Colombia - Trade Policy and Export Diversification Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY . 4X - Co Report Nt. P-4055-CO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTEPNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED TRADE POLICY AND EXPORT DIVERSIFICATION LOAN IN AN AMOUNT EQUIVALENT TO USt300 MILLION TO THE REPUBLIC OF COLOMBIA May 2, 1985 is docut sited distributi and may be used by recipienft only in the performance of their official dutie Us cotests may not otherwise be dislosed widibot Would Bank autherozati,n.  CURRENCY EQUIVALENTS Currency Unit = Colombian Peso (Col$) Col$101.8 = US$1.00 (1984 average) Col$129.84 = US$1.00 (exchange rate on April 17, 1985) Col$1 = US$0.0077 (exchange rate on April 17, 1985) WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 to December 31 GLOSSARY OF ABBREVIATIONS BR Banco de la Republica (Colombian Central Bank) CERT Certificado de Reembolso Tributario (Tax Reimbursement Certificate) DANE Departamento Administrativo Nacional de Estadistica (National Bureau of Statistics) DNP Departamento Nacional de Planeacion (National Planning Department) INCOMEX Instituto de Comercio Exterior (Institute of Foreign Trade) JM Junta Monetaria (Monetary Board) PROEXPO Fondo de Promocion de Exportaciones (Export Promotion Fund) PV Plan Vallejo (Import Duty Drawback System for Exporters) PV Jr. Plan Vallejo Junior (Import Duty Drawback System Applicable to Occasional Exporters) SIEX Sistema de Importaciones para Exportaciones (System of Imports for Exports)  FOR OMCIAL USE ONLY - i - COLOMBIA TRADE POLICY AND EXPORT DIVERSIFICATION LOAN LOAN AND PROJECT SUMMARY Borrower: Republic of Colombia Amount: US$300 million equivalent. Terms: 17 years, including four years of grace, at the standard variable interest rate. Project Description: The proposed loan would support the first phase of the Government's trade policy adjustment program. The immediate objective of the program is to support an outward looking development strategy by introducing policy reforms to re- orient the economy towards export promotion. Specific measures have already been taken within the context of a medium-term adjustment program to achieve these objectives; others will be implemented over the next twelve months to reform trade policies by: (i) reorienting export policies so as to reduce the discretionary element and provide automa- ticity and uniformity of access to incentives and foreign exchange in order to promote the free trade status of the exporter; (ii) adopting a program of elimination of export restrictions; (iii) initiating a program of elimination of import prohibitions and quantitative restrictions and a reduction of tariff dispersion and levels; (iv) improving the administrative mechanisms of trade management; and (v) formu- lating an Action Program of trade reform for the longer term. The program is described in the Government's Policy Statement on Economic Adjustment. The foreign exchange provided by the loan will be used to finance general imports of industrial and agricultural inputs and raw materials for exporting firms and several studies related to export incen- tives, export promotion, external debt management and budget programming and planning. The immediate benefits of the program would be an improvement in the net balance of pay- ments contribution of the tradeables sectors, and the strengthening of external lenders and investors' confidence in Colombian growth prospects. The risks of the program and of export performance relate to assessing the length and difficulty of the adjustment process, domestic pressures against the continued implementation of the program, delays in completing export-oriented petroleum and coal projects, uncertainties in the external environment and export This docuient has a resbicted ditbution and may be used by recpients only in the pefomance of toeficial duties. Its contents may not otherwise be disdcod without World Bank autborization  - ii - prospects, destabilizing capital flows which are the result of illegal transactions, and the possibility of the further straining of Colombia's financial sector which could affect the commitment to import liberalization. These rtsks are expected to be reduced by DMF monitoring of the program through special arrangements, by Bank monitoring in the context of the Loan, and by assurances obtained from the commercial banks, on the basis of the Loan and the related monitoring, regarding the availability of financing required for 1985 and 1986, including the maintenance of trade credit lines. Estimat-d Disbursements: The loan would be disbursed in two tranches. The first tranche of US$150 million would be available for disbursement at the time of loan effectiveness; the second tranche of US$150 million is expected to be released six mouths later, on the basis of a favorable assessment of the economic program and the direction of policy, and the implementation of specific trade policy actions. Disbursements for the entire loan are expected to be completed within 12 months of loan effectiveness. Appraisal Report: This is a combined President's and Staff Appraisal Report.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA FOR A TPADE POLICY AND EXPORT DIVERSIFICATION LOAN 1. I submit the following report and recommendation on a proposed loan to the Republic of Colombia for the equivalent of US$300 million in support of its program of trade policy adjustment and export diversification. The loan would have a term of 17 years, including 4 years of grace, with interest at the Bank's standard variable rate. PART I - THE ECONOMY 2. An economic mission visited Colombia in July 1982 and its report (4444-CO) was distributed to the Executive Directors in August 1983. A mission to review the external sector and agriculture visited Colombia during April/May 1983, and its report (4981-CO) was distributed to the Executive Directors in April 1984. This report reflects the major findings of a mission which visited Colombia in December 1984. Country data sheets are presented in Annex I. Background 3. The Colombian economy has made considerable progress since the arly 1950s. From a largely rural and agricultural base, the economy has e--olved into one that is more integrated, with a greater urban-industrial and services orientation today. The growing economic activity, rapid rural-urban migration, together with the increased participation of women in the labor force and expanded public services, have been instrumental in reducing poverty and improving income distribution over time. Financial aun capital markets have evolved pari-passu with the growing needs of the economy, and the country has become an active participant in international capital markets. State enterprises are few, follow on the whole adequate pricing policies, and many have some form of private sector participation. The country's energy balance has been changing in recent years and Colombia is expected to become a net petroleum exporter in 1986 and to become increasingly an exporter of thermal coal. 4. In the 1950s and early 1960s, development policy favored import substitution supported by high tariff protection. By the mid-1960s, the prospects for further import substitution were substantially reduced, and the country was confronted with great economic uncertainty, arising from the fact that economic activity and the balance of payments were heavily influenced by developments in the world coffee market. In order to ease this constraint, beginning in 1967 the authorities adopted an outward-looking development  - 2- strategy, expanding and diversifying exports. Export promotion policies, including frequent small devaluations of the peso, export tax rebates and other incentives were introduced and the authorities began lowering tariffs somewhat and relaxing capital market controls as a means of raising effi- ciency and increasing the profitability and competitiveness of Colombian goods in external markets. These measures were highly successful in reliev- ing the foreign exchange constraint and stimulating growth and employment. However, by 1974 the economy was once again experiencing difficulties caused primarily by the world recession and by excessive Central Bank financing of the Central Government's deficit. A. Economic Performance During the 1970s 5. In late 1974, the Government introduced measures to correct policy weaknesses. Before these reforms were fully effective, the economy was subjected to strong inflationary pressures from a sharp increase in world coffee prices. The increased coffee export receipts, together with some official surrender of foreign exchange from illegal exports, caused a turn- around in the balance of payments. Incomes rose rapidly and stimulated aggregate demand; inflation accelerated. Unemployment fe]l substantially, both in rural and urban areas. Largely as a consequence of increased coffee tax revenues, the public finances generated overall surpluses averaging about 1% of GDP during the 1976-78 period and, by the end of 1979, net official international reserves had risen to about US$4.1 billion, equivalent to about 12 months of imports of goods and non-factor services. 6. While beneficial in many respects, the foreign exchange boom had some negative effects. The rate of currency devaluation was slowed and the conversion of export receipts into pesos was delayed to moderate the growth of domestic demand, with adverse effects on non-coffee export expansion and diversification. Also, the Government sought to control inflation by maintaining high reserve requirements and expanding controls over credit thereby reducing, in real terms, the financing available to the private sector through the official capital market. 7. The 1977-79 economic program was partially successful in restrain- ing aggregate demand growth, but relatively high inflation persisted. In response to the increasing restraint on aggregate demand and troublesome financial market distortions, the authorities began in late 1979 to adjust their program. The rate of peso devaluation was advanced somewhat, and, in early 1980, credit restraints were relaxed. At the same time, interest rates on certificates of deposit-and on lending therefrom--were freed from controls. To offset the inflationary effects of these measures, the authori- ties further liberalized import payments and adopted the policy of not expanding the subsidized selective credit operations of the Central Bank in excess of the resources captured from private savings for this purpose. The effects of the above measures were not immediately noticeable. Real GDP growth decelerated to 4% in 1980 from an average of almost 6% since 1960, unemployment started to creep up, and inflationary pressures continued. B. Recent Economic Developments 8. In 1981 the economic situation took a turn for the worse, and the problems continued through 1983. Real GDP growth, which had slowed down to 2.5% in 1981, fell to about 1% on average in 1982 and 1983. Agricultural output was hard-hit as a result of low international prices, reduced  - 3 - fertilizer use and adverse weather. Industrial activity deteriorated on account of depressed aggregate demand, and unutilized capacity continued to increase, particularly in manufacturing. Unemployment reached almost 14Z of the labor force at the end of the year, up from about 7X at the end of 1981. Inflation, however, slowed down in 1983 to a 20% average for the year, down from 28% in 1981 and 25% in 1982. 