Colombia - Current economic position and prospects (Vol. 1 of 5) : Main report

RE'ruFN Jo RESTRICTED FE TS E CIRCULAIG COPY Report No. WH- 188a OWT N TO E RETURNED TO REPORTS DESK NE Esg IN GENERAL FILES This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accurocy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS OF COLOMBIA (in five volumes) VOLUME I MAIN REPORT December 30, 1968 Western Hemisphere Department  CURRENCY EQUIVALENTS (as of November 4, 1968) 1 U.S.$ 1 l6.77 Pesos I Peso (Ps.) = US$0. 0596 .1 Million Pesos US$59, 630  TABLE OF CONTENTS Page No. PREFATORY NOTE THE MISSION BASIC DATA i - ii SUMMhARY AND CONCLUSIONS v VOLUME, I: THE MAIN REPORT I. THE COLOMBIAN ECONOMY 1945-1968 1 A. Introduction 1 B. Economic Growth since World War II 5 C. The Present Position 6 D. Conclusion 11 II. THE OUTLOOK FOR 1969-1973 14 A. Development Goals 14 Introduction 14 Capital Formation 15 B. Public Finance 16 Tax Reform 16 The Domestic Effort 18 C. Monetary Program 25 D. Balance of Payments 28 The Problem 28 The Prospects 29 Export Promotion 36 E. Creditworthiness 40 III. AGRICULTURE 43 A. Recent Performance 43 B. Public Services to Agriculture 44 C. Agrarian Reform 48 D. Coffee Diversification 49 E. Export Potential 51 F. Fbreign Financing and Public Invest- ment 56 G. Conclusion 56  TABL3 OF CONTENTS - Page 2 Page No. IV. IANUFACTURING INDUSTRY 57 A, Introduobion 57 B. 'Main Characteristics 59 C. Import Substit-ution and Export Promotion 63 W, OTHER SECTORAL DEVELPMENTS 68 A. Transport 68 B. Powe r 71 C. Telecomwunications 73 D. Water Supply and Sewqerage 73 E, Education 74 F. Health 76 C. HlIousing 77 VOITUE II: STATISTICAL APPENDIX General Note Part I - National Accounts Part II - Balance of Payments Part III - Public Finance Part IV - Money, Credit and Prices Part V - External Financing Part VI - Agriculture Part VII - Industry VOLUME III: ANNEX I: INDUSTRY AlNEX II: POWER ANNEX III: TRANSPORT AN1EX IV: WATER AND SEWERAGE A14NEX V: HUM4AN RESOURGES Population Education Health Housing VOLUME IV: ANNEX VI: TECHIICAL ASSISTANCE VOLUAE V: PROJECTS FUR EXTERAIL FINANCING IN 1969  PREFATORY AOTE This report deals only briefly with subjects already analyzed and reported on in the rather extensive reporting to the Consultative Group witthin the past 18 months. Its main purpose is to re-examine Colombia's longer ter-n development problems and prospects and their policy inplications for the next three to five years. The first two chapters of the main report surmnarize briefly the long-tern trends and present position of the Colombian economy and, against an explicit framework of projections through 1973, update present judgments about major financial and economic policy issues and external capital require- ments for this period. The last tlbree chapters focus on sectoral issues in agriculture and industry, on whose fortunes Colombia's economic pros- pects ultimately depend, and on the other major sectors in the pUblic investnent program. The report reflects the findings of a mission wzhich visited Colombia during Hay 19 to June 21, 1968 and discussions of these findings iitth representatives of the Colombian Gcvernraent in mid-October.  THE MISSION Mervyn L. Vt;tiner je Chief of the Mission Jose D. Teigeiro oeceos ea.oeaeeoe**o Chief Economist Anthony A. Churchill Fiscal Economist Lorne To Sonley . Agricultural Economist Alexander Nowicki *O*Sb*tSbo.@o,ee. Industrial Economist Charles A. Morse 4000****O***OOOOOSgS Sanitary Engineer Sel-Young Park o TransDort Economist ManuQel C. Zenick .... Power Advisor George C. Zaidan *o..e..o.e.. o eeee* Human Resources Economist  BASIC DATA Area 439,825 square miles Populationr (mid-1968) 20,0 million Growth Rates: Total 3.2 UrbanQJ 5.5 Gross Domestic Product (1967 est.) Ps 80.3 billion Real rate of growth: 1947-67 5.0 1945-50 6,o 1950-54 5.6 1954-58 3.2 1958-62 5e3 1962-67 4.4 Per capita GDP end 1967 est, US$251 Gross Domestic Product by Origin 1950 1967 Agriculture 37.8 29.3 Manufacturing 14e8 19.2 Others 47.4 51:5 Million % of Public Finance (1967) Pesos GDP Current Revenues of the Central Government 6676 8-3 Current Expenditures of the Central Government 4293 5e3 Surplus on Current Account of the Central Government 2383 3.0 Surplus on Current Account of the Public Sector 3613 4.6 Public Sector's Investment Expenditure 5157 63-4 Net Borrowing 1544 1.9 Money Supply iillion Pesos % Change December 1964 8370 20.9 December 1965 9680 15.7 December 1966 11035 14.0 December 1967 13450 21.9 Balaice of Payents 1966 1i967 (us$ milT? EWports f.o,b. 525.1 554.9 Imports f.o0b. -6389 -480.2 Invisibles, excl. factor income -63.3 -25.6 Investment income -83.4 -78.3 Balance on current account -2O0.5 -29.2 1J Includes all cities with more than 100,000 inhabitants in 1964.  