Colombia - Agricultural Sector Credit Project

A---~~~~~ ~~~~~ AX -c / Document of The World Bank FOR OFFICIAL USE ONLY - \ : Report No. 10840-Co STAFF APPRAISAL REPORT COLOMBIA AGRICULTURAL SECTOR CREDIT PROJECT FEBRUAPY 25, 1993 Country Department III Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Colombian Peso (Col$) Exchange Rate (1993) Us$1.00 = ColS 747 WEIGHTS AND MEASURES Metric System FISCAL YEAR OF THE GOVERNMENT OF COLOMBIA January 1 - December 31 GLOSSARY OF ABBREVIATIONS BR - Central Bank (Banco de la RepCablica) CIAT - International Center for Tropical Agriculture (Centro Internacional de Agricultura Tropical) CNCA - National Commission for Agricultural Credit (Comisi6n Nacional de Credito Agropecuario) DTF - Money Market Deposits (Dep6sitos a Termino Fijo) EMP - Economic Modernization Program FEDERACAFE - National Federation of Colombian Coffee Growers (Federaci6n Nacional de Cafeteros de Colombia) FFAP - The Agriculture and Livestock Financing Fund (Fondo Financiero Agropecuario) FINAGRO - Fund for Financing the Agricultural Sector (Fondo para el Financiamiento del Sector Agropecuario) GDP - Gross Domestic Product ICA - Colombian Agricultural Institute - (Instituto Colombiano Agropecuario) IDEMA - Agricultural Marketing Institute (Instituto de Mercadeo Agropecuario) IFI - Industrial Development Institute (Instituto de Fomento Industrial) INCORA - Colombian Agrarian Reform Institute (Instituto Colombiano de Reforma Agraria) HIMAT - Colombian Institute for Hydrology, Meteorology and Land Preparation (Instituto Colombiano de Hidrologia, Meteorologia y Adecuaci6n de Tierras) PFI - Participating Financial Intermediary PROEXPO - Export Promotion Fund (Fondo de Promoci6n de Exportaciones) QR - Quantitative Restriction SOE - Statement of Expenditure  FOR OMCIAL USE ONLY X ~~~~~COLOMI AGRICULTURAL SECTOR CREDIT PR_OJECT Table of Contents Page No. I. LOAN AND PROJECT SMtMARY . . . . . . . . . . . . . . . . . . 1 II. COUNTRY POLICIES AND BANg GROUP'S ASSISTANC<E STRATEGY . . . 3 Recent Performance. . . . . . . . . . . . . . . . . . . . . . 3 Achievements: The Economic Modernization Program . . . . . 3 Economic Performance: 1990-91 . . . . . . . . . . . . . . 4 Recent Developments: 1992 . ............... 4 Medium-term Economic Prospects ...... . . . . . . 5 Colombia's External Environment . . . . . . . . . . . . . . . 7 The Bank's Country Assistance Strategy. . . . . . . . . . . . 9 Colombia's Development Agenda . . . . . . . . . . . . . . 9 Areas for Action . . . . . . . . . . . . . . . . . .. 9 Institutional Agenda . . . . . . . . .. . . . . . . .. 12 Proposed Bank Assistance .A.s...t.. ................ 13 A Changing Role for the Bank. . . . . . . .. . . . . . 13 Objectives and Composition . . . . . . . . . . . . . . . 14 Vehicles for Bank Assistance. . . . . . . . . . . . . . . 15 Program Size . . . . . . . . . . . . . . . . . . . . . 17 III. THE AGRICULTURAL SECTOR ................. . 18 Structure, Performance and Constraints . . . . . . . . 18 Agricultural Trade and Pricing Policy Reform . .. . . . . . 20 Supply Response . . . . . . . . . . . . . . . . . . . . 21 The Formal Agricultural Credit System . . . . . . . . . 21 Agricultural Credit Supply and Demand . . . . . . . . . . . 22 Previous Bank Involvement in the Agricultural and Credit Sectors in Colombia . . . . . . . . . . . . . . . . . .. 27 Lessons from Previous Bank Involvement . . . . . . . . . . . 27 IV. THE PROJECT . . . . . . . . . . . . . . . . . . . . . . . . 29 Origin and Relation to Country Strategy . . . . . . . . . . 29 Rationale for Bank Involvement . . . . . . . . . . . . . . . 29 Project Objectives . . . . . . . . . . . . . . . . . . . . . 29 Project Description . . . . . . . . . . . . . . . . . . . . 31 Agricultural Credit Policy Framework . . . . . . . . . . . . 31 This report is based on the findings of ar appraisal mission that visited Colombia in April 1992. The mission comprised Messrs. V. Ferrer (Mission Leader) and R. Simsolo (LA3AG). The Country Assistance Strategy section was prepared by the Country Division (LA3CI). The Department Director and Sector Division Chief were Messrs. Toshiaki Abe and Douglas Porno, respectively. This document has a restricted distribution and may be used by recipients only in the performance of their offiial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - li - Table of Content. (cont'd) Page No. Support to Private Banks Participation in Agricultural Lending 4 9 o o o a o o o o o 9 9 * * o 9 * a a 9 oo 9 * 34 Reform of CajaAgraria . .................. ........a...a... 35 Project Cost and Financing . . a . .. . . . . . . . . . .. . 37 Lending Terms and Conditions. . .. . . . . . . . . . . . 37 Project Implementation . . . . . . . . . . . . . . .. . . . 40 Procurement .. . . . . .. a. .. . .a . . . . ... ..... .. . 41 Disbursement .... . .. . .... ... ... . . . ... ... ... .. . 41 Accounting, Auditing and Reporting . . . . . . . . . . . . . 