9. After experiencing a surplus for six years, a deficit of about US$1.4 billion emerged in the resource balance in 1981 and it increased to an average of about US$1.8 billion in 1982-83. These deficits resulted mainly from a drop in exports in real terms: major reasons were the slowdown in world demand, a major devaluation and import restrictions in Venezuela-a major trading partner-in 1983, and the reduction of Colombia's coffee export quota in the International Coffee Agreement to significantly below the 1981 coffee export level. Net foreign exchange reserves declined by about US$1.8 billion in 1983 to about US$3.1 billion, equivalent to about 6 months of imports of goods and non-factor services. On the fiscal side, a slowdown in revenue growth, together with increased current expenditures resulting from automatic transfers and large infrastructure investments in energy and transport led to growing deficits: the overall Central Government cash deficit grew from 2.1Z of GDP in 1980 to 4.1% in 1983, while that of the consolidated public sector rose from 3.6% to 7.0%. 10. In 1983 the Government introduced policies to stimulate aggregate demand, expand and diversify non-coffee exports, and resume economic growth. The rate of peso levaluation was accelerated; the housing construction industry was provided with incentives to mobilize an increasing amount of resources; and selective credit to the productive sectors was expanded. Temporary import restrictions were introduced to arrest the falling foreign exchange reserves, with a view to being lifted once the real exchange rate improved and exports responded to this incentive. 11. The Government also adopted measures to reduce the fiscal deficit and ease distortions and restrictions in the financial system. While the thrust of these measures was in the right direction, they were insufficient to reverse the deteriorating trends. At the same time, the country began to be hurt by economic problems of its neighboring trading partners and by the tight internatioral capital market. Colombia, unlike other Latin American countries, has not had a debt problem because of the high share of official debt in total debt outstanding and the relatively favorable term structure of such debt. NevertAeless, a reduction in the credit lines and medium-term loans to complete ozfoin r c=-_ributed to further declines in foreign exchange reserves in 1984 and to strains in the financial system. 12. As a result, a reversal of the deteriorating trends has begun to take place beginning in 1984, with a resumption of growth in manufacturing and non-coffee agriculture and an expansion in exports. At the same time Government policy has focused on demand management, fiscal and monetary restraint, and acceleration of the exchange rate devaluation; it has also taken steps to improve the profitability of the commercial banking system's operations and resolve the external debt problems of the private sector. In 1984, real GDP growth increased to 3.1%, the unemployment rate fell to 13% of the labor force at year's end while inflation was brought down to 16.4% on average. Total merchandise exports grew at over 16% in nominal terms, and the current account deficit in the balance of payments was reduced by about US$1 billion to 5Z of GDP. The losses in foreign exchange reserves, which  -4- had accelerated during the first half of 1984, were reduced during the second half, and reserves at year end remained at about USS1.8 billion, equivalent to about 4 months of imports of goods and non-factor services. PART II - THE GOVERNMENT'S MEDIUM-TERM PROGRAM AND THE EXPORT SECTOR A. The Context of Policy Change 13. An analysis of the economic developments since 1970 and associated external and domestic factors is set out in Table 1. The period 1970-75 witnessed export-led growMth based on outward-looking policies initiated in the late 1960s and continued in the early 1970s. Solid growth was maintained in the latter half of the 1970s, largely by the coffee boom. The downturn in non-coffee exports and the balance of payments difficulties in the early 1980s resulted from external and domestic factors. The tightening of the international capital market and Latin America's economic and debt problems had a major deleterious effect on Colombia's immediate prospects: net capital inflows declined in 1983; this continued into 1984. 14. Domestic policies also contributed to the problems in the 1980s. On the whole, five interrelated policy areas may be associated with the difficulties in the 1980s which are elaborated below: (i) fiscal policy, including the public sector investment program and domestic resource mobili- zation efforts; (ii) monetary policy, including Central Bank credit creation to finance the Government budget; (iii) exchange rate and export policy; (iv) import policy, especially the availability of imported inputs for exports; and (v) external borrowing. 15. The fiscal and monetary problems can be traced to an imbalance between growth in current revenues and total expenditures, and the financing of a growing deficit with Central Bank's monetary emission. Between 1978 and 1983, current revenues rose by about 24Z p.a., while total expenditures rose by 36% p.a., and a modest overall surplus of the Central Government in the late 1970s had by 1983 turned into a deficit of about 4% of GDP. 16. The exchange rate appreciation began in the second half of the 1970s although its balance of payments effect at that time was hidden by the coffee boom. During 1975-82, the Col$/US$ real exchange rate declined against the dollar by an estimated 222 compared to 1975 in spite of a crawling peg policy (the 1975 real exchange rate was the highest achieved in the past 25 years). Compared to a basket of currencies of the country's fifteen most important trading partners (constituting about 85% of non-coffee trade), the appreciation in 1982 compared to 1975 was about 25Z. 17. Imports grew significantly in absolute terms during the latter half of the 1970s, but as a proportion of GDP,they were only marginally higher in the early 1980s compared to the 19709. However, the growth of imports- partly as a result of energy investment requirements-had become out of line with export performance during 1981-83 contributing to the sharp worsening of the current account deficit. During 1983-84, import reduction in nominal and real terms was necessitated by the balance of payments problem, and reduced imports, particularly of inputs needed for exports, has had negative effects on performance. Additionally, the external capital constraints of the 1980s have made a scaling down of the external borrowing program necessary.  -5 - Table 1: ULGM AL- BMXIC RWCWU AND AD.DW, 970-1986 Pecrd of te 1970b Ealy 198( Enmad.c P amwc-p Gorff= Fccalc h&glmdtig of Umeghmdrg of Groith BO= St- Pi CO Ads t _ pd AdM it 1970-75 1976-80 1981-83 1983 1984 e 1985 p 1986 p I. Pefomoce Idcators Ave CGuth Rate a/ GP, cO5tUt primS 5.8 5.5 1.3 LO 3.1 2.0 3.0 pEtu (Isws), eostat 5.4 7.0 -6.3 -12 9.4 10.1 7.7 price Coffee (4.4) (11L4) (-&3) (2.6) {14.2) (1.1) (1.1) N.,ofe (7.7 (3.9) (-1.2) (-2.8) (lO.S) (16.1) (13.4) spxt (am). anse 0Q6 10.2 6.2 -10.1 -45 43l2.1 TnflatiM (CPI,vezr) 17.1 24.5 24.9 19.8 16.4 22.0 20.0 Ak""g, Rto (tM) Qxrrent Acc=iGDP -2.9 1.5 -65 -7.3 -52 -4.3 -3.5 Year-eid Pser (U$m) 36D 3,000 4,533 3,079 1,796 1,796 2,129 tlbat' Iia-s of GlES (2.8) (10.0) (8.7) (6.4) (4.2) (4.2) (4.7) TotaL ebt Sernc Ratio 22.7 14.7 35.1 40.6 44.3 43.1 41.3 -jbic Debt Service Raio 13.2 10.4 19.6 23.7 28.5 32.0 33.0 Total InvesuretGP 1L9 1&5 20.2 19.4 18.9 185 l&5 I. Extemmal Factors Real cblfee Prie (1970-100) 84 33 88 89 98 93 98 Met Oaptal kila (S$u)C/ 284 543 1,699 1,014 587 1,442 1,530 M h Rate d 2.1 3.6 3.3 2.3 4.7 3.0 3.0 Mf. namcPoc Pate (=Ml19709 - lOD)e/ 89 85 75 75 82 100 ..f/ MoneyBse rth 23 35 18 14 18 22 24 Ceotral Gaenmit Overalt Dflit/E L 1 0.4 3.9 4.1 4.5 2.4 2.0 verll P.Sector D fidui 3.0 5.5 6.8 7.0 7.3 4.6 3.0-3.5 tocal Twprts/GP 15 15 16 15 14 15 16 e - pielimny estimn p - jEojeetis a/ Note tint ava grith rate inch the Sraz in tie end years. i ROU911y cGs=t 31 nOmIna US dollar el Inul g erro and amissm. F Yor 1970 - 1975 fge, gmrth rare for 1973 - 1975 was ta4lu frm Il's wa2d Ecamadc 1982; 1975-83 wee drived from Nd Bra's. World Devklout leport, 1982; and 1984-6 ae frmC Outlook. e. 1he calculatis use 1975-O4 estiasted rwcaffee t e ets; the 1983 sid 1984 figures utill estinted weighted avra exdbm rates and irilatim ras for Vsmala. f/ Maineain rel exchane rate aid mevie its adequay in via, of blie of paymts evidenc. ' # Crl G errunt plhs decentraliaid aencie. Source: Hinistry of Finance, IMF and World Bank estimates  -6- 18. The abovementioned problems were highlighted in the Bank's 1983 and 1984 economic reports. Recognizing their importance, the Government in the 1983 Consultative Group Meeting committed itself to undertaking corrective action and initiated reforms. However, the degree and speed of the subse- quent response was insufficient. The reasons included: the level of reserves was still high; domestic policies in place had over the long-term achieved solid economic growth; the pluralistic nature of policymaking lengthened the decision process; and the Government was slow to appreciate the full indirect impact on Colombia of the Latin American economic and debt crisis. 19. By the first quarter of 1984, the need for stronger domestic policy adjustments had become clear. The loss of reserves continued in 1984. Although there was a stabilization in its trend by the latter part of the year, the reserve level had begun to become worrisome, and the attitude of traditional commercial lenders towards Colombia was hardening. By the third quarter of 1984, the Administration consolidated its position, and began to carry out a significant adjustment program. 20. The adjustment program addresses the five areaz mentioned earlier. It represents the Government's commitment to stabilize the economy during 1985-86 and to re-establish a medium-term policy framework based on an outward looking development strategy. The stabilization measures already in place and planned for 1985-86 (see below) have been reviewed favorably by an IIMF Article IV Consultation mission, and the related variables are expected to be monitored by the IMF (para. 75). B. The Medium-term Adjustment Program 21. The 1985-86 policies represent a critical phase of the medium-term program, in which stability would be achieved, permitting continuation of modest growth as the economy is reoriented towards export promotion. Subse- quently, the program would concentrate on reforming further the incentive system in trade (paras. 