Colombia - Current economic position and prospects

RETURN TO REPORTS DESK RESTRICTED WITHIN 1N C P Report No. WH- 126a ONE WEEK This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS OF COLOMBIA June 6, 1963 Department of Operations Western Hemisphere  CURRENCY EQUIVALENTS US $1 = 9 pesos 1/ lpeso = US$0.11 1 million pesos = US $111, 000 approx. 1/ Colombia has two exchange markets; an official ("Auction") market in which the rate is 9 pesos = US $1, and a "free" market in which the rate is 10 pesos = US$1. The official buying rate on proceeds of coffee exports and on Petroleum Company conversions is 7. 10 pesos = US $1. The "free" market rate is generally applicable on the proceeds of other exports and on capital transactions.  C U R RE N C Y E Q U I V A L E N T S US$ 1 9 pesos 1/ 1 peso = US$ 0.11 1 million pesos - US$ 111,000 approx. 1/ Colombia has two exchange markets; an official ("Auction") market in which the rate is 9 pesos = US$1, and a "free" market in which the rate is 10 pesos = US$1. The official buying rate on proceeds of coffee exports and on Petroleum Company conversions is 7.10 pesos US.'1. The "free" market rate is generally applicable on the proceeds of other exports and on capital transactions.  TABLE OF CONTENTS Page BASIC DATA i S7-L1-.iJY AMID CONjCLUSIONS ii CHAPTER I BACKGROUNID ON COLOIKBIAN ECONOiCY A. Natural and Economic Features .. B. Political and Economic Stabilization ..... 1 CHAPT.R II THE, DEVELOPICiiNT PROGRRAllN AiiD L- FF I .CE IN 1961 AND 1962 A. Background 3 B, C.ross Domestic Product . 3 C. Public Finances and Credit ..... 6 D. Balance of Payments - Current Account ..... 8 CHAPTER III THE STABILIZATION PROGRAM A. Introduction ..... 10 B. New Foreign Exchange System ..... 10 C. New Fiscal Program ..... 11 D. Internal Credit Policy ..... 12 E. Current Price Cost Situation . 12 F. Current Balance of Payments Outlook .. 14 CHAPTZR IV RECENT INVESTMENT TRENDS A. Introduction ... 16 B. Public Sector Investment .o.* 16 C. Private Sector Investment ' ' 17 D. Volume and Phasing of E.xternal Credits ..... 20 E. Status of Development Planning ..... 22 CHAPTER V EXPORT PROSPECTS, FOREIGN DEBT, A.D CRFDITWORTHINESS A. Export Prospects .,.. 23 B. Foreign Debt ..... 24 C. Debt Service .... 24 D. Creditworthiness .... 25 APPENDIK A PRIJATE IJ4V7S'T,NT FUND - PIF - Resolution No. 11 of 1963 of Board of Directors of the Banco de la Republica STATISTICAL APPENDIX  i BASIC DATA Area: 439,825 Square miles Population: 15 million (mid-1961 estimate) Rate of growth 1951-60: 2.8% Gross Domestic Product: Real rate of growth 1950-55: 5.o% 1956-59: 3.7% 1960: 4.1% 1961: 4.9% 1962: (prelim.) 5.3% Total GDP (1960): 26.4 billion pesos Per Capita G-DP: 1,785 pesos Per Capita GDP at 1960 average free market rate of exchange: :,;250 equivalent Gross Investment (1961): 22% of GDP Balance of Payments (1962): (in millions of U.S. dollars) I. 'erchandise Account -25 II. Services (net-excluding donations) -95 III. Medium G- Long-Term Capital (net) +90 IV. Official Reserves, Short-Term Ca.pital, Errors and Omissions +30 Prices: Cost of living of workers - Change during 1961 - 8.5%0 1962 - 5.2% Wholesale prices - Change during 1961 - 5.h% 1962 - h.9% External Public Debt (December 31, 1962): Total (including undisbursed) .;.639 million IBED and IDA ;,235 Other .?4 Currency Equivalents (April 1963) Official Selling Rate (Auction) .1.00 = 9:00 pesos 1 peso = 0J.11 Official Puying Rate on Coffee and Petroleum Co.conversions ,41.00 = 7.10 pesos Free market ;1.00 = 10.00 pesos 1 peso = ;,0.10  - ii - SU12ARY AND CONCLUSIONS The most recent economic report on Colombia was completed early in 1961 (W:H-102a of January 1961). A Bank mission subsequently made a comprehensive appraisal of Colombiats ten-.year development program during January-June 1962 (WH-119a of June 21, 1962 and XH-119b of August 3, 1962). The purpose of this report is to consider Colombia's current situation and prospects, with particular attention to the progress and problems of the development program. 2. As a base for the development effort, Colombia is fortunate in having extensive and diversified natural resources, including abundant low-cost hydroelectric potential and petroleum reserves sufficient to meet local needs and provide supplies for export. Improvements in highway and railway transport have substantially reduced the obstacle to develop- ment existing because high mountain ranges divided the country into separate population and production centers. A dynamic industrial class and expanding commercial agriculture have enabled Colombia increasingly to expand production both for domestic consumption and for export. 3. A political arrangement under which Colombia is being governed by a coalition of her major political parties also provides a basis for carrying forward economic and social programs with substantial continuity. This liberal-conservative coalition was formed in 1958 after violence which verged on civil war. The presidency is to rotate between the two parties for four presidential terms totalling 16 years and other major govern- mental positions are divided equally between the two political parties. Under this arrangement, a peaceful election and orderly transition occurred in 1962. 4. Substantial progress has been made in the economic and social fields by the coalition government. For example, a severe overhanginig burden of external debt, existing at the end of the Rojas Pinilla admini- stration in May 1957, was overcome by the end of 1959 under a rigorous austerity program despite declining coffee prices. A comprehensive land reform program was approved by the Colombian Congress in 1961 and is now being implemented. The coalition government prepared a four-year public investment plan which was used as a base for government programs beginning in 1960. The plan was broadened to cover the entire economy under the "General Plan for Economic and Social Development," which covered the decade of the 1960's and was published in January 1962. 5. Review of economic activity during 1961 and 1962 in relation to the Plan highlights both the growth capability of the economy and problems requiring particular attention by the government. Despite the limited time available to prepare and initiate programs to carry out the Plan, the annual growth of gross domestic product during 1961 and 1962 approached the target (averaging roughly 5 per cent compared with a 5.6 per cent target in the Plan). Production in the agricultural and services sectors generally reached the target levels, while substantial shortfalls occurred in the industrial and mining sectors. The National Governmentts revenues fell substantially below the Plan's projections and the resulting budget deficits were financed largely by borrow^ing from the Central Bank.  - iii - A balance of payments problem develoned because of a combination of a short- fall of export earnings belowj the plan and a larger demand than had been projected for imports of raw materials and intermediate products. 6. The need to restrict import demand, curb the budget deficit, and restrain bank credit became increasingly apparent early in 1962, and the outgoing administration of President Lleras introduced a series of measures in each field. The new administration of President Valencia initiated a comprehensive stabilization proaram in November which included: a. Devaluation of the Peso. The selling rate applicable to imports of commodities wa3s depreciated by 34% (from 6.70 to 9.00 pesos to UStl) and the buying rate on coffee and currency conversions by petroleum companies w