Colombia - Small-scale Industry Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1548-CO REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO DE LA REPUBLICA WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA FOR A SMALL-SCALE INDUSTRY PROJECT December 31, 1974 This report was prepared for official use only by the Bank Group. It may nol be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness.of the report.  CURRENCY EQUIVALENTS (as of December 5, 1974) Currency Unit - Colombian Peso (Col$) US$1 - Col$28 Col$1 - US$0.0357 Col$1 million - US$35,700  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF TlhE PRESIDENT TO TilE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BAiCO DE LA REPUBLICA WITH THE GUARA4TEE OF WITH. REPUBLIC OF COLOMBIA FOR A SMALL-SCALE INDUSTRY PROJECT 1. I submit the following report and recommendation on a proposed loan to the Banco de la Republica with the guarantee of the Republic of Colombia for the equivalent of US$5.5 million to help finance a small-scale industry project. The loan would have a term of 12 years, including 3-1/2 years of grace, with interest at 8 percent per annum. The proceeds of the loan would be relent in pesos by the Banco de la Republica to the Corporacion Financiera Popular (CFP) at 18.5 percent per annum on the equivalent of US$5.0 million to be made available for fixed-asset financing, and at 12 percent per annum on the equivalent of US$0.5 million to be made available for technical assistance financing. CFPt's on-lending rates to beneficiary firms would be 24 percent and 15 percent per annum, respectively. If beneficiary firms so desired, they could receive fixed-asset sub-loans denominated in foreign exchange and pay an interest rate of 13-1/2 percent; under this alternative, the Banco de la Republica would make such funds available to CFP at 8-1/4 per- cent interest. PART I: THE ECONOMY 2. The Bank's most recent economic report (Economic Position and Prospects of Colombia, 138-CO) was distributed to the Executive Directors on May 18, 1973. A note on major developments in the economy since that time is included in Annex I. 3. The Colombian economy has shown impressive gains in the recent past. The rate of economic growth has accelerated to more than 7 percent per annum, and the expansion of non-traditional exports has been remarkable. Such improvements are very much needed in order to accelerate employment generation and to raise gross national product per capita, currently US$400, one of the lowest in Latin America, to a more acceptable level. Colombia also needs to spread the benefits from growth more widely in order to surmount problems of poverty and population pressures in both rural and urban areas. Concentration of land ownership, technical backwardness, and under-employment characterize most rural areas. In urban areas, pressures of population growth, compounded by heavy migration from the countryside, have generated serious unemployment and a severe housing deficit. Prospects for coping with these problems seem brighter as a result of the accelerated growth upon which the Colombian economy has embarked in the past several years. 4. Recent Government administrations have reacted to rural poverty and urban unemployment in a more systematic fashion than in the past, but  - 2 - much remains to be done. In spite of the passage of an Agrarian Reform Law and the creation of the Agrarian Reform Institute (INCORA) in 1961, only modest results have been achieved in alleviating rural poverty. Additional legislation has been enacted which lays a better basis for land reform but much remains to be done to raise income in rural areas. In recognition of the problems of urban concentration and unemployment, Colombia's previous Government placed greater emphasis on urban development, particularly in the housing field, but despite such action unemployment continued to increase in most of Colombia's major urban centers. Prelimi- nary indications suggest that the new Government, which took office in August 1974,will strive to sustain a high rate of economic growth while simultaneously attempting to achieve a more equitable distribution of its benefits, inter alia, through expansion of employment opportunities and increased investment in education, health and agriculture. There is likely to be more emphasis on the development of agriculture and industry, and less reliance on the urban construction sector to provide a stimulus to economic growth. Export diversification will continue to be a major component of development strategy and the Government is currently rationalizing the export promotion system. These development programs have necessitated and will continue to require a strengthening of the fiscal effort. 5. At the latest Consultative Group meeting held in June 1973, members of the Group expressed the view that growing needs for public investment and other public expenditures called for increases in domestic fiscal efforts. While the Government then expressed the intention to further increase revenues by new tax measures and by increasing the savings of public enterprises, little progress was achieved, and the fiscal situation remained weak. To overcome these problems, Colombia's new Government has instituted a comprehensive struc- tural reform of the fiscal system which includes major modifications of the sales and income taxes, and a strengthening of the fiscal contribution of decentralized public enterprises. Discussions between the Government and the Bank on fiscal issues are continuing. 6. Colombia's efforts to expand exports have been amply rewarded in recent years. Merchandise exports amounted to US$1,334 million in 1973, of which over half came from non-coffee items. Allowing for price increases, this represents a fourfold increase (representing an average annual real growth of 24 percent) in non-traditional exports since 1965-67; flowers, clothing, emeralds, cotton thread and cloth, chemical and pharmaceutical products, sawwood, and wood products enjoyed particularly large gains, al- though raw cotton, sugar, meat, and other agricultural products continued to account for the greatest absolute amounts. Coffee receipts were up largely as a result of high international prices as the volume of coffee exports has increased relatively little in recent years. 7. Rapidly expanding exports accompanied by more slowly rising imports, despite progressive removal of import restrictions, have created substantial balance of payments surpluses. Net foreign exchange reserves of the Banco de la Republica reached at the end of February 1974 nearly US$600 million, or the equivalent of about five months' imports of goods and non-factor services  - 3 - at the 1973 rate. This compares favorably with the US$345 million and US$170 million held at the end of 1972 and 1971, respectively, and to the deficit positions that were common prior to 1968. Since February, accelerated import payments resulting from liberalization of import restrictions and lengthening of the lag between export registrations and exchange surrender,together with lower world prices for coffee, moved the current account of the balance of payments from a surplus position in 1973 to a deficit for the first eight months of last year. Sharply reduced external borrowing by the Government has further lowered the inflow of foreign exchange, and reserves probablr declined by about US$120 million during 1974. Care will have to be exercised in foreign exchange reserve management since world coffee prices may remain weak for some time and prices of several of Colombia's non-tradi- tional agricultural exports appear to have peaked, while those of imports are expected to continue to rise. The new Government is aware of the possi- bility of some weakening in the balance of payments, and since taking office in mid-August has more than doubled the rate of depreciation of the peso, ahead of domestic price increases, in an effort to hold down the rapid growth of imports and sUstain adequate incentives to exporters. A longer-term problem is that, unless appropriate action is taken, Colombia will become a sizable net importer of crude petroleum near the end of the decade, and the pressure on the balance of payments from petroleum imports, should they become necessary, could be considerable. A high-level Energy Council is studying exploration incentives, taxation and foreign-exchange arrangements, product pricing, and other aspects of this problem. 8. The rapid growth of Colombia's GDP in 1972-73 was accompanied by a sharply accelerated rate of price inflation. Consumer prices jumped 22 percent in 1973, as compared with 14 percent in 1972, 12 percent in 1971, and an average of 7 percent yearly in 1967-70. Food prices, which have a weight of about 50 percent in the cost of living index, increased by 30 percent in 1973. The authorities have taken a number of measures to dampen price pressures, including liberalization of import controls, reduction of tariffs, and tighter controls on public expenditure, but given the weak state of public finances, inflation continued to be a problem throughout 1974 and is expected to have reached 25 percent by year end. To deal with this situation, the new Govern- ment has inmoked emergency economic powers and is moving forcefully to implement a comprehensive fiscal and monetary reform aimed at strengthening public finances and at producing a more balanced flow of resources through Colombia's financial system and at providing the authorities with greater monetary control. 9. Colombia's public external debt repayable in foreign currency amounted to US$2.6 billion at the end of 1973, or US$1.9 billion excluding undisbursed commitments. The Bank's share of this external debt (disbursed only) as of end 1973 was about 28 percent, but this share is expected to decline to 25 percent in 1978 as Colombia relies to a greater extent on other external borrowing. Service on this debt is modest (12 percent of foreign exchange earnings in 1973) relative to other developing countries. Since exports have risen more rapidly than debt service in recent years, there has been a decrease in the debt service ratio at a time when economic growth has accelerated. The debt service ratio is expected to rise moderately and peak  in the mid-1980s at about 18 percent as a result of greater capital inflows associated with a high growth rate. The Bank's share of total debt service is expected to peak at about 28 percent in 1975 and is likely to decline thereafter. Should economic growth continue at a rapid pace, which appears feasible, and should that growth be accompanied by a further strong expansion of non-coffee exports and the maintenance of sound economic and financial policies, Colombia should find it possible to secure the amounts of external capital it needs and to service the indebtedness that this borrowing would generate. PART II: BANK GROUP OPERATIONS IN COLOMBIA 10. The proposed loara/--the fifty-seventh to be made to Colombia -- would bring the total amount of Bank loans to Colombia to US$1,085.8 million (net of cancellations). Of the foregoing amount, US$854.6 is now held by the Bank. IDA has made one credit of US$19.5 million for highways in Colombia in 1961. 11. Disbursements have been completed on 33 loans and the one IDA credit. IFC has made effective investments and underwriting commitments in 20 enterprises in Colombia, totalling about US$27 million of which IFC now holds US$13 million. Annex II contains a summary statement of Bank loans, the IDA credit, and IFC investments as of September 30, 1974, and notes on the execution of the 23 on-going projects. SECTORAL COMPOSITION OF BANK GROUP OPERATIONS TO SEPTEMBER 30, 1974 (Amounts in US$ millions) Sector Share of Total Sector Number of Loans Total Amount % Agriculture 8 80.7 7.5 Telecommunications 2 31.0 2.9 Education 3 33.8 3.1 Industry 7 221.5 20.5 Power 18 344.1 31.9 Transportation 12 229.6 21.2 Water Supply 5 131.6 12.2 Pre-Investment 1 8.0 0.7 Total 56 1,080.3 100.0 12. Since 1968, Bank lending in Colombia has become more diversified than in earlier years. All three loans in the education sector have been made since then as were one-half of the eight agricultural loans, four of the five loans in the water supply sector and four of the loans for industry. / The proposed loan is presented simultaneously with two other loans for a Water Supply and Sewerage Project and for a Telecommunications Project.  -5- This compares with six loans during these past five years in the sectors where the Bank has been traditionally active, i.e., power and transport. Bank efforts have been focused on production-oriented activities and activi- ties which carry social as well as economic benefits. Projects being developed will seek to combine the objectives of increasing output with maximum benefits in terms of employment and improving the income of the poor, particularly in rural areas. 13. We expect over the next several years to make an increasing contri- bution to the agricultural and industrial sectors, with particular emphasis on projects involving small and medium size farmholdings and industrial enter- prises. The other major focus of our activities would be in such social sectors as education and water supply. We would continue to support projects in the traditional sectors of Bank lending -- electric power and transportation -- in those cases where support is required for necessary institutional development Projects are currently in an advanced stage of preparation for rural settle- ment and irrigation rehabilitation. 