Public transfers 10.2 2.1 Short-term private capital 77.3 -1.4 Long-term private capital 42.6 i6.3 Official disburserments 121Q9 i45.o Official amortization -63.9 -54.7 Change in international reserves of the Banco de 1a Republica (-increase) 42.0 -57.4 Errors and omissions 30.4 -20.7 Current Account 3eficit as Percentage of Inmvestent c1967 estr) 3.4 Commodity- Concentration of Excports 2967 Coffee 58.1 Pe troleuri 11.0 Banana 4.5 Cotton 2,7 Sugar 2 .d O thers 21.17 Change over National Cost of Li i. Index fEor Workero previous period ( December to Annual December Average 1963 35.L 27.3 1964 8.5 17.7 1965 14.3 7.D 1966 12.7 16,7 1967 7.0 82. aternal Debt Outstanding (inc. uundisbursed) December 31, 1967 Us$1,08508 m-illion Debt Service Ratios t1967} 14.2% total. comnodity exports 11,3 % exports of goods and services Certificate 2.chang! e Rate (November 4, 1968) Selling US$1.00 equals Ps 16.77 M1F Position (as of July 31, 1960) Quota US$125 million Fund holdings of currency US$220,4 million Holdings as percent of Quota 176 Net International Reserves US$1.0 million as of end-Sep- tember 1968  SUMAARY AND CONCLUSIONS5 1. The purpose of this report is to identify, against a background of long-term trends, the major financial and development policy issues facing Colombia in the next three to five years and their implications for Colombia's development prospects and external capital requirements in this period. Its principal conclusion is that if the quality of Colombiars response to problems continues to be as good as it has been in the past two years, substantial external support of its accelerating development effort continues to be warranted. This support, which would make possible official loan disbursements of between US$250 million and US$300 million annually during the next four years, would represent obligations which Colombia could, with good policies, prudently undertake. They would be incurred as part of a well-conceived effort to sustain a more rapid growth of income and employment than has been possible since coffee prices collap-* sed in the mid-1950's. 2. Colombia is a country of 20 million people, relatively poor (average per capita income of $251) but with less extremes of wealth than in many other countries in Latin America. The population is growing rapidly because of declining mortality rates - by some 3.2 percent annually - and is becoming increasingly urbanized. A well-designed family planning pro- gram was recently initiated; but with the best of effort Colombia will most probably still have a fairly rapid rate of population growth ten to fifteen years from now. Accelerating economic growth to support this large and growing population will thus remain a central goal of public policy for a long time. 3. The resource base for faster growth is good. But in the past the required supporting policies have been poor, with the result that economic development efforts were not sustained, economic growth was uneven, balance of payments problems were chronic and many distortions were introduced intc the economy as a result. Since the end of 1965, however, and particularly since early 1967, major efforts have been launched in support of an acceler- ated development effort. They have already produced impressive changes. The public investment effort has increased markedly. After declining steadily in real terms between 1962 and 1965, it increased by 17 percent in 1966, 15 percent in 1967 and almost 19 percent in 1968. To support this effort, the Government is improving the management of public agencies, the quality of sectoral policies, and, most important, the quality of its finsn.- cial policies. Since 1966, the financial situation of the public sector, which was chronically in difficulty in the previous four years, improved remarkably. As a result of new revenue measures and strict control of ex- penditure, the current account surplus of the Central Government increased by 60 percent in 1966 and 25 percent in 1967, and another 24 percent in- crease is in prospect in 1968. Monetary policy has improved, with the re- sult that domestic price increases of 16 to 17 percent annually during 1962-66 have been cut to 8 to 9 percent during 1967 and 1968. Balance of payments management also improved with the break early in 1967 from the past tendency to maintain exchange rates that were overvalued in relation to the need to provide incentives for non-coffee exports, for petroleum development and to restrain the demand for imports.  - ii - Put Colombia still continues to confront major uncertainty about its ability to sustain its present and planned development effort; for its balance of payments cantnot yet support this effort without extraordinary assistance for anoth;er few years, U.hile non-coffee exports are increasing rapidly, under the best of circumrstances they will not be able for some while yet to provide for the enlarged import flowns which sustained growth w-ill require. The realization of Colombia's conside&'able growth prospects will thus remain for a few more years unusually depen 5ent on1 continrued mutuality of effort between the external financing agencies and the Colombian Governmernt. 5. The framework for such assistance has not yet been defined in detail beyond 1269, b-ut the rain outlines are clear. 6. To realize tihe national investnent effort that is planrned in support of a sustainied 6 percent annual growth rate (similar -o the early postwar years but considerably above the performance of recent years", -he public sector will have to increase its resources for investment by some 10 percent annually in real terms over the next few years. Anticipating the substantial effort that this would call for, the Government appointed early in 1968 a high level commission to make proposals for an overall tax reform. The recommendations of the Commission are eycpected before the end of the year in the form of draft legislation designed to reform the exist- ing tax structure to make it more efficient and equitable and to increase erevenuesa A tax reform that would expand reven.ues by at least 15 percent annually after 1970; the gradual elimination, beginning in 1969, of the ex- change rate subsidy to domestic fuel consurption;and the elimination of most operating subsidies on public utility services by the introductioni in 1969 of a new system for the pricing of these services - these are the principal measures now planned. They would ensure that public savings, which are Ourrently financinig two-thirds of public investment, would increase more rapidly than inveetment and finance some 75 to 80 percent of total public inveEtment after 1970. This effort, coupled with the likely availability of other financing, including counterpart funds from program. loans, should satisfy the public sector's financial requiremnents through 1972. Some pro- gram support will continue to be required for the Government feels, with reason, that the additional fiscal effort planned is about as much as it carT add immediately to the very considerable revenue effort of the past few Years and that if external support were to be cut abruptly, it wculd have little ontion but to make sharp cuts in its on-going development effort, It does not intend to satisfy public sector financing needs by borrowing from the banking system at the expense of the private sector. To comple.ment this fiscal effort, the Goverrunrent is taking paral-lel steps tc increase savings flows through the banking system, to support a growing private in- vestment effort. The measujres recently taken and under consideration would permit total bank credit to increase adequately over the next fiew years, writh an increasing share of this credit going to the private aector. 7. Coffee exports continue to dc-minate thhe export picture, curently acccunting for 60 percent of total ccrmodity exports4 Inadequate growth of exchange earnings and import capacity accordingly continue to constitute a serious barrier to sustained overall economic growth. If GDP has been able  - iii - to grow; even slightly in excess of population, it has been possible only because of the extraordinary balance of payments support that Colombia has been receiving for a number of years. Between 1961 and 1967, dis- bursements of official loans averaging US$110 million annually financed some 22 percent of all merchandise imports; one-third of this assistance was in the form of program loans. Program loan assistance has now reached an all-time high, financing 11 percent of all merchandise imports in 1967 and 14 percent in 1968; it has constituited 40 percent of all gross official capital inflows in the last three years, a period in which total gross in- flows wiere