41, 54-56). In agriculture, policies would stimulate higher productivity and exports; and in the financial sec'or, they would assist in the restructuring of commeLcial banks and industrial enterprises and in the elimination of distortions which affect the profitability of the financial system and the efficient allocation of credit. 22. A good part of the adjustments have been in place, and some positive results have already been obtained as can be seen in the changes recorded in 1984 (Table 1). The deepening of adjustments during 1985-86 with emphasis on external trade is consistent with modest growth in 1985-86 and more rapid growth thereafter. 23. The policy package concerns: (i) further reductions in the expen- diture-revenue gap of the public sector, including a scaling down of public sector investments and improving their effectiveness, postponing long-gesta- ting new projects, and maintaining prices of public utilities at appropriate levels; (ii) slowdown in the credit expansion to the Government by the Central Bank; (iii) full correction of the overvaluation in the real exchange rate; (iv) liberalization of imports needed for exports; and (v) scaling down external borrowing targets, 'Lowering the demand for external funds. Described below is each of these elements as it has evolvcd recently and would be further changed during 1985-86.  -7- Fiscal Policy and Public Investment 24. Income tax reforms were undertaken in late 1983 and followed up in 1984 by the change in the application of the sales tax to a value added basis. In addition, utility tariffs and real estate taxes were increased; the gasoline price was raised 15%, and a 25% temporary surcharge on import duties was introduced. Central Government current revenues rose by some 26% in 1984. However, notwithstanding an employment freeze, expenditures also increased at the fairly high rate of about 28%, reflecting in part the excessive wage increases granted in early 1984. The Central Government's overall cash deficit consequently increased further to some 4.5% of GDP, most of which was financed by Central Bank credit. 25. The 1985-86 program includes additional revenue measures which were approved by Congress in December 1984. These comprise measures to eliminate deductions in the income tax, a broader base for the value-added tax, an increase in stamp taxes and a temporary (by law) 8% import tax, which together should result in an additional ColS55.5 billion (1.2% of GDP) in revenues during 1985. Current revenues are projected to increase by about 50% in 1985. (Further measures totalling Col$17 billion in revenue collec- tions, in 1985 on an annualized basis, which were presented to Congress in April 1985, are not included in the above estimation.) 26. Government salaries approved for 1985 imply a reduction by about 10 on average in real terms. Public sector subsidies in transport have been reduced and a scaling down of the investment program has begun. Central Government current expenditures are expected to grow in nominal terms at 25% in 1985 and 20% in 1986 compared to about 30% p.a. on average in recent years. Additional expenditure measures, envisaged to be approved by Congress include: (i) a deceleration in Central Government transfers to local govern- ments; (ii) streamlining of decentralized agencies; and (ill) tightening of administrative controls on expenditures. The overall cash deficit of the Central Government is projected to decline to 2.4% of GDP in 1985 and to some 2% in 1986. Together with the scaling down of the public investment program and real increases in revenues of public enterprises (in part as a result of tariff policy), the overall public sector deficit is projected to decline from an estimated 7.3% of GDP in 1984 to 4.6% in 1985 and 3.0% in 1986. 27. The public investment program has been scaled down and reoriented towards quick-yielding investments, export and import competing activities; more intensive use of existing facilities; and increased resource mobiliza- tion. The revised program, which constrains public sector investment during 1985-86 to about US$3.1 billion p.a., or 9.4% of GDP-compared to US$3.5 billion p.a. during 1983-84--consists largely of projects which are already in execution or for which loans have been contracted. Only a few high priority projects are to be initiated in 1985-86. More than three quarters of the program consists of projects associated with external financing. The investment program is dominated by the mining and power sectors. The mining investments of US$ 1.8 billion include ECOPETROL's (the petroleum company) petroleum production and development program in association with foreign partners and CARBOCOL's (the coal company) ongoing El Cerrejon Coal project,  -8- a joint venture with EXXON. Both will contribute to a significant increase in export earnings from 1987 onwards. Public investments in sectors other than mining would be reduced from 7.4% of GDP during 1983-84 to 6.7% during 1985-86. Monetary Policy 28. A Central Government overall cash deficit of about Col$108 billion on average during 1985-86 (compared to Col$163 billion in 1984) will allow for a dramatic reduction in monetary financing to the public sector from the high 1984 level of about Col$150 billion. Central Bank financing of the deficit will be kept to about Col$45 billion during 1985-86 annually, rising modestly in nominal terms thereafter. This reduction in credit to the public sector would permit the banking system to expand credit to the private sector in line with the growth in nominal GDP during the period. Such an outcome would reduce the pressure on the growth of the monetary base and thus of monetary expansion and it would be a critical element of the program during a time period when no major fall in reserves can be sustained. With a year-end level of reserves at about US$1.8 billion in 1985 (i.e. the same level as at the end of 1984) and around US$2.1 billion at the end of 1986, a fiscal policy as discussed above and a moderate expansion of credit to the private sector, the growth in the monetary base can be kept to around 22-24% annually. Assuming no significant changes in the money multiplier and velocity, the growth in money supply would be in line with the expected growth of nominal GDP. Export Policy 29. With an acceleration in the crawl in 1984, the peso made the largest estimated real depreciation since the crawling peg was established in 1967. Even so, relative to a mid-1970s base of 100, the 1984 average level of the exchange rate remained appreciated by roughly 20% in real terms. This calculation, however, does not account for the subs:antially increased export tax rebates or increased import protection since the base period which have served to offset a part of the peso overvaluation for tradeable goods. The Government plans to restore the mid-1970s rate in real terms in 1985 on aver- age and review its adequacy on the basis of changing economic conditions and evidence of balance of payments performance. Towards that end, the Govern- ment has accelerated the crawl. 30. The current export incentive system utilizes three major instru- ments for export promotion: (i) import duty exemptions to eligible export- ers; (ii) tax rebates; and (iii) credit financing at positive real rates of interest. The current system has many weaknesses which affect its effi- ciency (para. 44). These will be addressed in the context of the loan (paras. 46-48). In addition, a number of products are subject to export restrictions, whose elimination is also intended in the context of the loan (Annex IV). Import Policy 31. The rapid fall in reserves during 1983-84 led the Government to put in place more quantitative restrictions on imports and a strict foreign exchange budget. Concomittantly, the Government has intensified its ef'orts to promote exports. The Government intends to undertake a phased elimina-  tion of import restrictions, beginning with automatic access to inputs and intermediate goods for exports (paras. 49-51). In addition, recourse to tariff protection has also increased; average nominal tariff rates were fairly stable during 1979-81. They were increased in 1983, and again substantially in 1984. Unlike in previous years, the current legal structure is characterized by a sizeable incidence of fairly high rates and disper- sion. These characteristics of the legal tariff structure are meant to be temporary and future policy actions are intended to reduce dispersion and levels (paras. 52-53). Foreign Borrowing 32. A critical objective of the Government program concerns the stabi- lization of reserve levels. Major support for the tradeable good sectors is expected from exchange rate adjustments in 1985; and medium-term export and import projections indicate a steady decline in the current account deficit (pare. 34). A reversal in private capital inflows is also required: gross disbursements from new commercial bank loans during 1985 of about US$535 million,-primarily for project financing--will be needed to stabilize reserves in 1985. An agreement has been reached in principle between the Government and the commercial banks on 1985-86 financing, and this program has the endorsement of the IMF's management. The increase in the commercial banks' net exposure to Colombia in this period is envisaged to be small. 33. The projected pattern of gross disbursements Indicates an increas- ing dependence in relative terms on official sources of finance (multilateral institutions, bilateral development agencies and export credit agencies) in recognition of the country exposure constraints of external commercial banks. More than half of the new commitments and disbursements during 1985- 86, including the additional commercial bank resources, would be for the productive sectors. In order to support the expansion of the trade sector, it is also envisaged that the country will continue to have access to its short-term credit lines from its -major external bank creditors at least at levels prevailing at the end of 1984, roughly US$1.5 billion. C. Growth and Balance of Payments Prospects 34. With a successful adjustment during 1985-86, Colombia's growth prospects for the rest of the decade will be reasonably good. The current account deficit of the balance of payments is projected to average US$1.3 billion per year during 1985-86, equivalent to about 3.9% of GDP. The deficit is projected to be financed largely by increasing disbursements of public loans and by direct foreign investment. By the end of this period, net official inter-ational reserves would have been maintained at a satisfac- tory level of about four and a half months of imports of goods and non-factor services. This should be sufficient to support an average growth of real GDP of 2.5% during 1985-86. 35. Total investment would have to be maintained at about 18.5% of GDP to complete energy and mining projects, while utilization of existing industrial capacity increases; and, to avoid too large an increase in foreign indebtedness, gross domestic savings w. 