Colombia - Current economic position and prospects

RETURN TO R E S T R I C T E D REPORTS DESK r WITHIN FIJLE COPY Report N o.WH-85a ONE WEEK This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT CURRENT ECONOMIC POSITION AND PROSPECTS OF COLOMBIA March 4, 1959 Department of Operations Western Hemisphere  CURRENCY EQUIVALENTS Effective Rate for Imports ( end of January 1959) U.S. $1 - 7.20 Pesos 1 Peso - $0.139 I million pesos - $139,000  TABLE OF CONTENTS Page No. BASIC DATA i SUTiARY AND CONCLUSIONS ii - iii I. INTRODUCTION 1 II. RECENT FINANCIAI. POLICIES 2 III. DOMIESTIC RESOUR(ES AVAILABLE FOR ECONOMIC DEVELOPIHENT 7 IV. COL01MBIA'S BALAIqCE OF PAYMENTS PROBLEM 12 V. CREDITWORTHINESS 19 APPENDIX I - Colombia's Land-use Decree 21 STATISTICAL APPENDIX Tables 1 - 14 inclusive  - i - BASIC DATA Area b39,825 square miles Population 13.5 million (1958 estimate) Gross National Proouct (1957) 14.1 billion pesos National Income 71937T 12.1 billion pesos Per capita Income (1957) about USC` 250 Origin of National Income (%) 1915 1957 Agriculture 38.7 37.9 Industry 12.2 16.14 Commerce and Transport 13.7 1a4.2 All other 35.7 31.5 Mlillion pesos Government Budget 1957 1958 Tax Revenue 1,174 1,650 Current Expenditures 818 1,050 Investment Ecxpenditures 424 450 Debt Amortization (net) 200 250 Millions of U.S. dollars Balance of Payments 1956 1957 1958 Exports 586 537 Imports 657 480 370 Services (net) -25 -20 -35 Current Account Balance -96 37 100 Net Long-term Cppital Receipts 27 27 10 Commercial Backlog (net) Debts 170 -110 -49 Gold and Foreign r.xchange Reserves (end of year) 144 156 170 Mlillions of U.S. dollars External Public Debt (January 1, 1959) 428.1 Suppliers' and Private Bank Credits 43.6 Credits contracted to settle Commercial Backlog 221.8 Long-term debt: IBRD 89.0 Other 73.7 Net reduction in total external debt during 1958 48.3  - ii - SUTMARY AND CONCLUSIONS 1. In the post-war decade Colombia has maintained a rapid pace of economic grovth. Concentrated efforts to improve and develop the trans- portation system are beginning to yield results in gradually bringing about integration of the Colombian economy. The slowly emerging economic integra- tion is providinga powerful stimulus for rapid industrial development. On the other hand, the development of agriculture has lagged behind that of manufacturing industry. However, agricultural development is now being accelerated by better utilization of land resources promoted by the Govern- men t. 2. The pace of economic growth slowed down drastically in the last two years. This was caused, in the first instance, by mismanagement of the balance of payments situation in 1955-56, which together with the decline in the value of coffee exports after 1956 made necessary drastic reductions in imports. In addition to experiencing a rapidly progressing inflation in 1956 and early 1957, the country accumulated a backlog of overdue foreign payments of approximately $370 million as of April 1957. The situation required that the new Government which assumed office in May 1957, take strong corrective measures. 3. Since June 1957, the Colombian Government has followed a policy of bringing domestic inflation under control, and of adjusting its imports to a greatly reduced level of foreign exchange resources. Measures have been taken to reduce the portion of the coffee surplus financed by the Government or the Central Bank to approximately one fourth. The Government's economy efforts have resulted in an excess in tax revenue over expenditures excluding debt amortization. Due primarily to a flexible exchange rate policy accom- panied by credit restrictions, imports have been greatly reduced. This has enabled Colombia to make a substantial reduction in external debt and to increase its gold and fore:ign exchange reserves. 4. The financial measares taken since June 1957 frankly recognize that Colombia's resources for development have been greatly reduced. In the years 1959-61 the scarcity of development resources is expected to continue and circumstances will not permit the relaxation of present monetary, fiscal and foreign exchange policies. 5. In t1w public sector, the National Government may be expected to main- tain the current account surplus at its present level in relation to Gross National Product. However, after meeting debt amortization payments, the Government will have only a relatively small amount left for non-inflationary financing of capital expenditures. This places new emphasis on the need for increasing Government tax revenue and for improving the selection and coordina- tion of public investment projects. 6. In the private sector, if further progress is to be made without substantially increasing the present level of investment, more economic use must be made of domestic resources than has occurred in recent years. This  - iii - process has already begun in some respects; for instance raw material and agricultural production are improving and new industrial investment is being shifted into fields where Colombia has sufficient raw materials of its own. On the basis of proFress made so far, it can be expected that Colombia will utilize its domestic resources to resume economic growth at a moderate pace. 7. In brief, despite Colombia's stabilization efforts its domestic and external financial position continues to be difficult. In the period ahead resources for development will continue at a greatly reduced level as a substantial coffee surplus will need to