Colombia - Country Assistance Strategy

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 17107 CO MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF COLOMBIA October 15, 1997 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit: Colombian Peso (Col$) US$1.0 = Col$1,180.5 (September 5, 1997) FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES Metric System GLOSSARY OF ACRONYMS AND ABBREVIATIONS AIL Adaptable Investment Loan bpd barrels per day CAR Regional Autonomous Corporation (Corporaci6n Aut6noma Regional) CAS Country Assistance Strategy CINEP Center for Research and Popular Education (Centro de Investigaci6n y Educaci6n Popular) DANE National Statistics Department (Departamento Administrativo Nacional de Estadisticas) DNP National Planning Department (Departamento Nacional de Planeaci6n) DO Development Objective DOD Debt Outstanding and Disbursed ECOPETROL Colombian Petroleum Company (Empresa Colombiana de Petr6leos) EDI Economic Development Institute EMA Environmental Management Authority ESW Economic and Sector Work GDP Gross Domestic Product GOC Govermnent of Colombia IBRD International Bank for Reconstruction and Development ICBF Family Welfare Institute (Instituto Colombiano de Bienestar Familiar) IDB Inter-American Development Bank IDF Institutional Development Fund IFC International Finance Corporation IMF International Monetary Fund IP Implementation Progress LAC Latin America and the Caribbean MIF Multilateral Investment Fund MIGA Multilateral Investment Guarantee Agency NFPS Non-Financial Public Sector PLANTE National Plan for Alternative Development (Plan Nacional de Desarrollo Alternativo) SEAP Economic Society of Friends of the Country (Sociedad Econ6mica de Amigos del Pais) SME Small and Medium-sized Enterprises SUL Start-up Loan SYNERGY National Evaluation System of Public Sector Performance (Sistema Nacional de Evaluacion de Resultados de la Gesti6n Publica) Vice President : Shahid Javed Burki Director : Andres Solimano Country Team Leader : David Yuravlivker Task Manager : Emesto May  FOR OFFICIAL USE ONLY COLOMBIA COUNTRY ASSISTANCE STRATEGY TABLE OF CONTENTS SUIIAMRY ....................................................... i I. SOCIAL, ECONOMIC AND POLITICAL CONTEXT ....................................................... I A. SOCIAL ISSUES .......1................................................ 1 B. ECONOMIC ISSUES ....................................................... 2 C. POLITICAL AND GOVERNANCE IssuEs ...................... .................................. 3 II. MACROECONOMIC PERFORMANCE, PROSPECTS AND RISKS ................. .................. 4 A. REcENT EcoNoMIc PERFORMANCE ....................................................... 4 B. MACROECONOMIC PROSPECTS AND RISKS ................................. ...................... 5 C. ExTERNAL ENVIRONMENT ....................................................... 7 III. COLOMBIA'S DEVELOPMENT AGENDA AND THE BANK'S CAS .............. ................ 8 A. COLOMBIA' s DEVELOPMENT AGENDA. 8 B. PROGRESS TOWARDS OBJECTIVES IN PREVIOUS CAS ................................. ........... 8 What did not work well ............................................ 9 What worked well ............................................ 9 C. PROPOSED COUNTRY ASSISTANCE STRATEGY ................. ........................... 9 Promoting Peace and Development ............................................ 10 Promoting Rural Development ............................................ 11 Developing Human Capital ............................................ 12 Attaining Public Sector Responsiveness and Efficiency ....................................... 13 Improving Infrastructure Services ............................................ 14 Ensuring Sustainable Development ............................................ 15 IV. BANK GROUP COUNTRY PROGRAM .................................................. 16 A. VEHICLES FOR BANK ASSISTANCE .................................................. 16 Portfolio Management ................................................. 16 Lending Services .................................................. 18 Non-Lending Services .................................................. 20 Partnerships ........ ..................... ................................................. 21 B. COUNTRY PROGRAM MoNITORING .................................; 21 Risk Management and Creditworthiness ................................. 21 Risks ................................. 22 Performance Indicators ................................. 22 V. CONCLUDING REMARKS ....................................... 22 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TEXT FIGURES FIGURE 1. COLOMBIA: MAIN SOCIAL INDICATORS ..1........................................ FIGURE 2. COLOMBIA: MAIN ECONOMIC INDICATORS, 1990-96 . ............................................ 4 TEXT TABLES TABLE 1. SELECTED ECONOMIC INDICATORS, 1992-2005 .............................................. 6 TABLE 2. PORTFOLIO MANAGEMENT INDICATORS ............................................. 17 TABLE 3. EXPOSURE INDICATORS, 1992-2005 ............................................. 21 ANNEXES ANNEX AI COLOMBIA AT A GLANCE ANNEX B 1 COLOMBIA - CAS PROGRAM MATRIX ANNEX B2 COLOMBIA - SELECTED INDICATORS OF BANK PORTFOLIO PERFORMANCE AND MANAGEMENT ANNEX B3 COLOMBIA - BANK GROUP PROGRAM SUMMARY, FY98-00 ANNEX B4 COLOMBIA - SUMMARY OF NONLENDING SERVICES ANNEX B5 COLONMiA - POVERTY AND SOCIAL DEVELOPmENT INDICATORS ANNEX B6 COLOMBIA - KEY ECONOMIC INDICATORS ANNEX B7 COLOMBIA - KEY ExPosuRE NDICATORS ANNEX B8 STATUS OF BANK GROUP OPERATIONS IN COLOMBIA ANNEX B9 COLOMBIA - CAS SumMARY OF DEVELOPMENT PRIORITIES ANNEX C THE PARTICIPATORY PROCESS OF THE CAS ANNEX D COLOMBIA: [BRD PORTFOLIO ANALYSIS MIAP  COLOMBIA COUNTRY ASSISTANCE STRATEGY SUtMMARY i. The Country Assistance Strategy (CAS) for Colombia has been prepared following a new participatory approach being piloted in the Bank, which has included: (i) Colombia Country Team workshop in Washington; (ii) Government of Colombia (GOC) workshop in Bogota; (iii) consultations with civil society in Bogota; and (iv) joint Bank/GOC workshops in Bogota. As such, the proposed CAS reflects a joint Bank/GOC assessment of the required new directions and shifts in emphasis for the Bank Group country program to assist Colombia in meeting its most critical development challenges. It is to serve as the driving instrument for our partnership with Colombia and for managing our resources in response to its needs and priorities during the FY98- 00 period. ii. This has been a very productive process and has strengthened the Bank's already close relationship with Colombia. Furthermore, the dialogue with various sectors of civil society provides a dimension of continuity to this relationship and serves as a buffer against political risk. An important conclusion of the consultation process has been that Colombia places as much value on the Bank's world-wide experience, technical expertise and ability to develop partnerships, as it does on its financial contributions. Thus, even though Colombia has open access to the international capital markets, both government officials and civil society representatives have indicated that the Bank can and should play an important catalytic role in assisting Colombia's overall development process in the near future. At this juncture, the Bank is being requested to: (i) assist in identifying new approaches where existing models have failed (e.g. institutional development, land reform); and (ii) implement identified solutions in strategic areas (e.g., decentralization, private sector participation) and, by focusing on implementation, help bridge the existing gap between conceptualization and results on the ground. iii. The previous CAS, presented to the Board in November 1993, emphasized the need to help Colombia consolidate and deepen its structural reforms, to support private-sector-led growth by improving the skills of the labor force and ensuring efficient provision of infrastructure and utility services, to improve the delivery of basic services so that the poor participate in the benefits of growth, to address the degradation of the natural resource base, and to strengthen institutional capacities. Significant advances have been made in these broad development objectives. This new CAS recognizes the progress in the structural reforms, the relatively strong international reserves position of the country, its weak project implementation record, and the adoption of a new medium-term development agenda. This agenda aims to ensure that Colombia achieves its full economic growth potential and focuses on reducing poverty, improving social conditions, and sustainable development. In setting this agenda, the joint Bank/GOC teams have identified six key areas of strategic importance where the Bank should play a catalytic role in assisting Colombia's overall development process in the near future: (i) promoting peace and development through a focus on the socio-economic determinants of violence; (ii) promoting rural development; (iii) developing human capital; (iv) attaining public sector responsiveness and efficiency; (v) improving  ii infrastructure services; and (vi) ensuring sustainable development. The Bank's contribution to the promotion of peaceful development will include lending operations, policy dialogue and transfer of international best practices in the area of resolution of internal conflicts and in the reduction of violence. Monitoring indicators will be included in the relevant operations and will be evaluated jointly with the Colombian authorities. This six-point agenda should be supported by an adequate macroeconomic framework. iv. The new directions envisaged for the country program will in general lead to smaller loans but more staff intensive projects. In its catalytic role, the Bank will also be undertaking more challenging and riskier interventions, and entering into less known areas of operation. In the context of the decentralization process, for example, we need to recognize sharp disparities in institutional capacity among sub-national governments. In the area of violence, much remains to be known about the relation between violence, development and poverty. Against this background, the proposed Bank Group Program is a high risk/high reward program, given the intricate problems of the Colombian society at this juncture and the innovative nature of some new operations. v. For the Bank to play the type of role it is being requested to take, therefore, it needs to confront and properly manage these higher risks. To do so, the Bank needs to make complementary use of its diverse set of assistance instruments. Portfolio management and project implementation is the starting point of our concerted efforts in Colombia. They are critical not only to ensure Colombia attains the development objectives envisaged by the program, but that we learn by doing and use the corresponding information for the design and development of new operations. Indeed, improvements in portfolio performance should serve as a gauge of our ability to deliver high quality products, which is central to the proposed strategy. The new lending program, on the other hand, needs to combine larger, more traditional projects, with smaller, knowledge-transfer operations to give the program both greater balance and economies of scale. Adaptable lending products are to be used to allow task teams to test approaches, build on successes and cut losses through greater reliance on pilot projects, systematic capacity building and institutional development. The proposed base case lending scenario involves an average of four to six operations per year. While specific large projects could affect the volume of lending in each particular year, new commitments could average about US$300 million p.a. for FY98-00 provided that country conditions--including the political and security situation related to the upcoming electoral process--are adequate to support this program. Finally, economic and sector work will be used as an essential instrument to manage risks and enhance the development impact of our operations in Colombia--providing support to our policy dialogue, contributing to the design of our operations, and setting the basis to learn from best practices around the world. vi. The following issues are suggested for Board discussion: Does the Board agree with the six strategic priorities identified for Bank support in para. iii above? In particular, is the emphasis on promoting peace and development through the focus on the socio-economic determinants of violence--raised as one of the key development priorities by all sectors of the Colombian society--appropriate for Bank involvement?  * Is an adequate balance achieved between lending and non-lending services and the respective roles of the Bank, EDI, IFC and MIGA in view of the Government's indicated priorities? * Is adequate attention given to other priorities, including macroeconomic management and private sector development? * Are CAS implementation risks realistic and acceptable? * Is the CAS sufficiently flexible to be able to respond to country and implementation risks?   MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF COLOMBIA L SOCIAL, ECONOMIC AND POLITICAL CONTEXT A. SOCIAL ISSUES I. Solid growth of about 4.5 percent a year for the past four decades, combined with a drop in the population growth rate to 1.8 percent per year, have facilitated substantial improvements in economic and social conditions in Colombia. Since the early 1950s, life expectancy at birth--now at 69 years--has risen almost two decades, while infant mortality rates--now 27 per thousand live births--have been slashed by a factor of four. The incidence of poverty declined steadily from an estimated 50 percent in 1964 to 20 estimatedpercent in 1995.6Nonethe , povFigure 1. Colombia: Main Social Indicators p)ercent in 1995. Nonetheless, poverty remains a critical problem. Almost 7 Incidence of Extreme Poverty, 1978-95 million Colombians have incomes 40.0 A5 39R9 At3 m.I " 34.3 below a nutritionally defined 301.o 25.1 27. 6 25 23.3 subsistence level. Some 15 percent of 2o0o .0:> g_ I; 33#i2.S ,R a3Oai the children under age 5 are 10 ii malnourished and about 17 percent of 5.0 _ _ _a s f s _ the population lacks access to safe kn-78 Sep-OS Dec-91 Sep.92 Sep-93 Sep.94 Sep-95 water. Sharp regional disparities in Life Expectancy at Birth, 1950-95 Infant Mortality Rates, 1955-90 the quality of life contribute to social 75 140 R.tperl,000 disintegration in large areas of the 75 72.3 120 70- 69.2 country. Poverty incidence is more 65 - 66.4 l than three times higher in rural than in /. 'o urban areas. Infant mortality rates in 60Wmen 55 2 Choc6, the department with the worst - ToI 40 273 social indicators, are similar to the. .; -e 20 ' - . 45 0 ;4 I' ;, national average twenty years ago. . . . . . . . . ........... The incidence of child malnutrition is . .fi 50 percent higher in households in 120 epe100000 HomicideRate,1980-9 which the mother has no education 100 7 94 2 1 92 than in those in which she has primary 60 61 3 education. Overal, the sustained 40- 33 lH improvemet in the main ecoomic 20i43l [i l3 i:]fg and social indicators of the last 0 - decades should not divert attention from those Colombians still Frhondcider-Gallardo, andRodiguezi p.(1996). ISom=io6n.Cw&radeNf,-d2d experiencing conditions that the porHomkidimspra ColombiaporDepanramntos,Colombia.  2 COLOMBIA CAS country, as a whole, left behind ten or twenty years ago. The experience of other countries in Latin America suggests that faster rates of improvement in living conditions can be achieved. 2. A significant obstacle to improve the living conditions of the average Colombian is the high and pervasive level--as well as the diversity of types--of violence in the country. The homicide rate is 92 per 100,000 habitants, as compared with Brazil at 20, the US at 10, Argentina at 5 and Chile at 3. While in Latin America only 3 percent of all deaths are explained by homicides, in Colombia it is 25 percent. There is an average of 1,400 reported kidnappings every year. But the State has been unable to effectively prosecute criminal violations, resulting in extremely high impunity rates. Indeed, certain areas of the country are subject to active dispute between guerrilla and right-wing armed groups, with very limited presence of the State. This active confrontation has displaced a large number of people in the rural areas, the majority being children and women. The growth of the illegal drug industry in Colombia over the past two decades has also had serious economic, political and social effects. Clearly, the costs to society have outweighed any possible benefits related to the income being generated. Organized criminal groups have accumulated enormous wealth and gained access to political and business spheres, enhancing their influence and having a detrimental effect on the social fabric. The authorities have embarked on an intensive fight against narco traffic, resulting in the dismantling of the two largest cartels and the promotion of new legislation to fight drug-related crimes (see para. 7)--but this is still an ongoing fight. Overall, the direct annual losses imposed to society by illegal activities (including guerrilla warfare, narco trafficking, homicides, crimes, etc.) have been estimated by some studies to be over 10 percent of GDP. Most importantly, increased violence--80 percent of which is inter-personal violence and not directly related to organized crime or warfare--has imposed an enormous deadweight loss to development efforts in Colombia, with a corresponding estimated 2 percentage points reduction in the average annual economic growth rate during the 80s'. B. ECONOMIC ISSUES 3. Colombia has established a good reputation for its prudent and gradual approach to macroeconomic management--as reflected by its investment grade in the international capital markets. This tradition of stable macroeconomic management is best evidenced by a record of positive GDP growth every year for more than six decades. During the 1980s--referred by many as the 'lost decade' for Latin America--Colombia maintained an average annual growth rate of 3.5 percent while adjusting to a worldwide recession and coffee and oil price swings. Productivity in most sectors, however, remained stagnant and economic growth below its potential. Recognizing that Colombia can grow at a faster rate than its historical record of over 4 percent per year and that macroeconomic measures alone would be insufficient to raise productivity in the long term, the Colombian authorities have implemented major structural adjustment reforms. Throughout the 1990s the adjustment effort has included international trade, foreign direct investment and partial capital market liberalization, central bank autonomy, domestic financial reform, fiscal l For a more complete presentation of the costs of violence in Colombia refer to Rubio, Mauricio (1995), "Crimen y Crecimiento en Colombia", Coyuntura Econ6mica Volume XXV No. 1 (March), FEDESARROLLO, Santafe de BogotA, Colombia.  COLOMBIA CAS 3 decentralization, modernization of the public sector, an opening of the infrastructure sector to private investment, reform of the social security system, and modifications to reduce rigidities in the labor regime. By consolidating and further deepening these reforms, and with the resources being generated by the exploitation of the oil discoveries of the early 1990s in Cusiana and Cupiagua, Colombia could set the basis to move onto a higher economic growth path in the coming future and realize its potential. 4. The country is also facing other significant challenges. Since 1973 the economy has been characterized by stable but relatively high inflation--in the range of 18-32 percent. The costs to the economy of this level of inflation is increasing over time, particularly as other Latin American countries are achieving single digit inflation rates in the 1 990s. The main threat to macroeconomic stability, however, is related to a weakening fiscal position--with the Non- Financial Public Sector (NFPS) shifting from a surplus of 0.5 percent of GDP in 1991 to a deficit of 2.9 percent of GDP in 1996. To eliminate existing macroeconomic imbalances, brake the inertial inflation and attain a higher long-term sustainable growth path, the authorities need not only to avoid any policy backtracking but to address head-on the structural causes of the fiscal deficit. This should be done by: (i) containing pressures related to the decentralization process; (ii) reversing the accumulation of un-funded liabilities of the social security system; (iii) managing the oil stabilization fund to attain the long-term benefits from expected oil revenues; (iv) eliminating un-targeted subsidies in the provision of social and infrastructure services; (v) curtailing the increase in judiciary and defense outlays while improving the cost-effectiveness of these activities; (vi) attaining greater participation of the private sector in infrastructure financing to provide space for social expenditures; and (vii) streamlining the budgetary process to promote effectiveness and efficiency in the implementation of government programs. C. POLITICAL AND GOVERNANCE ISSUES 5. During the last four decades Colombia has shown remarkable stability of its democratic institutions, some of the oldest in the world. From 1958 to 1974 the predominant political scheme was the National Front, a political pact between the two main parties designed to overcome a period of intense civil violence. This pact consisted in the alternation of the presidential periods among the two parties and their share of cabinet responsibilities. Since the mid-eighties, major efforts have been made to increase the scope of democratic institutions. Key driving forces of the changes in the political system have been the process of territorial decentralization (including popular election of mayors since 1988 and of governors since 1991), the new Constitution of 1991 (expanding the scope of human rights, promoting civil society participation in the definition of development objectives and the evaluation of public sector performance, strengthening the independence of the judiciary, and enhancing government accountability) and the reform of the electoral system (making the process more transparent and fair). The reincorporation of illegal armed groups to Colombian society, one of the objectives pursued with the political reforms, has had only partial success--with three guerrilla groups having negotiated their entry into the political system. Two key remaining groups, the FARCs and ELN, have systematically rejected the peace offers coming from the political establishment and persisted in a confrontational strategy. If security conditions were to deteriorate during the upcoming electoral process, implementation of the Bank's program could be negatively affected. Overall,  4 COLOMBIA CAS however, the Colombian political system can be characterized as being a stable democracy in a state of transition towards stronger political competition that can render a more effective and responsive state. 