14. the operations of external lenders in Colombia are shown in Annex I, pages 3-4. Wfiile IBRD, IDB, and AID provided about four-fifths of total external financing to Colombia in the 1961-72 period, their share has de- creased since then. The IDB has assisted projects in low-cost housing, uni- versity education, agrarian reform, ports, electric power, water supply, transportation, and industry. AID has shifted the emphasis of its lending in recent years from program to sector loans, particularly for education, urban development, and agriculture. PART III: SMALL- AND MEDIUM-SCALE INDUSTRY IN COLOMBIA 15. For many years, manufacturing has been a leading growth sector in Colombia. It has made a substantial contribution to accelerating economic growth which reached an estimated 7.3 percent in 1973, and to Colombia's successful export diversification drive. Exports of manufactured goods rose from US$64 million in 1967 to an estimated US$260 million last year. Small- and medium-scale industry, accounting for 41 percent of labor and 24 percent of value-added in manufacturing, however, has not grown as rapidly as large industry. While it is difficult to identify any single constraint as being critical to expansion of small- and medium-scale industry, two major con- straints, which the proposed project would help to alleviate, are lack of access to credit and insufficient technical assistance. Other factors have been the inherent difficulties which are common to small- and medium-scale industry in most developing countries, such as inadequate raw material supply,  - 6 - obsolete machinery, crowded work shops, shortage of entrepreneurs and quali- fied technicians and low capacity utilization in some branches. Government policies and technical assistance by public and private institutions have lacked coordination and long-term planning. 16. Small- and medium-scale industry, defined as manufacturing units with 5 to 99 workers, comprises 91 percent of manufacturing firms. Because it requires less capital investment per job created, it is an effective means to increase employment, as well as to build up entrepreneurial talent. More- over, with unskilled workers forming 57 percent of its personnel compared to 40 percent for large-scale industry, it is an important training ground for entrants to the industrial labor force. 17. Colombia's mountainous terrain and widely distributed population provide protection for decentralized small- and medium-scale enterprises in thle form of high internal transport costs. Such firms enjoy a competitive position vis-a-vis the more centrally-located large firms. Reflecting this, over three-fourths of small- and medium-scale manufacturing firms are located outside the Bogota area, serving local or regional markets. The average size of such firms is small, nine-tenths having total assets under Col$5.0 million (US$200,000). 18. Until a few years ago import substitution was the principal goal of Colombia's industrialization policy. A number of export promotion measures have been added in recent years, with spectacular success, but with most of the benefits flowing to larger firms. Moreover, the credit system has tradi- tionally favored agriculture, housing, and the public sector, with the result that industry and commerce have had to pay substantially higher interest rates than other sectors and have faced frequent shortages of capital for both short- and long-term purposes. Larger firms have been able to expand through internal cash generation and by making use of institutional sources of medium- and long-term credit, in the development of which the Bank has played a major role since 1963. Such sources include (i) the Private Investment Fund, established within the Banco de la Republica, which has attracted external resources main- ly from the United States, the Netherlands, and the Inter-American Development Bank, and (ii) seven investment companies (Financieras), which have served as the channel for five Bank loans totalling US$162.5 million. On the other hand, smaller firms have continued to rely to a great extent on the extra-bank market and thus have found it more difficult and expensive to undertake neces- sary borrowings. 19. There are three public sources of credit for small- and medium- scale industry: (i) the Fondo Financiero Industrial (FFI), a rediscount fund operated by the Banco de la Republica; (ii) the Caja de Credito Agrario, Industrial y Minero (CAJA); and (iii) the Corporacion Financiera Popular (CFP). However, the FFI finances enterprises on average somewhat larger than those served by CFP, while the CAJA operates chiefly in rural areas and extends very small loans. Moreover, all three sources face constraints in the amount of funds they have available for financing fixed investment. The  proposed loan would help to relieve the pressing shortage of long-term funds by increasing the amount of such resources available to CFP, which is the only institution that lends exclusively to small- and medium-scale industry. 20. The cost of industrial credit varies greatly according to source. The effective interest rate of short-term commercial bank lending ranges from 24 to 32 percent per annum. On medium- to long-term loans the CAJA offers rates of 13 to 14 percent, but the volume of such loans is small. The FFI charges 18 to 24 percent, and CFP 22 percent on loans made from its own resources. The FFI rates for small- and medium-sized industries are 22 to 24 percent when recipient firms are located in cities with over 900,000 inhabitants (the lower rate applying to firms with total assets not exceeding Col$5 million), and 18 percent when the recipient firms are located in smaller cities. Furthermore, to encourage decentralization of industry, in the case of the smaller cities the FFI permits the intermediary banks to earn a 4 per- centage point spread and to rediscount 80 percent of the loan, as opposed to 3 percentage points and 65 percent respectively in the case of the larger cities. These are new rates for FFI loans adopted on November 12, 1974 in response to recommendations made by the Bank. The new rates, while still somewhat below the real cost of capital (at the current rate of inflation of 22-25 percent per annum), are less likely than the much lower former rates to bias factor proportions in favor of capital-intensive techniques. 21. There are several institutions rendering technical assistance to smaller firms, but their programs focus on general managerial and vocational training and provide little specialized consulting to individual firms. By far the most important and comprehensive programs are offered by the Servicio Nacional de Aprendizaje (SENA), a Government institution charged with improv- ing skills of workers and managerial competence of entrepeneurs. The Funda- cion para el Fomento de la Investigacion Cientifica y Tecnologica (FICITEC) -- a semi-private non-profit consulting institution -- is providing commendable managerial, marketing, planning, and production assistance to solve specific problems of individual firms, but the volume of its assistance (about 25 companies a year) is small. The trade association for small entrepreneurs, Asociacion Colombiana Popular de Industrias (ACOPI), organizes management seminars for its 2,200 members, and several universities have developed regional technical assistance programs in recent years. In connection with their lending, CFP and the CAJA occasionally provide some limited direct technical assistance but more often arrange for assistance by other institu- tions. 22. Colombia's development policies, concerned with creating increased employment opportunities, give emphasis to industry, agriculture, export promotion and more equal income distribution. Recently there has been an increasing awareness of the role which industry must play in creating employ- ment opportunities and furthering urban and regional development. Accordingly, the Government has initiated a dialogue with Bank staff concerning its indus- trial policies, and these discussions will include the specific needs of smaller industries. This is important as continuing strong local demand for manufactured goods should not only offer ample opportunities for further import substitution in existing product lines but also permit introduction  - 8 - of new lines. Enhanced by the prospects of the Andean Common Market, chances are good for exports of manufactured goods to continue to rise at a healthy pace. Consequently, the outlook for continuing high growth of industrial investment and output are good. Scope and potential of small and medium industry are considerablelbr meeting the demand for a large number of consumer goods, as well as for providing inputs for other manufacturing industries, particularly since despite all its handicaps small and medium industry in many products is efficient and competitive with large industry. PART IV: THE PROJECT Background 23. In the fall of 1972 CFP initiated discussions with the Bank con- cerning a possible loan, and following receipts of a loan request endorsed by the Government, a pre-appraisal mission visited CFP in June 1973 to assist in project preparation. The project was appraised by a Bank mission in November/December 1973 and in May 1974. Negotiations were held in Bogota during September/October 1974 with a Colombian delegation led by Dr. Cristian Mosquera, Director General of Public Credit, Ministry of Finance. 24. A project appraisal report entitled "Colombia: Small-scale Industry Project" (No. 499-CO dated December 11, 1974) is being circulated separately to the Executive Directors. The main features of the loan and the project are summarized in Annex III hereto. History and Objectives of CFP 25. CFP was founded in 1967 by Banco Popular, a Government-owned commer- cial bank. Its objectives are to contribute to the development of small- and medium-scale industry, including manufacturing, agro-industry, and mining; to encourage import subsitution and exports; and to stimulate local and foreign investment. Capital Structure and Resources 26. Until recently CFP was wholly owned by Banco Popular and its sub- sidiary, Corporacion de Ferias y Exposiciones. However, direct Government investment in CFP accounted for 44.5 percent of the paid-in capital as of September 30, 1974 and is expected to increase further in 1975. As of December 31, 1973, CFP's equity constituted 23.3 percent of its total resources of Col$ 417 million (US$16 million equivalent) and in addition it had mobilized borrowings from FFI (25.6 percent), Banco Popular (16.0 percent), Fondo Nacional de Ahorro (13.0 percent), Sociedades Capitalizadores(9.3 percent), Banco de la Republica (4.4 percent), and other sources (8.4 percent). Most of the borrowed funds have relatively short maturities.  -9- Management and Organization 27. CFP's Board is headed ex officio by the Minister of Development and includes five other members of whom two are appointed by the President of the Republic and three by Banco Popular. The Board meets weekly and actively guides CFP's policies and operations. The Board-appointed Loan Committee is empowered to approve operations between Col$350,000 and Col$1 .0 million (US$1h,000 and US$0,000 equivalent). Proposals below these limits can be approved by the managers of the Bogota and regional offices, while larger proposals are referred by the Loan Committee to the Board for a decision. In practice, about two-thirds of CFP's lending volume comes before the Board. 28. Following the accession of the new Government in August 1974, CFP's management was replaced in early September. CFP's new General Manager appears to have the experience and the capacity needed to carry out his role successfully. He is supported by four sub-managers and six regional managers. One of the sub-manager positions has recently been vacant, and the filling of it would therefore be a condition of effectiveness. Of the 177 total staff, 106 are professionals, of whom 34 are located at the head office in BDgota and the others at nine regional offices. Composed largely of young university graduates, the professional staff is highly motivated and dedicated to the institution's goals. 29. CFP's internal organization and management controls require streng- thening if CFP is to successfully manage an expanding loan portfolio and technical assistance program. For this reason, an organization study will be carried out by consultants, and the conclusion of a contract for such a study will be a condition of effectiveness. The project agreement would reouire CFP to review the consultants' recommendations with the Bank and to agree on a program for introduction of organizational reforms. Policies and Procedures 30. While CFP is sufficiently well-managed to aualify for a Bank loan, CFP's management is\aware that there is much scope for strengthening the institution's organizational and operational capability. The proposed loan offers an excellent opportunity for the Bank to assist in building up a relatively new and growing development institution which has not heretofore gained access to international credit. In this connection, Bank staff assisted CFP in drafting a Statement of Policies and Procedures which was recently adopted by CFP's Board. 31. To help insure against considerations of financial risk overshadow- ing developmental objectives in CFP's selection and approval of sub-projects, it was agreed that the composition of CFP's Board and Loan Committee would be diversified. Accordingly, it would be a condition of effectiveness that CFP's Statutes be amended to preclude Banco Popular's having majority represen- tation on CFP's Board or Loan Committee.  - 10 - 32. Project appraisal by CFP requires improvement. Although compre- hensive technical, financial, and economic evaluation of projects is not feasible in the case of CFP's typically small loans, greater attention should be paid to the long-term prospects of client firms, and to identi- fying managerial, technical, and marketing obstacles to greater output and efficiency. To strengthen its appraisal capability, CFP intends to continue increasing its staff. In addition, a UNIDO project evaluation expert joined CFP in July 1974 for a six-month assignment. 33. Monitoring of client operations was introduced in 1972 when arrears increased suddenly, but supervision is not yet commensurate with the volume of operations. Agreement has been reached with CFP regarding the steps it would take to improve this aspect of its activities (Section 2.08 of draft Project Agreement and Schedule to this Agreement). 34. Technical assistance to client firms is a necessary component of small-business development which distinguishes it from other industrial finance operations. CFP began a technical assistance program in 1971 with training courses in which representatives of 546 client firms had partici- pated up to December 31, 1973. In addition, CFP has arranged for direct technical assistance to 44 firms, addressed to their specific problems. The proposed loan would help CFP to expand its direct technical assistance activities by providing funds to finance technical assistance credits on somewhat concessional terms. Other resources for technical assistance will be provided by AID and possibly under the British and German bilateral assist- ance programs. A second UNIDO adviser is also assisting CFP for one year in assessing its technical assistance work. 35. The scope and quality of the work on CFP's accounts performed by its present auditor does not meet the Bank's standards. Hence, CFP has agreed to contract for the service of an external auditor acceptable to the Bank and to have the auditor prepare annually a full audit report following the standard format for DFC's associated with the Bank group. Past Operations 36. Despite its still small size, CFP has made a valuable contribution to the development of Colombian small and medium industry. Within six years, CFP has made over 3,500 loans totalling Col$ 802 million to some 3,000 enter- prises. Reflecting its rapid growth, almost two-thirds was lent during 1972 and 1973, when CFP provided an estimated one-fifth of institutional financing to small and medium industry. Loan recipients represented a wide range of industrial subsectors. Apparel and footwear (16 percent) and non-metallic mineral products, metal working, and food processing (about 10 percent each) received the most. These industrial lines are among the least protected in Colombia. 37. Given CFP's limited long-term resources,about 70 percent of its loans have been extended for working capital. Relatively short maturities -- the average is about 2-1/2 year for working capital and 4 years for fixed  - 11 - asset financing -- and tight collateral requirements reflect the conserva- tive past policy of CFPts Loan Committee. Almost 90 percent of the boctiwEs had total assets of less than Col$3 million and the average loan amount was below Col$250,000, which shows that CFP has been successful in reaching very small firnms. CFP was also able to penetrate virtually all of Colombia's geographic regions. For each loan in Bogota, CFP's regional offices made three o-;side_tbhe-capital-area. CFP estimates that its operations have helped create some 24,000 new jobs. 38. During 1969-73 CFP's total assets rose rapidly, from Col$ 51 mil- lion to Col$ 417 million. To sustain this brisk development CFP relied after 1970 on heavy borrowings, and consequently its debt-equity ratio increased from 0.4:1 in 1969 to 3.2:1 at year-end 1973. Considering the structure of its borrowings and the risks inherent in financing small and medium indus- try, CFP has proposed that its debt should not exceed four times equity. The latter limit has been incorporated in CFP's Statement of Policies and Procedures and in the Project Agreement (Section 3.04 of draft Project Agree- ment). 39. Since inception CFP has been modestly profitable. Administrative expenses, equivalent to 6.2 percent of average total assets in 1973, are not excessive considering CFP's need to maintain an extensive network of regional offices, to administer a large number of credits, and to perform non-income-generating activities in support of small and medium industry. For 1973 net profits amounted to Col$ 4.4 million and resulted in a return on average equity of 5.4 percent. As a result of inflation, CFP's 1973 relatively low profitability resulted in an estimated 16 percent decrease in net worth. Although as a public institution serving small entre- preneurs CFP should not be expected to yield high returns, erosion of its capital should be guarded against. This can be accomplished by insuring that interest rates provide an adequate real return and, when they do not, by replenishment of capital. The Government would make additional contributions to CFP's equity as might be required to maintain the real value of its capital (Section 2.02 (a) of draft Guarantee Agreement). 40. Reflecting a sharp increase in the loan portfolio from Col$ 95 million to Col$ 365 million in 1970-73 and a rising average age of loans outstanding, CFP's arrears have risen substantially. At year-end 1973, out of CFP's 2,473 clients, 667 were in arrears, and of these, 186 were in liquidation. Loan principal in arrears for more than three months amounted to Col$ 20 million and accounted for 5.5 percent of total loan portfolio (CFP's total exposure with clients in arrears reached 10.4 percent of total loan portfolio). Though CFP's arrears situation is acceptable when compared to other DFCs assisted by the Bank Group, there nevertheless is cause for concern about loans in arrears over one year, which increased from Col$ 5 million in 1970 to Col$ 15 million at year-end 1973. As noted in Paragraph 33, agreement has been reached on measures which CFP would take to reduce arrears, especially those above one year. 41. Earlier this year CFP and its independent auditor carried out a detailed review of its year-end 1973 portfolio. This showed that CFP's  - 12 - losses on doubtful loans in that portfolio would probably amount to Col$ 12 million, but that this risk was sufficiently covered by provisions and port- folio reserves which totalled Col$ 12.3 million and Col$ 7 million, respec- tively, on June 30, 1974. However, since CFP does not yet have an adequate provisions policy to cover itself against possible losses, CFP would annually review its portfolio and compute, to the satisfaction of its auditors, the necessary provisions to be deducted from equity when calculating its debt/equity ratio (Sections 3.03 and 3.04 (d) of draft Project Agreement). Projected Operations 42. On the basis of a sample survey, and taking likely inflation into account, it has been estimated that CFP's loan commitments would rise from Col$278 million in 1973 to Col$658 million by the end of 1976. Approximately 60 percent of the demand would be for the financing of working capital and 40 percent for fixed investment. While CFP intends to increase its equity investments, they would remain small relative to lending operations. 43. To achieve the foregoing level of operations, CFP would need to increase its borrowings by Col$ 728 million and its equity by Col$ 165 mil- lion by the end of 1976. As to borrowings, CFP believes it can obtain roughly half its requirements from its traditional sources. New local sources would be expected to supply about one-quarter, while the remainder would be sought in the form of foreign loans, including the presently pro- posed loan and another of the equivalent of US$2.5 million which is under negotiation with the German Kreditanstalt fur Wiederaufbau. Assurances have been obtained from the Government that CFP would be provided with sufficient local resources to permit the carrying out of its lending and investment program through 1977 (Section 2.02 of draft Guarantee Agreement). As to equity, an increase of CFP's capital by Col$ 115 million has already taken place in 1974. The Proposed Loan 44. The proposed US$5.5 million loan would consist of three elements: (i) a US$2.5 million first tranche for relending to small enterprises for fixed investment; (ii) a US$2.5 million second tranche for the same purpose, to be released only if a Bank review were to show that CFP's performance in utilizing the first tranche had been satisfactory 1/ and provided also that agreement were reached on the sub-loan interest rate to be charged on the second tranche (Section 3.02 (a) (iv) of draft Loan Agreement); and (iii) US$0.5 million which would be used to finance technical assistance to CFP itself and for technical assistance lending by CFP to enterprises also receiving credits for fixed investment. 1/ Such review would concentrate on: (a) satisfactory implementation of CFP's program for reducing arrears in loan recovery; (b) introduction and maintenance by CFP of adequate subproject appraisal standards; (c) introduction and maintenance by CFP of a systematic loan supervision system; and (d) progress in implementing the main recommendations of the study on the organization of CFP.  - 13 - 45. The loan would relieve the scarcity of long-term resources avail- able to CFP and permit it to increase its financing of fixed investment by small-scale industry. Since this would be CFP's first association with an international agency, the loan would also permit the Bank to make an impor- tant contribution to the improvement of the institution's organization and procedures. The loan might also serve as a catalyst by facilitating CFP's access to funds from other sources. Moreover, since this would be the Bank's first loan in Latin America exclusively for small industry credit, it is expected that new knowledge would be gained about the ways in which this sub-sector can best be assisted. 46. The sample survey of CFP's past clients indicated that the Bank's US$5.5 million loan would help finance investment projects and technical assistance aggregating US$10.2 million; about 30 percent of the financing would be provided by CFP out of its own resources and about 15 percent by the sub-borrowers themselves. 47. The proposed loan would be made to the Banco de la Republica, which would assume the foreign exchange risk on peso-denominated subloans. The Banco de la Republica would make the peso equivalent available to CFP at 18.5 percent interest for the fixed-asset relending program and at 12 percent interest for the technical assistance program. Interest rates to the ultimate borrower would be 24 percent on peso-denominated fixed-asset subloans and 13.5 percent on foreign exchange denominated fixed-asset subloans,i/ and 15 percent on technical- assistance subloans (peso-denominated). The composite interest spread to the Banco de la Republica, assuming that all subloans are taken in peso denominations, would be on the order of 10 percent, which would be sufficient to cover the ex- pected depreciation of the exchange rate, which has been running at approximately 8-1/2 percent per annum, and also to cover the Banco de la Republica's adminli- strative costs. Subloans would have a maturity of between four and ten years, with up to 3 years of grace. Should recent inflation rates in Colombia continue, the proposed rate for fixed-asset lending would be slightly positive in real terms, but the proposed rate for technical assistance lending would be substantially negative. Given the promotional purpose of the proposed loan, the relatively small subsidy inherent in the first rate seems justified; as regards the second rate, while the subsidy may be large in percentage terms, the amounts involved are small, and it must be recognized that fairly large incentives for Colombia's small entrepreneurs will be needed in order to broaden the application of more sophisticated techniques as will be promoted by the technical assistance envisaged. As noted earlier, the relending rates would be reviewed after the first half of Bank loan funds for fixed-asset financing have been committed to determine whether the relending rate for fixed-asset financing would be likely to remain slightly positive in real terms and continue to provide an adequate spread to Banco de la Republica and Corporacion Financiera Popular. 1/ In the latter case the Banco de la Republica would make the funds available to CFP at 8-1/4 percent.  - 14 - 48. The Bank loan would be repaid by Banco de la Republica in twelve years, with 3-1/2 years of grace, and any difference between subloan repay- ments to CFP and amortization of the loan received by CFP from the Banco de la Republica would be freely available to CFP for its normal operations. In the case of subloans denominated in foreign exchange, the Banco de la Republica would also carry any exchange risk resulting from the foregoing difference in amortization schedules. The commitment fee on the Bank loan would be charged against the undisbursed portion of sub-loans which either have been authorized by the Bank for withdrawals or have been approved by CFP and submitted to the Banco de la Republica (Section 2.05 of draft Loan Agreement). This slightly concessional treatment is considered justified as CFP is still a young institution and has a low profitability. 