'ld need to average about 18% of GDP compared to 16.4% during 1981-84, with the public sector generating a significant part of the additional savings. Beyond 1986, real GDP growth  - 10 - should resume at near historical rates, about 5% per year on average. The current account deficit should also improve rapidly from 1987 as a result of increasing export proceeds from new non-traditional exports (particularly crude petroleum and coal). 36. Total gross external medium- and long-term capital requirements (including the private sector) are projected to total about US$5.3 billion for the 1985-86 period, for an annual average requirement of about US$2.6 billion. Net foreign investment is expected to account for US$750 million during 1985-86, most of which would flow into the country to complete existing energy projects. This should provide about 14% of the gross exter- nal financing required. Of the remaining 86% (US$4.5 billion) about US$3.5 billion, has been either committed or is expected to be secured from multi- lateral and bilateral sources, while the difference, of the order of US$1 billion, will need to be borrowed abroad from commercial banks mainly to complete petroleum and coal projects for export. 37. At the end of 1984, Colombia's public and publicly guaranteed medium- and long-term external debt disbursed and outstanding amounted to US$8.1 billion, equivalent to 22.3% of GDP. The Bank/IDA share of this external debt was 22.5% which is expected to increase somewhat during 1985-86 reflecting the rapid disbursement of the proposed loan. The public debt service ratio in 1984 was 28.5% and is expected to peak at about 33% in 1986 and then decline gradually to 30% in 1990. The World Bank's share in public debt service is expected to be less than 23% during 1985-86. With sound economic and financial management and the development of new export activ- ities referred to above, Colombia is expected to maintain its creditworthi- ness through and beyond the 1985-90 period. PART III - THE TRADE POLICY AND EXPORT DIVEPSIFICATION LOAN A. Loan History 38. The Bank's involvement in the area of trade policy and export diversification has taken three forms: dialogue on trade and financial poli- cies, assistance in developing major individual export activities, and sup- port of key institutions in these subsectors. A Bank Industrial Sector Mission which visited Colombia in August/September 1981 focussed on the determinants of the export competitiveness of individual manufacturing sub- sectors and on trade policies. These themes were pursued further by an economic mission which visited Colombia in June/July 1982, and an agricul- tural sector mission which was in the field in April/Miy 1983. The proposed loan expands on the policy dialogue between the Bank and the Government of Colombia in the area of trade policy. 39. The proposed loan grew out of discussions with the Government during 1984 on the policy measures required to correct the continuing balance of payments deficits, to stabilize foreign exchange reserves, and to promote export-oriented economic growth. The operation has been processed concur- rently with the formulation of an effective program of adjustment, with the proposed loan constituting an essential element of the financial package which was presented to the leading commercial bank creditors of Colombia on  - 11 - December 10, 1984. Assurances were obtained on April 18, 1985 that the necessary financing would be available. The loan was appraised in November/ December, 1984. Negotiations were held in Washington in April 1985. The Colombian delegation was led by Dr. Mauricio Cabrera, Director of Public Credit, Ministry of Finance. Supplementary loan data are provided in Annex III. B. Project Objectives and Rationale for Bank Involvement 40. The objectives of the program are threefold: (i) to reorient export policies so as to reduce the discretionary element and build in substantial automaticity and uniformity in the access to incentives and to eliminate restrictions to exporting, with a view to promoting export-oriented growth, and effecting rapid improvements in the balance of payments. Given that import liberalization constitutes an important element in an outward-oriented development strategy, the loan also focuses on the rapid reduction of import prohibitions and licences within the constraints posed by the program's stabilization objectives. Moreover, given that nontariff barriers are a less efficient instrument than tariffs, the program stresses a shift away from quantitative restrictions to tariffs, the shift being combined with a policy of reductions in tariff dispersion and in levels; (ii) to help formulate an Action Program of trade policies for the longer term to be based on a more detailed study of the impact of incentives on export performance and to be implemented in a second phase of trade policy reforms and (iii) to help put together a financial package in support of Colombian export activities which, when buttressed by the assessments of economic performance associated with the tranching of the loan, will foster the resumption of commercial bank flows to Colombia. 41. Progress towards the program's trade policy objectives will set the stage for the program's second phase. This second phase will focus in the context of the Action Program (paras. 54-56), on the expansion of free imporLs and further rationalization of import controls, tariffs, tax rebates and other iucentives to promote the free trade status of the exporter and reduce biases against exports. These trade policy actions and a favorable assessment of macropolicies would form the basis of a follow-up loan. C. The Trade Policy Adjustment Program 42. The program of trade policy reforms supported by the loan, is presented in the Government's Policy Statement on Economic Adjustment (Annex V). The measures subsumed by this program are described in detail in Annex VI; the schedule for their implementation is summarized in Annex IV. 43. The Export Incentive Package. There are currently three major instruments of export promotion. (i) Plan Vallejo (PV) provides access to imports and import duty exemptions to established exporters. Until the recent policy changes introduced in the context of the proposed loan, such access was authorized on the basis of contracts between the exporter and INCOMEX (Institute of Foreign Trade, responsible for authorizing import and export activities). Under a variant, Plan Vallejo Junior, occasional exporters obtain, subsequent to a first export, duty exemptions on second time imports restricted to specific commodities and quantities. (ii) Tax rebate incentives (CERTs) are equivalent to a certain percentage of the value  - 12 - of exports and differentiated by export commodity. Whereas non-PV exporters obtain CERTs on total export value, PV exporters obtain CERTs only on the domestic value added component. (iii) PROEXPO (Export Promotion Fund) credits are available at positive but below market real interest rates, for pre-shipment, post-shipment and investment. PV exporters are currently not eligible for PROEXPO credit for financing imported inputs. 44. The system that prevailed until the recent reforms had several weaknesses (Annex VI): the underlying rationale of the system (e.g., to move towards free trade status in the production of exports so as to enable the exporter to operate on a more competitive footing with international compe- titors, and/or to enhance his profitability relative to production for the domestic market) was unclear; access to incentives was not automatic; the distribution of incentives was not uniform as between PV and non-PV exporters; and the increasing reliance on tax rebates (CERTs) had large fiscal costs. Moreover, while the strength of the PV scheme lay in requiring PV exporters to secure prior access to foreign credit lines, the repayment regulations requiring them to retain the foreign credit right through the period of production and export, and to repay the credit only if, and when, the foreign exchange proceeds of exports were remitted to the Banco de la Republica (BR), rendered the PV system less attractive to foreign creditors. 45. The recent reforms and others proposed under the loan seek to remedy these weaknesses. The Government is committed to the retention of the PV scheme. It has been in force for nearly thirty years, is well understood by exporters and has succeeded in bringing increased amounts of exports within its purview. The Government has rationalized the system by simpli- fying operating procedures and intends to open up admission to the scheme over time, as uniform access to incentives is gradually extended to all exporters. For administrative convenience, exporters currently operating outside the PV scheme are being grouped under a new System of Import-Export (SIEX) complementary to PV, on the understanding that SIEX exporters who have completed two rounds of exports will be allowed to move into the PV system. 46. The major incentive reforms (Annex VI) adopted under thL loan, with the objective of promoting uniformity of access to export incentives and to move towards free trade status for the exporter are: (i) automatic access to imports by all exporters on the basis of a viable program of export and import requirements, a condition of effectiveness, (draft Operating Agree- ment, Section 2.01(b) and draft Loan Agreement, Section 6.01(a)); (ii) as a condition of effectiveness, automatic access to foreign exchange required for the repayment of external credit lines or letters of credit used to initiate the export process, at the time when repayment is due, through the cash purchase of foreign exchange by the exporter (draft Loan Agreement, Sections 3.02(b) and 6.01(a)). Prior to second tranche release, existing regulations stipulating minimum periods for the repayment of import financing will be -mended to allow repayment by PV and SIEX exporters following the arrival of imports into Colombia (draft Loan Agreement, para. 6 of Schedule 4); (iii) a reduction in the dispersion of CERT rates across product groups. As a condi- tion of second tranche release (draft Loan Agreement, para. 5 of Schedule 4), CERT rates will be assessed only on the domestic value added component of exports for both PV and SIEX exporters; at a later stage, CERT levels will be reviewed as part of the Action Program (based on the results of an incentive study to be completed during the first phase of the loan) and further reforms considered with a view to offsetting indirect taxes; (iv) SIEX exporters will  - 13 - be allowed to move autowatically into PV and gain automatic access to import duty exemptions on the basis of a record of two rounds of export operations, thereby removing the element of discretion inherent in previous INCOMEX decisions regarding eligibility of exporters for PV (draft Operating Agree- ment, Section 2.01(b)(iii)); and (v) removal of access to Lelow market rate PROEXPO credits (Annex VI) for financing imported inputs by both PV and SIEX exporters unless such financing is made available in line with prevailing market terms and conditions (draft Loan Agreement, Section 3.04). 