6. Much of the international and domestic political agenda during the recent years has been dominated by the drug problem. Colombia has initiated a major drive to eradicate the substantial influence that the drug cartels have been exerting over various sectors of Colombian society. The prosecution of politicians with links to the drug cartels, the investigations related to the financing of the 1994 Presidential Campaigns, the approval by Congress of laws to confiscate property of the cartels, the increased prison sentences for drug-related crimes and the recent efforts to reinstate the extradition of Colombian nationals, constitute significant efforts to recuperate ground in the fight against the drug cartels and provide an effective framework for future action in this field. With the legislative agenda regarding the fight against drug cartels being addressed, the political calendar will leave more room to economic and social issues that will be driving the upcoming local, congressional and presidential elections. Among those issues, the need to secure peace is a priority item among all sectors of Colombian society. II. MACROECONOMIC PERFORMANCE, PROSPECTS AND RISKS A. RECENT ECONOMIC PERFORMANCE 7. Economic performance in 1996 was weaker than expected (see Figure 2 and Annex B6). Real GDP growth slowed to just over 2 percent (from 5.4 percent in 1995). Contractionary monetary policy, the economic effects of the war against narco traffic and declining confidence factors help to explain this downturn. Manufacturing and residential construction were two of the sectors mainly affected by this downturn. An economic Figure 2. Colombia: Main Economic Indicators, 1990-96 downturn in neighboring GDP Growth Inflation and Unemployment Rates Venezuela, as well as a 6.0% 58 5 12 weather-related shortfall in 5.0 - 4.3 4.0 31 / 11 coffee production have also 340. 10 been contributing factors. As 200 23 - a result, the year-end .0 1 7leftscal) 0.0 19 - lto l unemployment rate jumped 17 -unemployment (ight scale) 6 sharply from 9.5 percent in 15 5 1995 to 11.5 percent in 1996. Inflationary pressures, External and Internal Balances Real Interest and Real Exchange Rate Index however, did not recede: of 14.0 Real E nchange Rate index 120.0 5.0 ~~~~~~Current Accoiunt Balance (1986=100) (dg3i scale)15. inflation rose to 21.6 percent, 4.0 Fiatdalance _ 00.0 0.0 compared with 19.5 percent in 20 1.0- 100.0 1995 and the authorities' 00-O 960 original target of 17 percent-- :20 4.0 IelnterestRate 05.0 owing in part to the 20 (l 2 K 0 te 950 persistence of backward- -6.0 0.0 70.0 looking wage indexation and Ia Source: Bsaco de Ia Republica.  COLOMBIA CAS 5 I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ sizable one-time adjustments in the charges for education, health and electricity services. Notwithstanding the higher oil export prices and a decline in imports related to the slower growth, the external account remained practically unchanged around 5.5 percent of GDP. Nontraditional exports fell as a result of an appreciation of the peso in real terms by 10 percent last year. Available indicators suggest that activity was sluggish in the early part of 1997, with unemployment reaching 13.6 percent in June, but started to recover in the third quarter. Inflation is in a downward trend, falling from 21.6 percent in December to 18 percent in August 1997. Moreover, GDP growth for 1997 is projected at 2.4 percent. 8. Despite the administration's efforts, including the 1995 tax reform, central government collections, as a proportion of GDP, were flat in 1996 due to the economic downturn. In addition, effects of the tax reform on fiscal revenues were less than expected because Congress did not approve the full proposed reform (foregoing the proposed broadening of the VAT base and introducing an amnesty for tax arrears incurred before 1994). With public spending continuing to increase, the NFPS deficit excluding proceeds from asset sales widened from 1.5 percent of GDP in 1995 to 2.9 percent in 1996. For 1997, the Government projects that the fiscal deficit will reach 3.6 percent of GDP, reflecting mostly increases in public spending. On the monetary front, growth of money and credit aggregates slowed down in 1996 reflecting confidence factors, slower economic growth and the lagged effect of a monetary tightening in late 1995. Liquidity conditions, however, have eased in recent months. Interest rates have continued to decline from their peak in mid-1996--10 percentage points in real terms. Net international reserves increased by US$1.6 billion in 1996, bringing them to the equivalent of six months of goods and services. They have subsequently increased by US$450 million in the period January- August 1997 to US$10.4 billion. B. MACROECONOMIC PROSPECTS AND RISKS 9. With ample and diverse natural resources, moderate population growth, a literate workforce, a resilient entrepreneurial class, and a tradition of competent economic management, Colombia has the potential for sustaining strong economic growth and substantially improving living conditions. A necessary condition for achieving these objectives is a sound macroeconomic framework, which depends primarily on the fiscal stance. Thus, reversing the recent deterioration on the fiscal accounts, addressing structural causes of the fiscal imbalances, and maintaining the course of ongoing economic reforms is extremely important. At this stage, efforts are required to tackle the roots of the fiscal problem, to resist pressures for policy slippages, and to maintain the declining trend of the inflation rate. The medium-term economic scenario for Colombia presented below is intended to examine the existing policy stance and portray its implications for the corresponding macroeconomic environment within which the Bank could be operating. 10. The projections presented in Table 1 reflect the ongoing dialogue between the GOC and the Bank, as well as the participatory preparation process of this CAS. Following the economic recovery that started in the second trimester of 1997 and the expected sharp increase in oil production, GDP growth is projected to increase from 2.4 percent in 1997 to about 4 percent in 1998 and 1999, slowing down somewhat in the following two years as oil production declines. This slowdown could be averted if the recently discovered oil fields become operational at that time. The Government believes that existing excess capacity in the economy, as well as high  6 COLOMBIA CAS levels of investment in physical and human capital in the past few years, would result in higher growth rates--of about 1 percent p.a.--over these projections. The fiscal projections assume that the recent recovery of government revenues will be maintained, and that the expected increase in oil revenues will further strengthen the fiscal stance. Furthermore, the projections presuppose that the structural roots of the deficit will be tackled during the projection period. Also, several major public investment projects would be completed this year. Thus, the overall fiscal deficit is projected to decline from 3.6 percent of GDP in 1997 to 2.4 percent in 1998 and further to close to 1.7 percent of GDP in 1999 (see Table 1 and Annex B6). Table 1. Selected Economic Indicators, 1992-2005 IJ Base Case Actual Prd. Proyectkm 1992 1993 1994 1995 1996 1997 1998 1999 2000 2005 Real growth rates GDP 4.0 5.4 5.8 5.4 2.1 2.4 4.2 4.0 3.2 5.0 GDP per capita 2.2 3.6 4.0 3.3 0.7 1.0 2.8 2.6 2.2 4.0 Private consumption per capita -3.9 2.2 -3.0 3.0 0.4 0.7 2.4 2.3 1.5 3.5 Exports ofgoods 4.5 6.7 4.8 4.4 2.9 5.7 16.0 13.0 0.3 5.7 Shares of GDP (%/) Gross domestic investment 17.2 21.2 23.3 23.5 20.3 20.5 19.6 18.8 19.2 19.6 Grossnational savings 19.0 17.2 18.8 17.3 14.7 15.7 15.4 15.1 15.1 16.2 Cuurrentaccountbalance 1.8 -4.0 -4.4 -5.4 -5.6 -4.8 -4.2 -3.7 4.1 -3A NFPS balance -0.1 -0.2 -0.2 -1.4 -2.9 -3.6 -2.4 -1.7 -1.4 -0.5 NFPS primary balance 2.2 2.4 1.7 1.0 0.3 -1.4 0.3 0.7 0.8 1.0 NFPS operational balance -1.7 -2.5 -1.1 -0.5 -0.4 -0.1 Other Inflation (CPI, end of period) (%) 25.1 22.6 22.6 19.5 21.6 18.5 18.0 17.0 16.0 13.0 Real exchange rate (apprec. down) (%) -2.3 -2.2 -8.2 3.9 -9.4 0.0 -1.0 -0.5 3.0 1.0 Grossreservesinmonthsofimports 8.8 6.9 5.8 5.1 5.9 6.1 5.2 4.7 4.4 4.1 DOD/GDP 34.9 30.8 27.7 31.1 34.1 31.2 30.3 29.7 30.3 31.9 DOD/exports 177.4 163.4 152.5 169.7 191.3 185.6 175.2 167.2 173.6 165.7 Debt service/exports 38.8 30.1 29.0 29.4 36.0 27.9 29.5 30.1 30.1 30.4 Source: Banco de la Republica and Bunk staff estimtes. '-' See Annex A5 fcr8more complete list of key ewmcmic indicatoas. 11. Since in an inflationary environment a substantial part of interest payments on the domestic debt are actually amortization of that debt, Table I also presents the operational deficit of the NFPS, which deducts from the overall deficit the part of interest payments that merely compensate bond holders for inflation. As Table I shows, the projected fiscal adjustment in the next two years would virtually bring the operational deficit in real terms to about 0.5 percent of GDP and gradual adjustments would virtually eliminate it thereafter. Thus, assuming that the private sector would be willing to maintain the same level of government bonds in real terms, the public sector will sharply reduce its pressures on monetary and financial markets in 1999, leading to further gains on the inflation front and lower interest rates. Fiscal consolidation will reduce the pressures on the real exchange rate to appreciate. It should be pointed out, however, that the Government may have to pursue a stronger fiscal effort in order to solve the financial problems of the social security system. In addition, the Government will face major challenges in maintaining fiscal balance within the increasingly decentralized political and administrative environment, and in improving the efficiency of public expenditures.  COLOMBIA CAS 7 12. On the external front, events will be overshadowed by the expected increase in oil exports in the next two years. Between 1996 and 1998, oil production is expected to jump from 630 thousand barrels per day (bpd) to 890 thousand bpd, as the Cusiana and Cupiagua fields reach their plateau in 1998 at 500,000 bpd. Consequently, the current account deficit is projected to decline from nearly 5 percent of GDP in 1997 to about 4 percent of GDP in 1998 and to 3.7 percent of GDP in 1999. Thereafter, increasing non-traditional exports are projected to offset the decline in oil exports in the year 2000, leading to a gradual improvement of the current account in the balance of payments thereafter. 