49. Eligibility for fixed-asset subloans would be limited to firms with total assets not in excess of Col$ 10 million (the equivalent of US$400,000) except for 25 percent of the loan proceeds which could be relent to firms with total assets over Col$ 10 million but not exceeding Col$ 20 million (US$800,000 equivalent). The maximum relending under the loan to any one firm would be Col$2.5 million (the equivalent of US$100,000), in the case of firms with assets up to Col$10 million and Col$4 million (US$160,000) in the case of the larger firms. We would expect about 200 fixed-investment subloans averaging the equivalent of US$25,000 to be made by CFP under the project. The typical recipient would be a firm with assets between Col$ 3 million and Col$ 6 million, employing 20 to 50 workers. Under CFP's policies, no credit could exceed 50 percent of the total investment in a new enterprise, or the net worth of the firm in the case of an existing enterprise. Accepting CFP's existing procedures, regional offices would be empowered to approve subloans up to Col$ 350,000, while subloans of higher amounts would require the approval of CFP's Loan Committee or Board of Directors. Subloans over Col$ 1.5 million (the equivalent of US$60,000) would require prior Bank approval. Bank super- vision missions would, of course, also review ex post a sample of subloans approved by CFP under the free limit and would at the same time make suggestions for improvements in CFP's appraisal practices. Disbursement 50. Disbursement of Bank funds would be made for 90 percent of expendi- tures for specific fixed assets -- 100 percent of CIF cost whenever documen- tation is available -- and 100 percent of the cost of consultants' technical assistance services. On average, disbursements under this formula would be equivalent to the estimated 54 percent foreign exchange component of the project. 51. CFP would apply for disbursements through the Banco de la Republica's Department of Development Credit, which would monitor all applications. Detailed documentation for expenditures would normally not be submitted to the Bank but retained in Colombia for inspection by Bank supervision missions.  - 15 - Economic Benefits and Justification 52. Due to the varied nature and large number of sub-loans anticipated, it would be difficult to calculate an economic rate of return for the project. However, CFP's appraisal of sub-projects would help insure an adequate finan- cial rate of return, which in most cases would be expected to exceed 15 per- cent. Considering the substantial urban unemployment and the low rate of protection enjoyed by many of CFP's clients, the economic rate of return on most sub-projects would be higher than the financial rate of return. 53. Most sub-projects would be for the expansion of capacity. Foreign exchange benefits would result from the increased output, much of which would substitute for imports. In addition, about 25 percent of sub-projects could be expected to produce some additional exports. 54. With small industry requiring less capital investment per job than large industry and in addition employing a large number of new entrants to the industrial labor force, the project's employment benefits should be sub- stantial and should assist in improving income distribution. An estimated 1,700 to 2,300 jobs would be created, about three-quarters outside Bogota. In addition to helping to upgrade the skills of labor, the project would encourage the development of entrepreneurship. Because Colombia's topography causes high transportation costs, small industry is widely dispersed, and hence the project would contribute to regional development and industrial decentralization. PART V: LEGAL INSTRUMENTS AND AUTHORITY 55. The draft Loan Agreement between the Bank and the Banco de la Republica,the draft Guarantee Agreement between the Republic of Colombia and the Bank, the draft Project Agreement between the Bank and the Corporacion Financiera Popular, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement, and the text of a draft resolu- tion approving the proposed loan are being distributed to the Executive Directors separately. Features of the draft Agreement of special interest are referred to in Part IV of this Report. PART VI: RECOMMENDATION 56. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President By J. Burke Knapp Attachments December 31, 1974   an" Page 1 of 12 Page8 COUNTRT DATA, - r0L01MIA 3,139,000 1,02 23.0 minlion (mId-19172) .. Par Ilof a.r abia lawd Itafereoss Gastric.s B TflnS " mki'DE Turkey Brazil Bafon ON? MR CAPITA VUM (ArLAS BASIS 42 .. 100 /A 370 A( 53D /a 750 LA 'r-- r-t ate (Pat thA... sd) :39/tn D ./ 6s,as 3/ ./ Owed, death rate (Par thousand) 12 11 7W 13 ~ 10l La 10 Infent Mortality rate (Per thouaand live births) 100o 70 14.5 110 - 50 Iaa Life expectancy at bairth (year.) 57 59 __55 7ra 6 / !._ Gross reproduction rateSL 3.2 3.2 Id 2.6/ 2.6 3.1 /d Population growth rat .T3.1 3.3 iT 2.5 ~Fa 2.9 /1 3.5 7 Population gruath rate - urban 6 u.k 57 4%l.5X7 5 78 5 70 Age trocire (percent) 4' / .'/ 1 8 L2 1.6 15-61 50 F 50 5 53.9 53 Ir 50 15-6h ~~ ~ ~ ~~~~~3f 3 L.3 578 1. 65 and over 1.7 a~ 1.771 1.2 i. 78 1.9/A DnondercY ratio 4 _ Urcban population as percent of total 53 /p,ik 62 /a.k 38.7 I 56 /n 59 /n Fanily plumning: Ho. of acceptors oseolattve (thoum.) 0.5 316 1.81. M 250 No. of umaro 5% or earned ao)...8.2 75-' 1.6 Total labor force (thoosands) 5,100 Ip 6,200 IL3J,500 /al 29,500 It 13,000 Farcantaga employed in agricultore If? Fl it 59 14 39 Per-antago oomployod __7__ 2jj 4 Percent of nationa tcma recated by highest 5% 36p, 33A/ 32 Ac ow a 33 /ab 36 /ob o Percent of national lweoa recseood by higheot 20% 63 P 59 7! 60 7htEtiK 62 733 61. naTj Percent of national inroms received by 2besot 2C% p,y ii7- 3 7E'.tE 3 733 41. Percent of national Incomme reraivod by lowast .0% 9 tO 7! 10 10 7a3 11 wn MSTRIUJTON OF LAND 0WNNSHW S seed by topF 1t ofown-wer... 53 % omeod by smallest 10% of ososa .-. 0.9 HEALTH AN1D NEUTRlTOI Population per physician 2,1.00 2,160 /ac 2,220 1,950 laD 1, .1. Population Par noo sing person 3,520 lad 1,04.0 fano 1,8)0 /to 3,300 /ac.,ce 1,570 Population par hospital bad 580 - 1.50 - 90- 260 930 Per capita calorie sopply an % of roqclreoent 90 /0f 88 1233 106 107 Per capita protetn supply, total (razz. per dayTa6 50 72' so7 78~ 67 66 Of which, shied and PUlse 28 70- 26 22 39 78 Death rate 1-1. years /7 l2 . 15 73 11 duse/8prileary school en,olboent ratio 77 95 A 2.11 130 /a,c 101, lai Adjusted 78 onnndary school enrollment ratio 12, 21 7 28 277 na- 23 Ta..ro of :1hootlg providad, first and eacond lava 11 1 11 13 12 V*ocational anrolloust as % of sec. school enrollment 30 lok 25 /n at ,1 17 2. /ao Adult literacy vote % 73M ,55 /an 68 /zn t4 7; Avaroga No. of parrscos par roan (urban) ...1.9 1.0 /a- 2.5 /a- Percent of o..-Pled units without Piped sater 59 /p,uruu. 64. /cp1 6? 7a7co., st 51 a Accesstto eleotricity (an % Of total population) 65 , 787I 4.1 17jM 1.7 ____M__ _ Percant of f.ral popoulation conste o icil.t 6 .1 l /000 2 'fl3;2eZ-ivara par 1000 population 139 10)3 /' 89 60 2~ P.asanger co Pa pr 1000 PaPolatios 7 Ia. 00 77 40,w 1 25 25 Elac.troc poser consumption (khi p.c.) 237 7* 1.1. 241 1.77 5.36 Nawpnnt onncption p.c. lkg par year 2.2 1.9/0 2.0 2.9 3.1 noteo: Figures refer mOther to the 1istoot perioda or to account of Zanronmseta tempeatuire, bod~y gsicts, and the loteot years. lateot periodo racer in principle to diotribation by age aao sea of national popolaloas.n the years, 1956-60 or 1966-70; the latest Yearo in pai.]- /-6 Protein standards (reqairinanta) far all sontries an.estab- ciple to 1960 ond 1970. liabad by USDA Soonomlo Resoarch Sarvia pro-tdm for a sininmu Th. Per Capita GNP estisair ia at norhet priea fcw afll..cc of 60 gren of total protein par day, and 20 grama of years otter tihn 1960o,alculated by the none con version amnlai and pulse protein, of obioh 10 gran should be ani.sl technique as the 1972 World Dank Atlo,. Protein. These standards are ooswbat 1ose than those of 75 2 A-rarge number of daughtorm per woma of raproduotins Emma of total protein and 23 grans of animal protein as an age. average for tao world, propasad by PAO in the Third Vorld Fond La Pepul.tino groah votes ore for the de...den ending in Suos.Y 1960 end 1970. L can studies iotea.sggasted that crode death rtate of children 4j bun of under 15 and 65 and noor age brackets. t. ages I thrnagb I may ho used 00a .firat approximation index of those in labor forc bracket of ages 15 throogh 61.. malnu,trition. 4 FAG refcrvnon standards reproes,t phyotologio-i r- /8 Percn-tage enrolled of oorreupoinuig population of actool age quilroncoc fr notno0l. actiIty and heolth, tokIng as defined fcc- soot onouniro. /a 1972; To lBbO.1. c ReItgistered only; fd 1965-70 iN eotimate; le 1967];, 4f 955-59; / -Rote based on inc-tu2' b pe 9cil ; /n <.II..igmi 179); /i 1O60-?2;L/Tlo 6 cPpoltto3i4o t n ucesof 1,50 or n.r- inhchi. tanto; A 196t-79; /. Ad-nlntrten- centers of PrV-rZemni and dlstricts ("Viloyet" and 'ln"cantor,); /n Urban nod somor5c soneo of aCtitai e ntero or mnlcncpolittieo and diosrttuts; fo Localities of 2,500 or more; 4 1961,; -/ Estimute; /r 15-59 yearn; /s 60 yearo and owror /t Ratio oO'7oPalation under 15 and 65 and over to totol labor force; /u -Tatio of popolotion _under 15 and 60 and ovor to total labor force; /n hooed on 1.3 percent uaValo toablotion of nsos. returns, ezolading Indian jungla population; /w Bogota only; 7! 1963; /4 Incom recipioct; In icono-ically actiro population; /aa GDSPo9nble income; -Yob Ilooatholds; Inac 1969; /ad 1965; /ae Hospital peroonnel; /0f 1961-63j /ag 196.-66;-/ah 19656-67; /al Gr73is enrollmcot sAicF_Tnciud.a nvfeag st.- dentn; 4% ThIe net 7-ofl.not ratio. In 1971 wor 877 pecnt and l87~rosnt for basic and secondary eduactiono, respec- tiraty; /ak Including teacher train.ing at third levol; aIa 15 yoarO end near; lam Persons 6 years old an,d ovor abhc tell the conoon toiter that they can rood and write; /aKbDefinition unknown; /.ia Total, urban and rural; lap BooedI on re.ulto. cC suiple survey; /aq~ ho percent, of dw7Tilcgo; /ar Wator ptpedCflide; /a. Gotsot,at baoed on uanplr tabulutico of cooort.ro.; a.t Goalie orotando; /au m.olludiog oevi-pen,oansot d-li,,go; fn1971; loIncluding special purpose vehinlao IE 161 /y ared from~ s-nple survy otinaton (210,000 peroni37 ocld tog 17 cantern proolnes; /az 1965-7r7 /ba 193F7; Ab 19614-Juno 1971., 86 perment being IUGs; Aic lnoloding assistant nuroeo and miiwivsao. * xeico is seleoted m0 tha objootive nuanty beca..n Coloobia is now in the stage of ec.oorito deuelopoot that Nealco woo ton years ago. Both ocontries alt at a GDP growth rate of about 7 peroeot and at a subsatantlal reduction of unemployment. nzt,i: t R6 Doomobar fLI, 1971.  ANN'EX 1 Page 2 of 12 p,ages COLOMBIA ECONOMIC DEVELOPMENT DATA (Amounts in milLions of UI. S. dollars) Actual Projeocted 1966- 1970- 1972- 1977- 196-6 1970 1972 1974 1977 1980 1970 1972 1977 1980 1966 1970 1977 NATIONAl, ACCUNTSSN -rtAe ea 9711 rcs&toag ae Average Annua.l Growth Rates As Per-et of COY Cross Lionetic, Prodoct 5507.6 6916.1 7832.6 8979.2 11000.0 13475.4 1.9 6.4 7.0 7.0 99.1 98.3 92.5 Gains Iro Teams ot rd t 50.1 118.8 2184 2T67. 2 267.6 336.1 . .9 1.7 2.5 Grass Domepstic Inoon 05557.7 7034.9 8051.0 9246.4 -11287.6 13811.4 60 70 71 . 0. 0. 0. Import (iooN. NFS) 793.1 1170.1 1379.7 1432.1 1609.6 2216.9 10.2 4.6 7.2 7.0 10.1 16.6 16.0 E.ports "(import capacity) 748.7 981.8 122. 409.1 1770 2061 7. 05_. .91. 4.0 15.0 Bonoorco Cap u~~~~~~~~~~4.4 186.4 77.2 73. 923 108 4. 3. 3.6 24.4 3. n.6 1.0 Consumption Eopeodit.ers 4482.7 0706.7 6355.2 7156.0 8790.7 10780.5 6.2 5.5 6.7 7.0 80.6 81.1 77.9 Lnetns (1001. stocks) 1120.0 1514.6 1773.0 2113.5 2589.1 3171.7 7.8 8.2 7.9 7.0 20.2 21.5 22.9 Duaor~sic Sa,Ings 1075.5 1328.2 1695.7 2090.4 21.96.8 3030.9 5.4 13.0 8.0 6.7 19.4 18.9 22.1 N4atio..al Savings 994.5 1191.6 1543.1 1989.2 2400.4 2904.6 4.6 13.8 9.3 6.8 17.9 16.9 21.3 MffERi00A01111 TRADE Anneal Onto t Cjrren Prices As Pcrcent of Total Imports Capital' Goods 261.5 396.4 402.4 621.8 10192.3 1659.5 11.0 0.7 22.0 15.0 38.8 47.0 50.0 ilL-rediate Coor 271.0 273.9 295.9 486.8 655.4 968.7 0.3 3.9 17.2 13.1 40.2 32.5 30.1 Pan1s 7.8 8.8 6.3 10.0 48.1 150.0 3.1 -15.0 50.0 27.0 1.2 1.0 2.2 C-nsoprion Goods 118.9 135.3 172.4 233.3 349.5 531.2 3.3 6.7 15.1 15.0 17.6 16.0 16.0 others 74.9 29.6 34.3 35.0 39.3 59.7 18.7 7.6 2.7 15.0 2.2 3.1 5.8 Total --rh. Imports (.di) 674.1 84.0 911. 2 1391.0 2184.6 3090o. 39 191 15010. 10I 100.0io Exports Prinary Products 380.! 519.4 569.1 653.2 1070.0 1424.2 60.1 1.9 13.4 9.9 72.5 71.5 41.0 Fadls 70.6 74.6 511.3 25.0 00). 0 00.0 1.4 -17.0 - - 13.5 9.5 - mdn-fictr-ed Goods 73.3 148.0 224.0 828.9 1302.9 2124.3 19.2 2 . 42.0 17.5 12.9 16.9 55.1 Tvta,l March. Esports (tob) 124.0 -78 2.0 845.1 1-50 7. 1 737 7.9 73154 8. 5 13.9 4. 0 2-~3.0 174 .3 100-.0 100.0 1 05.0 Mer-h-odsn Trade Indioces Average 1967-69 = 100 Enport Price indon 100.97 127.03 128.97 135.48 169.89 209.33 5.9 0.8 5.7 7.2 Import Price index 95.26 90.00 98.19 137.27 175.19 218,2G -1.6 4.4 12.4 7.5.. Tones of Trade loden 105.44 141.13 151.31 98.62 96.59 95.93 7.5 -3.6 -6.0 -0.3. Isports VoLume Index 88.4 109.46 124.49 14-4.53 183.96 247.80) 1.5 6.6 7.9 8.2 VALUE ADDED BY SECTOR Annual Data at 1967-69 Prices and Exchange Rates Average Annual Groth Rates As Percent of Total Agri-ult,,e 1749 1969 2130' 23130 2656 3402 3.0 4.0 6.1 6.0 31.7 00.4 20 Industry and Mline. 