Colombia - Agricultural Machinery Project

ESTRICTED ,Copy No. INTERNATIOM'M B&MFOR RECONSTRUCTION AND DEVELOPFiMENT REPORT AND RECOaivlIENDATIONS OF THE PRESIDENT TO THE BOLRD OF EXECUTIVE DIRECTORS ON TME LOAN hPPLICATION OF THE CIJA, DE CREDITO &GRtRIO INDUSTREIL Y NINERO GUARANTEED BY THE 0EPJUBLTC OF COLWIBIA August 15, 1949  CONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTITON AND DEVEIILOP1-ENT REPORT AND RECOjJLf0NDAATIONS OF THE PRESIDENT TO THE EXECUTIVp DIREhCTORS CONCERNING THEz PROPOSED LOATN TO THE C:AJA D:H CR.33ITO AXGTh\PLIO I 0USTIT-i.L Y PIIN!RO OF THE R3PUBLIC OF COLOiIBIA Page PART I History of' Negotiations 1 II Description of the Proposed Loan 3 III Appraisal of the Proposed Loan A. Colombia's Economic Position 5 B. The Political Situation 6 C. The Project 6 IV, Compliance with the Articles of Agreement V. Recommendation 9 Appendix I Loan and Guarantee Agreements II Preliminary Report on the Economy of Colombia III Report on the Colonbian Agricultural Machinery Project IV Report of the Statutory Loan Gommittee  C 0 N F I D E N T I A L Report and Recommendations of the President To the Executive Directors Concerning The Proposed Loan to the Caja de Credito &grario Industrial y Minero of the Republic of Colombia 1. I submit herewith the following report and recomnendations with respect to an application by the Caja de Credito Agrario, Industrial y i4inero of the Republic of Colombia for a loan of "P5,0000QO. Part I - History of Negotiations 2. On July 20, 194S, a Colombian Financial iM4ission to the United States * presented informally to the Bank a loan application on behalf of the Banco de la Republica which was acting as an agent of the Colombian Government. The loan application included various amounts for improvements to railways, equipment for highway construction, river control and ports, a steel mill at Paz del Rio, a soda ash plant at Betania, and the purchase of agricultural machinery, the total being ;,iP78 million. Svubsequently, an additional request was submitted for the financing of three hydroelectric plants, the foreign currency component of which was `.9 million. 3. Following receipt of this application, a mission was sent by the Bank to Colombia to make a preliminary survey of the economic situation of the couI-n tz5y, and to determine which projects of those submitted were sufficiently developed to permit an accurate appraisal by the Bank. 4. The Bank mission, upon its return in August 194S, reported that there were certain elements in the fiscal and financial situation which were adversely affecting Color4bia's economy and credit, bu4t recolmmended that as soon as correotive measures were applied by the Government, the Bank should consider the financing of several projects among which was a project for the importation of a quantity of agricultural machinery. For all of thesQ projects, plans and studiGs were available.  -2- 5. The Bank consulted with the Fund. Recommendations were made by both institutions to the Government of Colombia, designed to solve some of Colombia's more pressing problems. At the same time, the Bank indicated its willingness in principle to extend financial aid for development purposes upon evidence of the adootion of effective policies along the lines recommended. The Bank also suggested to the Colombian Government that the developmraent problems of the coln- try might best be handled after a study of the potentialities and resources of Colombia on a more thorough scale than had yet been carried out. The Colombian Government then invited the Bank to send a general development mission. This mission, headed by Dr. Currie is now at w0ork in Colombia. Its report will pro- vide a background against which the Bank will be able to determine the ext.3nt and the nature of the Bank's further participation in the financing of Colombian development. The Colombian Government, however, made it clear that they would not wqish the Banlk to defer consideration of the projects referred to in para- graph 4 above. 6. By mid-December 1948, the Bank was advised that the Colombian legis- lature had enacted important legislation designed to stabilize the financial situation in both the internal and external fields. A balanced budget was introduced. A new parity was fixed, for the Colombian peso. Powers were granted to the Government for the effective control of imports and exports to pro- tect dwindling gold and foreign exchange reserves. The legisslation also authorized the Government to contract and to guarantee loans made by the IBRD and the Export-Import Banlk. At the seme time, the Bank was informed of the Goverment's intention to conclude negotiations with foreign bondholders for the resumption of service on certain Departmental and ijunicipal bonds on which service bad been suspended.  -3- 7. APft.er this action on the part of the Colombian Government, a second Bank mission left for Colormbia on. December 31, 1948 to make a study of and report upon the specific projects enumerated above. This technical mission returned on February 3, 1949 and, in the light of the missionts report, the Bank went on to consider working out a loan of ..5,000,000 oi the project for the importation of a ricultural machinery. Negotiations began in the latter part of April 19/49 with the Colombian Ambassador, Sr. Don Gonzalo Restrepo-Jaramillo, who acted in the capacity of authorized negotiator on behalf of both the prospectlive borrower and the guarantor. Part II - DescriDtion of Prorosed Loan Borrower 8. The borrowler would be the Caja de Credito hgrario, Industrial y ilinero. This institution was established in 1931 under Colombian law to aid in the development and expansion of agriculture, mining and industry, principally in the field of finance. Its financial structure is that of a private corporation. The total authorizQd capital is 50 million pesos, Of this, 32.9 million pesos has been paid up, and, of the total stock, more than 99% is held by the