13. An improved fiscal stance, lower inflation and real interest rates, and a stronger export performance would allow the Colombian economy to resume and even surpass its historic growth rates which is necessary in order to boost job creation and reduce current unemployment levels of around 13 percent. By the end of the projection period, the economy would be expected to grow at a sustainable pace of 5 percent p.a., with inflation dropping to about 13 percent and the current account deficit leveling off at about 3-3.5 percent of GDP--broadly financed by foreign direct investment and other long-term capital inflows. The Government believes that, under the gradual monetary policy followed by the independent Central Bank, inflation will fall to single digit levels by the early years of the next decade. This scenario requires strong commitment to maintain macroeconomic stability by the new authorities that would take office next year, as persistent fiscal imbalances present risks for the overall macroeconomic framework and sustained growth and weaken the economy's capacity to deal with external shocks. 14. This economic scenario could be boosted by a more proactive policy stance aimed at reducing existing macroeconomic imbalances at a faster rate. In particular, fiscal measures could be adopted to tackle the structural problems in the area of decentralization, mineral royalties and social security--building on the recently issued recommendations of the Presidential Commission of Public Spending which was established in 1995 and joint econornic and sector work done with the Bank. This could be accompanied by a more restrictive monetary policy stance to start with. In turn, these efforts could set the conditions for a more robust and sustainable pace of economic growth--with the economy growing at the end of the projection period at about 6 percent p.a. in real terms, and inflation at single digits. 15. On the downside, Colombia could see its traditional checks and balances weakened by political considerations geared to attain the short-term benefits of lax and pro-cyclical macro and financial policies. An accommodating monetary stance would not only undermine the central bank's credibility but, together with the expansionary fiscal position, ignite price and balance of payments pressures, as well as fiscal disequilibria. In this case, the considerable leeway that Colombia currently has--given its energy resources, reputation for prudent economic management, strong external reserve position and favorable rating from international agencies-- would be used to postpone the required adjustment. The economy could then be led to a hard landing requiring a more difficult adjustment process during the 2000-05 period. C. EXTERNAL ENvIRoNMENT 16. While the U.S. is still Colombia's major trading partner, imports from preferential suppliers from the region, mainly Andean Group partners, have greatly expanded. The Andean  8 COLOMBIA CAS Group granted import tariff concessions to Peru, which has agreed to gradually adjust its tariff structure in line with the Andean Pact within eight years. Peru is the second commercial partner of Colombia in Latin America after Venezuela, and is an important destination of Colombia's surging non-traditional exports. Colombia is also pursuing the intensification of regional trading links through its membership of the G3 with Mexico and Venezuela, and of the Association of Caribbean States, and is placing high priority in establishing a formal trade agreement with Mercosur. 17. Colombia's external environment will be affected mainly by: (i) the envisaged rise in oil production for the next two years; (ii) the evolution of oil and coffee prices; (iii) the levels of foreign interest rates and global growth rates; (iv) the size of capital inflows; and (v) the relationship with the United States. Although traditional exports such as coffee, oil and coal, continue to influence the level of foreign exchange earnings, in recent years export growth has largely been based on non-traditional exports, which rose from 39 percent of total exports in 1991 to 51 percent in 1996. These results were achieved despite the recession in the manufacturing and construction sectors of 1996, which forced sectors to reduce labor costs to remain competitive. Although the country's economic prospects are dependent on the outlined external factors described above, the most critical factor, as Colombia's own historical economic performance demonstrates, will depend on the policy stance and overall macroeconomic management of the Colombian authorities. III. COLOMBIA'S DEVELOPMENT AGENDA AND THE BANK'S CAS A. CoLoMBu's DEVELoPMENT AGENDA 18. Although its medium-term economic, prospects are favorable, Colombia faces important challenges to fulfill its development potential. The Government's national development plan 1994-98, El Salto Social (the Social Leap), defines a policy agenda to address these challenges. It focuses, in particular, on four critical areas of action: (i) social development; (ii) competitiveness of the economy; (iii) environment; and (iv) decentralization and institutional development. While being extremely ambitious--with some of the key objectives for the four-year period being 1.6 million new jobs, an average economic growth rate of 5.3 percent, redistribution of one million hectares of land, coverage of the basic health system extended to about 15 mnillion people, and water and sewerage coverage increased to 90 percent--the plan clearly identifies the major development challenges now being faced by Colombia. With this broad perspective as the starting point, the Bank and Government teams tried to identify the role the Bank should play during the next three years. B. PROGRESS TOWARDS OBJECTIVES IN PREVIOUS CAS 19. The 1993 CAS established three main strategic areas: (i) private sector development; (ii) poverty alleviation; and (iii) environmental management. Progress was to be evaluated on the basis of the following criteria: (i) pace of reforms in key sectors, such as power and capital markets; (ii) improvements in the coverage and quality of basic services; and, (iii) improvements in the portfolio's performance. As discussed above, significant advances have been made in these  COLOMBIA CAS 9 broad development objectives and lessons have been learned from what did not work well. The new CAS recognizes the progress made in structural reforms, Colombia's relatively strong position vis-a-vis the international markets, its continuing weak implementation record and the adoption of a new development agenda that reflects the adjusting priorities of society. What did not work well Project implementation needs to be improved. Increased fiscal difficulties--particularly in the last two years--, inflexibilities of the Colombian budgetary system and cumbersome, centralized project execution mechanisms have negatively affected the performance of the portfolio (see Annex D). On our side, implementation reviews have lacked consistency and have focused too narrowly on project specific issues, failing to address the generic portfolio bottlenecks. In July 1997, we discussed with the GOC and agreed on a portfolio implementation strategy that: (i) incorporates both cross-portfolio and project-specific issues; (ii) constitutes an integral part of the CAS and a yardstick by which its progress will be measured; and, (iii) includes specific vehicles in the CAS to address structural issues affecting project performance such as budget reform. In November 1997, a follow-up discussion will be held jointly with the GOC to proceed with the portfolio "clean up" and to ensure the appropriate measures are taken in individual projects. * In the increasingly decentralized environment, project performance has suffered from complex project design and centralized execution mechanisms that attempt to address the enormous diversity of needs, capacity and socio-economic conditions in Colombia under a single umbrella scheme. One of the lessons learned from the conclusion of the Rural Investment Development Program is that a simpler, more flexible project design, with a decentralized program management, is needed to adequately address the beneficiaries' needs. What worked well O Our country dialogue has been strengthened by the collaborative execution of analytical tasks. Joint ESW products have ensured that these respond to the country's needs and that there is increased ownership and internalization of the results. Our overall ESW work provided decisive guidance in the design of our operations and even in cases where no specific lending materialized, it fostered an internal process of debate on key development issues and promoted a serious discussion of alternatives facing the country. * The Bank has become more responsive to the demands of the decentralization process, particularly in the latter period of the previous CAS, by: (i) moving away from heavy reliance on centralized institutional arrangements toward schemes that support devolution of responsibilities to the local level; (ii) introducing effective participation of civil society in the formulation and implementation of development objectives, particularly in the social sectors. C. PROPOSED CouNTRY ASSISTANCE STRATEGY 20. The proposed assistance strategy is built upon the open dialogue and effective collaboration the Bank has developed in Colombia with government officials at the national and  10 COLOMBIA CAS local levels, and with important leaders of civil society (see Annex C). Indeed, the CAS exercise has not only allowed us to gauge the real development needs of the country, but to build stronger relationships in the process. The proposed strategy recognizes the progress in the structural reforms, the relatively strong international reserves position of the country, its weak project implementation record, and the adoption of a new medium-term development agenda. In setting this agenda, the joint Bank/GOC teams have identified six areas of strategic importance for the Bank's catalytic interventions: * Promoting peace and development Poverty reduction and * Promoting rural development social development * Developing human capital socia * Attaining public sector responsiveness and efficiency * Improving infrastructure services Sustainable growth * Ensuring sustainable development J Although there are six strategic areas, one can see them as addressing two main objectives: (i) poverty reduction and social development; and (ii) sustainable growth. In moving in this direction, Colombia is expected to consolidate the gains of the structural reforms implemented since 1990, regain fiscal and macroeconomic stability, and move along towards second generation reforms that would allow the economy to grow at its full potential. Particular attention is to be paid to the pace of institutional reform that has to accompany efforts in all areas of Colombia's development strategy--to avoid problems of the past where both the Bank and the Government have seriously underestimated the difficulties of implementation and institutional change. The following paragraphs present some of the critical elements of diagnosis, strategies and actions in each of the six strategic areas of assistance. The detailed presentation can be found in the Country Assistance Matrix in Annex B 1. Promoting Peace and Development 21. Up until now, the Bank has operated in Colombia considering violence a risk that has to be minimized, a constraint in terms of the expected development impact of its activities. Both government authorities and civil society representatives agreed that promoting peace and addressing the socio-economic determinants of violence should now be the number one development priority in Colombia. The question then was whether the Bank has any comparative advantage in assisting in this area. Although there was consensus that this is probably not the case, there is the expectation that given the Bank's exposure to areas in conflict, the Bank should have the ability to identify the relevant expertise and to put it to work for the Colombians. In response, the Bank country program in Colombia is proposed to include, among others: (i) social assessments with explicit recognition of conflict and fault lines of social tension as a core aspect of development planning; (ii) engagement with civil society following participatory approaches in the design and implementation of interventions, thereby developing social capital; (iii) focus on governance issues, incorporating elements of accountability and transparency; (iv) development of alternative dispute resolution mechanisms and conflict management capacity both for civil society and state; and (v) analysis of the costs of both random and organized violence in undermining the routine functions of socio-economic activity.  