1422 1796 2036 2370 3294 4.384 6.0 6.5 10.0 10.0 23.7 21.9 30 Serice 2352_ 3170 3637 4432 4833 5669 7.6 7.1 5.8 5.5 42.6 45.6 44 Total 5523 8955 7803 86 103 1455 1. 61 70 70100 100 hO PTUBLIC FISANCE a *As Percent of GDP (Central Governmet)a Co.rrect Receipts 543.6 638.3 095.1 796.4 975.7 1287.3 12.4 4.3 7.0 9.7 9.9 9.2 8.9 2orront Expseeditores 355.8 422.4 492.5 564.8 691.9 912.9 18.7 8.0 7.0 9.7 6.5 0.1 6.3 lodgetary Savings ~~~~~1-87.~8 211.9 202.6 231.6 2-8-3.8 3F74.4 5 11.0 -3.1 7 .0 -9 .7 2.4 3.1 2.6 Other Public, Sector 213.7 385.7 354.4 40)6.8 498.3 652.4 80.5 -4.0 7.0 9.7 3.9 3 .6 4.5 Pohlid Sector Investment 249.4 290.3 381.3 4153.9 507.1 669.0 16.4 11.1 7.0 9.7 4.1 4.2 4.6 CURRENT EXPENDITUREE DETAILS Actual Prclim. Est. Prnj. DETAIL ON As Pe-r,et of Total (An, , Total Correat Exened.) 5866 1970 1972 10 73 1974 NATIONAL GOVERNYEENT (1968/72 - 19 73/1751 Edo-tioc, . . . . INVESTISENT PROGRAM Other Social Services . .. . . . Social Senctors 26.2 Agricolture . .. .. .. ..Agriculture a12.63 Other Economic Services .. .. . . ..Industry and Power a-2. Adninistrotion and Defena. .. . . Transport and Cnmeoicaticons 31.6 Other .. . . . .Other 6.0 Total Current Expenditures . .. .. . ..Total E.peoditorei 100.0 - SELECTED INDICATORS 1960- 1965- 1970- 1973- FINANCING (acltdfrom 5-year averaged dora) 1965 1970 1975 1928 Avergae ICOR 3.96 -TT7 3S.32 3.25 Public, Sector Savings 69.4 20.7 Im.port Elasticity 1.10 1.16 a0-,1 1.00 Domestic Sorrmalng (not) 0.8 1.1 Marginal Domestic Saviogs Nate 0.11 0.18 0.31 0.17 Pore.igo l3orrosiog (net) ...29L1 .....2. Margin~al National Savings Rare 0.08 0.14 18.29 0.23 Total Fin.mnoing 100.0 100.0 LABOR FORCE AND Total Lahor Porno Valne Added Per Wokr(976 rces 6 Ext. Rates) OUTPUT PEN WdORKlER To Millions % of Total 1960-70 In 0.21. Dollars Percent of Average 1960-70 1960 1970 1960 1970 Growth Rate 1960 1970 1960 1972 Growth Nate Agriculture 2.14 2.4-2 48.6 42.0 1.3 61 7066.4 63.7 2.0 Tnd.stry 1.00 1.37 22.2 23.7 5.2 1327 1663 143.0 140.6 2.3 Service 1.26 1.98 28.6 34.3 4.6 1142 1367 123.1 115.7 1.8 Total .4 5.76 100.0 100.0 2.6 9~28 928 100.0 10.24 Nct applicable -oil or negligible 9/74 lot available- loe- than half the emallos unit shown R2 .1 Onloding Mining *1969 doat xx1969-20 growth rato,  ANNEX I BALANCE OF PAYMENTS, EXTERNAL ASSISTANCE AND DEBT Pg fL ae (amounts in millions of U.S. dollars at current prices) Avg. Annual Actual Estimated Projected Growth Rate 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1968-1978 SUMMARY BALANCE OF PAYMElqTS Exports (incl. NFS) 788,0 870.0 1000.0 983.0 1198.6 1626.1 1803.9 2198.9 2561.5 2972.4 3410.3 15.8 Imports (ind. NFS) 866.0 939.0 1149.0 1294.0 1217.1 1487.4 1989.7 2361.0 2714.4 3120.8 3588.0 15.3 Resource Balance (X-M) -78.0 -69.0 -149.0 -311.0 -1-8.5 1738.7 -185.8 6 -12. 1 - 15-2.9 -1T48.4 -177.7 8.6 interest (net) -66.0 -70.0 -89.0 -105.0 -128.1 -139.9 -76.4 -88.1 4108.6 -131.8 -157.1 9.1 Direct Investment Inicome -47.0 -74.0 -91.0 -71.0 -69.5 -67.6 -78.0 -80.0 -81.0 -84.0 -90.0 6.7 Workers' Remittance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Current Transfers (net) 31.0 38.0 36.0 34.0 34.7 39.8 45.0 4~6.-0 48.0 50.0 52.0 5.3 Balance on Current Account -160.0 -175.0 -293.0 -453.0 -181.4 -29.0 -205.2 -284.2 -294.5 -314.2 -372.8 6.8 Private Direct Investment 48.0 50.0 39.0 40.0 18.5 26.5 51.0 30.0 32.0 38.0 46.0 -0.4 Official Capital Grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 14.3 6.9 4.0 0,0- Public M&LT Loans Disbursements 219.8 200.8 236.5 223.1 355.9 341.0 128.0 465.4 511.1 566.0 686.4 12.1 -Repayments -74.0 -67.3 -75.1 -94.3 -95.0 -112.6 -100 -128.4 -127 -161.5 -207.6 10.9 Net Disbursements 145.8 133.5 161.4 128.8 260.9 228.4 160.0 337.0 368.4 404.4 478.8 12.6 Other M&LT Loans Disbursements 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - -Repayments 0.0 0.0 0,0 0.0 0,0 0.0 0.0 0.0 0.0 0.0 0.0- Net Disbursements 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Short-Term Credit (Net) -22.0 -15.0 58.0 67.0 -22.8 -38.6 0.0 0.0 0.0 0.0 0.0- Capital Transactions n.e.i. -17.8 3.5 28.6 117.2 70.3 12.9 -32.8 0.0 0.0 0.0 0.0- Change in Net Reserves 6.0 3.0 6.0 100.0 -145.5 -200.2 117.0 -97.1 -112.8 -132.2 -152.0- Actual Estimated Actual ;RANT AND LOAN COMMITMENTS 1968 1969 1970 1971 1972 1973 DEBT AND DEBT SERVICE 1968 1969 1970 1971 1972 1973 Official Grants & Grant-like 27.0 27-.2 42.9 29_.2 06.0 0d._0 Public Debt Outs. & Disbursed 958.5 1090.9 1251.8 1386.4 1649.1 1867.5 Interest on Public Debt -30.4 -35.6 -44.1 -48.6 -58.0 -80.5 Public MALT Loans Repayments on Public Debt -74.0 -67.3 -75.1 -94.3 -95.0 -111.7 IBRO 105.6 60.3 109.3 153.1 74.1 162.2 Total Public Debt Service -104.4 -102.9 -119.2 -142.9 -153.0 -192.2 IDA 0.0 0.0 0.0 0.0 0.0 0.0 Other Debt Service (Net) -35.6 -34.4 -44.9 -56.4 -70.1 -.59.4 OtheTr Multilateral 0.4 55.6 0.0 41,5 40.6 29.1 Total Debt Service (Net) -140.0 -137.3 -164.1 -199.3 -223.1 -251.6 Governments 98.5 154.2 111.9 108.8 113.9 79.3 Suppliers 33.5 20.7 107.3 28.9 40.5 20.9 Burden on Export Earnings (. Financial Institutions 25.2 14.1 19.0 36,1 90.7 86.0 Public Debt Service 13.2 11.8 11.9 14.5 12.8 11.8 Bonds 0.0 0.0 0.0 0.0 0.0 45.0 Total Debt Service 17.8 15.8 16.4 20.3 18.6 15.5 Public Loans n.e.i. 15.9 0.0 0.0 0.0 0,0 0.0 TDS+Direct Invest. Inc. 23.7 24.3 25.5 27.5 24,4 19.6 Total Public MALT Loans 2i79-.1 30-4.9 34-7.3 368.4 359.8 422.5 Average Terms of Public Debt Actual Debt Outstanding on Dec. 31. 1972 EXTERNAL DEBT Disbursed Only Percent Int. as 7. Prior Year D04D 3,7 3.7 4.0 3.9 4.2 4.9 World Bank 453.4 27.5 Amort. as 31 Prior Year D060 9.1 7.0 6.9 7.5 6.6 6.8 IDA 20.9 1.3 Other Multilateral 85.5 5.2 IBRD Debt Out. & Disbursed 289.9 313.1 354.1 390.8 453.3 504.5 Governiments 766.4 46.5" as 31 Public Debt 060) 30.2 28.7 28.3 28.2 27.5 27.0 Suppliers 114.9 7.0 as 31 Public Debt Service 27.9 31.4 30.8 29.0 31,1 31.6 Financial Institutions 173.8 10.5 Bonds 14.0 0.8 IDA Debt Out. & Disbursed 19.5 19.5 19.5 19.4 20.9 22.9 P'ublic Debts n,e.i. 20,2 1.2" as 7, Public Debt 060 2.0 1.8 1.6 1.4 1.3 1.2 Total Public M6LT Debt 1649.1 100.0 as 7, Public Debt Service 0,1 0.1 0.1 0.2 0.3 0.3 R/3 12/74  Annex I Page 4 Of 12 pages COLOMBIA: EXTERNAL PUBLIC DEBT COMMITMENTS, 1970-73 a (Millions of Dollars) Source of Financing: 1970 1971 1972 1973 1 INTERNATIONAL ORGANIZATIONS 109.3 19h.6 114.7 191.3 IBRD 109.3 153.1 7h.1 162.2 IDB/ - La.5 40.6 29.1 GOVERNMENTS 111.9 108.8 113.9 79.3 Germany (F.R.) J1.3 6.5 4.6 5. U.S. 96.6 92.6 109.3 1. Other 1.0 9.7 0.0 32.5 SUPPLIERS 107.3 28.9 40.5 20.9 Germany (F.R.) 36.0 6.8 0.0 1.7 Japan 0.6 0.8 13.5 0.0 Sweden 15.8 1.5 3.6 14.5 U.K. 0.0 6.1 9.L 0.0 U.S. 1.3 7.1 1.1 2.0 Others 53.6 8.1 12.9 2.7 PRIVATE BANKS 18.1 36.1 83.7 83.4 Japan - - - 25.0 U.K. 7.7 10.0 0.0 - U.S. 6.4 13.1 42.8 17.2 Others 4.0 13.0 0.9 h1.2 BOND ISSUE -- - _5,0 OTHER FINANCIAL DISTITUTIONS 0.9 0.D 7.0 2.6 TOTAL 347.5 368.4 359.8 422.5Sv a/ Data contain estimated components and are therefore suitable only for illustrative purposes. S/ Estimated on basis of information available on July 5, 197L. c/ IDB commitments (Board approvals) exclude amounts repayable in Colombian Pesos. d/ Net of refinancing loans totalling US$83.5 million from private banks in the Euromarket. Source: IBRD 8/7h  ANNEX I page 5 of 12 COLOMBIA - MEMORANDUM ON RECENT ECONOMIC DEVELOPMENTS AND PROSPECTS A. Recent Economic Developments Economic Growth 1. The Colombian economy has performed impressively in a number of important respects in the past several years. Real growth of gross domestic product accelerated from an average of 4.7 percent in 1950-67 to an average of 6.4 percent over the 1967-72 period. During the past two years, Colombia has sustained even higher rates of growth, 7.1 percent in 1972 and 7.3 percent in 1973, the highest rates of growth achieved in 25 years. Strong expansion of the industrial, agricultural, and in 1973, construction sectors, rapid growth of non-traditional exports, and favorable coffee prices were the key factors in this achievement. Preliminary indications are that GDP growtn has decelerated slightly in 1974 as a result of a slowdown in the construction boom and a weakening of coffee prices. While industry continues to be the leading growth sector, expanding by 10 percent in real terms in 1973 and accounting for about 30 percent of growth of GDP, a boom in construction generated an increase in value added by that sector of 12.6 percent. Despite rapid growth of the labor-intensive construction sector, unemployment has continued to increase in most of Colombia's major urban centers, in part as a result of accelerated rural to urban migration. While the rate of growth of agriculture (4.8 percent in 1973) was well above the historical average, most of the growth was concentrated in agricultural commodities for export. Lagging production for domestic consumption, insufficient to keep pace with domestic demand has contributed to inflationary pressures. Mining production has declined steadily for the past several years as a result of declining petroleum production. Inflation 2. Inflation has become a serious problem in Colombia and seems likely to persist for some time, despite a number of measures taken in recent months to combat it. The cost-of-living index is expected to have risen by about 25 percent in 1974 as compared to 22 percent last year, 14 percent in 1972, 12 percent in 1971, and an average of 7 percent per year between 1967 and 1970. Accelera- tion in the rate of inflation during 1973 and the first quarter of 1974 was the result of a surge in the level of demand stemming from (a) the substantial increase in the income of the export sector; (b) the large fiscal deficit in the cash operations of the,public sector; and (c) continued strong private investment. Rising cost of imports, labor and credit, combined with tight controls on imports and a decline in the output of agricultural production for domestic consumption further aggravated inflationary pressures. Measures adopted in late 1973 and early 1974 to limit the rate of expansion of aggregate demand and increase aggregate supply have begun to take hold and the rate of  ANNEX I Page 6 of 12 inflation has declined during the second and third quarters of 1974. However, increasing pressure for substantial upward wage adjustments from organized labor and the need to eliminate some subsidies and allow upward adjustment in prices of a number of items which have been controlled for the past 12 months have caused some increase in the rate of inflation during recent months. Progress in reducing the rate of inflation in 1975 will depend heavily upon the Government's success in arresting the deterioration in public finances which has taken place since 1972. Balance of Payments 3. Colombia's rapid growth in 1972-73 was sparked by strong growth of coffee and most minor exports which permitted a large accumulation of foreign exchange reserves. Coffee exports increased an estimated 34 percent to US$630 million, largely as a result of continuation of the upsurge in world coffee prices (an average of US$0.73 per pound in 1973 as compared to US$0.57 in 1972) which began in mid-1972 as Brazilian coffee production declined. Of even more significance from the point of view of the long-term growth of the Colombian economy was the continued strong performance of minor exports which increased 48 percent to US$680 million. Price rises for these goods accounted for a significant proportion of the increase, but volume exported also rose by a substantial 15 percent. Despite the impressive 40 percent increase in total export earnings which took place in 1973, Colombia continued throughout most of the year to maintain tight controls on imports. As a consequence the value of imports exceeded the 1972 level by only 22 percent, not substantially more than the increase in import prices. The increased real availability of imported goods accordingly did little to dampen domestic inflationary pressures. Despite official measures to speed up import payments and to reduce foreign exchange inflows to the Bank of the Republic arising from private borrowing abroad, official reserves increased from US$345 million at end-1972 to US$524 million at end-1973. 4. Export performance during the first seven months of 1974 was out- standing. Higher world coffee prices and a 32 percent increase in the volume shipped resulted in a 36 percent increase in coffee export registrations during this period as compared to the same period of 1973. Registrations of non-traditional exports increased 51.4 percent through July, an increase of over 30 percent in real terms. Exports of manufactured products have been a major element in the strong expansion of non-traditional exports with earnings from textiles increasing three-fold, while those from chemicals and pharmaceuti- cals, and metals and metal products, doubled. Import liberalization has led to accelerated import payments and there has been a lengthening of the lag between export registrations and exchange surrender. Thus, despite strong export performance the current account of the balance of payments has shifted from a surplus of over US$100 million during the first seven months of 1973 to a deficit of US$80 million during the same period of this year. Sharply reduced external borrowing by the Government has further lowered the inflow of foreign exchange, and reserves probably declined by about US$120 million during 1974.  