47. Operational Reforms (draft Operating Agreement, Section 2.01(b)) INCOMEX administrative procedures for PV and SIEX exporters have been simplified in the context of the loan through the replacement of formal contracts by technical agreements on import/export programs between INCOMEX and the exporter; the eschewing of pressure to buy Colombian; the simplifica- tion and expediting of customs guara&ltee procedures and the introduction of INCOMEX guarantees to ensure exports and prevent abuses of the privilege of automatic access to imports; the inclusion and application of more uniform procedures to indirect exporters and capital goods imports for exports; and the drastic reduction of export clearance requirements by INCOMEX and other Ministries. These reforms are likely to reduce significantly the time taken for export/import approvals, registration and import licence appiovals from more than two months to about twelve days (draft Operating Agreement, Schedule), while at the same time widening the coverage of the incentive scheme to include new and occasional exporters. 48. The Removal of Export Restrictions. Despite the Government's stated commitment to exports, products falling under about 725 tariff posi- tions are subject to export restrictions either of a quantitative or adminis- trative nature. INCOMEX is concentrating on the elimination of export restrictions/suspensions (about 400 positions) imposed on supposedly economic grounds (protection of domestic consumers or producers); and then on the removal/reduction of the remainder based on non-economic considerations. Within the latter class INCOMEX is concentrating on those which do not derive their validity from international agreements or other national imperatives such as the country's security, health, natural resource endowment and historical and cultural heritage. INCOMEX has already liberalized, in the context of the loan, about 230 positions which fall eitber within its own jurisdiction or require prior consultation with other Ministries. Included among these were the most entrenched (economic) restrictions (on inter alia cocoa, flour, oil seeds, cement, specific textile products, etc.) imposed on domestic market grounds. INCOMEX is to institute a review process for the remaining restrictions (165 economic and 333 non-economic) with a view to liberalizing before second tranche as many of the remainder which appear to the Bank and the Government to carry little current justification (draft Loan Agreement, para. 4 of Schedule 4). 49. Reduction of Import Controls. Since non-tariff barriers to imports impair allocative efficiency, are less efficient than tariffs, and were imposed as a temporary means of foreign exchange control, the Government' is committed to a program of reduction of quantitative restrictions, within the constraints set by its stabilization objectives and progress towards the maintenance of stable reserves. Emphasis is placed under the Loan, on the removal of prohibitions (covering some 830 tariff positions, or 16.5% of the total). Some 710 prohibited positions (about 86% of the total), equivalent in value to about US$87 million, are to be moved to the prior licence list as  - 14 - a condition of loan effectiveness (draft Loan Agreement, Section 6.01(b)): of these 710 positions, about half (346 in number), representing about US$60 million in imports have already been moved out of the prohibited list. A further 50 positions representing about US$80 million in imports, will be moved to the prior licence list before second tranche release (draft Loan Agreement, para. 2 of Schedule 4). With respect to the remainder, only about 1.4% of total tariff positions, INCONEX plans to initiate a thorough product-by-product review so that barring a few exceptions, all imports not potentially harmful to the State or to the population's health (weaponry, drugs, etc.) are moved out of the prohibited list. It is estimated that imports freed from prohibitions prior to the second tranche will represent a value of approximately US$167 million; it is expected that an additional US$28 million of prohibited imports will be allowed entry during 1985 on account of regional agreements and re-export arrangements. 50. The Government is also committed under the Loan to reducing, before release of the second tranche, the share of imports subject to prior licences (currently covering 83X of tariff positions) and, correspondingly to increasing the share of imports under the free list to 23% of total tariff positions from the present level of 0.52. Five hundred positions, or about 44% of the total number of tariff positions to be liberalized have already been moved to the free list; another 19% will be liberalized as a condition of loan effectiveness (draft Loan Agreement, Section 6.01(b)); the remainder will be moved prior to second tranche release (draft Loan Agreement, para. 1 of Schedule 4). In addition, all imports for exports (raw materials, intermediates, and capital goods used primarily in export activity) will be allowed automatic entry into Colombia (para. 46). Prior to the disbursement of the secord tranche (draft Loan Agreement, para. 3 of Schedule 4), agreement will be reached on actions directed towards liberalizing imports of spare parts and maintenance items for productive machinery and equipment. INCOMEX has also undertaken to refrain from controlling or determining prices of imports under the free import regimes, unless there is significant evidence of pricing irregularities practiced by importers (draft Operating Agreement, Section 2.04). 51. The share of free imports, including, inter alia, imports for exports, delicenced imports, and imports under regional agreements or for use in free trade zones, is expected to rise under the loan to 57% of the total annual equivalent value of 1984 imports, compared to about 23% through September 1984 (comprising imports under regional agreements, public sector and PV imports). Moreover, the assurance of automatic access to imports for exports will remove the costs associated with obtaining import licence approvals. In addition, it has been agreed that additional liberalization will be achieved by March 31, 1986, to raise the share of free imports to 63% of the total annual equivalent value of 1985 imports (draft Loan Agreement, para. 7 of Schedule 4). Moreover, the Government may undertake a program of further rationalization of the import regime as part of the Action Program formulated on the basis of the study of incentives and the associated review of import licences (paras. 55-56). 52. Import Tariff Levels and Structure. Given the Government's inten- tion to shift away from quantitative restrictions towards greater reliance on tariffs, and the overriding -,eed to cut the Central Government's cash deficit, the Government is unable to reduce immediately the contribution of  - 15 - tariff collections to current revenues (about 15.6% in 1984). The initial emphasis of tariff reform therefore has been to reduce tariff dispersion. This and the associated objecrive of reducing the average tariff rate, have been achieved prior to first tranche, by reducing peak tariff rates from over 2U0% to a maximum of 80%. The fiscal impact has been minimized by eliaina- ting wherever possible ad hoc tariff discounts and exemptions not dictated by regional agreements. 53. Prior to the disbursement of the second tranche, agreement will be reached on further reforms on the basis of an Action Program (draft Loan Agreement, para. 7 of Schedule 4). A major objective of these reforms will be to phase out the temoorary 25% import surcharge and the 8% import duty and to reduce further the average level and dispersion of tariffs, so that, with few exceptions, tariffs would fall within a specified tariff range. Such action will be taken following the assessment of progress towards the stabilization of reserves and the attainment of a favorable real exchange rate, during the second phase of trade reforms to be initiated in 1986. A MediumrTerm Action Program for Export Promotion 54. The broad changes in the incentive system introduced under the first two tranches of the Loan will lay the basis for improvements in Colombia's interrational competitiveness and the profitability of exports relative to production for the domestic market. Moreover, the Action Program for which agreement will be obtained prior to second tranche disbursement, will be based on a strong commitment to the country's future export strategy, and on the results of the proposed Ministry of Finance study of export strat- egy and the incentive system, and on PROEXPO/INCOMEX studies related to export promotion (Part B of the Project, Section 3.01(b) of the draft Loan Agreement). 55. Adjusting the Incentive Package. The most recent studies of the Colombian incentive system date back to the late 1970s. Given the complexity of the current system, the range of measures to be taken during the first phase of the program, and the growing diversification of Colombian exports, desk studies of the impact of incentives on export profitability based on relatively aggregative data would not be adequate. It is therefore envisaged that the next round of incentive reforms, designed to promote a move towards free trade status for the exporter and to reduce remaining biases against export production will be undertaken on the basis of a study of tne impact of changes in the exchange rate, quantitative restrictions, tariff levels, CERTS, and other incentives on selected key export products. This study is to be completed under the auspices of the Ministry of Finance by October 1985 (draft Loan Agreement, Section 3.02(a)(ii)) so as to provide the basis for the Action Program to be undertaken during the second phase of the program. It will also provide the basis, along with the proposed PROEXPO studies, for the elaboration and strengthening of Colombia's export strategy, and thereby for promoting growth and employment. 56. PROEXPO/INCOMEX Studies. In addition, a number of studies in the fields of export promotion and debt and budget management will be undertaken under the auspices of the Ministries of Finance and Developmeat and the National Planning Department (draft Loan Agreement, paras. 1 and 2 of Part B, Article III). PROEXPO will undertake several studies related to export  - 16 - promotion. These cover the strengthening of PROEXPO's role in the country's export strategy; mechanisms for the promotion of trading companies; the development of commercial information systems; systems to assist exporters in product design and quality control; and determinants of the export potential of horticultural products. Other studies relate to the consolidation of computerized systems of information linking the trade data of PROEXPO, INCOMEX, BR, Customs and DANE (National Bureau of Statistics); the determina- tion of input coefficients by INCOMEX; assessment of proposed stabilization and export liberalization schemes for agricultural commodities; and external debt maragement and budget programming and planning. D. Expected Effects of the Adjustment Program 57. The Government's medium-term adjustment program and the more speci- fic reforms envisaged under the Trade Policy Adjustment and Export Diversifi- cation Program are expected to have the following results. 