COLOMBIA CAS 11 22. Although this is a new area of involvement for the Bank, there is a strong consensus that the Bank can no longer be on the sidelines. The Bank needs to be an active player in defining alternative solutions and intervention mechanisms to promote peace. To initiate this process the Bank is now beginning to develop a project that would support the initial four years of a multi- sectoral program aimed at improving the well-being of the population in the 29 municipalities defined as the Magdalena Medio region--one of the poorest and most violent rural areas in the country. In this endeavor, the Bank team is working with two well-respected NGOs (SEAP and CINEP) with financing from the state oil company (ECOPETROL). The Bank has also been approached by the municipality of Cali to assist them in a joint public/private sector program to reduce urban violence. In this context, the Bank is currently exploring the possibility of developing a project--in close collaboration with IDB--aimed at the four most important cities in the country (3ogota, Medellin, Cali and Pereira). The Bank has also initiated the preparation of a youth development project which will target one of the key actors involved in violence--both as victims and perpetrators. This innovative operation aims to increase productivity and earnings of poor youth by reducing school drop out, promoting healthy lifestyles, improving employment opportunities, and rebuilding social capital. A project to strengthen the judicial system is also envisaged, excluding however the Bank's direct involvement in crirninal court activities. Importantly, Bank activities would be aimed at reducing general inter-personal violence, developing capacity to peacefully resolve conflicts at the local level, and increasing trust and collaboration in local communities. These would only indirectly complement other government programs aimed at reducing drug and guerrilla activities. IDB, on the other hand, has recently approved an alternative development project (PLANTE) which they are now starting to implement. In addition to new potential projects, the Bank needs to devote resources to studies on violence that facilitate the development of a coherent and participatory inter-sectoral strategy to promote coexistence and peace. It can also help organize conferences on international experience of alternative strategies against violence, both to underline the importance of the topic in the policy agenda and to bring together the existing international expertise. Overall, this is an area of work where the potential for IDB/Bank collaboration is very high. Everyone has a lot to learn, and the efforts need to be properly coordinated to ensure learning by doing. Both for economic and sector work and in the design of new operations, the two institutions are expected to be working closely together with the Colombians. Promoting Rural Development 23. The 1994 Poverty Report for Colombia identified a poverty reduction strategy focusing in four priority areas: (i) rural development; (ii) human capital; (iii) infrastructure services; and (iv) decentralization, capacity building, and institutional strengthening. Indeed, a coordinated approach to poverty reduction has to address the issue of rural development and the existing rural/urban gap. As mentioned before, extreme poverty in Colombia is mainly a rural problem-- with 70 percent of the people with incomes below subsistence living in the rural areas. And the difficulties in reducing rural poverty, associated directly with people's precarious access to productive resources (i.e., land, finance, appropriate technology) and to basic social services (i.e., education, health), are now causing the rural-urban gap to widen. To deal with these problems there is the need for a coherent rural development strategy and an institutional framework which is conducive to its implementation. Consistent with a comprehensive rural strategy of this nature, the government needs to provide adequate incentives for the agriculture sector, invest in  12 COLOMBIA CAS economically attractive rural infrastructure projects and services to support production, and modify the delivery modes for social services such as education and health so that they more closely respond to the special circumstances of the rural population. 24. The Bank is supporting the Colombian authorities in their effort to advance, in the context of Agrarian Reform Law (Law 160 of 1994), a new market-based approach to land reform. This entails providing the rural poor with grant assistance to buy land, with access to grants contingent on the development of economically viable farm projects. Furthermore, local government and community participation is promoted to develop investments in infrastructure that are needed to enhance the welfare and growth impact of these projects (e.g., secondary and tertiary roads). Overall, the new market-based approach to land reform should be conducive to a more equitable distribution of land at the same time that it increases the efficiency of land use through productive projects. Another area of attention of course is to improve the capacity to generate, transfer and adopt technologies that increase productivity and sustainability of small farmer agriculture. Effectively increasing productivity may be, indeed, one of the most effective means to reduce rural poverty. The Bank is currently implementing an Agriculture Technology project aimed at this objective. To support these initiatives it is important to have a concomitant effort of institutional strengthening in the rural sector (e.g., Municipal Councils for Rural Development and Agrarian Reform Committees that are functioning well and with adequate participation, Water User Associations that are managing irrigation districts). Finally, the design and delivery of social services should respond to the special circumstances of the rural population and avoid the simple replication of urban models. The Rural Education Project, Municipal Health II and Magdalena Medio Regional Program, are all projects in the proposed pipeline that aim to address these issues. Developing Human Capital 25. The 1994-98 National Development Plan--the Salto Social--defines as one of its top priorities, reflected in a very ambitious investment program, the development of human capital. In terms of strategy, attention is correctly being given to: (i) universal coverage and better quality of basic education and health; (ii) improved quality -arid coverage of secondary education; (iii) increased competition among service providers and freedom of choice to consumers in selection of schools and of health insurance and service delivery providers; (iv) greater private sector involvement in delivery of education and health services; (v) introduction of cost control mechanisms in the health sector; and (vi) support for.well targeted programs aimed at reducing poverty and rectifying inequities. The implementation of these social programs, however, has so far been limited--there is a wide gap between intentions and actions. Key constraints have been the continued weakness of the social sector ministries--including high turnover at the ministerial level--, the complex budgeting process, the inadequate operation of the national co-financing system, and the complications that have surfaced in the decentralization process. 26. The Bank can play a catalytic role bridging the gap between conceptualization (strategies and policies) and implementation (actions, projects). To do so, the Bank needs to redirect its efforts in the social sectors--mainly education and health--and play a facilitating role in the decentralization process while ensuring that the strengtheniing of service delivery at the local level is developed within a sustainable fiscal framework. The Bank will move away from working only  COLOMBIA CAS 13 with the central ministries, design more projects at the local level, and learn by doing. This approach is now being taken in the preparation of the education projects for Antioquia and Pasto, and is being followed in the restructuring of the Secondary Education and Municipal Health projects. The design of the new education projects, for example, is geared to promote school autonomy, community participation, resource sharing through establishment of school networks, and increased delegation of responsibilities and resources. Furthermore, with the support of EDI, we have launched a complementary initiative which provides assistance to the Government in analyzing the experience attained through these operations in an effort to draw lessons for replication on a broader scale--which should set the basis for the proposed follow-up operation, Local Govermnent Education Credit Line. This 'learn by doing' approach is already generating positive results from a large number of stakeholders involved in the exercise. Overall, while strengthening the decentralized provision of social services, Bank's assistance in the education sector is aimed at: (i) improving coverage and quality of education across all levels; (ii) identifying specific strategies for reaching vulnerable populations (e.g., rural poor, youth) in an effort to rectify the large service delivery gaps and inequities which persist; (iii) promoting the autonomy of school institutions as a key to improving quality; (iii) enhancing technological development and transfer; and (iv) improving the quality of life for youth. In the health sector, where the reform process has been underway since 1995 after the enactment of Law 100, support will continue to be provided to: (i) expand the affiliation of health insurance among the poor; (ii) manage the transition from a regime of financing supply directly in public facilities to one of primarily of subsidies to demand via explicit individual insurance; (iii) support the transformation of public health facilities into autonomous entities and improve their quality; and (iv) promote participation of private and community organizations in the administration and provision of health services. Attaining Public Sector Responsiveness and Efficiency 27. The 1991 Constitution seeks to redirect the actions of the state to serve the community promptly and efficiently. It sets out the basis to give the community greater freedom to choose the provider of services--whether it be the state, the private sector or community organizations. It reinforces the rights of the population to demand results in public administration and thereby attempts to create an environment where public servants are to take responsibility for the services offered, and be held accountable for their performance. Thus, the Constitution promotes a new culture of results-oriented public sector management, in which performance is centered on the general interests of the community and a permanent effort to make better use of resources. The success or failure to improve governance conditions in Colombia will ultimately be determined by the GOC's ability to deliver this improved public sector performance. To do so, and as the basis for institutional development, there needs to be a concerted effort to promote a change in culture (results orientation), innovative, honest and responsible leadership, cohesion among different levels and functions of government, clear rules and incentives to define public/private roles and community participation. 