Colombia's external public debt history

1<*4 oERM122 IINTETATIONAL BANK FOR PiRCONSTRUCTION AND D A Economic Department COLOMIBIA 'S EMXRNIAL PUTBLIC DEBT HISTIW Foreign Investments 'PREPARED BY: James J. Lyrnch APPROVE.D BY: Paul D. Dickens . , . i.  Colombia's External Public Debt History Summary I. Historical Review of External Borrowing II. Purposes for Which External Loans Were Issued III. Causes of Default IV. Course of Default and Factors Involved V. Final Adjustment of External Debt Settlement of Dollar Pebt Settlement of Sterling Debt Settlements Pending VI. Outstanding External Debt and Estimated Service Charges VII, Debt Service in the Balance of Payments Appendix  During the 19th century Colombia's debt record was marked by a ,series of defaults and adjustments. However, after a settlement in 1905, all service payments were regularly met until 1931. Colombia defaulted on the interest and sinking fund of all its external debts between October 1931 and October 1933. These defaults were brought about by the overborrowing of the 1927-1929 period, the world-wide depression, a flight of capital with consequent depletion of the country's gold and foreign exchange holdings and, finally, hostilities with Peru which required substantial foreign expenditures. Colombia did not make any final settlement of its external funded debt until 1941 when it offered 3% bonds, due 1970, par for par in ex- change for outstanding national dollar issues, with approxAimately 50o of interest arrears funded in the same bonds. The same offer was made to holders of national sterling issues in January 1944. The debts of the mortgage banks and of two municipalities were settled in similar manner. Final details are now being worked out on a plan to settle the remaining departmental and municipal debt by issuing, par for par, 3% 30-year national government bonds with arrears of interest funded at 24o of par. By the end of 1949 Colombia will have an external debt of ap- proximately U.S. $193 million. The major portion of this debt will be made up of publicly-held external dollar obligations which, it is estimated, will be outstanding in the magnitude of $153 million. Export-Import Bank loans amount to about $31 million. Most of the re- mainder is accounted for by debts in sterling ecuivalent to U.S. $8,683,000. It is estimated that total interest and amortization payments on the external debt will amount to $10,715,000 for the year 1949. With the exception of L114,o00 payable in pounds sterling (equivalent to U.S. $460,000), the service payments are required in U.S. dollars. The major portion of these interest and amortization payments, or U.S. $5,957,000, is due on the external privately-held dollar debt. Another large item is the interest and amortization payments on the Export-Import Bank loans which will amount to about U.S. $4,127,000 in 1949. Funds for payment on the external debt and other service items normally come from capital imports and a favourable trade balance. Colombia's usual favorable trade balance with the rest of the world shifted to unfavourable in 1945. The excess of merchandise imports, which amounted to some $20 million in that year, increased to $29 million in 1946 and $86 million in 1947. In order to make the required payments of interest and amortization on the external debt and income payments on foreign direct investments  in the next few years, Colombia will have to have an excess of receipts from foreign trade and miscellaneous services, net new investments of foreign capital, or a combination of the two, totalling around $30 to $40 million each year. That is about the size of the balance in the early 'thirties, when strict import controls were in effect, and in the war years, 1942-1944. The service of the external bonded debt alone requires around $10 to $11 million of this total. Direct investment income requires about the same amount. The gold and foreign exchange reserves are sufficient for normal currency coverage and turnover but would not take care of a substantial or continued deficit.  