58. Growth and Employment Effects. The increase in exports and the expansion of capacity utilization and output of tradeable goods is likely to offset the deflationary impact of the stabilization program and to lead to an increase in the growth rate of GDP to about 2.5% in 1985-86 and to about 5% during 1987-90, based on assumptions of a growing world economy, relative to the 1.3% p.a. characteristic of 1981-83. In addition, the expansion of out- put is likely to create new job opportunities. Given that exports, particu- larly minor exports, are generally labor intensive, the increase in direct employment in the export sector is likely to be of the order of 75,000, and 90,000 by 1986 and 1987 respectively. This projection does not take account of the indirect effects on employment in other sectors of the economy. 59. Reorientation Towards Tradeables and Balance of Payments Effects. The combined impact of the overvalued exchange rate and the liberal import regime of the second half of the 1970s led to a loss of domestic markets to foreign competition in several specific agricultural and manufacturing sectors; capacity utilization in manufacturing dropped to 65-74% during 1980-84. The continuing devaluation of the real exchange rate and the improvements in the profitability of exports envisaged under the Loan will go a long way to increasing capacity utilization and redirecting real resources to the tradeable goods sectors, particularly agriculture, industry and mining. Hence a projected outcome of the medium-term adjustment program will be an increase in the growth rate of the agricultural and industrial sectors to about 4% in 1985-87, compared to 1.6% in 1981-84. 60. The strengthening of export incentives will increase the profitabi- lity of exports of goods and non-factor services and therefore, the outward orientation of the economy. The share of exports as a proportion of GDP is to rise significantly, from about 12Z of GDP in 1981-84 to about 16% in 1985-86. Moreover, the accelerated crawl of the exchange rate is projected to outweigh the impact of the loosening of import controls and of reductions in tariff levels and restrict import expansion. As a consequence, the resource balance is expected to improve in 1985, and to turn positive in 1986. Exchange rate policy is also expected to produce, inter alia, an expansion in earnings from tourism, and transport. As a result, the deficit in the current account of the balance of payments as a percentage of GDP is projected to decrease from 5.2% in 1984 to about 3.5% in 1986 (Annex VII).  - 17 - 61. The projected decline in the current account deficit, a result in part of the postponement of public sector investments, implies that the growth of debt outstanding and disbursed and of external debt service obliga- tions is likely to decelerate. Together with the expansionary effect of exchange rate policy and of the incentive package on exports, this implies that Colombia's creditworthiness indicators will improve (para 37). E. Benefits and Risks 62. Benefits. The most immediate benefit of the program would be th- medium-term improvement of balance of payments prospects through increased exports and stabilization of the level of reserves thereby strengthening the confidence of international lenders and investors in Colombia's growth prospects. It would also improve the allocation and efficiency of public sector investment while maintaining resource mobilization at levels required by the stabilization effort and in line with a prudent external borrowing program. The loan itself will provide quick-disbursing foreign exchange to alleviate the current shortage of imported inputs and intermediate goods, which has constrained capacity utilization and export competitiveness. Estimates of the quantitative impact on output and employment are provided in paragraphs 57-61. 63. Risks. Given the Government's commitment to export-oriented growth, the trade policy refcrms per se do not appear to face major risks. However the pace of trade liberalization may be slowed if success in stabilizing the foreign exchange reserves is inadequate. On the other hand, an unexpectedly rapid accretion of reserves resulting from expansions in petroleum or coal exports, could weaken the commitment to trade policy reforms. The risks of the economic adjustment program relate to the length and difficulty of the adjustment process, domestic pressures against such an adjustment, delays in completing export-oriented mining projects in the face of financing con- straints, uncertainties in the external environment and export prospects, and the possibility of furthet straining the financial sector as a consequence of liquidity problems on the part of industrial enterprises and commercial banks. The magnitude of the expected benefits of the program depends on the degree of success in stabilizing Colombia's net foreign exchange reserves, which in turn depends on a strengthening of the capital account. Also, the need to reduce the overall public sector deficit means that the Government will have to take difficult decisions at the project level when postponing public sector investments and external borrowing decisions. Unexpected adverse de elopments in the world economic environment could cause Colombia's export performance to fall short of the projections; output shortfall and increased unemployment could create pressures on the Government to abandon its stabilization efforts and to reverse its policy of import liberaliza- tion. A renewal of debt problems in other Latin American countries could cause commercial banks to cut credit lines to Colombia again and further strain the financial sector. 64. There are, however, a number of factors that reduce the above risks. Most importantly, the Government has shown a strong commitment to the program by implementing strict demand management and trade policy adjust- ment, and the policies and outcomes are envisaged to be monitored by the IMF and the Bank (para. 75). Second, the exchange rate is roughly expected to achieve on the average, its mid-1970s level during 1985. This should offset most of the risks of the proposed import liberalization. Third, the program  - 18 - gives priority to imports of inputs and raw materials utilized by exporting firms. This should give a boost to exports, domestic production and employment. Also, the phased implementation of tariff changes and reductions in quantitative restrictions is designed to allow firms to adjust gradually. Fourth, the Government has reduced the size of the public sector investment and external borrowing program in line with a prudent foreign borrowing strategy. A review is to take place later this year, prior to second tranche release, to determine the levels, composition and financing plan of the 1985-87 investment and external borrowing program. Fifth, implementation of the economic program and Bank support through a policy loan should help in fostering commercial bank financing to Colombia, as preliminary evidence already suggests. The whole system of import controls has had the additional function of providing a check on destabilizing capital outflows and this is another reason why the process of import liberalization has to proceed gradually. Finally, a significant effort to diversify exports should reduce the effects on export performance of changes in the international economic environment and in the prices of particular commodities such as coffee, coal, and petroleum. F. Loan Features and Operation 65. Loan Amount and Complementary Funds. A US$300 million Bank loan is proposed to support the Government's trade policy adjustment program. The amount of the loan is hased on the estimated uncovered foreign exchange needs of imports for exports under the liberalized PV and SIEX systems. This is based on projections of average minor exports (total exports excluding coffee, coal, petroleum, gold and nickel) of about US$1.5 billion per annum during 1985-87, estimated foreign exchange content of exports of 35% (30% direct and 5% indirect), the maintenance imports requirements of coal, nickel and petroleum exports of about 1.5% of their value, and an average lapsed time of six to nine months to be covered between entry into Colombia of imported inputs for exports and shipment of exports. Together these yield e3timated medium- and long-term foreign exchange resource requirements of the order of US$400 million. The Bank loan of US$300 million is predicated on the continued availability of commercial bank short-term resources amounting to the remaining $100 million, and the understanding that foreign commercial banks will maintain their total short-term, revolving credit lines for trade financing to Colombia at least at their current level throughout 1985, and would expand such lines during 1985-86 in proportion to the growth of non- coffee exports. Based on commitments made by the commercial banks, the Government has provided assurances that medium and long-term financing and trade financing in the amounts required for the program will be forthcoming. 66. Loan Channeling. The Governaent of Colombia would be the Borrower of the proposed loan, but the proceeds of the loan will be made available to and administered by BR (draft Loan Agreement, Section 2.08), except for the technical assistance component which will be transferred to the relevant agencies. BR will maintain separate accounts to record and monitor loan disbursements and repayments. These accounts will be audited each fiscal year in accordance with sound auditing principles by independent auditors acceptable to the Bank. The Government will oversee and assume the primary responsibility for the operation if the liberalized PV and SIEX schemes and the implementation of the complementary policy and administrative actions being undertaken.  - 19 - 67. Loan Operation and Export Account for Provision of Foreign Exchange to ExportJ9. BR will provide foreign exchange to exporters up to the value of their imported inputs under the PV and SIEX systems in exchange for pay- ment of an equivalent amount in pesos. BR will open an Export Account for the purpose of these transactions. US$50 million of the first tranche of disbursements under the Bank loan would be msde available as an initial deposit to make payments for imports under the PV and SIEX systems. 