28. The discussions with government and civil society representatives has led to the conclusion that the Bank should assist public sector reform efforts aimed at: (i) strengthening the responsiveness of public institutions to public interest objectives; (ii) improving public sector management based on a result oriented approach complemented with social control mechanisms  14 COLOMBIA CAS (i.e., increased civil society participation, accountability and transparency); (iii) making decentralization work (ensuring cohesion among different levels and functions of govermuent); and (iv) developing appropriate regulatory frameworks to ensure participation of the private sector and competition. This is proposed to be done through a coordinated group of specially tailored projects (e.g., Public Sector Management II), non-lending services (e.g., supporting budget reform or an IDF grant to define anti-corruption strategies), and design features embedded into our operations geared to promote institutional development (e.g., by working directly with local governments or engaging civil society through participatory approaches in the design and implementation of interventions). Improving Infrastructure Services 29. Colombia's poor and deteriorating infrastructure has long been identified as a critical constraint to attain a faster economic growth path. A key in the government's strategy to improve the quantity and quality of infrastructure has been encouraging and facilitating private sector participation in infrastructure--to increase efficiency, mobilize additional resources, reduce risks assumed by the public sector, obtain the benefits of competition, and to reallocate public resources into the social sectors. The National Development Plan reflected this policy stance and envisaged that 40 percent of the 1995-98 new investments in infrastructure would be provided by the private sector. Although there were delays in setting in motion this strategy, there has been significant progress in divestiture of public assets--mainly in power generation, where from a public monopoly, the private sector now has control of 45 percent of generation assets. In addition, there has been progress in promoting private investment in infrastructure--which is expected to reach to about 2 percent of GDP in 1977--and in improving the regulatory framework of utilities. Continuing efforts need to be made in six areas: (i) divestiture of existing infrastructure assets; (ii) consolidating power sector reform by increasing private sector participation in power distribution utilities, and ensuring adequate incentives for the expansion of the generating capacity; (iii) developing the regulatory and competitive environment within which infrastructure services are provided--including the gas and mining sectors--and in particular strengthening the autonomous character of the regulatory agencies; (iv) expanding coverage of water supply, sewerage and sewage treatment, and solid waste services; (v) enhancing the development of financial markets to facilitate private sector financing of infrastructure; and (vi) ensuring that where government--at both the national and territorial levels--does play a role in mitigating risks in private infrastructure deals, it does so for risks that can not be covered by private sector means, in a way that minimizes the potential distortions of such actions and at reasonable costs to government. Attention needs to be paid to technical issues such as: concession designs, procurement rules, contracting practices, and rules for issuing government guarantees. 30. Given the Bank's worldwide experience in facilitating private sector participation and related legal and regulatory issues, the GOC is seeking our direct involvement in their efforts. In addition to the support to be provided at the technical level, there is the sense that Bank's participation can enhance the credibility of the Government's program. Investors are closely scrutinizing the Government's commitment to facilitate private sector participation and will carefully assess the legal and regulatory framework, concession design, and the transparency of the process. Two projects recently taken to the Board are in line with this strategy, the  COLOMBIA CAS 15 Regulatory Reform Technical Assistance Project (co-financed with IDB) and the Financial Markets Development Project. The Bank is also developing an innovative Toll Road Project and a Infrastructure Project Finance Facility to assist Colombia's mobilization of private sector financing for infrastructure projects at minimal risk exposure to the Government. Future lending operations would be aimed at upgrading and expanding urban and regional infrastructure within this new framework. The Bank would consider financing selected projects in infrastructure sectors that exhibit externalities or public good characteristics, such as transport and water and sanitation. As part of the Bank Group strategy, IFC will continue to facilitate and support private sector infrastructure in roads and gas transportation, water and sanitation, and other sub-sectors where IFC's participation enhances the financeability of the project, thereby reducing the extent that the government's risk mitigation is called for (see para. 35 for a detailed description of IFC's strategy in this area). Ensuring Sustainable Development 31. Macroeconomic Stability. Maintaining macroeconomic stability is a key element to attain a higher long-term sustainable growth path. In this area, as mentioned before, the challenge for Colombia is to address head-on the structural causes of the fiscal deficit, to avoid any policy backtracking and to move along towards second generation reforms. The Bank stands ready to assist the authorities through open policy dialogue (e.g., through our joint semi-annual consultation with the IMF), economic and sector work (e.g., policy note on decentralization to the new administration and technical assistance on budget reform), and lending operations (e.g., adjustment loans to support the decentralization process and reform of the social security system). 32. While the Colombian financial sector is relatively well developed, its financing activity is generally limited to short-term instruments and efficiency needs to improve. Stock market activity is low compared to other emerging markets. Neither the banking sector nor its capital markets allow small and medium-sized enterprises (SM:Es) to raise term financing at reasonable costs. The Bank Group should continue to support financial sector development. The Bank will concentrate its attention on the implementation of a Financial Sector Development Loan recently presented to the Board, while IFC is expected to focus on developing longer term financial products (see para. 3 5 for a detailed description of IFC's strategy in this area). 33. Protection and Conservation of the Environment. Colombia is rich in natural resources, including fertile agricultural land, abundant water resources, plentiful energy resources (i.e., oil, natural gas, and coal), and mineral deposits (i.e., nickel, gold, and emeralds). Its ecological resources are also rich and varied. With 10 percent of the world's fauna and flora and 19 percent of its bird species, the country is listed as one of the worldwide priority areas for conservation. The inadequate management of natural resources, however, has led to a growing deterioration as seen by the loss of bio-diversity, deforestation--about one-third of the country's forests have already been eliminated--, endangered strategic ecosystems, soil degradation, highly polluted rivers, canals and wetlands. The combination of rapid urbanization and increasing industrialization in recent decades has resulted in worsening air and water pollution problems and greater environmental risks (from floods, earthquakes, and other natural disasters, as well as industrial accidents) in urban areas. Although significant progress has been made in recent years in setting up a national environmental management system, much needs to be done for it to  16 COLOMBIA CAS operate effectively, as a decentralized system with significant inputs from local communities and the private sector. Furthermore, environmental interventions have in general been focused on dealing with the impact of specific projects, without proper consideration of environmental issues in the formulation of local, sector, and sub-national strategies. 