be financed and retained at home and service payments on external debt will continue at a high level. Foreign exchange earnings are expected to decline below last year's already low level as a result of the further weakening in the coffee market, even if a drastic reduction in coffee prices is averted. UJnder the circumstances greater efforts are necessary to curb domestic credit expansion and the Government will need to take steps to improve its tax revenue. On the other hand, Colombia's financial position has strengthened as the result of the drastic reduction in imports and the substantial repayment of external debt. Colombia's economy has also been strengthened by the rapid growzth in exnorts other than coffee and petroleum, including some manufactures, which has occurred in the past two years. The improvement in economic policies warrants the expectation that economic growth can be resumed at a moderate pace. Moreover, the Government intends to continue its present severe foreign exchange policy and it is expected that it will avoid any substantial increase in inports which would make impossible a sizeable net reduction of short and medium-term external debt over the next few years. Provided Colombia continues to make substantial repayments on its medium-term debt, it should be able to contract and service a moderate amount of new long-term debt for high priority development projects.  I. INTRTODUCTION 1. Colombia's terrain is sharply diviAed by high and extensive mountain ranges into separate plateaus and valleys, each with its own urban and economic center. Concentrated efforts to improve and develop the country's transportation system - highways, railroads and air transport - have constituted a substantial part of public investment during the postwar years, and are now beginning to yield results in bringing about integration of the Colombian economy. The slowly emerging economic integration is providing a powerful stimulus for rapid industrial development. Although most of Colombian man- ufacturing industry is heavily dependent upon inports, the country is now concentrating new industrial investment in fields wh.e:re it has ample raw materials of its own - a process which is lie y to be continued. Cormared with the rapid exDansion of manufacturing industry, agriculture has made only slow orogress over the past several years. There is evidence that agricultBural develonment is being enhanced by the land-use decree of 1957(See Appendix I) which is inducing the conversion of cattle land into crop land. 2. In the post-war decade (1946-1956) Colombia has maintained an irnpressive record of overall economic growrth - averaging more than 7% per annum. In the last two years there has, however, been a considerable slow-down in economic growth. In 1957 real gross national product declined somewhat and, in 1958 the increase in GNP was probably limited to a few percentage points. This slow-down was caused, in first instance, by mismanagemnent of the balance of payments situation in 1955-1956, which in addition to the decline in coffee exports, made necessary a drastic reduction in imports. This made a decline in the level of economic activity unavoidable. 3. Since June 1957 the Colombian government has taken measures to control domestic infion, finance the coffee surplus (arising from Colombia's particf-Oation in the Latin American Coffee Agreement), and to make the necessary adjustments in the balance of payments. As described in the last Fconomic Report (July 23, 1958) these measures brought about an improvement in Colombia's economic position in the second half of 1957 and early 1958. Since then the Government has continued to pursue cautious financial policies and, as discussed in Section II below, the economic position has improved further. Colombia's financial policies frankly recognize the fact that resources available for development have been greatly reduced by the fall in foreign exchange earnings, the repaying of the commercial backlog debt and the financing of the coffee surplus. This decline in available resources will, for some years to come, limit the investments which can be undertaken in both the private and the public sectors - a problem considered in Section III. Section IV discusses Colombia's balance of payments problem in the light of the possible further decline in coffee earnings and the heavy schedule of external debt repnyment during the next few years, and the implications which this has for the level of Colombia's foreign exchange resources available for imports. Section V concludes with an appraisal of Colombia's creditworthiness.  II. RECThT FITN,TANCIAL POLICIFS L. Since June, 1957 the Governmnent's financial policies have been (directed at bringing domestic inflation under control and restoring balance to the country's foreign exchange position. In 1957 the military government was renlaced by an interim government leading the way to a newq constitutional government which assumed office in August 1958. On taking office the interim government was faced with a very difficult economic problem. Domestic inflation was proceeding raT)idly as a result of unrestricted credit expansion and a large budget deficit. In 1956 and the first half of 1957 the money supply increased at a rate of 25% per annum. The foreign exchange system, based on an unrealistic fixed rate, was badly organized and did not restrain the import demand which increased as a result of domestic monetary expansion. The country had built up a commercial backlog debt estirated at "370 million in April 1957. The repayment of this debt was made difficult by the anticipated decline in coffee e:xoort earnings. 