ANNEX I Page 7 of 12 5. The estimated decline in foreign exchange reserves of US$120 million for 1974 should not present any problem to Colombia since an appropriate cushion of reserves, sufficient to cover about 4 months of imports, probably still existed by year end. Foreign exchange reserve management over the next eighteen months should aim at preventing further losses, since world coffee prices may remain weak for some time, and prices of several of Colombia's non-traditional agricultural exports appear to have peaked, while those of imports are expected to continue rising. The new government is aware of the possibility of some deterioration in the terms of trade and is attempting to sustain the high rate of growth of non-traditional exports by accelerating devaluation of the peso so as to compensate exporters for the differential between internal and ex- ternal inflation. Since mid-August the rate of depreciation of the peso has been substantially greater than the differential between domestic and world inflation and the Government intends to continue this policy for the fore- seeable future. Public Finances 6. Deterioration of Colombia's public finances since 1971 has made it increasingly difficult for the authorities to manage aggregate demand so as to contain inflation while maintaining a desirable pace of development. Despite an average annual real rate of growth of GDP in excess of 7 percent, National Government tax revenue has failed to show any significant increase in real terms and, as a percentage of GDP, declined from the peak of 9.4 per- cent in 1971 to an expected 7.4 percent in 1974. This weakening in domestic resource mobilization through the tax system was, in 1972 and 1973, reflected in increased Government recourse to general purpose external borrowing to cover the Government's cash deficit, and in declining real levels of public investment. In order to overcome these problems, the new Government has initiated a comprehensive structural reform of the fiscal system which includes major modification of the sales and income taxes, elimination of the wheat subsidy, reduction of fiscal incentives for non-traditional exports, and strengthening of the fiscal contribution of decentralized public enterprises. The reform has not yet been fully put into effect, but it could, if fully implemented and supplemented by an urban property tax and measures to eliminate the subsidy of gasoline consumption, produce a substantial strengthening of public finances. B. Development Problems and Policy Requirements 7. While Colombia's growth, and balance of payments performance has been excellent in recent years, lagging performance in several important areas could, if permitted to continue, jeopardize the country's development effort. The key areas where policy action is required include improving the performance of the petroleum sector, strengthening public finances and  ANNEX I Page 8 of 12 investment, maintaining the appropriate balance in the flow of resources through the financial system, further improving income distribution and the employment situation, and assuring continued strong expansion of non-tradi- tional exports. Petroleum 8. Colombia is fortunate in having sufficient crude petroleum supplies to escape any immediate adverse balance of payments' effect of recent in- creases in world oil prices. However, an unrealistic pricing policy has, in recent years, encouraged excessive consumption and contributed to a decline in output. While the internal reference price paid to producers for "new" crude oil was increased to US$4 per barrel in February 1974, prices to producers for petroleum flowing from existing fields as well as prices at the refinery and consumer levels have not been changed since June 1971, and are far below prices in international markets. 9. Crude oil production has declined 20 percent since 1970, and crude exports have stopped altogether. Creation of appropriate incentives for in- creased exploitation of oil from fields already in production, and a modest dampening of domestic demand by means of long-overdue price increases, would permit Colombia to hold off crude oil imports until 1979-80. If decisive action is taken in the months ahead to encourage exploration and drilling, it is entirely possible that new oil, sufficient to meet domestic demand, could become available in 5-6 years. Failure to act in the immediate future, however, could, in the early 1980's, result in a heavy burden on Colombia's balance of payments. 10. Prices of petroleum products are controlled by the Government and the retail price of gasoline is among the lowest in the world (regular gasoline is US$0.12/gallon). Considering the country's supply and demand situation, product prices to the consumer and at the different stages of production should be increased so as to be more in line with international prices. Such a price adjustment should be done as soon as possible since low petroleum product prices have not only discouraged production of petroleum, but have diverted attention from development of the abundant coal, natural gas, and hydroelectric resources which Colombia possesses. Hydropower, coal, and natural gas currently account for only 4 percent, 12 percent, and 17 percent, respectively, of energy production and there is considerable scope for sub- stituting these alternative energy sources for petroleum. To develop them will, however, require careful planning and sizable capital outlays, as well as proper pricing to encourage an appropriate energy balance. There is a close relationship between petroleum pricing policy and the fiscal situation since price increases of petroleum products would increase the Central Govern- ment's fiscal resources through further improved finances of the State-owned oil company, ECOPETROL, and through increased gasoline tax collections. This would help to overcome the revenue shortfalls which hamper the investment program and which limit the government's ability to reduce present inflationary pressures.  ANNEX I Page 9 of 12 Public Savings and Investment 11. Notwithstanding the booming production and trade conditions of the economy over the past few years, Colombia's public finance performance has been disappointing. Largely because of poor tax collections in 1972 and 1973 (especially for the income tax) the real current surplus in both years was below that in 1971. The real decline in income tax collections in 1973 oc- curred despite a 7.3 percent increase in real GDP and reveals a serious weakness in income tax administration. Real public investment spending in 1973, covered in part by severe compression of current outlays and by US$80 million in Eurocurrency borrowing, fell sharply despite the continued pressing need for expanded social and economic infrastructure. Preliminary data for 1973 indicate that the decline in public investment has not been offset by an increase in private investment and that the share of total investment in GDP has fallen from an average 21.4 percent in the 1969-72 period to 19.3 percent in 1973. Without substantial strengthening of public finances, public investment could continue to decline in real terms and the expansion of the private sector could be constrained by lack of complementary social and economic infrastructure. 12. Reliable data are not yet available concerning Colombia's overall public sector accounts for 1971-74, but enough is known to make it clear that the decline in National Government investment during this period was not offset by spending in the rest of the public sector. The new Government is aware of the need for increased investment by decentralized public sector agencies and is expected to move rapidly in the coming months to assure an appropriate increase in the internally generated resources of these agencies. Deficits of public enterprises in the electric power, water and sewerage, and telecommunications sectors, with the exception of Empresa Nacional de Telecomunicaciones (TELECOM),have risen in recent years as a result of lagging tariffs. Three decentralized enterprises, Empresa Colombiana de Petroleos (ECOPETROL), TELECOM and Empresa Colombiana de Puertos (COLPUERTOS), have in the past few years accounted for 90 percent of the total current surplus of the public enterprises. Dissaving of public enterprises was concentrated in four enterprises; IDEMA (the Government's agricultural marketing agency), the Railways (CNR), Instituto Colombiano Agropecuario (ICA), and Instituto Colombiano de la Reforma Agraria (INCORA). In the rest of the public sector the tendency has been for savings to decline also since 1969. As a result total public savings fell from 7.0 percent of GDP in 1969 to 5.0 percent in 1973. 13. The recently completed fiscal reform contains an impressive array of measures aimed at (a) increasing tax revenue; (b) improving the progressivity of the tax system by reducing the tax burden on the lowest income groups, increas- ing taxes on the highest income groups, and by closing numerous loopholes which have permitted high income groups to avoid paying taxes; (c) increasing the elasticity of the tax system; and (d) improving tax administration. While it will be several months before the revenue implications of the fiscal reform become completely clear, preliminary estimates indicate that new tax revenue of about Col$ 2.5 billion will be generated in 1975. In addition, elimination of the wheat subsidy has reduced the need for transfers to IDEMA by an esti- mated Col$ 1.2 billion in 1975. The outlook for 1975 is for a sharply  ANNEX I Page 10 of 12 reduced National Government deficit as the recent revenue generating measures begin to take hold. The Central Government deficit should be reduced from about 2% of GDP in 1971-72 to 0.2% in 1975; but it must be noted that this is likely to be achieved only with the help of a further reduction in real terms in investment expenditures by the National Government. Reform of the Financial System 14. In August 1974, the new administration introduced a series of execu- tive decrees and resolutions aimed at domestic monetary reform. These measures involve restructuring of interest rates, including establishment of a maximum ceiling on the rate of monetary correction, a simplification of Colombia's complex reserve requirement system, the elimination of numerous portfolio requirements, the elimination of several rediscount facilities, and the adoption of more stringent controls over existing facilities. In broad terms, these measures should produce a more balanced flow of resources through Colombia's financial system and provide the authorities with greater control over the functioning of the monetary system. Income Distribution and Employment 15. Despite the paucity of suitable statistics it seems clear that tile existing distribution of personal income is markedly unequal. The poorest fifth of the population appears to be receiving 3 percent of total income, while the richest fifth gets about 60 percent. Not much can be said about changes over time, but since rural incomes seem to be more highly skewed than urban incomes, the increasing demographic importance of the towns and cities would seem to present a prima facie case for presuming a modest improvement in the overall national income distribution. This conclusion is to some extent supported by national income accounts data which indicate that the share of wage and salary income of GDP increased from 36 percent in 1950 to 40 percent in 1970. Few Colombians would accept past rates of improvement as adequate, however, and a great deal remains to be done in order to snr-! the benefits of economic growth more widely. Rural land redistribution, more effective taxation, higher public spending for education and health services, and a vigorous effort to boost overall production and employment growth are all needed, together with continuing efforts to prevent abuses arising from monopoly power. Colombia's authorities have accelerated their efforts to do all of these things in recent years. 