34. During the past few years the Bank has assisted the Government's environment strategy focusing on: (i) building institutional capacity of the newly created Ministry of Environment; (ii) supporting decentralization of environmental management through institutional restructuring and strengthening of the regional corporations (CARs); (iii) consolidating management of renewable resources, including forestry, bio-diversity, national parks and protected areas, followed by investments in watershed rehabilitation, river basin and coastal zone restoration; (iv) strengthening environmental management in urban areas, particularly the four major urban centers; and (v) appropriate investments in water supply, sewerage and sewage treatment , urban transportation, and solid waste management, in order to improve environmental conditions in urban areas. While continuing to build on these efforts, future activities in this area now need to give special attention to: (i) incorporate environmental considerations and sustainable development incentives into key production sectors and the provision of public services (e.g., internalizing the environmental agenda into sector strategies for energy, mining, agriculture, industry and infrastructure); (ii) enhance capacity of environmental management authorities (EMAs) and seek opportunities for partnerships with other government agencies and the private sector, NGOs, and academia (e.g., TA operation for EMAs, departments and municipalities on land use planning, with emphasis on natural disaster preparedness); (iii) promote economic opportunities for the poor through environmentally sustainable activities (e.g., incorporated into investment operations targeted to both rural--Natural Resources Management 1I--and urban areas-- Land Regularization and Barrio Upgrading Project); and (iv) reduce health risks related to the environment (e.g., investment operation targeted to urban areas--Urban Environmental Investment Project). IV. BANK GROUP COUNTRY PROGRAM A. VEHICLES FOR BANK ASSISTANCE Portfolio Management 35. In recent years implementation of the existing loan portfolio has received mixed reviews. On the one hand, there has been progress in resolving some of the policy and institutional issues affecting projects at risk as identified by the Quality Assurance Group (QAG). This resulted in a significant reduction in the number of problem and at risk projects by the end of fiscal year 1997. On the other hand, there has been an alarming fall in the portfolio's disbursement ratio--almost 50 percent in the last two fiscal years--coupled with a significant lag between projected and actual project implementation. The main reasons behind this deterioration are: (i) increased fiscal difficulties (including the use of investment as the residual component to adjust the fiscal accounts); (ii) inflexibilities of the Colombian budgetary system and heavy reliance on cash flow management to effect budgetary adjustments--as reflected in a lag between budgetary appropriations and payments of 46 percent for 1996--; and (iii) cumbersome and centralized execution mechanisms. Our concerns regarding lagging performance are fully shared by the Colombian authorities. With the commitment of the highest levels of government, we have  COLOMBIA CAS 17 embarked on a joint effort to improve portfolio performance and, through a consultative process, have identified a number of cross-cutting issues that contribute adversely to the overall quality of the portfolio and to the particular projects "at risk". At the portfolio level, project performance suffers from problems associated with: (i) budget management; (ii) intergovernmental finances; and (iii) institutional capacity. At the project level, the most common problems are associated with operational processes, including special accounts, financial management and auditing. The Portfolio Improvement Program that has resulted from this effort (see Annex D) has generated a detailed and monitorable Action Plan recently discussed with the authorities. The Action Plan rests on an on-going effort of the Colombian government to improve the efficiency of the budgetary system and ultimately the use of public resources based on the concept of results- oriented management. The actions proposed by the Plan will be incorporated in this process in order to eliminate budget execution lags and ensure the prioritization of objectives for our projects. The key performance indicators included in the Plan that will allow us to monitor progress against specified targets are summarized in Table 2. Table 2: Portfolio Management Indicators Colombia LAC Colombia LAC Colombia Target Colombia Target 7/1/96 7/1/96 1/1/97 1/1/97 6/1/98 6/1/99 Disbursement Ratio" 20.2 24.9 6.9 10.0 18.0 20.0 Disbursement Lag Reduce existing Reduce existing lag lag by 40% by 30% No. of Projects 'At Risk' 7 37 4 33 3 2 No. of Problem Projects 4 65 4 62 3 2 (DO and/or IP) Realism Index (o)b 71 56 100 61 Above 80 Above 80 Proactivity Index (0/)c 57 66 60 1 58 64 80 ' Disbursements realized during the course of a year over the total undisbursed balance at the beginning of the year. b Percent of projects rated unsatisfactory on DO and/or IP to projects 'at risk'. Percent of projects rated as problem projects 12 months earlier that have since been restructured, closed or upgraded. 36. An assessment of our past experience in the implementation of the Bank's program allows us to draw upon certain crucial lessons. In the social sectors, the Bank has been responsive to the demands of a radical decentralization process by moving from a heavy reliance on centralized public entities for the implementation of our operations to institutional schemes that support devolution of responsibilities to the local level. These efforts have been complemented by measures to introduce effective participation of civil society in the formulation and implementation of social sector development initiatives. In the case of one operation, the GOC has assigned the leading role of preparation and execution to an NGO consortium. In the infrastructure sector, the strategy is consciously moving away from direct financing of ventures to activities that aim at strengthening the regulatory and institutional framework to enable private sector participation. During the transitional stage towards a sound and sustainable regulatory environment, the Bank is developing innovative financial instruments to provide the private sector with comfort in critical areas. 37. Improved implementation performance of the existing portfolio will be particularly crucial in bridging the gap between conceptualization of the new assistance strategy and actually attaining the desired outcomes. In view of the ambitious and innovative nature of the proposed strategy,  18 COLOMBIA CAS sound portfolio management should serve as a key instrument to strengthen our operational foundations and mitigate our risks, as well as an indicator of our ability to deliver results on the ground. Some of the remedial actions agreed upon are of a short-term nature, to be completed within approximately a year. Other recommendations are medium-term, particularly the ones relating to the cross-portfolio structural issues, and will require additional time for their implementation and completion. The resolution of some of these issues, such as budget management and intergovernmental transfers, has been incorporated as a key objective of the new CAS program. With one third of our projects under implementation due to close within the next year, there is a window of opportunity to also address implementation problems through quality at entry as we design our new lending operations. Lending Services 38. To manage higher risks the Bank needs to maintain flexibility in its operations. Although lending vehicles for the proposed program will mainly include project investment loans and technical assistance projects, in moving towards a high case lending scenario (see below) the Bank should be able to use sector investment loans to support a time-slice or subset of government investments in a sector (e.g., infrastructure, rural development or social sectors) or adjustment loans to promote significant structural reforms (e.g., intergovernmental finances or social security). Furthermore, as the Bank develops new types of lending products, we should stand ready to pilot test them in Colombia. At this stage, the two proposed new products--Learning and Innovation and Adaptable Program Loans--seem to offer attractive alternatives for our pipeline. The Learning and Innovation Loans (LIL) involve modular lending of under US$5 million with potential sequential loans that could go forward with sign-off by the Regional Vice- Presidencies. This type of instrument would be utilized in cases in the Colombian program where alternatives need testing and the Bank can play a catalytic role in support of building development partnerships. They would provide an option for "grow-as-you-go" lending for programs that are difficult to be engineered ex-ante. On the other hand, the Adaptable Program Loans (APL)-- which provide for the incremental implementation of a program through the adjustable and sequential commitment of funds to finance additional time slices of the program-- would seem well suited for cases where sector knowledge is strong, long-term objectives are clear, and country ownership of the process established. Potential candidates from our lending program for these new instruments include the following operations: Infrastructure Project Finance Facility, Urban Violence, Magdalena Medio, Land Reforn, Youth Development, Land Regularization and Barrio Upgrading, Municipal Development II and the Local Government Credit Line for Education. 39. The highly innovative nature of the proposed Colombian program--including the uncertainty regarding the type of lending instruments to be used--combined with the expedient access of Colombia to the international capital markets, requires a departure from the traditional definition of lending scenarios based on specific performance trigger points. Although it should be clear that improved portfolio implementation (as discussed in the previous section), and continued fiscal discipline are necessary conditions for continued and increased Bank assistance, the main challenge for delivery of the proposed country program is linked to the ability of Colombia and the Bank to identify, design, and prepare the proposed interventions, as well as to develop the institutional and policy basis to implement the various elements of the proposed  COLOMBIA CAS 19 assistance strategy. Given the existing Bank budgetary resources allocated to Colombia, and the commitment of the Government to the proposed strategy, we are envisaging a base case lending scenario of about US$300 million p.a. for FY98-00 (see Annex B3). This scenario takes into consideration the innovative nature of the program, the potential availability of different lending instruments, and the corresponding expected value of the operations (in terms of probabilities of delivery). Given those parameters, if everything moves in the right direction, we could then be delivering a high case lending program of around US$450 million p.a., including significant additional support to private sector-led infrastructure initiatives. On the other side, if project implementation problems or continued macroeconomic imbalances and associated social and political problems reduce our ability to work effectively with the government, or a new administration prefers to limit the relations with the Bank, a low case scenario of about US$100 million could emerge as a result. 