Colombian Government which is empowered in certain circumstances to guarantee Cajals obligations. Caja is administered by a manlager and board of directors elected by the stockholders, which means virtually that they are appointed by the Government. Assets and lia- bilities, as of June 30, 1948, were stated to be 264.6 million pesos. Thile having the status of a private oorporation, Caja must be considered largely as a governmental development institution, ultimately dependent upon government for its finance. In the agricultural field, Caj&'s three- fold function of providing banlking facilities for the small depositor, loans to farmers, and sales outlets for seeds, fertilizers, and agricultural implements in the small qommunities wThich are not reached by the larger  -4- comxneroial banks and farm suppliers, commends this institution as a logical recipient of a loan such as is here proposed. Guarantor 9 The Colombian Government would guarantee the payment o.f principal, interest, comrrrission, and other charges on the loan as well as the fulfill- ment of all other obligations of the borrower. Amount and PurDose 10. The amount of the -proposed loan would be 5,O000,000, or the equivalent in other currencies, to provide for the purchase and transporta- tion to Colombian ports of agricultural machinery, spare parts, and eqjuipment for repair and maintenance centers which would be established by t)-ie borrower. A. general classification of the goods to be purchased is to be found on page 1 of Appendix III, copy of which was transmitted to the Executive Direc- tors on August 12. 11. A. trogram of machinery imUportation was drafted by experts of the Colombian MiinistryT of Agriculture in collaboratiOn with U. S. Government experts, and this Drogram served as a basis for discussions with the Bank. As a result of investirations and consultations with many ol the ex-XDerts who drafted the program presented by the Ministry, a imodified version was agreed upon as t'ne project to be financed by the Bank. This project places less emphasis on heavy mechanization than did the original program, and pro- vides for considerably more machinery of a lighter type as well as for hand tools and animal-drawin equipment. 12. The machinery would be sold exclusively to persons or entities primarily engaged in agricultural pursuits and to the Ministry of A-riculture, under arrangements to be agreed upon betweer4 the Bank and Caja. Sales to the 14inistry of Agriculture woud provide equipment pools for the perfor- mance of custom service to the small fairner whose financial resources or small land holdings prevent his acquiring machinery of his own. The MIinis- try now operates several equipment pool.s and desires to expand these  operations. Unless the Bank should otherwise agree, the local currency counterpart of ihe proceeds of the loan vould be used only to purchase the foreign exchange necessary for servicing the loan or for financing, additional irmportations of agricultural machinery. Amortization 13. The loan vwould be repayable over a period of seven years, Amortization would commence on M4ay 15, 1952, and repayment would be made in ten equal semi-annual installinents which would permit retirement of the loan at maturity on November 15, 1956. The average maturity wrould be four years and nine months, Interest Rate 14. The loan iwrould bear inteirest at the rate of 32 per annumi, in- cluding tlhe 1% commission to be carried to the Bankts special reserve. Commi-tment Charge 15. A commitmnlent charge would be fixed in accordance withl tthe present policy of the Bank. Legal Instruments 16. Appendix I containis drafts of the followi.-lng legal instrumients to be executed in order to give effect to the proposed loan: (a)- a Loan Agreement between the Caja de Credito Agrario, Industrial y Minero and the International Bank; (b) a Guarantee Agreement between the Republic of Colormbia and the International Bank., Appendix I was submitted to the 2xecutive Directors under date of August 12.  -6- Part III Ae of the_Proposed Loan h. Colombia's Economic Position 17. The e,0onomic report, Appendix II, which has rQready been circulated to the Board, was -prepared as a preliminary paper for thG Currie i"iission and as background against which the oroposed loan is to be considered. 18. It will be seen that during the War, Colombia, in common with nearly all Latin american countries, shared the inflationary experience arising chiefly from unusually favorable balances of payments. Subseouently, inflation con- tilaued, due partly to deficit government financing, but, more esvecially, to the expansion of commercial bank credit. This situation coupled with a larce backlog of demand for foreign goods whioh accumulated over the war neriod, later occasioned a high level of imports which, in turn, has resulted in a heavy depletion of exchange reserves. By April 1949, gold and foreign exchange holdings had reached a level barely sufficient to provide legal reserves for issued currency. Latest reports however, indicate that exchange holdi-ngs have increased somewhat, due partly to the seasonal movement of coffee at good prices and also to the adoption on April 1, 1949 of rigorous restrictions upon import licenses. 19, The foreign exchange situation of Colombia and also the do2.estic inflationary situation present problems which sho-uld be susceptible of solution if the Government adopts and maintains appropriate foreign exchange, fiscal, and internal credit policies. It is expected that the Currie iission will be of assistance to the 4overnment in appraising these problems and in formulating effective policies to solve them. Long range prospects for mild coffee, Colom- bia's principal export, appear to be good, except in the event of a severe recession within the United States, and Colombia faces no substantial problem due to the inconvertibility of currencies.  -7- 20. External national direct and guaranteed debt now totals $124.7 mil- lion, all in dollars, except for the equivalent of $9 million which is in sterling. Domestic cost of total external debt service represents 6% of the budgeted national expenditures for 1949. .hen all Sxport-Tmport Bank loans are drr-,,n, it is estimated that peak annual external debt service will be reached in 1953, and will then amount to $13.2 million. This amount rapre- sents 5.2% of 1948 current account balance of payments receipts. 21. Service on all external debt of the National Government is now baing met. Service on the i',unicipal and Departmental external bonds hov- ever has not yet been resumed, although an agreement has been reached wlith the Foreign Bondholders Protective Council. Nothing now stands in the way of a resumption of service except completion of the necessary formalities. Paynent of principal, interest, and sinking fund installments on these obligations will be guaranteed by the Republic of Colomlbia under legis- lation already enacted by the Colombian Congress. B. The Political Situation 22. Colombia has a long record of political stability and of unintter- rupted functioning of democratic institutions. She successful-ly withstood the serious threat to these institutions during th>.- riots of April 9th of last year. 1-iore recently, the lively political contest early in June 1949 culminated in elections which were held peacefully and without major inci.dent. The newqly elected Congress is now in session and Presidential elections are scheduled for June of next year. C. The Pro.ject 23. The economic j1stification of this project is given in detail in Ap1Dendix III; The following is a summary: 24. Shortage of Labor - Expanding industry which offers higher wages and more attractive working conditions has had a tendency to with- draw labor from rural districts and this, coupled with an intensi-  - g.- fication of agricultural Production and an increase in the areas under cultivatiQn, has resulted in a shortage of farm labor in many regions which can only be compensated by additional mechanization. 25. High Costs - Even in those areas where labor is still relatively abundant, traditional haxn methods of preparing the soil, planting and harvesting have becorme unduly costly and the judicious use of machinery is expected to reduce these costs. 26. Self-Sufficiency - Despite increased agricultuural production, consumption of farm products has more than kept pace with the additional output so that imports which are largely paid for in hard currency have increased rather than diminished. It is expected that, with further mechanization, local production will eventually be stepped up to the point where the domestio demand can be supplied without resort to heavy importations. 27, Goverrment ,ssurance - To ensure that the agriqultural machinery to be purch4sed from the propeeds of the loan will represent an effecti.ve addition to the present machinery population, the Government of Colombia was asked to give assurances that it would pursup a policy of granting high priority to the supply of foreigin exchange for the importation of spare parts and replacements for existing machinery. These assurances have been given.  Part IV gnce ith the Articles of greeement ompliance with Article I of the Articles of Areement 28. The proposed loan is within the -'urposes of the Bank as set forth in Article I of its Articles of Agreement. The proceeds of the loan vlould be used to finance the purchase and importation into Colombia of arricuLtural machinery to be utilized in the oroductive development oP Colormbiapagricul- tural resources. The loan would, ther3fore, come within the purpose specified in paragraph (i) of Article I of assisting in the development of Droductive facilities and resources w1ithin the territories of one of the less cleveloped member pountries of the Bank. Compliance with Article III ection 4. of the Articles of Agreement 29. The proposed loan conforms to the a plicable provisions of Section 4 of article ITI of the Articles of A,greement of the Bank. (a) The Republic of Colombia, the member in whose territor:ies the proposed project will be located, wqould not itself be the borrowler, but it would fully guarantee the repayment of the principal and the payment of int3rest and other charges on the loan. (b) Inqruiries made by the Banlk and other available information furnish satisfactory evidence tha-l under prev;liling m-arket qonditions the borrower would be unable otherwise to obtain the loani .)n conditions reasonable for the borrower, (c) There is annexed hereto, and marked Appendix IV, report of the Qommittqe provided for in Darafsraph (iii) of that Section recQmmending the project for which the loan is to be made.  - 10 (d) It appears that the rate of interest and other charges in connec- tion with the loan are reasonable, and that such rate, charges, and the schedules for repayment of principal are ap-.ropriato to the project. (e) There is satisfactory evidence that in making the proposed loan the Bank will be actinag prudently in the interests both of the RepublJc of Colombia and of the members of the BDan as a w;hole, Due regard has been paid to the prospects that the borrower and the guarantor will be in a position to meet their obligations under the proposed loan. (f) The proposed loan is for the purpose of a specific project of development within the meaning of paragraph (vii) of that Section. Compl.iance with Article II- Section 5(b) of the Articles of Ahreement 30. The form of loan agreement contains provisions to insure that the proceeds of the loan shall be used for produitive purposes and only for the ppurposes for which the loan is recommended. Part V - Recommerndation 31. I recommend that a loan in th-ie amount of 'l5,"000,000 be granted to the Caja de Credito Agrario, Industrial y Miinero at such rates and upon such terms as are set forth in the form of the loan agreement ilich w7as submitted to the Board on &ugiast 12. Eugene R. Black President August 15, 1949