16. The employment goal is perhaps the most important of all the major national objectives in the economic sPbere. Increasing and spreading employ- ment opportunities is the single most effective way to raise the level and improve the distribution of national income. Data on unemployment are sparse, but the available figures for 1972 point to an improvement in Bogota accom- panied by deterioration in Medellin, Barranquilla, and other urban centers. If rough weights by city are applied, a slight overall deterioration seems to have occurred. Since 1972 rural to urban migration appears to have increased and as a result unemployment in Colombia's major urban centers has increased. The one exception to this has been in Cali where accelerated rural to urban migration has not been as pronounced because of its rich agri- cultural hinterland and decentralized agro-industries located in a number of  ANNEX I Page 11 of 12 smaller cities throughout the Departments of Valle and Cauca. The challenge facing Colombia's authorities is to encourage and shape growth of employment through the use of excise taxes, depreciation allowances, import tariffs and general monetary/fiscal policies. Special incentives should be provided to industries which are labour-intensive and to firms willing to undertake multiple shifting as a means of increasing employment. External Borrowing 17. Available data indicate that Colombia's public external debt out- standing at the end of 1973 came to US$2.6 billion, of which US$1.9 billion had been disbursed. During 1973 contracts were signed to borrow US$421 million (of which US$305 million were project loans). The levels and composi- tion of 1973 borrowing closely approximated the amounts set forth in the 1973 project list (as described in the May 1973 IBRD Economic Report net of expected slippage and droppage). An estimated disbursement of US$340 million on public external borrowing occurred in 1973, as compared to US$355 million in 1972 and US$223 million in 1971. While disbursements on project loans increased 20 percent in 1973, a slowdown of such disbursements has taken place since late 1973, reflecting a scarcity of local counterpart funds stemming from the deteriorating fiscal performance. However, the fiscal actions now being taken by the Colombian Government, and those under consideration may to some extent ameliorate this situation, and it is hoped that by the time of the 1975 Consultative Group Meeting sufficient action will have been taken to enable the Group to proceed with consideration of a full assistance program for 1975-76. C. The Growth Perspective and Capital Requirements 18. Recent IBRD Economic Reports on Colombia have concluded that the economy can sustain a 7 percent annual rate of growth over the long-term without excessive foreign borrowing, provided that exports can be increased at a reasonable rate. During 1972-73 this growth target was attained, and it is likely that in 1974 real growth will again reach about 7 percent. These high rates of growth were accompanied by a strong export and balance-of-payments performance, which made possible a large build-up of foreign exchange re- serves, and a decline in the debt service ratio. The long-term projection made last year is being revised, to take into account recent developments and new information on the outlook for commodity prices and world inflation. 19. For the time being it seems safe to assume that the volume of coffee exports will increase 1.5 percent annually from 1975 through the remainder of the current decade and that export earnings from coffee in current prices will increase an average 7.6 percent annually, until 1979. Growth in the volume of other exports which include a wide range of manufactured and agricultural exports, can be assumed on that basis to decline from 20 percent in 1975 to 10 percent for 1979. Total exports would increase in current prices at an average 14.3  ANNEX I Page 12 of 12 per year from 1974 on. In real terms the growth rate of total exports may thus be between 7% and 7.5%. Imports may be assumed to be about 15 percent of GDP throughout the projection period provided that Colombia will not require sub- stantial imports of crude oil. Under these assumptions Colombia will require public external assistance disbursements totalling about US$3.5 billion during the five-year period 1975-79. This level of external assistance implies new commitments averaging US$700 million annually. These public external assistance requirements imply only modest increases in real terms over recent levels. 20. In the past the structure of Colombia's external debt has been strongly influenced by the receipt of large amounts of development assistance from inter- national development agencies. This, together with the successful export per- formance, explains the low and relatively stable debt service ratio which Colombia has experienced over the past decade. As a result of continuing rapid growth of non-traditional exports and favorable coffee prices, the burden of debt service on the balance of payments declined moderately in 1973. The debt service ratio (principal and interest payments as a percentage of exports of goods and nonfactor 3ervices) amounted to a modest 12 percent in 1973 compared to 12.9 percent in 1972 and 14.3 percent in 1971. The debt service ratio is now lower than throughout, most of the 1960s. Despite the expected shift away from external assistance from international development agencies and the large increase in total external borrowing (in current prices) which is foreseen at least until the end of the current decade, the debt service ratio would remain well manageable during that period. In these circumstances, and assuming that Colombia is able to sustain its export expansion and avoid external borrowing on unfavorable terms to cover fiscal shortfalls, the country should have little difficulty in obtaining the required external capital and in servicing its external debt obligations. However, some of this capital will have to finance local costs, if the country is to cover its justifiable resource gap, since the foreign exchange content of the projectizable portion of the investment program is likely to be comparatively small.  ANNEX II Page 1 of 8 Page8s THE STATUS OF BANK GROUP OPERATIONS IN COLOMBIA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30, 1974) US$ million Loan Amount (less cancellations) Number Year Borrower Purpose Bank IDA Undisbursed fully disbursed loans and credits 592.3 196 -5 502 1967 Instituto Colombiano de la Reforma Agraria Irrigation 9.0 1.8 536 1968 Empresa de Acueducto y Alcantarillado de Bogota Water Supply 14.0 04 575 1968 Interconexion Electrica,S.A. Power 18.0 2.8 624 1969 Colombia Agriculture 17.0 3.2 625 1969 Banco de la Republica Industry 25.0 01 651 1969 Colombia Agriculture 18.3 4h5 679 1970 Colombia Education 6.5 1.9 680 1970 Colombia Roads 320o 6.3 681 1970 Interconexion Electrica,S.A. Power 52.3 12.6 682 1970 Empresas Municipales de Gali Water Supply 1865 10.8 738 1971 Empresas Municipales de Palmira Water Supply 2.0 1.2 739 1971 Colombia Agriculture 8.1 365 740 1971 Empresa Nacional de Telecomunicaciones Communications 15.0 5.3 741 1971 Empressa de Acueducto y Alcantarillado de Bogota Water Supply 88.o 73.2 742 1971 Banco de la Republica Industry 4000 4.2 842 1972 Colombia Industry 30.0 4 9 849 1972 Instituto Colombiano de la Reforma Agraria Irrigation 5.0 408 860 1972 Instituto de Fomento Municipal lWater Supply 9.1 8.3 874 1973 Empresas Publicas de Medellin Power 56o0 49.59 903 1973 Banco de la Republica Industry 6o.o 54.7 920 1973 Colombia Education 21.2 21.1 926 1973 Ferrocarriles Nacionales Railways 25.0 2365 971 1974 Colombia Pre-Investments Studies 8.o 8.0 TOTAL 1,07803 1965 307.0 Cf which has been repaid 222.7 o.6 Total now outstanding 857.6 15.9 Amount sold 20.5 Of which has been repaid 1765 3.0 Total now held by Bank and IDA 854.6 18.9 TOTAL UNDIbBUR6ED 307.0 307.0  ALNIEX II Page 2 of S pages B. STATEHi'NT OF IFC INVESTMENTS (As of September 30, 1974) Type of Amount in US$ million Year Obligor Business Loan Equity Total 1959 Laminas del Caribe, S.A. Fiber-board 0.50 - 0.50 1960-1965 Industrias Alimenticias Noel, S.A. Food products 1.98 0.08 2.06 1961 Embases Colombianos, S.A. Metal cars 0.70 - 0.70 1961-1968 Morfeo-Productos para el Hogar, S.A. Home furniture 0.08 0.09 0.17 1961 Electromanufacturas, S.A. Electrical equipment 0.50 - 0.50 1962 Corporacion Financiera Development Colombiana financing - 2.02 2.02 1962-1963 Corporacion Financiera Development Nacional finarcing - 2.02 2.01 1963-1967 Compania Colombiana de Tejidos, S.A. Textiles 1.56 0.27 2.13 1964-19?3 Corporacion Financtera Development de Caldas fLnancing - 3.81 0. a_ 1966-1963 Forjas de Colombia, S.A Steel forging - _.27 1.27 1966 Almacenes Generales de Deposito Santa Fe, S.A. Warehousing 1.00 - 1.00 1966 Industria Ganadera Colombiana, S.A. Livestock 1.00 0.58 1.58 i967-1974 ldKA de Colombia, S.A. Textiles 5.00 2.70 7.70 1969 Compania de Desarrollo de Hioteles y Purismo, Ltda. Hoturismo Tourism - 0.01 0.01 1969 Corporacion Financiera del Development Norte financing - 0.45 o.46 1969 Corporacion Financeera del Development Valle financing - 0.43 0.C3 1970 Fromotora de Hioteles de Turismo l'edellin, S.A. Tourism 0.23 0.11 0.32 1970 ?ro-H-oteles, S.A. Tourism 0.80 0.22 1.02 1C73 Corporacion Colambiaxna de Ahorro y Vivienda Housing - 0.32 0.32 1)7L Cementos doyaca Cement 1.50 - 1.50 Total gross commitments 15.15 11.20 26.55 Less cancellations, terminations, repayments and sales 8.87 4.o) 13.56 Total comnaitments now held bY IFC 6.28 S 6.71 12.99 Total undisburEed 3.97 .67 4.62  ANNEX II Page 3 of 8 pages C. PROJECTS IN EXECUTION 1/ 1. Summarized below is the current status of all loans signed but not fully disbursed: Ln No. 502 Irrigation (Atlantico I); US$9 million, June 1967. Closing date: original - December 31, 1973; current - December 31, 1974. 2. While all physical works should be completed by the current clos- ing date, final payments to contractors will not occur until March or April 1975. A further extension of closing date to June 30, 1975, is therefore being considered. The delays in project execution have been occasioned by poor selection of areas suitable for irrigation, technical problems in the construction of irrigation and drainage works, and non-compliance by con- tractors with established schedules. Agricultural development has also been slow, due to poor project management and lack of adequate supporting services to the farmer. However, INCORA has lnow appointed a very capable Project Manager who has brought with him a competent agricultural team who, it is believed, have the potential to develop the project satisfactorily under its less than ideal circumstances. Citrus has now been abandoned as a project crop. Rice is now proposed as a temporary irrigated crop in order to allow the leaching of salts from the soil profile. The intensive cropping pattern needed to justify the investment in irrigation facilities will be several years in development. Ln No. 536 Water Supply (Bogota I); US$14 million, June 1968. Closing date: original - June 1972; current - December 31, 1975. 3. As of September 30, 1974, US$13.6 million or 97 percent of this loan has been disbursed. Notwithstanding that the Project is essentially completed, the Closing Date was extended because of delays in procurement and to permit final payments to suppliers. Ln No. 575 Electric Power (Interconnection): US$18 million, December 1968. Closing date: December 31, 1974. 4. The original project was completed and commercially operational in 1971. The Bank agreed that an undisbursed balance could be used to fi- nance a 220 kv transmission line, Guatape - Barrancabermeja, which would 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the under- standing that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  ANNEX II Page 4 of 8 pages be completed in the first quarter of 1975, one year behind schedule. The cost is estimated at US$7.2 million of which about US$4.1 million represents the foreign currency component. The Bank is seriously concerned about ISA's financial situation which is being discussed with the borrower and the Govern- ment. Ln No. 624 Agricultural Credit II, US$17 million, June 1969 Closing date: original - December 31, 1973; current - June 30, 1975. 5. After disappointing performance in the first three years, changes in project management and organization and an increase in technical personnel provided the basis in February 1973 for the Bank's agreeement to enlarge the project area and include lending to small farmers under the project. As a result, the project is now proceeding in a satisfactory manner. All project funds are expected to be committed by end 1974. Ln No. 625 Development Finance Companies III: US$25 million, June 1969. Closing date: June 30, 1974 6. The loan is fully committed to sub-projects. The Bank will ascertain whether the Borrower wishes the Closing Date postponed or the small undisbursecd balance cancelled. Ln No. 651 Livestock II; US$18.3 million, December 1969 Closing date: July 31, 1975 7. After a disappointing performance during the first three years afLer signing, 1970-72, CAJA's project administration was reorganized and the project area was extended to cover the entire country. The project has, since early 1973, progressed satisfactorily. Demand for on-farm investments is high an, disbursements have been accelerating. Ali loan funds are expected to be com- mitted by end 1974 and disbursements might be completed before the original closing date of July 31, 1975. Ln No. 679 Education II; US$6.5 million, June 1970. Closing date: original - June 30, 1973; current - December 31, 1974. 8. Major civil works have been completed and all nine project schools have been in operation since January 1973. However, operation of schools is below the expected level because of inadequate organization and shortage of local funds to meet current expenditures. Procurement of equipment and furniture has been delayed. All contracts will be signed before the extended closing date, but disbursements should continue later on. A further post- ponement of the closing date is therefore planned. Ln No. 680 Highway VI; US$32 million, June 1970 Closing date: original - November 30, 1974; current - November 30, 1976.  ANNEX II Page 5 of 8 pages 9. The largest component of the project, the paving program, has ex- perienced considerable cost increases and is still experiencing delays. The Ministry of Public Works has taken many steps (approved by the Bank) which have reduced, although not avoided, delays and contractor bankruptcies. Due to cost increases, the Bank's participation in the paving program has been reduced to 15 percent. The status of the other components of the project is more satisfactory. Ln No. 681 Chivor Hidroelectric Power; US$52.8 million, June 1970. Closing date: June 30, 1977. 