate of investment, the increasing volume of exports and anaccumulation of foreign reserves. Although coffee prices had risen sharply, official regulations restricting bank credit had helped control what might have been a highly inflationary situation. In the past few years, all government expenditures, including capital expenditures, have been met from current revenues and public finance has not generally added to inflationary pressuref 24. The report also mentioned the fall in the spot price of Manizales coffee in August 1950 to just over 70 cents a pound from a peak in March 1950 of 91 cents, and took into account further reductions. The fall in coffee prices in August was responsible for a drastic decline in coffee exports because of exporters' expectations (which have proved to be correct) that lower prices would be followed by a reduction in the amount of exchange they must surrender to the Central Bank. On the other hand imports, inflated by demand from large incormes of the preceding months, remained high and foreign reserves declined by $20 million in August and $41 million in September. 25. The Colombian Government reacted promptly to the new situation. In mid-October it took a series of measures calculated to restrict imports, stimulate coffee exports and counteract the deflationary effect of reduced exchange earnings. Import taxes and advance deposits by importers were greatly increased while the amount of dollars which coffee exporters must surrender to the Central Bank was reduced. Reserve requirements on bank deposits were lowered, but banks were asked to institute selective credit controls with the objective of diverting bank loans from the financing of unnecessary imports and speculative activities toward more productive uses. While the success of these measures will in part depend on the effectiveness with which the banks carry out these controls, the promptness with which Colombian authorities have acted to check the drain on foreign reserves, as well as the relative stringency of the measures adopted to restrict imports, is an encouraging sign. Latest reports indicate that coffee exports have again increased and that Colombia's foreign reserves remain adequate to meet foreseeable contingencies. 26. The conclusion of the economic report, which remains unchanged by recent events, is that on the basis of its natural resources and the progrest already made, Colombia's prospects for further economic advance are good. The report also pointed out that Colombia's external debt is not excessive, on reasonable export assumptions, and that it would be justifiable for a country with the economic record and prospects of Colombia to assume a greater burden of external debt. Political Situation 27. In August, 1954, the Constituent Assembly elected Lieutenant-General Rojas Pinilla, who had assumed power a year before in the name of Colombia's  -6- armed forces, as President of the Republic for a four-year term. The cabinet appointed by the President was composed solely of members of the Conservative Party, which was the party in power immediately before General Pinilla came into power. In recent weeks, however, the President has indicated that he intends to include members of the Liberal Party in national agencies concerned with economic matters. Although the state of siege continues, the country is now more tranquil politically than it has been for years. Prospects of Fulfillment of Obligations 28. The Caja has a long and consistently good record of service to Colombian farmers. Its management is competent and has demonstrated its ability to handle projects like the agricultural mechanization program in an efficient and business-like way. The financial position of the Caja is sound. It should have no difficulty in providing the local currency needed, at preseni exchange rates, to purchase the amounts of foreign exchange needed to service the Loan, and these amounts should be within Colombia's capacity to provide. PART IV - COUPLIANCE WITH ARTICLES OF AGREEIHENT 29. I am satisfied that the proposed loan would comply with the requirements of the Articles of Agreement of the Bank. PART V - RECOISgENDATION 30. I recommend that the Bank make to the Caja de Credito Agrario Industrial y Minero, with the guarantee of the Republic of Colombia, a loan of $5 million, or the equivalent thereof in other currencies, for a term of seven years, with interest (including commission) at the rate of 4 1/4% per annum, and on such other terms as are specified in the draft Loan and Guarantee Agreements attached herewith as Appendix I and II, respectively. Eugene R. Black Washington December 9, 1954*