I, H.istorical Review of External Borrowing Colombia has been a borrower in international capital markets for more than 125 years. Until 1927 the amount Colombia borrowed abroad had been moderate but from 1927 through 1929 the borrowing increased rapidly, primarily to secure funds for the construction of railroads and other public works which had been neglected during the period when foreign loans were limited. From 1930 through 1948 Colombia did not sell any long-term securities in foreign countries but borrowed direct- ly from the United States Government, through the Export-mport Bank, during the latter half of the period. From 1821 to 1905 Colombia underwent a series of partial defaults and adjustments on its external debt. In 1905 a final settlement was reached covering future service payments. From that time through 1930, with the exception of a few tardy interest remittances in 1915, Colombia faithfully maintained service on all its obligations. In 1931 Colombia defaulted on its external departmental and municipal debt. This default has not been adjusted to date but a plan for resumption of service on these obligations has been approved and is expected to be put into operation in the very near future. In 1933 Colombia defaulted on its external national debt and from that time made only partial payments on these issues until 1941, when this debt was permanently readjusted. II. Purposes for Which External Loans Were issued The main purposes of the external loans were: building of highways and railroads, purchase and construction of public u-iS'ities, improve- ment of rivers and harbors, paving of streets, erectioa of public buildings, refunding of loans contracted at high interest rates and public health sanitation. Criticism has been levelled against many of these projects on the grounds that they were undertaken without mature, comprehensive plan- ning. It has been alleged, in particular, that there was a lack of concentration on enterprises promising the surest economic returns and that there was too much duplication of railroads and highways. In addition, the usual assertions of "inefficiency, waste or graft" have been made. 2I In the light of developments after 1929, it is clear that insufficient thought was given to the purposes of the loans from the standpoint of generating foreign exchange to meet future service pay- ments. (For details of the loans issued, see Appendix I.) III.Causes of Default The major defaults of 1931 and 1933 were due to overborrowin6, the world-wide depression, the flight of capital from Colombia, payments on l/ J. Fred Ripply, The Capitalists and Colombia, page 167.  other current transactions and, finally, hostilities with Peru. These are discussed below in detail. Because of the heavy increase in foreign borrowing by the central goverNment and its various departments and municipalities during 1927 and 1928, the total external debt of Colombia had risen sharply by the end of 1928 to about U.S. $200 million, as compared to the total ex- ternal debt in 1923 of approximately U.S. $23 million. This led to the national government passing a law on June 5, 1928, limiting the bor- rowing capacity of the departments and municipalities and requiring that all future external loans be reviewed and approved by the central government. The law contained various provisions to limit borrowing except for productive purposes and to only those departments and muni- cipalities which appeared to be in a position to meet the debt service without any major difficulties. However, the law came too late. The balance of payments of Colombia for the years 1923-1927 / offer a partial explanation of the country's position at that time. The principal items on the credit side were the proceeds from loans and direct investments made by foreigners in Colombia, while on the debit side the service of the public and private debts was the largest item. In only one of those five years did Colombia have a substantial e-port surplus -- in three of the years imports were in excess of exports. There was also an excess of payments over receipts from services, even if the large net payments of interest, dividends and amortization of foreign investments are excluded. The difficult position that Colombia was getting into by the end of the 'twenties and early 'thirties is shown in a study made by a banking grou4p which had granted a series of short-term credits to Colombia. / This study brings to light the fact that total debits (mainly brought about by required interest and amortization payments on external debt) amounted to around 51-1/2 million pesos, ws.hereas the net favorable merchandising balance amounted to only 25-1/2 million pesos for the year 1931. Some inflow of new foreign capital investments, estimated at 9,300,000 pesos, offset part of the gap. Gold shipments of 16,700,000 pesos were necessary to offset the remaining portion of the gap between total debits and credits. It can be seen that the increase in the external public debt which took place in the 'twenties (as shown in Table I), the restricted amount of funds available due to the decline in exports and the high payments due on the current transactions, all tended to bring about the default on part of the external debt in 1931 and complete default in 1933. ZI Institute of International Finance, Credit Position of Colombia, Bulletin No..25, May 25, 1929, page 16. g/ Institute of International Finance, Bulletin No. 53, July 8, 1932, page 10.  -3. -Table I External Debt of Colombia (in thousand pesos) End -Depart- Muni- Mortgage of: National mental cipal Banks Total 1923 21,085 -- 3,000 -- 24,o85 1926 14,501 27,132 12,939 8,921 63,493 1929 70,295 66,186 24,o98 53,221 213,800 1930 68,o56 61,417 23,996 51,682 2C8,151 1931 64,071 63,052 23,361 48,563 199,047 Note: The rate of exchange for the peso and the U.S. dollar ranged from about $0.95 in 1923 to $o.996 in 1931. Source: Institute of International Finance, Bulletin No. 53, July 8,1932, page 10. The year 1931 was a particularly difficult one for Colombia. In addition to other unfavorable factors, the abrupt cancellation of long- standing credit lines granted to Colombia's banks by many foreign com- mercial banks injected an element of fear into Colombian financial circles and caused a serious flight of capital from the coumtry. This resulted in heavy shipments of gold with a corresponding contraction of currency and made it practically impossible for Colombia, despite a large export surplus, to balance its international accounts. In September 1931, when the decrease in the gold reserves of the Central Bank threatened to reduce too greatly the currency in circula- tion, it became evident that drastic measures to conserve the gold supply and to stem the flight of capital would have to be adopted. These measures took the form of a vital embargo on all but the most urgently needed imports and a rigid control and restriction of foreign exchange transactions. When these exchange restrictions were imposed, it was the declared intention of the government not only to continue to pay in full the service on its ow.n external debt but also to permit the de- partments and municipalities to do likewise. Imports were, in fact, drastically reduced from U.S. $70 million in 1930 to U.S. $33 million In 1932 (see Appendix II). However, the government was faced with the alternative of restricting transfers of part of the external debt ser- vice or of further depleting the gold reserve, thereby destroying the stability of the currency. It decided that a collapse of the currency would render impossible a continuation of the debt service and that, therefore, the lesser evil was to defer payments on part of the ex- ternal debt until the gold reserves of the country could again be re- stored. The indications of the magnitude of the decline in foreign ex- change holdings of the banks can be visualized when we realize that  4. from 1923 to the end of 1928 gold and foreign exchange holdings of the banks increased steadily to $63 million. From December 31, 1928, how- ever, reserves of the Central Bank declined until, on March 12, 1932, they amounted to less than $12 million (see Table II). The notes in circulation showed a corresponding contraction, decreasing from around U.S. $55 million on December 31, 1928 to U.S. $17 million on March 12, 1932, about 70%. Another factor in the final complete default by Colombia on its external debt was a conflict with Peru over Leticia. The purchase of war material abroad, plus increased war expenditures w-ithin the country, was a heavy drain on Colombia's resources. IThile hostilities ceased in May 1933 and a treaty of peace was signed in May 1934, sizeable expendi- tures for defense purposes were made even as laate as the first six months of 1934, with approximately 18 million pesos budgeted for that period. An additional factor, which became increasingly important, was the difficulty in accumulati.ng the necessary local currency due to the de- preciation of the peso. If the full external debt service had been paid in 1934, it would have absorbed 33% of the total estimated original revenue for the year. IV. Course of Default and Factors Involved In 1931 Colombia defaulted on all external departmental and muni- cipal debts. Effective January 1, 1932, the national governiment ceased to transfer funds for amortization of external debt but met requirements up to July 1, 1933 by surrendering bonds for cancellation. One-third of the interest payments from July 1, 1933 to January 1, 1934 on the national issues was made in cash and the balance in scrip. Interest coupons maturing between January 1, 1934 and January 1, 1935 were paid in 4% funding certificates due January 1, 1946. No further payments were made to December 31, 1939 except on the scrip, which was paid off in 1937, and on the 4% funding certificates, on which full interest and amortization payments were regularly made. Interest pamyents were re- sumed in 1940 on tlfo C% national dollar loans of 1927 and 1928 at