42 Mid-Term Review . . . . . . . . . . . . a . .. .a . . ...aa 43 Project Benefdts and Risks aiuka * 9 .a.................... 43 V. AGREEMENTS REACHED . . . . . . . . . . . . . . . . . . . . . 44 Recomnendation . . . ..... .. .. .. .. .. .. . .. .. ... .. 45 ANNEX 1 FINAGRO . . .... .............. . 46 ANNEX 2 Caja Agraria . . . . . . . . . . . . . . . . . . . . . . . . 63 ANNEX 3 Agricultural Credit Policy Framevork . . . . . . . . . . . . 87 ANNEX 4 Policy matrix .... . . . . . . . . . . . . . . . . . . . 90 ANNEX 5 Agricultural Trade and Pricing Reform . . . . . . . . . . . 93 ANNEX 6 Experience with Bank Lending for Agricultural Credit Project in Colombia . . .. . . . . . . . . . . . . . . . 113 ANNEX 7 Agricultural Credit Statistics . . . . . . . . . . . . . . 116 ANNEX 8 Selected Documents in Project File . . . . . . . . . . . . . 118  1. LOAN AND PROJECT SUMMARY Borrower: Fund for the Financing of the Agricultural Sector - FINAGRO Guarantor: Republic of Colombia Imolementlna Fund for the Financing the Agricultural Sector (FINAGRO); Agenciest Agricultural Bank (Caja Agraria). Beneficiaries: Farmers, farmer groups and enterprises involved in agricultural production and marketing. Loan Amount: US$250 million equivalent, to be repaid in 17 years on an annuity basis, including four years of grace, at the standard variable interest rate. Onlending FINAGRO would onlend the proceeds of the loan to Participating Termas Financial Intermediaries (PFIs), in dollars and/or in pesos, and charge: (a) for peso loans, the fully variable deposit rate of the Colombian banking system (DTF), which is presently sufficient to cover foreign exchange risks, the cross currency risk and ad-ninistrative costs; the rate will be monitored and adjusted whenever the DTF is inadequate to cover the above; and (b) for dollar loans, a rate reflecting at least the Bank's interest rate and commitment charge, plus a fee to cover the cross currency risk and administrative costs. The methodology to obtain these two rates would be consistent with that of the BR for determining its rediscount rate. Relending rates would be determined by the PFIs according to maturity, credit risk, operational costs and market conditions. Prolect The proposed loan would, during an interim period of two and Oblectives: one-half years, help the Government adjust the provision of agricultural credit to a market-based framework. Specifically, it would support the Government's actions to: (i) implement the agreed program of financial and trade reforms; (ii) promote, encourage and facilitate voluntary lending by commercial banks to the agricult -1 sector without incurring a significant decline in lending resources; (iii) monitor and analyze agricultural credit demand and supply, and recommend measures to ensure a smooth transition to market-based credit system, including the phasing out of forced investments; and (iv) transform Caja Agraria, the largest bank serving the rural sector, into an efficient rural financial institution. Proiect The proposed project would provide US$250 million of loan Description: funds to PIPMGRO to be used to rediscount medium- and long- term loans to iinance on-farm investments, agroindustry and related working capi.l. The project would also help ensure the implementation of Caja Agraria's Corporate Plan aime4 at restructuring, rationalizing and recapitalizing the institution.  -2- Benefits and The project would support Colombia's move away from forced Risks: investments, directed lending and subsidized interest rates for agriculture, to market determined resource mobillzation and interest rates, and would ensure the maintenance of the present acceptable agricultural trade regime. It would support policy and institutional reforms in the agricultural financial sector, while meeting the financing gap for term lending during the transition. Through such measures, the project would ensure that credit would be available to agriculture at a time of macroeconomic and trade policy reforms, and thereby boost the capacity for a supply response. The project would also play a central role in moving private banks more quickly along the learning curve towards voluntary agricultural lending, leverage FINAGRO's rediscounting towards term lending, reduce the role of FINAGRO in financing the sector, and restore Caja's viability as a specialized rural financial institution, primarily to serve small farmer credit needs. The main risk of the project is that Caja Agraria's reform program, as well as the agricultural credit and trade reform program, will be delayed or softened because of the political sensitivity to some of the measures proposed. The Government's commitment to both reform programs lessens such risks. Estimated Cost and Local Foreign Total Financing Plan: ---(US$ million)--------- Beneficiaries 302.0 - 302 Financial Intermediaries 379.0 - 379 FINAGRO 445.3 145.7 591 World Bank - 250.0 250 Total 1,126.3 395.7 1,522 Estimated --------------------IBRD Fiscal Year----- Disbursements: 1993 1994 1995 1996 1997 1998 1999 Annual 25.0 10.0 70.0 70.0 50.0 15.0