10. The Chivor Hydroelectric Project is expected to be put into ser- vice in June 1975, six months behind schedule. The project's foreign and total costs are expected to be 35 percent higher than originally estimated. Because the shareholders have not made their financial contribution to ISA when due, ISA has not been able to pay its contractors on time. Another problem facing ISA is the present ownership of its capital stock, which permits three of the four shareholders holding individually more than 25 percent of the shares to block any resolution requiring a 75 percent majority. The Bank is seriously concerned about ISA's financial situation. The Government has now formulated a plan of near term action which is expected to shortly restore ISA's financial viability. Ln No. 682 Cali Water Supply and Sewerage; US$18.5 million, June 1970. Closing date: original - June 30, 1974; current - December 31, 1975. 11. As of September 30, 1974, about 42 percent of the loan amount was disbursed. Disbursements were delayed due to a late project start, but the entire project is under execution, and it is expected that construction activities will be finished by June 1975. Ln No. 738 Palmira Water Supply and Sewerage; US$2 million, May 1971. Closing date: March 1, 1975. 12. As of September 30, 1974, about 40 percent of the loan amount was disbursed. Disbursements were delayed due to initial management and fiscal problems. A financial crisis in early 1973 has now been resolved through higher tariffs and tight budget control. Construction is expected to be terminated in late 1975. Ln No. 739 Land Settlement Caqueta I; US$8.1 million, May 1971. Closing date: April 30, 1975. 13. Because of considerable price increases and unexpectedly difficult physical problems, project objectives were reduced to about 70 percent of appraisal targets in August 1973, halfway through the project period. Since then, the livestock credit program has picked up speed so that the revised goal for this component should be achieved ahead of time. On the other hand, the road construction program has fallen behind schedule so far that not  ANNEX II Page 6 of 8 pages enough time remains to catch up, even with an accelerated work pace. Despite these problems, the project is making a substantial contribution to the suc- cessful colonization of the Caqueta area. A second-phase project was ap- praised in February 1974. Ln No. 740 Telecommunications II; US$15 million, May 1971. Closing date: June 30, 1975. 14. Due to initial delays in the procuirement of project equipment, a slippage of about one year in the completion date of some works on the project is now anticipated. Ln No. 741 Water Supply (Bogota II); US$88 million, May 1971. Closing date: June 30, 1978. 15. Disbursements up to September 30, 1974 amounted to 17 percent of this loan, only 42. percent of the appraisal estimate. Slow progress in the construction of the vital palacio - Rio Blanco Tunnel is the main reason for the project's delay; the nrevious foreign contractor has been replaced by another firm. EAAB's financial situation was weak, but important mea- sures to improve it have been taken by the Empresa. Ln No. 742 Development Finance Companies IV: US$40 million, May 1971. Closing date: December 31, 1974. 16. This loan is fully committed. Disbursements are ahead of schedule. The Borrowers will soon request postponement of the Closing Date. Ln No. 842 Development Program and Export Expansion Project; US$ 60 mil-lion, June 1972. Closing date: December 31, 1974. 17. The US$10 million DFC portion of this program loan is now almost fully committed. The last subproject which will utilize the unallocated balance of the loan (US$943,000) was presented to the Baic before the final date for sub- project submission September 30, 1974, and is now under review. Disburse- ments are proceeding satisfactorily and amounted to US$5.2 million as of October 31, 1974. However, itwill be necessary to extend the present clos- ing date of December 31,' 1974 to allow commitments to be fully disbursed. Ln No. 849 Irrigation (Atlantico II), US$5 million, June 1972. Closing date: March 31, 1978. 18. Construction of drainage facilities is lagging far behind schedule primarily due to the poor performance of the contractor having the major re- sponsibility for the drain construction financed under this loan. Steps are being taken to either force compliance with the contract or replace the con- tractor with another. With the high world prices of livestock products, it appears that more of the project area will be devoted to combination cattle feeding and milk production than was previously envisaged. The returns per ha from such enterprises will not differ too much from the field crops originally contemplated.  ANNEX II Page 7 of 8 pages La No. 860 Medium-Size Cities Water Supply and Sewerage Project; US$9.1 million, October 1972. Closing date: September 30, 1976. 19. As of September 30, 1974, about 6 percent of the loan amount was disbursed. Disbursements were delayed due to initial serious management pro- blems. Lower demand than estimated has prompted investment reprogramming and it is expected that construction activities will not be finished until 1979. Ln No. 874 Guatape II Hydroelectric Power Project; US$56 million, January 1973. Closing date: December 31, 1978. 20. The progress of the work is generally satisfactory except for delays in the resettlement of El Penol and Guatape villages, which will make it dif- ficult to start filling the Santa Rita reservoir before mid-1977, two years behind schedule. If filling of the reservoir does not begin in mid-1976, an energy deficit in the interconnected system of at least 10 percent from 1978 to 1981 is expected. The revised project cost estimate (US$119.2 mil- lion) is 21.3 percent above appraisal estimates, mainly due to higher costs of the works at El Penol and Guatape. EPM has failed to achieve the 9 per- cent rate of return required under the Loan Agreement and it has fallen behind in its payments to ISA, thus contributing to the problems experienced by the latter (see Loan 681). The Bank is seriously concerned about EPM's financial situation which is expected to be adequately improved soon by a substantial increase in EPM's electricity tariffs. Ln No. 903 Development Finance Companies V; US$60 million, May 1973. Closing date: June 30, 1977. 21. Commitments of the loan were interrupted for several months this year pending agreement on a revised interest rate. Commitments are proceeding well, and it is expected that the balance of US$27.2 million unallocated at October 31, 1974, will be fully committed early in 1975. Currently, loan applications pending approval exceed the unallocated funds available. Disburse- ments are still behind schedule, but in view of the rapid rate of commitment, they should be completed by the closing date, June 30, 1977. Ln No. 920 Education III; US$21.2 million, July 1973. Closing date: June 30, 1977. 22. This loan became effective on January 9, 1974. Shortage of counter- part funds delayed to September 1974 the opening of construction bids for the first 22 project institutions. Construction works are expected to proceed smoothly by April 1975. Procurement of teaching equipment has been progressing satisfactorily and 60 percent of the purchase orders have been placed. Im- plementation of the technical teacher training program is expected to commence within the next six months. Various studies for the sector analysis are also expected to begin within the next four months.  ANNEX II Page 8 of 8 pages Lu No. 926 Sixth Railway Project; US$25 million, August 1973. Closing date: June 30, 1976. 23. Implementation of CNR's Investment Plan is progressing satisfac- torily; track rehabilitation and maintenance, together with workshop produc- tion, continue to improve. Project objectives probably will have to be reduced by 35 percent because of the large increase in the price of materials. CNR's financial picture has continued to improve because of increased traffic and tariffs. However, the Government's recent emergency program, which intends to halt imports of wheat, will have a serious adverse impact on that traffic between Santa Marta and Bogota. The Government's performance under the fi- nancial provisions of the Guarantee Agreement was satisfactory to the end of June but subsequently has been inadequate. The matter is currently under review. Ln No. 971 Preinvestment Studies Project; US$25 million, March 1974. Closing date: December 31, 1978. 24. This loan became effective on June 27, 1974.  ANNEX III Page 1 of 4 pages COLOMBIA SMALL-SCALE INDUSTRY PROJECT LOAN AND PROJECT SUMMARY Borrower: Banco de la Republica (BR) Guarantor: Republic of Colonbia Beneficiary: Corporacion Financiera Popular (CFP) 1/ Amount: US$5.5 million equivalent Terms: 12 years, including 3-12 years' grace at 8 percent interest. Relending Terms: (a) From BR to CFP (i) at 18.5 percent interest on US$5.0 million equivalent to be made available for fixed-asset financing and (ii) at 12.0 per- cent interest on US$0.5 million equivalent to be made available for technical assistance fi- nancing. (b) From CFP to its clients (i) at 24 percent for fixed-asset financing and (ii) at 15 percent for technical assistance financing. (c) Clients would have the option of borrowing from CFP for fixed investment at 13-1/2 percent, with the subloan denominated in foreign exchange. In such cases, BR would provide the funds to CFP at 8-1/4 percent. The Banco de la Republica would assume the foreign exchange risk. Project Description: The project comprises the financing of the establish- ment and expansion of privately-owned small industrial firms, technical assistance to CFP to strengthen its organization and procedures, and the financing of technical assistance to CFP's clients. 1/ Summary Income Statement and Balance Sheet attached.  ANNEX III Page 2 of 4 pages Estimated Cost: Local Foreign Total - US$ Million- Investment Financing 4.150 5.450 9.600 Technical Assistance: (i) to CFP .150 .050 .200 (ii) to CFP Clients .400 - .400 Total 4.700 5.500 10.200 % of Total 46 54 100 Financing Plan: CFP Clients Bank Total _________US$ Million- Investment Financing 3.000 1.600 5.000 9.600 Technical Assistance: (i) to CFP - - .200 .200 (ii) to CFP Clients .100 - .300 .400 Total 3.100 1.600 5.500 10.200 % of Total 30 16 54 100 Estimated Disbursements: FY75 FY76 FY77 FY78 --------- US$ Million -------- Incremental .500 2.300 2.100 0.600 Cumulative .500 2.800 4.900 5.500 Procurement Arrangements: As usual under DFC-type projects there will be no international competitive bidding. Most capital goodswould be purchased "of-the-shelf'1 from domestic distributors. Construction of industrial buildings will be by domestic firms. Consultants: Colombian consultants will principally be utilized for technical assistance to CFP and its clients. Rate of Return: Most sub-project are expected to have a financial rate of return over 15 percent. Appraisal Report: Report No. 499-CO dated December 11, 1974.  ANNEX III Page 3 of 4 pages COLOMBIA: SMALL-SCALE INDUSTRY PROJECT CORPCRACION FINANCIERA POPULAR Income Statements as of December 31, for the period 1968-73 (in Col$ 000's) 1968 1969 1970 1971 1972 1973 INCOME Income from loans Interest 1,056 3,911 9,387 21,228 40,824 49,639 Commissions 1 270 843 _1,729 3,012 3,976 1,057 4,181 10,230 22,957 43,836 53,615 Other Income 4 24 102 751 570 1,383 Total Iticome l,_M1 4,205 10,332 23,708 44,406 54,998 EXPENSES Financial expenses from domestic borrowings - 500 2,262 8,175 21,157 27,883 Financial expenses from foreign borrowings _ - -__ _ Total Financial Expenses - 500 2,262 8,175 21,157 27_,88 Salaries 300 708 1,381 4,385 6,672 14,6'8) Other Personnel Expenses 168 420 813 2,847 3,972 14, Other Administrative Expenses 45611 1,6561' 1,876!' 2,789 5,236 7,689 Research and Expansion Expenses - - - - - Total Administrative Expenses 924 2,784 4,J00 10,021 15,880 22,337 Total Expenses Before Provi- sions and Depreciation 924 3,284 6,33?. 18196 37,037 50,220 Provisions for doubtful loans - 293 1,552 2,709 4,128 - Provisions for equity investments - 200 397 - - - Depreciation 14 45 70 215 354 339 Total Non-Cash Expenses 14 538 2 019 2,924 4,482 339 Total Expenses 938 3,822 8 351 2.,l20 4.,519 5,559 Net Profit 123 383 1 93L _2_,588 2,887 _4,3_9 1/ Includes administrative commissions paid to Banco lPopuLar of: Col$89,530 in 19686 Col$1.02 million in 1969, and Col$1.039 million in 1970. November 1974  ANNEX III Page lw of 4 pages COLOMBIA: SMALL SCALE INDUSTRY PROJECT CORPORACION FINANCIERA POPULAR Balance Sheets as of December 31, for the Period 1968-73 (in Col$'000) 1968 1969 1i 197 1972 1973 ASSETS Cash and Banks 14,417 1,976 3,111 2,704 5,132 8,918 Portfolio Loans 8,385 47,317 94,745 189,986 290,235 3'.4,924 EqUity Itnvestments 35 _1040 _.040 I 79 1330 ,! Total 8,420 4 _95,785 191,065 291,565 3 252 Less provisions for losses on: DoLubtful Loans - 293 1,845 4,292 8,419 9,528 Doubtful Equity Investments - 200 597 597 597 597 Net Portfolio - 47,864 , 93,34 1 I86,176 2 ,L543 359665 Other Receivables and deferred Expenses 57 694 1,133 5,221 11,773 34,648- Fi.xed Assets (net) 319 510 861 2,296 3,189 3,624 Other Assets - - - 130 385 10,4L.27 TOTAL ASSETS 23,213 51,044 98,448 196,527 303,028 416,982 LIABILITIES AN'D NET WORIH Borrowings in Domestic Currency: Rediscounting - FFI - 11,143 18,685 58,511 69,496 107,019 lemr Deposits - - 30,000 48,193 80,575 62,247 Bonds: Banco RNpublica, Banco Popular - - 2,281 12,052 32,245 52,116 Sociedades Capitalizadoras - - - - - 38,619 Foendo National del Ahorro - - - , Total Bonids: - - 2,281 12,052 32,245 90,735 Other Rorrowings is Domestic Cur-rency - 1- .341 5,310 42,523 48,579 Total Borrowings in Domestic Currency - 11,143 _52,30 124,063 _ 22