Statement by Ilkka Niemi at the meeting of November 17, 1999

International Bank for Reconstruction and Development 87515 International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS99-324 November 17, 1999 05:15:00 PM Statement by Ilkka Niemi Date ofMeeting: November 17, 1999 Colombia: Country Assistance Strategy Progress Report The current economic and social situation in Colombia is a cause for grave concern. Colombia is in the midst of its worst recession in decades, unemployment has increased rapidly and the incidence of poverty has risen again in the last 12 months following a steady decline for more than thirty years. In addition, the country has suffered a devastating damage and loss of human life caused by an earthquake early this year. The present situation justifies a review of the World Bank's program in Colombia and we therefore welcome the opportunity to discuss this CAS Progress Report today. We would like to thank staff for a well-written and comprehensive document, which covers themes of major importance for Colombia. I would like to start by commenting on the timing of this Board discussion. Both the CAS Progress Report and the FSAL depend on successful implementation of macroeconomic reform that will be supported by the IMF Program. In fact, one justification for moving the Bank's program to a high-case lending scenario is the Government's commitment to implement structural reforms under the IMF Program. Still, the Executive Board of the IMF is not scheduled to discuss its program until December 17. We would therefore have felt more comfortable if our discussion had taken place following the IMF Board discussion. The implementation of the Bank's program in Colombia is crucially dependent on the political development in the country and President Pastrana's peace initiative. The unpredictability of the peace process has been illustrated by several bomb detonations in the capital and two other cities in the past ten days. Since only a small share of the violence in the country comes from acts of war, we particularly emphasize the importance of the participation ofthe Colombian people in the peace process. A striking example of the lack of participation of civial society is that the " Plan Colombia", which has been presented in the U.S. and in Europe has not yet been presented IThis document has a restricted distribution and may be used by recipients only in the : perform::mce of their official duties. Its contents may not otherwise be disclosed without · \\"cr!d B.1nk .:luthorization. - in Colombia. We wish to further emphasize the priority issues which were identifided by the Colombian authorities and civil society during the preparation of the 1997 CAS in a set of Policy Notes. These issues should be kept at the top of the development agenda since they remain the main causes of the war and violence in the country. We wonder what will be the implications of the new lending program for Bank's involvement in the fight for peace. We note with satisfaction improvements in the Progress Report-most notably the section on good governance and transparency. We feel, however, that more attention should have been given to corruption and particularly the ineffectiveness of the judicial system. These issues should be better reflected in the Program Matrix. Other issues that should also be given more attention in the paper is the problem of internal refugees and the inability of the state to address massive violations ofhuman rights. The improvement in portfolio performance is encouraging. In this context we wonder whether the current economic decline and the serious fiscal difficulties can threaten this achievement. Looking ahead we also wonder whether the quality of the portfolio can be maintained at the current level, given the nature and size of the operations of the proposed lending program. We agree that there is a clear need to address the problems of the financial sector. It is, however, interesting to note that the 1997 CAS stated that the Colombian financial sector was "relatively well developed". It did therefore not emphasize financial sector development. In November 1998 a World Bank study "Colombia- Economic and Social Development Issues for the Short and Medium Term" only very briefly mentioned financial sector issues. The study concluded that even though the slowdown in economic activity had had adverse effect on the financial sector there seemed to be "no systemic risk but rather localized problems". Today, only one year later the main focus of our effort is a comprehensive program of structural reforms in the financial sector. Certainly the external environment has had a serious impact on the financial system during the last 12 months. Still, the core problem-the structural limitations of the system-did hardly emerge only during the same period. We are alarmed by the increase in poverty. We therefore urge the Government and the Bank to give their social safety net programs strong poverty focus. Rural development was among the cent~al elements of the CAS. The Progress Report indicates that the outcome of this work has been mixed during the last two years. At the same time the incidence of poverty in the rural areas has risen by nearly seven percentage points between 1996 and 1998. We would appreciate if staff could elaborate on the level of poverty and the social conditions in rural and urban areas, respectively. Noting the reduced amount planned for Rural Education in the Progress Report we would like to learn how the revised lending program in general would affect the work on rural development. A brief comment on the economic indicators: The projection for GDP turnaround to growth in year 2000 seems somewhat optimistic (-4.5% in 1999 and 3.0% in 2000). Could staff explain the basis for this assessment? Finally, we wonder how Management will be able to monitor the economic and social situation closely in order to be able to move fast and take appropriate actions if circumstances change.