5. In June 1957 the government began to cope with the precarious domestic economic and external financial situation by a series of drastic measures in the foreign exchange, monetary and fiscal fields. 6. An essentia'l step toward improving Colombia's foreign exchange position was taken when in June 1957 the unrealistic fixed rate of 2.50 pesos pDer dollar was eliminated and all transactions were permitted at a free exchange rate. Since then the government has pursued a flexible exchange rate policy, supported by tight credit conditions and, to a lesser extent, by d;rect import controls. After fluctuating between 4.8 And 6.10 pesos per dollar between June 1957 and 11arch 1958, in April, 15P the export rate was fixed at 6.10 pesos per dollar (the present level) and, at the same time, the import rate became determined at auctions in which the Central Bank is the sole supi)lier (the auction rate hqs ranged from 6.80 in liay 1958 to 6.40 pesos Der dollar at present). 7. fls a result of these foreign exchange measures the balance of payments deficit of 1956 was converted into a substantial surplus in 1957 and 1958 despite the decline in foreign exchange earnings. In fact as a result of the drastic import reduction the balance of paynen surplus in 1958 was considerably higher than the surplus in 1957. The surplus has enabled Colombia to reruce the commercial backlog debt which the Government assumed as a result of the refinancing of the private commercial debts outstanding in early 1957. The backlog debt was reduced by about P'160 million in 1957 and 1958 and gold and foreign exchange reserves increased by r26 million.  - 3 - Sunmiary of Balance of Payments (millions of dollars) 1956 1957 1958 Exports 586 537 505 Imports 657 h8o 370 Balance of "Invisible" Payments -25 -20 -35 Current Account Balance -96 37 100 Change in Commercial Backlog Debts fl70 -110 -49 Change in Gold and Foreign Thcchange Reserves - 4 12 1.9 Note: The change in commercial backlog debt in 1957 and 1958 are cash repayments to foreign banks and suppliers plus net amortization of credits contracted to refinance the backlog (1957) and to finance essential imports (1958). Debt repay-ment in 1957 exceeded that in 1958 even though the balance of payments surolus was higher in 1958; the difference is largely due to the resumption of norrmal commercial credit relations and other factors causing a very substantial capital inflow in 1957 (see Table 11). 8. The foreign exchange measures could not have had such considerable impact had not the Central Bank reversed its domestic monetary policies. Starting in July 1957, the rediscount quotas of commercial banks in the Central Bank were reduced and their reserve requirements were increased. These measures were reinforced by the domestic effects of the backlog settlement. In the course of 1957 importers were required to pay the peso counterpart of the overdue foreign payrents. The corresponding transfer of some Ps800 million to the Central Bank had a powerful contractionary impact. Moreover, in September 1957 inporters were required to make advance deposits for 100% of the value of all inmort orders (except for a few essential items for which the advance deposit is limited to 20%). These rmeasures were intensified during the Spring of 1958 by further lowering the commercial bank rediscount quotas, increasing their reserve requirements and the rediscount rates, and by lengthening the period during which import deposits are frozen. The result has been a sharp reduction in the expansion of bank credit during 1957 and 1958. cxpansion of Barnk Credit Percentage increase in Credit 1956 1957 1958 Commercial Banks 22 5 7 Government Banks 19 9 9 Change in Central Bark credit to All other Banks (net) (mill. pesos) -11 220 -86 9. Colombiats stabilization effort will not be complete until it succeeds in financing all or most of the coffee surplus accumulated under the Latin American Coffee Agreement in a non-inflationary manner. The surplus amounts to more than 2 million bags per annum  - h - in 1958 and 1959, equivalent to about 644 million pesos (or 20% of the money supply) in the year ending September 1958, and 420 million pesos in the year ending September 1959. Prior to April 1958 all of the export surplus was financed by the Central Bank. Since then, howiever, the proportion financed by the Central Bank has been reduced considerably as a result of two new measures. Exporters were required to retain, without compensation, a certain proportion -- at present 22% -- of their shipments. Secondly, the exchange profit which the Central Bank makes on the spread betw7een the 6.10 export rate and the auction rate for imports, is uced frr the financing of the coffee surplus. These measures came in addition to the 15% coffee export tax wphich had been in effect since June 1957, the proceeds of which are used for the servicing of the commercial backlog debt. Thus during April - September 1958, 720,000 bags of the 1.24 million bag export surplus were financed in a non-inflationary manner and the rest either directly by the Central Bank or by Government credits rediscounted with the Central Bank. 10. For the current coffee marketing year it is expected that exports will be about the same as in the previous year (5.3 million bags) and that the