financing 27 percent of all merchandise imports. The problem Colombia faces now is how to negotiate the next few years that it will take for non-coffee exports to rise enough to eliminate this dependerce on ex- traordinary aid without sacrificing the development momentum that has been built up in the past two yea-s. 8. The prospects for the balance of payments through 1973 are for progressive improvement resulting from the Government's export promotion drive which started in 1967. This drive, which is on target to date, aims to raise the annual growthi of "lminor" exports to 25 percent through 1970 and around 20 percent thereafter. Its realization will require formidable and sustained effort; but with appropriate incentives, there is no reason at this time to conclude that the target is not feasible. If successful, total export earnings would increase from US$555 million in 1967 to almost US$900 million by 1973, or by an annual 8G3 percent, and represent a sharp break from the pattern of the past twelve years when total exports fluctua- ted widely, but without any consistent upward trend. However, even this substantial expor-L effort would not by itself provide Colombia with adequate imports to support growing investnent and activity levels. During the tran- sitional period in which exports, as well as public savings, would be in- creasing to levels which would reduce Colombiats dependence on external resources, the need for external assistance will thus rise rapidly. The external deficit on current account is expected to increase from 2.3 percent of GDP in 1968 to over 4 percent of GDP in 1970 and 1971, although it would decline rapidly toward the 1968 proportions thereafter. Gross disbursements from official loans would have to increase very sharply in this period, from US$188 million in 1968 (already well above the 1961-67 average) to some US$300 million in 1971 to sustain the planned increases in investment. As a result of recent improvements in the effectiveness of investing agencies, in sector policies and in the availability of domestic funds for investment, all of the increase in disbursements should be forthcoming through project loans, which are scheduled to rise from US$110 million in 1965 to US$235 million in 1971. But even with this impressive increase in project loan disbursements, the planned phase-out of program lending will have to be gradual if Colombia is to be enabled to sustain her present development effort. 9. Any exact estimate of the import "requirements" on which this conclusion rests is, for an econemy of the size and complexity of Colombia, open to challenge. However, when one considers that Colombia's capacity to import goods and services was not significantly greater in 1967 than in 1954, even though GDP had increased by 70 percent and population by 50 per- cent, and that actual merchandise did not increase during the 1960's (except in 1966), the conclusion that import capacity has been restraining cverall  - iv - growth is difficult to avoid. Even on the basis of observed relations between imports and GDP in the 19601s, a period in which imports were severely constrained by administrative controls, estimated import require- ments for 1968 through 1973 exceed projected import capacity. If economic growth is not to be scaled back sharply toward the 4.5 percent average for the 1960's, i.e., cut by one-fourth overall and by one-half on a per capita basis, this import gap must be filled somehow. Raising external cost- sharing of project financing underway and in sight from its present average of 61 percent to even 100 percent would not fill the gap unless an impossi- bly large addition were immediately made to the project list. The project-- izable proportion of the Colombian program, which has increased considerably in recent years, could undoubtedly be increased further - the total value of projects to which external financing is attached currently represents some 55 percent of the total public investment program - but this could not be done overnight. 