68. The Government has agreed to maintain the Export Account in the BR for the operation of the PV and SIEX schemes. The Export Account, together with governmental action for providing automatic access to foreign exchange to exporters operating under PV and SIEX, will help ensure that priority is accorded to meeting the import needs of PV and SIEX exporters. The Govern- ment has undertaken to ensure this, as a condition of loan effectiveness, by exempting the import needs of PV and SIEX exporters from the monthly foreign exchange and import licence budgets issued by the Government, thereby assuring them of automatic and unrestricted access to both import licences and foreign exchange (draft Loan Agreement, Section 6.01(a)). The Export Account will play an important role in this process by facilitating the monitoring of the operation of the export promotion schemes, the expenditures financed by the loan, and the level of imports made by PV and SIEX exporters thereafter. This will be accomplished through the separate registration under the Export Account of transactions relating to payments for impr-:ts for PV and SIEX exporters. Exporters operating under PV and SIEX will have to present clear evidence of eligibility in the form of INCOMEX documents signifying registration and the award of import licences under those systems and documents from the BR's Oficina de Cambio granting a foreign exchange licence for repayments for imports under the export promotion schemes. 69. An important feature of the arrangement is that the assurance of automatic access of PV and SIEX exporters to foreign exchange should induce foreign commercial banks to extend the required trade credit to eligible exporters more readily and enable a faster turnover of such resources in support of larger volumes of exports. In support of this arrangement, the Government has obtained assurances from the commercial banks to maintain credit lines at an appropriate level and has agreed to keep in place monitoring arrangements to ensure compliance by the banks. The arrangement is to be further reinforced by legal action to be taken prior to second tranche release exempting eligible exporters from the application of a Monetary Board resolution (Resolution 83) stipulating that a minimum period must elapse betw'een the shipment of imported goods and the issuance of the corresponding foreign exchange licence. This exemption reassuring foreign creditors of prompt payment following the arrival of imports into Colombia is expected to strengthen further the foreign commercial bank commitment to maintaining short-term credit lines. 70. Data management systems will be developed and maintained by INCOMEX and Oiicina de Cambio to keep accurate, up-to-date records of imports enter- ing and foreign exchange provided under the imports-for-exports (PV and SIEX) systems, distinguishing these clearly from import licences and foreign exchange allocated for general imports (Section 2.02 of the draft Operating Agreement). Records of the total imports of exporting firms will also have to be maintained by both INCOHEX and BR. These involve developing new formats for import and customs registers. Consultancy services required by  - 20 - INCOMEX and Oficina de Cambio to maintain and improve the data management systems will be eligible for financing under the technical assistance compo- nent of the proposed loan. Resources under the technical assistance compo- nent amounting to US$1.0 million, would also be available to finance the proposed studies to help articulate the further stages of the export develop- ment program (paras. 55-56), and the strengthening of debt management and budget programming and planning. 71. Loan Disbursement. Although the loan amount is designed primarily to meet the import requirements of exports, US$199 million of the loan would be available for disbursements against general import requirements of exporting firms since it would be cumbersome and extremely difficult to distinguish the purely export operations of these firms from their domestic market operatiors. 72. The loan proceeds would be disbursed in two tranches. The first tranche of US$150 million, available for disbursements upon loan effective- ness, would consist of two parts: (i) US$50 million as initial deposit to cover imports under the export promotion schemes; ai.d (ii) US$99 million to be disbursed against general imports of inputs and intermediate goods for exporting firms, except items identified in a negative list (draft Loan Agreement, Schedule 1). The remaining US$1.0 million will be utilized to finance studies. 73. The second tranche of US$150 million would be released upon (i) completion of the review of, and agreement on, the medium-term public sector investment program and financing plan; (ii) completioa of actions on the various trade policy reforms including (iii) agreement on the removal of all limitations to exports (165 based on economic considerations and 333 on non- economic) which cannot be adequately justified; (iv) action to move CERTs co a domestic value added basis for both PV and SIEX exporters; (v) movement of 50 prohibited items to the prior licence list and 418 prior licence items to the free list to enable free imports equivalent to about 57% of total 1984 imports; (vi) agreement on actions towards liberalizing imports of spares and maintenance items for productive machinery and equipment; Cvii) agreement on an Action Program to further restructure tariffs, including the phasing out of the 25% tariff surcharge and the 8% import duty, with a view to reducing their current dispersion and level so that, with few exceptions, tariffs would fall within a specified tariff range; (viii) agreement on an Action Program to raise by March 31, 1986 the share of free imports to 63% of the total annual equivalent value of imports in 1985, to reduce gradually remaining import prohibitions, to rationalize further the import regime, and to undertake additional reforms of incentive policies (para. 5 of Schedule 1 and para. 7 of Schedule 4 to the draft Loan Agreement); (ix) reduction of the minimum periods stipulated by current regulations for financing imports under the PV and SIEX schemes (draft Loan Agreement, para. 6 of Schedule 4); and (x) favorable Bank assessment of performance under the economic program, including the adoption and direction of policies to ensure the future viability of the program and the achievement of the objectives set out in the Government's Policy Statement on Economic Adjustment. The second tranche would be available for disbursement to finance additional imports under the export promotion schemes (US$50 million) and for financing further general imports of intermediate goods of exporting firms as specified above.  - 21 - G. Monitoring 74. To monitor the implementation of the adjustment program, the Socio-economic Committee of the Cabinet (CONPES), headed by the President of the Republic and comprising Cabinet ministers, will meet regularly to review progress, and to decide on appropriate actions to ensure timely implementa- tion. 75. The Bank will monitoz the progress of the program: ti) through an assessment of the adequacy of the 1985-86 macroeconomic program, including the adoption and direction of policies to make it successful and ensure its future viability; the specific agreements on trade policy reforms; the review of and agreement on the public sector investment and external borrowing program; and the adjustment of prices of public utilities to appropriate levels together with corrective actions on the overall economic program as required; (ii) through regular supervision and exchange of views with the Government; and (iii) through consideration of subsequent policy-based loans. The present assessment of the macroeconomic program takes into account the findings of the IMF on stabilization, particularly as it relates to targets on net international reserves, total credit of the Central Bank, net credit of the Central Bank to the public sector and the level of public sector external debt on a quarterly basis. It is envisaged that the Bank's overall assessment will incorporate the IMF's review on progress with respect to stabilization. As part of this process, the Government will prepare and send to the Bank two reports, summarizing the status of implementation of the program, the first in October 31, 1985, and the second in May 30, 1986 (draft Loan Agreement, Section 4.01(a)). The first status report would also serve as a basis for a mid-term review (draft Loan Agreement, Section 4.01(a)) which in turn would form the basis for the release of the second tranche of the loan (see para. .3 and draft Loan Agreement, Schedule 1, para. 5). PART IV - BANK GROUP OPERATIONS IN COLOMBIA 76. The proposed loan, the 112th to be made to Colombia, would bring the total amount of Bank loans to Colombia to US$4,755.8 million (net of cancellations). Of this amount the Bank held, as of March 31, 1985, US$3,383.8 million; IDA made one credit of US$19.5 million for highways in 1961. Disbursements have been completed on 70 loans and the IDA credit. Before 1979, disbursements averaged US$86 million equivalent per year, but had increased to US$286 million in FY84, reflecting the higher level of commitments in the late 1970s. While disbursements in Colombia have been slower than those recorded in the Latin American Region for similar projects, concentrated efforts to overcome obstacles to initiating project execution have resulted in a significant increase in disbursements during FY83 and FY84. Improving perfirmance of social sector institutions in the execution of Bank-financed projects, the gradual containment of inflationary pressures and the effects of the recently-introduced fiscal reforms, which should improve counterpart funding, all point to a higher level of disbursements in the future. IFC has made investments and underwriting commitments of US$144.0 million in 29 enterprises and as of March 31, 1985, it held US$67.5 million. Annex II contains a summary statement of Bank loans, the IDA credit and IFC investments as of March 31, 1985.  - 22 - 77. Since the initial loan was made in 1949, Bank lending to Colombia has become quite diversified. Although through the mid-1960s, 88% of the loans made were for power or transport, since then the Bank has broadened its participatlan in lending for agriculture and industry, and initiated lending for irrigation and watershed management, education, water supply, telecommu- nications, urban development and nutrition. By the late 1970s, 53% of the loans made to Colombia were for projects other than transport and power. Of the loans made since 1978, 36% were for power and transport, 17% for industry, 19% for agriculture and irrigatior-, 9% for water supply, 6% for urban development, 4% for telecommunications, 2% for petroleum development and 6% for education, nutrition and multipurpose projects. The diversifi- cation was indeed a desirable aim as it helped provide close coneact with a broader range of Colombia's development problems. The experience gained has served to identify areas in which the Bank's presence can have a meaningful impact. 