present coffee financing measures will continue. The retention in kind and the financing with exchange profits are expected to cover approAimately 1.5 million bags of the 2.1 million bag export surplus. The rest will be finaiced by the Government with the counterpart funds of the Export-Import Bank credit. ($78 million granted in May 1958 to finance essential imports). Financing of Coffee Surplus Million Bags Million Pesos October 1957 - March 1958: Central Bank 0.95 265 April 1958 - September 1958: Retention in kind o.46 140 Exchange Profit 0.26 80 Central Bank 0.36 109 Government Credit 0.16 50 2.19 644 October 1958 - September 1959: Retention in kind 1018 270 Exchange Profit 0.35 80 Government Credits 0.57 130 2,10 480  - 5 - 11. In addition to the above measures the Government reversed the budget deficit trend of 1955 and 1956. It was able to maintain its revenue position by raising new taxes -- notably the 15% export tax introduced in 1957. Secondly, the Government kept the increase in its expenditures below the increase in the domestic price level, thereby bringing about a considerable reduction in expenditures as a percentage of GNP (namely from 11% in 1955 to less than 9% in 1958). As discussed in more detail in the next section, the expenditure items which suffered most in the Government's economy efforts were capital outlays which during 1956-1958 remained roughly o nstant despite the 50-60% rise in domestic costs aid prices. As a result of these efforts the budget was changed into a substantial surplus of revenue over expenditures excluding debt amortization. Government Budget Position 1955 1956 1957 1958 Tax revenue 1132 1138 144o 1650 Expenditures 1273 1220 12h2 1500 Current 701 780 818 1050 Investment 572 440 424 45o Balance -141 -82 198 150 As a % of Gross National Product: Expenditures 11 1 9.6 8.9 8,6 Tax Revenue 9.9 9e0 10.2 9.4 12. The above data on Government expenditures do not include amortization on ordinary internal and external debt and service payments on the backlog credits. While ordinary debt amortization is approximately offset by new capital receipts this is not the case with the backlog credits. Direct payments on the backlog and net service on backlog credits were equivalent to approximately 250 million pesos in 1958 (after deducting disbursements on the credits received from the U.S. Government and commercial banks to help in the settlement of the backlog). As can be seen from the above table about 150 million pesos of this was covered by tax resources. The remaining 100 million pesos (about 3% of the money supply) was financed by the Central Bank. Present Position 13. In the last two years Colombia has taken several measures as a result of which tax revenue now exceeds expenditures (excluding debt amortization), about three-fourths of the coffee export surplus is retained without Central Bank support, and the rate of bank credit expansion has slowed down considerably. Moreover, Colombia has achieved a balance of payments surplus, which has made possible an increase in gold and foreign exchange reserves and a substantial reduction in the commercial backlog debt (after allowing for disbursements of credits from the U.S. Gorernment and commercial banks).  - 6 - 1. Despite the stabilization measures there are still considerable inflationary pressures in the economy. In 1958 the money supply increased by 21% (compared with 13, in 1957). This was caused primarily by Central Bank credits to the private sector, mainly for coffee financing, and by the Central Bank financing of the Government sector, 15. Thus while the Government has taken firm measures to cope with the coffee surplus, reduce imports and slow down credit expansion, the pace of inflation last year was still high. In 1959 and 1960 Colombia's two most important financial problems will continue, namely those arising from the substantial coffee surplus and the high external debt service. Under these circumstances the Goverrment cannot relax its present stabilization policy and further steps are necessary to curb the expansion of domestic credit and to eliminate inflationary financing of Government expenditures. In particular, in view of the low level of resources available for public development expenditures, the Government will need to take steps to improve its tax revenue.  - 7 - III. DOMESTIC RESOURCES AVAIIABLE FOR ECONOMIC DEVELOPMENT 16. The decline in coffee exports, Colombia's principal foreign exchange earner, and the rapid repaying of external debts, have greatly reduced the resources available for new investment. In terms of foreign exchange resources this means that Colombia can purchase far less machin- ery than in previous years to expand its manufacturing facilities and to increase its stock of transportation equipment and agricultural imple- ments. In terms of domestic resources it means that to maintain stab- ility, Government expenditures and bank credit have to be curtailed in order to make room for the financing of the coffee surplus. Over the past two years while Colombia has made progress in adjusting itself to a lower level of available resources, there has been little, if any, increase in total national output. It is expected that over the years immediately ahead the scarcity of development resources will continue. Nevertheless, Colombia has the domestic potentials to resume its econ- omic growth at a moderate pace. This will, however, require that in both the private and the public sector, economic