10. The Governments effort to enlarge and diversify non-coffee ex- ports, to which it attaches the highest priority, consists of three main elements: adequate financial incentives, including in particular an adequate exchange rate, to permit Colombian products to compete increasingly abroad; more effective institutional support for exporters; and domestic credit and investment policies that would encourage increasing productivity in and the provision of adequate irfrastructure for production for export. The main instrument for providing adequate financial incentives is the flexible exchange rate policy which was ini-tiated in March 1967. Since that time, the certificate market rate depreciated gradually by some 24 percent, con- siderably more rapidly than the increase in prices in this period. The largest part of this depreciation took place during 1967. The adjustment during the first nine nonths of 1968 has been slightly slowfer than the movement in domestic prices, eroding some of the gains achieved in 1967. Iiowever, the Government does not regard the adjustment process as completed. It firmly intends to monitor minor export performance closely and take whatever additional measures may be necessary to ensure the realization of its minor export goals. 11. The newr external borrowing now being planned would double Colombiats external public debt outstanding from its present US?jl.l billion to US$2.3 billion by 1973. Because around 70 percent of the present debt is to official agencies, and a large proportion of it has been incurred for soft-term program loans, the average terms of this debt are 'very favorable. Even if terms harden slightly in future, as they might, the burden of this debt should remain reasonable. If exports develop as intended, the debt service ratio would increase from 12.7 percent in 1968 to between 16 and 17 percent in 1973. This increase in the debt burden would be accompanied by major improvements in the international liquidity position and a consider- able broadening in the export base. Minor exports would no longer be 11minot " and the 1973 share of coffee in total commodity exports would have fallen to around 40 percent. However, the long maturities of most of this debt means that the increase in debt service obligations would not be temporary. If the debt burden is not to increase indefinitely but is to level off during the 1970's, the pace of new borrowing on conventional terms after 1973 would have to be reduced considerably below the annual US$260 milli3n  level envisaged through 1973. Such a sharp reduction in the commitnent rate would imply a corresponding reduction in net inflows of official cap- ital from around 3.4 percent of GDP in 1971 to 1.8 percent by 1973, even below the 2.2 percent estimated for 1968. Import capacity need not become again a bottleneck to sustained growth, even with this reduced capital in- flow. However, domestic savings would have to be increased correspondingly if the national growth objectives are not to be compromised. 12. The external development support now underway and being planned and the related policy framework outlined above are in support of a well- conceived development effort. More than half of the public investment program consists of projects to which external financing is attached and which accordingly already satisfy critical external lenders. The major institutional and sectoral policy issues relating to the public investment program, which are discussed in the main report, have been identified, and preparations are being made to deal with those problems which are not already in hand and being resolvedr The overall thrus-t of the program is appropriatn. Perhaps the most critical issues for the future lie in the more general policy environment in which private agricultural and indus- trial investment and production decisions are to be made in the coming years. Beyond all the specifics discussed in the main report lies the basic question of making Colombian agriculture and industry more outward-looking, by im- proving specific sectoral policies and institutions and by providing appro- priate incentives to this end on a more sustained basis than Colombia has known over the past decade. It is to this change of emphasis at the margin that the Colombian Government has been turning its attention, to realize the export goals on which justification of the planned external support for its ambitious de-velopment effort largely rests,  T. TEE COiLOBIwl ECOIf-WIX 1945-1968 A, Ixtroduct:1c 1. rolcnbia is a country of 20 rnilior. ne ople, relatively poor (average Der capita incomie of $25]) butu with lass exzreies of wealth than in mary-DtIher courtries in Latir- kmr-ica. The population is growirg rapidly. It grew at a rate of -aotroxiriately 2 percent per year betweenL 1940 and 1950 and has since accelerated to about 3.2 percent, due largely to the 26 percent decline in mortality rates between 1253 and 1965