rates of 3% per annum. By 1934 the total annual service requirements on the outstanding external funded debt of the national government, departments, munici- palities and pri&rate mortgage banks amounted to around U.S. $18,500,000 of which $2 million was payable in pounds sterling. The Minister of Finance of Colombia in Msy 1934 published an estimate of the balance of payments for that year, indicating a possible surplus of $4 million. However, interest on the external debt was estimated at only $2.7 million. The Institute of International Finance indicated that the surplus of the balance of payments would likely be in the magnitude of U.S. $8 to $12 million, indicating that materially higher payments could have been made on the external debts. While some improvement took place in the availability of f'oreign exchange in 1935 and 1936, the Colombian Government ceased to issue scrip for interest due January 1, 1935 and, after that time, failed to  make any cash payments except on the scrip, as discussed above. Further- more, they did not include any provisions for service of the external debt in the 1935 and 1936 budgets. From 1935 through 1941 only $2.5 mil- lion was paid on the external debt service as contrasted to the old con- tractual requirements of $133 million. The balance of trade, while favorable for most of the years, was favorable only to a relatively small amount and was insufficient to meet requirements for external debt pay- ments. Data relative to the ability of Colombia to pay on its exte mnal bond obligations are shown in Table II. Table II Trade Balance, Gold and Foreign Exchange Holdings and External Debt Payments (in millions of U.S. dollars) Gold Debt Service, Contractual, and Adjusted and Paid Foreign Revised Year Trade A! Exchange Estimated Basis Actual End Balance Holdings Original Under Amounts of Bank Contractual Debt Ad- Paid in of Basis justment" Cash Colombia Plans 1929 -14.2 37 18,0 18.0 18.0 1930 42.7 27 18.0 18.0 18.0 1931 52.3 14 18.0 18.0 5.0 1932 62.8 17 18.0 18.0 5.0 1933 14.3 13 18.0 18.0 / 1.5 3/ 1934 33.4 10 18.5 18.5 4 - 1935 13.0 18 18.5 18.5 - 1936 13.3 27 18.5 18.5 - 1937 8.2 21 18.5 18.5 - 1938 2.2 27 19.8 19.8 0.1 1939 -3.6 26 19.0 19.0 0.1 1940 11.2 27 19.0 19.0 1.4 1941 3.5 24 19.0 19.0 0.8 1942 49.6 63 19.0 19.0 1.2 1943 41.2 115 19.0 16.o 1.3 1944 30.1 160 19.0 16.0 1.3 1945 -20.0 180 19.0 16.0 1.3 1946 -28.9 180 19.0 16.0 1.3 1947 -86.4 115 19.0 16.0 1.3 A! Includes gold. g/ Excludes some small payments on sterling bonds. 3/ Interest on national issues paid (U.S. $1.5 million) one- third in cash and two-thirds in non-interest bearing scrip due October 1937. gj/ Interest on national issues paid in 4% scrip which was paid off when due, January 1, 1946.  6. Sources: International Monetary Fund Bulletin No. 7 and Colombian country book; Institute of International Finance, Bul- letins Nos. 25 and 73. In the year 1942 there was a major jump in the trade balance, which was favcrable to the extent of around $50 million. During 1943 and 1944 favorable balances existed of $41 million and $30 million respec- tively. During this period Colombia put into effect three re-adjust- ing plans on their external debt. It is clear that, at this time, when gold and foreign exchange holdings increased by $136 million, materially higher interest and amortization payments could have been made on the external debt of Colombia. From 1945 through 1947 the huge amount of imports brought about an unfavorable balance of trade of $20 million in 1945, rising to the all- time high level of $86 million by 1947. Reflecting this unfavorable trade balance, gold and foreign exchange reserves declined from $180 million in 1946 to $115 million in 1947. It must be kept in mind that the funds from the trade balances are not all available to Colombia since a portion of the exports, mainly from oil and bananas, is controlled by foreign companies and Colombia receives only part of the foreign exchange from their sale. V. Final Adjustment of the External Debt of Colombia Since the major defaults in 1931 and 1933, Colombia has adopted a number of measures for adjustment of its national external debt and is soon to put into operation a plan for adjustment on the debt of its political sub-divisions. Debt plans were designed to reduce payments on all external funded public debt. These plans are discussed in detail below. Settlement of Dollar Debt. In 1941 Colombia took the first major step towards a permanent readjustment of its default status on the ex- ternal debt. On June 5 of that year the Republic offered US. $50 mil- lion of external sinking fund 3% bonds due October 1, 1970 in exchenge for outstanding external sinking fund 