use be made of the greatly reduced rescurces available. The Private Sector 17. In the private sector the most marked contraction has taken place in the construction industry, usually heavily dependent upon imported materials and domestic credit. Some unemployment has devel- oped in this industry. lNew investment in manufacturing industry has also been curtailed drastically. This has been brought about by in- dustry's lack of financial resources as well as the restrictions on capital goods imports. Ivianufacturing profits have been reduced because on the one hand raw materials must be purchased at a sharply depreciated rate (6.40 pesos per dollar plus 10% tax compared with 2.50 pesos per dollar previously), while on the other hand prices of finished mar:facture~ have r.t risen to the sa. extent. At the same tirme that creeit has hecome hardlier to get, new machinery - if obtainable at all - has also Decome more ex- pensive in terms of pesos. Similar factors are operating in transportatioi (e.g. trucking) and agriculture, (although in the latter a somewhat more liberal credit policy is pursued). Both because of the increased peso price of imported machinery and the scarcity of credit most business- men and farmers are going slow with purchasing new machinery even if they can obtain a license. 18. Despite the general slow-down in economic activity, several sectors have been able to register production increases in the last two years. Manufacturing production continued to rise, partly because new plants came into operation (using machinery ordered in 1956 or earlier), and also because factories are making better use of existing facilities. In the past years new manufacturing facilities relied heavily on im- ported raw materials, partly as a result of differential exchange rate Dolicies. Under the present circumstances of foreign exchange scarcity  Colombia can ill afford to increase its dependence on raw material imports. Further progress will be possible in manufacturing pro- duction (and consequently in the substitution of imports of finished products) provided new investments are concentrated in fields where Colombia has sufficient raw materials of its own. To some extent, this is already taking place, as a result partly of improving dom- estic raw material production, and partly of the present import licensing policy which permits new machinery imports only if the manufacturer can demonstrate ample domestic raw materials supplies. 19. In agriculture, production went up in 1958 despite drought conditions in several parts of the country. A start has been made with the conversion of cattle land into crop land under the incentives provided by the land-use decree of 1957. This has benefited in particular the production of barley and cotton. However, considerable scope still exists for further improvements in the utilization of Colombia's agricultural resources. The land-use decree has hardly begun to be applied even in the more developed regions of the country such as the Sabana of E3ogota and the Cauca Valley. Provided the Government continues tC) promote better utilization of land resources, agricultural production can be expected to increase more rapidly than in the past several years. The Public Sector 20. In the public sector resources available for investment have also declined. The National Government accounts for approximately 60% of total public investment, the rest being equally divided between the Departments and the large municipalities. In the past four years the National Government's "savings", i.e. tax revenue not used for current expenditures, hlave been maintained at about 3.5% of GNP, (except for a temporary decline in 1956). This has been possible as a result of new taxes enabling government revenue to keep abreast of the rises in prices and domestic product. In addition the Government has prevented any increase in current expenditures (in relation to GNP) despite the doubling of the interest burden caused by devaluation of the peso and the increase in outlays for education following the 1957 constitutional amendment requiring educational expenditures to be maintained at 10% of total. 21. However, in 1957 and 1958 not all of government savings were available for investment expenditures. As part of the commercial backlog settlement the Government (together with the Central Bank) has assumed large medium-term debts. The servicing of these debts represents a heavy claim against the Government's resources. In con- sidering the resources which the Government has available for non- inflationary financing of investment, these debt service payments should, therefore, be deducted from government savings. This greatly reduced resources available for investment, namely to about 2% of GNP in 1958, compared with 3.6% in 1955.  National Government Investment 1955-1958 (millions of pesos) 1955 1956 1957 1958 Government Savings 430 360 620 600 Service of backlog debt - - 200 250 hvailable for investment 430 360 420 350 Total investment 570 440 420 450 % of GNP 5.0 3.5 3.0 2.6 Roads & Railroads 270 240 250 250 Construction 140 80 60 50 Other 160 120 110 150 22. W,Jhen, in early 1957, the govern-ment began to adjust its invest- ments,to available resources it had to make sharp cuts in its various capital outlays. National Government investment was cut to less than 3% of GNP compared with 5S of GNP in 1955. This was achieved by eliminating several unessential nrojects. Over the past few years, total public construction (housing, public buildings and military projects) has de- clined in absolute terms. In addition, essential transportation invest- ment has been kept constant in terms of pesos even though prices rose by 50-60% during the period. Building of roads and railroads, highly essential for the country's development, were slowed down in all parts of the country. 