78. The Bank's dialogue with the Government through its lending activity has focused upon the need to mobilize additional domestic resources, to diversify and expand exports, to develop rapidly the country's energy resources, and to free the economy from excess ve controls. The discussions involved fiscal, interest rate and pricing policies, as well as incentives for exports. Positive results have been obtained particularly in the power sector, where power rates were increased sharply and a least-cost expansion program was formulated and launched. Similar results have been achieved in respect of some other public servicea, including appropriate charges for water for irrigation and domestic use and petroleum prices. 79. In lending to Colombia, the Bank has been supporting the Govern- ment's efforts to maintain sustained economic growth with financial stability, expanded and diversified exports, increased dependence on domestic sources of energy, provision of key infrastructure, and improvement of living conditions of the poor. More recently, in response to Colombia's having undertaken a gradual adiust'nent process to expand and diversify non-coffee exports and to resume growth, the thrust of the Bank's support has shifted towards strengthening the Government's programs, by enhancing the effective- ness of resource use, and giving priority to quick-yielding investments. Within this framework, special attention has been given to loans which would finance directly productive activities, such as agriculture and industry, support efforts to raise overall productivity, income and employment, increase and diversify exports and help develop renewable sources of energy through lending for hydropower and arranging associated cofinancing. The emphasis is being placed on operations geared towards productive sectors and essential infrastructure development which would: (i) increase output rapidly; (ii) reorient production towards exports and efficient import- competing goods; (iii) support quick-yielding infrastructure investments, particularly those that enable the more intensive use of existing facilities; and (iv) increase resource mobilization. Loans recently approved by the Board, and a number of operations at an advanced stage of preparation, reflect this overall direction. 80. The Bank lending in FY84 consisted of loans for power sector financing of ongoiag investments, coal exploration, earthquake reconstruc- tion, agricultural diversification and multi-purpose water supply and elec- tricity development, totalling US$464.1 million. In addition, the Bank  - 23 - participated in two B-loans to the extent of 14X of the loans, or US$28.75 million. In FY85 and beyond, increased emphasis is being placed on directly -productive projects, as under the already-approved loans for agricultural diversification, small-scale industry, petroleum, development banking and water supply and sewerage. Work is underway on projects for irrigation rehabilitation, agricultural technology transfer, ports rehabilitation and health. The loan described in this report is designed to support the trade policy adjustment and export diversification efforts in Coloabia. In infra- structure, the Bank is stressing rehabilitation, modernization and a more intensive use of the exiating facilities in ports rehabilitation, water supply and electricity distribution projects, and rural feeder roads. Finally, several projects in preparation will support the Government's efforts to help the poorer segments of the Colombian population. Proposed lending for further rural development, agricultural credit, water supply and sewerage, and public health will help improve the standard of living of the poor, while being designed to make better use of existing capacity and reduce losses. 81. The operations of external lenders In Colombia are shown in Annex I. While IBRD, IDB and bilateral sources provided about 75% of total exter- nal financing to Colombia in the 1961-72 period, their share has decreased since then to some 49% for the 1975-82 period. IDB has given increased emphasis to energy-related projects, in addition to those for low-cost housing, urban and rural development, agrarian reform, university education, water supply, rural electrification and land erosion control, which are aimed at improving living standards of the lower-income population. In the future, it proposes to assist Colombia in developing sources of domestic energy and in expanding productive sector activities to help generate increased capacity utilization and employment. USAID has supported yrograms in education, rural development and small farm development, but is phasing out its program in Colombia. The Government of Canada, the Federal Republic of Germany and the Netherlands have also provided concessional finaucing for basic needs and regional integration projects. PART V - LEGAL INSTRUMENTS AND AUTHORITY 82. The draft Loan Agreement between the Republic of Colombia and the Bank, the draft Operating Agreement between the Bank and INCOMEX, and the Report of the Committee provided for in Article III, Section IV (iii) of the Articles of Agreement of the Bank are being distributed separately. Proposed special conditions for disbursement are descr'bed in Annex III. PART VI - RECOMMENDATIONS 83. 1 am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 24 - 84. 1 recommend that the Executive Directors approve the proposed loan. - A.W. Clausen President Attachments May 2, 1985 Washington, D.C.  -25- AIINM I T lADLE * t Pqe 1 of 5 COLUSIA - SOCIAL INDICATORS DATA 6S COLONSIA UPRPS ROP (URIGuft 42mmu) L& T S (NT UTRST ) AL RI5NT t zuc Imp uuszms 196D!!- 1971Lb UsTDIATELi Ur. mRIC & Cm n Amu (11065Mm SQ. 28) TOTAL 1136.9 113a.9 1131.J AGICULTUAL 350.3 350.5 320.3 mA CEIXTA (156) 270.0 440.0 1460.0 2106.6 2345.3 _mIsy ClAwM in cwxxa (KILOGRAMS Or OIL EQUIVALENT) 355.0 495.0 690.0 "S.5 1122.6 VoMATXIV AM VITAL nsT!rU:s POPULATION.MID-VXAA (TOUDS) 15734.0 21266.0 26965.0 UROQ POPULATION (C OF TOTAL) 48.2 59.6 64.9 66.5 66.1 POPULATION ROJECTOIII POPUI.ATION LO TAR 2000 (HILL) 37.5 ITATLONARY POULATION (HILL) 61.7 PIPULATION SUIIEllIJN 1.. POPULATtON AENSIT! PER SQ. Ux. 13.8 18.7 23.2 35.7 82.9 153 Sq. KDI. ACU. LAND 63.0 60.7 82.4 92.4 156.9 POPULATTON AGE STRUCTURE CZ) 0-14 TMS Ab S U6.2 36.2 39.9 31.6 13-64 IRS 50.3 S 1.l 60.3 56.0 61.1 65 AND AOVE 2.9 2.6 3.4 4.1 7.1 POPUlATION GEOf RATE Cl) TOTAL 3.1 3.0 2.0 2.4 1.6 USRAN 5.7 5.2 2.7 3.6 3.7 CWUDC 33 LATZ CPER TII0W) 47.2 ;3.0 7t.S 31.3 23.4 CRUD DWATU RATS (PER TUOUS) 17.4 9.7 7.4 3.1 8.8 GROSS RERO0CTIO Ram 3.3 2.3 1.6 2.0 1.6 FAMILY PLANING ACCEPTORS. ANNUAL (TROUS) .. 115.4 192.8 USERS (S OW-PAIED w ) .. .. 49.0 40.3 FO AMD XVnWIG INDER Or FOOO PD. M CAPITA (1969-71-100) 100.0 99.0 124.0 114.3 114.3 pCR CAMA SUPPLY Or CALOS (2 OF RQOIUNENTS) 94.0 67.0 106.0 110.6 121.6 PREINS cGRS PER DAY) S4.0 46.0 53.0 67.3 39.7 OF WIICH ANINL AN PULSE 28.0 24.0 25.0 k 34.1 34.5 CHILD (AGES 1-4) NATIN RATE 11.2 6.0 4.0 5.7 5.2 LIFE EPECT. AT BSIM (TAS) 53.1 83.9 63.7 ".7 67.4 INSANT HURT. RATE CPU TUOUS) 93.4 70.6 53.9 60.6 54.2 ACCESS TO SAFE MATiE (IFOP) TOTAL 30.0 la 63.0 64.0 4U 63.. URUA 54.9 7 6a.0 73.0 7d 7S.i RURAL 6.8 7 23.0 46.0 7I 46.2 ACCESS To xCRETA DISPOSAL CZ WO POPULATION) TOTAL .. 47.0 44.4 Id 52.9 URN .. 75.0 60.0 7Z 67.0 IW"I. .. 0.0 L4.0 24.5 POPULATION PER IPHISICIAU 2640.0 2330.0 1710.0 A 1917.7 1063.6 POP. 0n NURSING PERSON 4220.0 t& 730.0 600.0 7F 015. 764.4 POP. PER HOSPITAL D3O TOTAL 360.0 450.0 560.0 if 367.2 326.3 UBA .. 350.0 490.0 411.5 201.5 UIRAL .. .. .. 2636.3 AUSSONS PER HOSPITAL BE .. 22.S 29.8a 2C 7.3 20.0 AVERAGZ SIZE OF HOUSEHOLD TOTAL .. 5.7.. RURAL *- 5.9' AVMEE NO. OF PIZSOHS/IN WTAL .. RoRAL .. 2.4 79 . ACS TO EL.1 (Z r MaELINOS) TOTAL 47.0 le 56.1 .b UriA 8 3.0 3 67.5 7W AL l.07: 13.2 7W  - 26- ANEX I T A I L * 3A Page 2 of 5 -j *5!A uLa U 1A (VKZG6ES AWnUAUS) l NDiT 01T KCT lXN ) a 1360Lk 15034?r MIDDLE INCOUI IDLTC LtsoLb. i97A z8:i TULb. LAT. A MI A cm l uui AMJUS81D INIOIUJNT RATTOU 1RXINR TOTAL 77.0 106.0 130.0 105.4 101.1 KIAL 77.0 107.0 123.0 106.3 105.5 13*1 77.0 110.0 132.0 104.5 36.7 SECUMWYI TOTAL 12.0 25.0 41.0 43.2 39.1 NIML 13.0 25.0 45.0 42.3 6e.9 ISNALS 11.0 24.0 31.0 ".5 50.6 VOCATIONL Cs o0 EcoUDA) 30.6 n 20.- 21.6 AL 33.6 21.6 UPIL-TK RAO pIIant sa38.0 38.0 31.0 30.1 25.1 OMZ! lS-O11.0 17.0 21.0 16.8 20.5 ADULT LITEMACY NATI C) 62.5 80.8 81.0 79.5 75.6 CMWT1 VASIxMa CARJITMOUSAN11 5.7 11.2 18- 6 46.0 57 m0 RICEIVU/TX0=11 POP 125.1 104.3 116-3 225.6 164.9 TV IU/T11012AND PO 9.5 38.1 86.9 107.2 123.8 rOIAm (1MAIL? OUaI ZAT1343?") CIRCULAON M TH0USAND POPULATION 50.0 108.7 50.2 li> 63.5 96.3 CIDOIA ANIUAL A AC /CPA .. .. 2.9 2.S 2.3 TOTAL LIOSR 10! (M10M) 4727.0 6353.0 3190.0 nIUALE tDUCT) 19.2 24.8 24.7 23.2 34.5 AAKCULTO3Z (PERCET) 51.4 37.9 25.8 31.5 40.7 IWU S (1DIJT) 19.2 21.0 21.2 23.9 23.3 PARTIIPATION RAU (3R) TOTAL 30.0 29.9 34.1 32.2 42.9 KAUl 48.8 43.1 51.2 49.3 54.7 1314Z 11.5 14.0 16.8 15.2 31.0 zCOU0!IC DEPONIC RATIO 1.7 1.6 1.2 1.4 0.9 IZIRUNT 01 IWJATE INCONZ m fzl nlvnD 152 Or 01 OUSEHOLDS 41.2 31-9 HIGEST 20S 0F 300815013 67.7 a 60.1 .... LOEST 2as o0 EOUS7E1ODI 2. I 3.5 LIT 401 01 UOUSENOLDS 6.e j 10.1 ESITATED AoMunz POVERTY INCOm LEVI! (US 3 CAPITA) .Al .. .. 214.0 j 288.2 SURAL .. .. 137.0 28 184.0 ESTDI*ZED RKZTIV lOVfl?Y iNCOVE LEV (MSS PER CAPITA) u .. .. 267.0 Lc 522.8 RURAL .. .. 122.0 372.4 USTDIATE POP. BELW ABSOLUTE rovER INC LVL (C) URBAN. .. 34.0 k* RURAL .. .. . .. . Z AVAILALE NOT APPLICABLE NO T Z S /a Ths group averave for each indieator are pop Ucatinn-vmgbtJd arithmtic maan. Coverage of countrie suoug the indSicators depends on availability of data and in not unform. lb Unless otherwina noted. -tt for 1960- refer to any yea bte 1959 and 1961; -Data for 1970' beten 1969 and 1971; and data for 'Mont Racent Eatimats' botuan 1980 mud 1982. /c 1977; Id 1976; /a 1964; If 1978; LL 1962. Ih 1973; li 1979; L IncluodLg teacher training at the third leval; /k Econouically active population. JN. 1984  - 27 - ANNEX I seu.I Page 3 of 5 Sb ..I.r.in a.... .e. III b i7 m~ 951. ..bieS mesa. ma ) . U t-N te S. b Ld. bIb -11e ieee% la. --"-W 59.0 .9 Ca. .915.5Ii-.. 1. lb. v.9..5. g.m 4.. tib. -e..a -. ,a.t.idl-t e.I 11d e.il tei t-9 Us WIdl. ..e .e- -it -^ -"-tert *9 Sb ~.t.e me. a.m, eie 9.. cbS idime. Use. lb . . ..CS5 lb uftweeeti - lb -almulet: .9 ilel ~dl iCin e..f . mess... b. C5CU .e15a sue. de..a 51. lb.e.9.s .. -V .ef la ilt'd Sb. eeb- f.1 md1nagb.. I5 S.. emt ab em-.., W -- ItmeaUs ...b.t ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~1CeSU~O f-MLlbd9I .91eSi55 de-Mmi 1 eby & al sn.lbE - 1.55 9.*e.e 55 s9-*Ssg .d tSee U ISSIs .#g S. .f..g.iiii.ia-Usgl e .1 .el -NewIl a-t. Site esi IUI isiS. ~ ~ ~ ~ ~ ~ ~ ~ ~ F~~.iaIm iseCisiLK dl bp .e. a-rptteele.is. 5se9.t mlCflbl. ese..ini telelIap - i.,-ee.SSi U 1 b t I i SS. W-atel, wt-U55 ed Ps.ee1. ebsm Us btMb. gesis Wls S. a 1.11mg 1946. -.Isie N-It.tbeigi ONg.e u deS.. _________________________________-PeeI55. = eet P .,te sUse"t ..... easem- -.ibe ,et-.. .it.b. C. p.9CC. ee pli. g.--) Us Wetpa aie beOPIss low tr. sgu s. hiM bmef - ~1e55. b.Usbb. i#e.Uba SstUseIlp .esd inl enUs