6's of 1927 due January 1, 1961 and 6's of 1928 due October 1, 1961. These bonds were exchanged on a par for par basis. Convertible certificates for half of the interest arrears were also paid. The same 3% bonds were offered on June 25, 1942 to the holders of the 6% and 7p Agricultural Mortgage Bank bonds guaranteed by the Colombian Government, with convertible certificates of $100 per interest arrears of approximately 7-1/2 years, ranging from $447 to $540 on each $1,000 bond. At the same time, holders of seven issues of non-guaranteed mortgage bonds -- Bank of Colombia, Mortgage Bank of Bogota and Mortgage Bank of Colombia -- were offered the same 3%/o bonds and convertible cer- tificates for 75% of the face amount with 10 to 10-1/2 years' interest arrears cancelled. While the Mortgage Bank bonds, guaranteed and non- guaranteed, were not being serviced either as to interest or sinking fund, more than 50% were reported as repatriated. On NIovember 15, 1944  7- these same 3% bonds, which had been further repurchased by the Colombian authorities, were offered, with coupons detached from 1941 through 1944, to holders of 8% and 6-g% City of Bogota bonds, with cancellation of 13 years' past due interest amounting to $1,040 on each $1,000 8% bond and to $834.50 on each $1,Coo 6-1/2% bond. The exchange agent advised the Council of Foreign Bondholders that less than $2,800,000 Bogota bonds were in the hands of the public, indicating that, during the period when Bogota bonda were not being serviced, more than 60% were repatriated at very lowf prices. The City of Barranquilla had adjustad the default on its 8% bonds in 1939 by offering new 4% bonds due 1964 and by offering the new bonds in payment of 60% of the past due interest. Settlement of Sterling Debt. An agreement, concerning the direct sterling debt became operative in January 1944. Holders were offered 3% 30-year funding stock equal to 50% of interest arrears dating from 1935 to December 31, 1939 and 60% of interest arrears from January 1, 1940 to March 31, 1942. From April 1, 1942 interest was payable at one- half the old contractual rates. The sinking fund, operating from April 1, 1942, would repay all assented bonds and funding stock at par by 1972. The offer was applicable to all bonds of the following issues: 5% (Bogota-Sabana) Railway Loan of 1906; 6%o Gold Loan of 19l1; 6%o debt of 1913; 5% Gold Bonds of 1916 and.6% bonds of 1920. Holders of government-guaranteed Agricultural Mortgage Bank of Colombia 6-1/t2 sterling bonds received the following offer: arrears of interest for 7-1/2 years to April 1942 to be cancalled, interest from that date reduced to 3% anld final -redemption date exteaded from 1959 to 1972; bondholders to receive a cash bonus of 5% and cmmulative sinking fund to operate from April 1942. Settlements Pending. In September 1948 there still remained some U. S. $73 million 5/of departmental and municipkl debt on which no in- terest had been paid for fifteen years (about U.S. $75 million back interest). On December 22, 1947 a plan for paymonit of these obligations had been ratified by the Federal Congcess. This plan called for the is- suance by the original obligor of a 30.year bond, guaranteed as to in- terest, sinking fund and Drinjipal by the Colombian Government. The new bond would carry interest at the rate of 3% aind interest arrears, amoun- ting to more than fifteen years (about $1,000 per bond), would be settled by issuing $200 of new bonds per $1,000 bond. The plan also provided an annual sinking fund of 0.6% for the first five years and 1% thereafter, The federal law guaranteed foreign exchange for service of the new bonds and provided the establishment of the necessary budget credits with which to meet the obligations in the case of new defaults. Implementa- tion of this debt plan is still awaited and it is believed that final papers are now being drawn up for completion of the plan. Through official purchases and repatriation, the total amount of bonds subject to the plan reportedly has been reduced to $40 million principal amount still held by the public.  8. VI. Outstanding External Debt and Estimated Service Charges By the end of 1949, Colombia will have an external debt of approxi- mately $193 million. 2 The major portion of this debt will be made up of publicly-held external dollar obligations which, it is estimated, will be outstanding in the magnitude of $153 million. Export-Import Bank loans account for an estimated $31 million. Most of the remainder is accounted for by debts in sterling equivalent to $8,683,000. It is estimated that total interest and amortization payments on the external debt will amount to $10,715,000 for the year 194