23. In the years 1959-1961 it is possible that the government will maintain its "savings" (i.e. the surplus on current account) at the 1958 level, about 3.5% of GNP. The government may be expected to prevent current expenditures from rising in relation to GNP. Some economies in current outlays will probably result from the administrative reforms now being introduced. Tax revenue may also be exr:ected to remain at the present level in relatior to GNP. In recent years the Colombian govern- ment has maintained its revenue rosition by introducing nelr taxes, partic- ularly the 15% export tax O't coffee and bananas, and new revenue producint measures are currently under consideration. 24. Assuming that Gross National Product will increase at an averagt rate of 3-3.5% per annum, government savings may be projected to rise from apDroximately 600 million pesos last year to 720 million pesos in 1962 (in terms of 1958 prices).  - 10 - Projection of Government Resources for Investment (millions of pesos) 1958 1959 1960 1961 1962 Tax Revenues 1650 17140 1790 1840 1900 Current Expenditures 1050 1080 1110 1140 1180 "Savings" 600 660 680 700 720 Service of backlog debt j 250 330 300 2Q0 120 Available for Investment 350 330 380 410 600 % of GNP (as projected) 2.0 1.8 1.9 2.1 2.9 j After deducting disbursements from backlog credits from the U.S. Govern- ment and commercial banks in 1958 and 1959. 25. Even if the Government maintains its savings at their present level (in relation to GNTP), resources available for investment will con- tinue to be lowy during the next few years. Assuming no new balance of payments credits are contracted after June 1959 service payments on backlog credits will present a claim averaging 310 million pesos per year against Government savings in 1959-1961. On average this will leave about 370 million pesos per year, less than 2% of GNP, for investment expenditures. Only after 1961 when most of the existing backlog debts will have been re- paid, will the Government's resources for investment begin to approach once more 3 to 3.5% of GNP. 26. In 1959 the National Government's current account surplus is esti- mated at 660 million pesos. Service payments on backlog credits will amount to US$ 72 million or approximately 430 million pesos of which 330 million resos must be met with budget resources. This leaves 330 million pesos available for financing of investment. The Government is making a serious effort to keep its investment expenditures down in 1959. Capital expenditures for 1959 approved as of Decermber 1958, amounted to 390 million pesos. Although this is above available resources, it is con- siderably below 1958 capital outlays of 450 million pesos. 27. Although the scarcity of resources will place a serious strain on the Government's investment undertakings, it would seem unlikely that the Government will be able to keep investments much below last year's level. vINost unessential projects have already been eliminated as a result of the Government's economy efforts of the past two years. Moreover, some part of available resources will have to be set aside for the gradual rehabil- itation of areas which in past years have suffered greatly from civil strife. After allowing for such rehabilitation expenditures and for the continuation of transport investment projects currently in progress, the Government has little leeway left for new but essential projects. This places renewed emphasis on the need to irprove the screening of investment projects and to coordinate the investment efforts of the various different agencies in the National Government, Departments and  - U1 - the larger municipalities. Some progress may be made in this direction as a result of the work of the Planning Council and Department which have recently been instituted. 28. In addition to improving the utilization of its scarce invest.- ment resources, the Government needs to take steps to strengthen its revenue position. Total tax revenue of the public sector is relatively low, about 13% of Gross National Product (with the National Government accounting for 9-10% of GNP). On the other hand 45' of total tax revenue of the National Government is accounted for by direct taxes. The prominence of the income tax and the apparently adequate methods of collection assure the Government that over a longer period of time its revenue will at least keep abreast of national income as new groups of the population are added to the gradually gro'rirg income ax base. However, in the years immediately ahead the Government needs to do more than merely maintain its revenue in relation to Gross National Product. An increase o-^ about 150 million pesos per annum in Government resources - close to l1% cf GNP - is needed to place the Government; in a position to finance peso expenditures of essential investment needs in the next few years. To some extent the Government has already begun the process of increasing revenue. In 1959 a new customs tariff becomes effective *hich will absorb the 10% import tax and increase total lax levies on imports. The Government is also planning to make the personal income tax more progressive and to introduce certain improvements in incorporate profit taxes, but it is not certain that these reforms will bring higher yields. It would appear that in addition to these tax revisions the Government could increase its revenue from indirect taxes (other than inport and export taxes) which last year accounted for less than 5% of total tax revenue.  - 12 - IV. COI.OIIBIA'S BPT-ANCE OF PAYI'NTS PROBLEM Outlook for Iixport Earnjngs 29. The basic weakness of Colombia's balance of payments is its dependence on coffee, price prospects for which are poor in the next few years. In 1958 earnings from coffee exports accounted for 2/3 of total export earnings. In 1959 coffee earnings are likely to decline below the level of 1958. Coffee prices are expected to fall, averaging between 40 and 450 per pound, compared with L60 at present and an average of 500 last year. The volume of exports may also decline from 5.44 million bags last year to 5.3 million bags, which at the lower price level would yield only `300 million in 1959. In the subsequent several years it does not seem likely that coffee exports wTill recuperate significantly above the `300 million level, and they may in fact decline somewhat further. 30. It is possible that after the mid-1960's the world coffee market situation may improve somewhat. On this assumption Colombia's coffee export earnings may surpass the P300 million level after 1965 (5.5-6 million bags exports at a price of 4o-450 per pound). In 1970 or thereabout, export earnings from coffee may recover to "350-eUOo million, with the volur> amounting to 6.5-7 million bags and export prices of about L50. All this assumes, of course, that coffee producing countries, primarily Brazil and Colombia, will succeed Ln controlling the course of events on the world coffee market during the current downswing phase of the coffee cycle. 31. In the last two years Colombia has made considerable progress in increasing its minor exports. Since 1955 exports other than coffee and petroleum have rmore than doubled. This has been due primarily to reduction in domestic prices and costs in relation to thiose abroad. In the past two years, while the exchange rate applied to minor exports went up from 2.50 pesos per dollar to 6.0o pesos, the internal price level increased by only 51%, so that Colombia's prices expressed in dollars declined by 1o%. Export Tarnings 195L-1958 (Krillions of dollars) 1954 1955 1956 1957 1958 Coffee 550 489 481 391 360 Petroleum (net) 46 37 42 46 50 IMinor Exports 44 L6 63 100 95 Total 640 572 586 537 505 Indices (1956 = 100) Exchange rate for minor exports 2.50 2.50 2.50 5.00 6.4o Domestic price level 90 91 100 129 151  - 13 - 32. WThat are Colombia's so called minor exports? Prior to their recent increase most minor export earnings were accounted for by bananas and precious metals (See Tabl'e 12). The rest consisted of certain agri- cultural products some of which did not provide exnortable surpluses year after year. W!ith the exchange rate depreciation Cclombia began to export a broad variety of goods including manufactured products such as textiles and shoes, particularly to neighboring countries. Much of the newly expanded border trade took place outside regular channels to avoid fiscal and customs regulations. This trade benefitted Colombia by at least $40 million on net balance - necessarily a rough estimate because of the natur of the transactions. This may mark the start of the much needed export diversification, provided Colombia worl's out adequate agreements with her trading partners to permit relatively free trade. 33. The maintenance of a relatively low level of domestic prices is an essential condition for the continuation and increase of Colombia's minor exports. The country's rapidly growing domestic manufacturing in- dustry is proving that it can exrort considerable q.uantities of merchan- dise provided domestic cost levels are favorable. Colombia has recently introduced newr exchange rate regulations, permitting manufactured exports to be sold at the free rate of exchange and exempting them from export taxes_ The benefit which manufacturing industry may derive from these measures would, of course, be quickly dissipated should the domestic price level be nermitted to rise substantially in relation to the exchange rate. 34. The revitalization of Colombia?s agriculture may provide another source of higher foreign exchange earnings. As agricultural crop lands are inereased under the incentives provided by the 1957 land-use decree - and Colombia permits some of its scarce foreign exchange resources to be used fcr purchasing agricultural implements and other items necessary to improve yields, exports of some products may be increased and some crops may begin to exceed domestic consumption even two or three years from now. These items include sugar, rice, tobacco and sesame. By the mid-1960's - and provided proner steps are taken to coordinate new road construction with forestation measures - Colombia could becoi,e an exporter of timber and other wood products. 35. In the petroleum industry - Colombia's second biggest foreign exchange earner - foreign companies have stepped up their exploration activities in the last twro years. While the possibility of major dis- coveries should not be excluded, explorations are taking place under difficult geological conditions and it rould not be prudent to count on a major increase in oil exports during the next 5 to 10 years. It is ex- pected that oil production will be sufficient to provide for the increase in domestic requirements and to leave a slowly rising exportable surplus. 36. In summary the domestic cost level favors exportation of the products of Colombian manufacturing irdustry, and present government policy seeks to increase agricultural production. Prospects for oil  - 14 - production are moderately favorable since Colombia has established a relatively favorable investment climate for oil companies. Provided these conditions continue, exports other than coffee are likely to increase gradually. This wll tend to offset the weakness in coffee exports. As a result total foreign exchange earnings may increase gradually after reaching a low of $525 million in 1959 (See Table below). In 1965, after allowing for earnings from services, total foreign exchange earnings are expected to increase to 8570 million. After 1965, assuming some increase in coffee exports and assuming that Colombia's export diversification will gather momentum, total foreign exchange earnings could increase further to some 1670 miLlion by 1970. Projection of Foreign Exchange Earnings milTlions of dollars) 1958 1959 1965 1970 Coffee 360 300 315 370 Other exports 1U5 150 170 210 "Inviisible" Transactions / 75 75 85 90 Total 580 525 570 670 2/ Travel, transportation and insurance and miscellaneous services, The External Debt Burden and the Level of Imports 37. Of the reduced foreign exchange earnings a substantial part will have to be set asidle to service external debt in 1959-1961. The bulk of the debt service payments is accounted for by the credits contracted in 1957 and 1958 to settle the commercial backlog and to finance essential imports (called "backlog credits" in the table below). In 1959 total service payments amount to t'108.3 million or 21% of projected foreign exchange earnings. Of this amount ,72.3 million is represented by service on backlog credits, on which, however, ;39 million remains to be disbursed in 1959. I'iost of the backlog credits are scheduled to be repaid by 1961, after which year service on external debt falls rapidly. In 1962 debt service is equivalent to 7% of projected foreign exchange earnings.  - 15 - Service Payments on Txternal Debt (millions of dollars) Foreign Total Debt Ebcchange Debt Service Service as Year Earnings Total Long Private Backlog a % of Term Bank & Credits Foreign Debt Supplier Pxchange Credits Earnings 1958 580 131.4 18.9 20.8 91.6 22.7 1959 525 108.3 19.8 16.2 72.3 20.6 1960 535 79.9 18.4 10.7 50.8 14.9 1961 545 72.9 16.7 7.8 48.3 13.4 1962 555 39.1 1L.2 5.2 19.7 7.0 1963 560 35.3 14.2 3.0 18.1 6.3 1964 565 31.3 11.9 2.1 17.3 5.5 1965 570 29.2 11.1 1.5 16.6 5.1 Not including Colombia's repeyment obligations to the IMF, amounting to $30 million (see footnote to Table 2), but including the ahport-Import Bank credit of 1958. 38. As a result of the decline in foreign exchange earnings, the heavy debt repayment schedule and in the absence of new external financing, foreign exchnn-e resources available for current transactions during 1959-1961 will not permit an increase in imports over the 1958 level of f 370 million. After 1961 available foreign exchange resources will permit a moderate increase in irmports to about-' 110 million in 1962 and about :4hh0 million in 1965. 39. Por the purpose of projecting the level of imports (see table below) it is assumed thAt current foreign exchange earnings wi.ll be augmented by direct private foreign investment. In 1953-56 direct private foreign investment averaged `30 million per annum, of which il6 million came from oil companies and `14 million from other sources. During the last two years, however, there was a considerable decline and it appears that direct private investment averaged less than $10 million per annum. It is expected that as a result ofthe improvement in Colombia's economic policies there wi11 be a resumption of direct private investment to previous levels - say averaging 325 million per annum in 1959-1961 and a gradual increase in subsequent years. In addition to receipts from private foreign investment, net receipts from public external loans averaged ~'7 million per anr;um in 1953-1957. IBRD loan disbursements averaged l12.5 million during that period. However, for the purpose of the calculations below it has been assumed that Colombia will contract no new public external loans in 1959-65. The table below states separately payments made on account of the backlog settlement, including cash payments on private debts in 1958 and amortization of backlog credits on a net basis (e.g. after deducting the disbursement in 1959 of `39 million of the W.xport Import Bank credit made in 1958).  - 16- Balance of Payents Projection 1959-1965 (millions of dollars) 1958 1959 1960 1961 1962 1965 Foreign Exchange Earnings 580 525 535 545 555 570 Direct Private Investment 10 20 25 30 35 45 Backlog Settlement (net) -50 -35 -50 -50 -20 -15 Amortization of other External Debt 2/ -15 -15 -15 -15 -15 -lo Available for current trans- actions Z/ h80 470 470 485 530 565 Services and interest 110 110 110 115 120 125 Imports 370 360 360 370 L1o hho After deduction of disbursements of existing long-term credits. 2/ After deducting from foreign exchange earnings an item for short-term capital movements and errors and omissions of ,25 million (estimate based on statistical errors of previous years). In 1958 this item is $145 million since it also includes the