40. International Finance Corporation. FC's programs continues to complement that of the Bank in its support for private sector development. While Colombia enjoys an investment grade credit rating, long-term financing is hard to obtain in the local markets and limited to large corporates internationally. Reflecting this is a relatively low rate of private investment to GDP-- 12 percent, including the oil sector, compared with a Latin American average of 15 percent. Private sector development is critical in helping Colombia achieve higher sustained growth and to provide for poverty reduction. Key elements include increased investment in the export sectors and improved physical infrastructure. IFC's strategy in support of these objectives would focus on: - Increasing provision of infrastructure services at the national and provincial levels. While the country's investment-grade rating permits financing of private sector projects particularly in power and telecommunications in the metropolitan area, long- term financing is limited for projects which involved the provincial and municipal levels and/or require a financial structure which accommodates revenue streams primarily denominated in local currency. IFC aims at assisting such infrastructure projects with a potential for expanding the scope for private sector participation, particularly in transportation, gas transmission, and water and sanitation. * Strengthening the Financial Sector. IFC's focus is on improvement in the efficiency of intermediation and in access to long-term financing, in particular for second-tier firms and small and medium enterprises (SMEs). This would potentially include support of: (i) private pension funds to create the long-term savings base; (ii) securitization and credit enhancement mechanisms to provide long-term instruments; (iii) credit lines for SMEs; and (iv) transfer of technical know-how to the leasing industry. * Selective direct investment in firms with insufficient access to financing. IFC continues to support corporates with limited access to long-term alternative at a reasonable cost.  20 COLOMBIA CAS Although it is difficult to forecast IFC's program size, IFC expects the net investment program may to grow to a total of some US$150-200 million, in aggregate, for FY98-00. There are no headroom constraints on growth of IFC investments in Colombia. 41. Multilateral Investment Guarantee Agency. With respect to MIGA, Colombia just recently completed its membership requirements and became full member on November 30, 1995. Since then, four operations have been presented to and approved by the Board. MIGA has approximately 21 applications pending for projects in the financial, infrastructure, manufacturing, natural resources, oil and gas, and power sectors, and expects that its operations in the country will increase in the near future. Non-Lending Services2 42. The Bank's contribution to Colombia will depend less on financial transfers and more on our effectiveness as a "knowledge institution". Following the experience of productive collaboration in the recent past, the Bank should conduct most of its economic and sector work (ESW) as joint products with the Government. This not only ensures that these services are demand driven, but that there is also a natural internalization process of the results. We are planning substantial ESW in several critical areas, including work on the relationship between growth and inflation and on the socio-economic determinants of violence in Colombia. These will be accompanied by two international conferences, on growth and inflation and on violence respectively, to be held in Colombia with national and international participants. In addition, presidential elections will be taking place in May, 1998, and the new Government will take office in the summer of 1998. As the new administration puts forward its four-year development plan, the Bank should be prepared to work jointly with the new team on achieving Colombia's growth potential at lower inflation rates and on public expenditure issues that would focus on the main strategic areas3. As mentioned above, specific work would focus on peace and development, on accelerated growth with lower inflation, on the education sector (focusing on the necessary policy and institutional environment to make decentralization work), on rural development issues and poverty reduction, and on the fiscal aspects of the decentralization process. Further work is also contemplated to assist the needed fiscal structural adjustment and ensure longer term fiscal sustainability, in particular budget and social security reforms. Joint Bank/IMF macroeconomic review missions twice a year are to be maintained as the principle vehicle for macroeconomic policy dialogue with the authorities. Sector work will also be geared to provide a sound analytical footing to the environment strategy in Colombia. Cross sectoral studies on the costs and benefits of environment investment programs, the potential use of environmental variables in the determination of public tariffs, and performance evaluation of public sector environmental management programs are to be undertaken. 2 The complete list of proposed activities in this area is presented in Annex B4. 3 If the Bank was to rely more, in the context of a high case scenario, on wholesale lending instruments (both single and multi-sector) this review could set the basis for the certification of the country's public expenditure program.  COLOMBIA CAS 21 43. To strengthen Colombia's capacity to manage change and economic reform, EDI would undertake a series of activities aimed at sharing best practices in policy design and implementation. In an effort to learn from the development of our own lending operations, EDI is now supporting the dissemination in the country of own experiences in the ongoing decentralization process of education services. In addition, Colombia is one of several countries involved in broader programs such as the LAC NGO Poverty Network, Partnerships for Poverty Reduction in LAC, and World Links for Development. EDI is also organizing several regional seminars that are of direct relevance to Colombia, including those on good governance, macroeconomic management of capital inflows and external shocks, networks, technologies and distance learning for health sector reform and population policy. Partnerships 44. IDB has a lending program of about US$1.1 billion for 1997-99, with a corresponding pipeline of sixteen projects. In addition, they have three technical assistance loans for a total of US$1.7 million, and five Multilateral Investment Fund (MIF) operations for a total of US$8.5 million. There is close coordination of our activities, sometimes leading to co-financed operations (e.g., Regulatory Reform Technical Assistance Project and Municipal Development II) and some other times to define differentiated areas of intervention (e.g., IDB took over financing of the Social Safety Net Program - Red de Solidaridad Social, and the Alternative Development Program - PLANTE, with the Bank taking over the Land Reform Project). In the coming years, this coordination will need to be enhanced to avoid duplication of activities and exploit complementarities. The IMF has no program in Colombia but, at the request of the government, is currently conducting semi-annual consultations with Bank participation. Finally, we will continue to help Colombia mobilize concessional resources (such as those of the Japanese Grant Fund, the Global Environment Fund, and the Canadian Trust Funds) to help build our lending pipeline, conduct economic and sector work, and promote innovative or global programs. B. COUNTRY PROGRAM MON1TORING Risk Management and Creditworthiness 45. As result of its prudent economic and debt management, Colombia's external debt levels are relatively low by Latin American standards and comparable with other medium indebted countries--with debt service ratios of 25-30 percent, debt to exports of goods and services of 160- 190 percent, and debt to GDP of around 30 percent. Although Bank exposure in Colombia has historically been high because the country was an early and active borrower from the IBRD, the ratio of Bank debt service to exports reached its peak of 9.9 percent in 1992. Recently, the Bank net disbursements have become negative and debt outstanding and disbursed (DOD) has declined. At the end of 1996 it stood at US$2,176.6 million, representing 2.1 percent of the IBRD portfolio. As can be seen in Table 3, the relatively strong presence of the Bank and IDB has maintained the share of preferred creditors in public debt service, 39.9 percent at the end of 1996, above the guideline of 35 percent. All other indicators, however, fall below Bank guidelines. At the end of 1996, the share of IBRD in total public sector debt service stood at 16.6 percent, and the ratio of IBRD debt service to exports was only 3.4 percent.  22 COLOMBIA CAS Table 3. Exposure Indicators, 1992-2005 Base Case Scenario (guideline) 1992 1994 1996 1998 2000 2005 IBRD Debt Service as % of Public DS (20%/6) 27.8 32.6 16.6 13.5 12.5 10.5 IBRD Debt Service (% of Exports) (5%/O) 9.9 8.3 3.4 2.6 2.3 1.6 Prefered Creditors DS/Public DS (35 %) 36.7 51.3 39.9 32.6 29.3 28.7 Share of IBRD portfolio 3.4 2.5 2.1 1.7 1.7 1.8 Risks 46. The proposed assistance program involves the following main risks: (i) the fiscal situation may deteriorate, jeopardizing the overall macroeconomic situation and growth prospects in the short and medium term; (ii) an increasingly politicized environment and declining security conditions before the 1998 municipal and Presidential elections may lead to delays in project preparation and implementation; (iii) an incoming Administration may have different priorities that could affect the type and focus of assistance requested from the Bank. In that case, the composition and processing of new lending for FY98-00 may need to be revisited. Performance Indicators 47. The achievements of CAS objectives will be monitored according to three criteria: (i) macroeconomic variables which affect growth performance vis-a-vis the economy's potential, especially fiscal performance; (ii) progress benchmarks defined for each of the strategic areas of assistance (see the Country Assistance Strategy Matrix, Annex B 1); and (iii) indicators of portfolio performance (see Table 2 and Annex D). Monitoring of macroeconomic performance will be conducted during the semi-annual joint IMF/Bank missions. Progress benchmarks and indicators of portfolio performance are to be monitored in the context of project supervision missions, the country portfolio performance review and the annual programming mission. V. CONCLUDING REMARKS 48. The overarching goal defined by the joint Bank/GOC teams for the country assistance is clear: Attaining sustainable development with continuous reduction of poverty and improvement of social conditions in an environment of peace. The proposed strategy is an integrated framework to pursue such goal. By systematically pursuing each of its elements, it will be possible to continuously monitor advances, make required modifications, and further elaborate the specific details of corresponding action plans. The Bank stands ready to support this strategy through economic and sector work, lending operations, technical assistance, and coordination with other multilateral and bilateral institutions. James D. Wolfensohn President By Caio K. Koch-Weser Attachments Washington, D.C.  Annex Al Page I of 2 Colombia at a glance Latin Lower- POVERTY and SOCtAL Amerca middle. Colombia & Caub. Income Development dlaeoad Populalion mid-1995 (fnWgmr) 36.9 480 1,154 GNP per capita 199 (USS 1,970 3,300 1.700 UfeStepxWt GNP 1996 (bllions USS) 727 1,58S 1,961 Average annual growth. 19S .1. Populabon (%) 1.9 1.8 1.4 Labor force (9Q Z7 Z4 1.8 GNP G"s Most *rcnt estimate (aest yew amibbb &me 1989) capita Povety headcount index (INC popufab. . . Urban poptlation (% dofal pepaak" 73 74 58 S Ufa expecc at birth (yews) 70 6B 67 Infarnt mortality (per t,OOO liveb WO 19 41 36 Child malmgribon (X cf chldctn ulder* @t O .. .. Accesc to safe watr Access to safe water (% dpoplaon) 90 S1 78 Illiteracy (% cpopEladca age 15) 9 13 Grossprimaryenrollment (%fschaapopufahn) 119 110 104 - Cdnmbia Mate 118 .. 105 Lower-mid1.canebgroup Female 120 .. 101 KEY ECONOMIC RATIOS and LONGTERM TRENDS 1575 1965 1565 19#6 GOP (billions USS) 13.1 34.9 78.1 87.3 Ecoboe n550 Gross domestic investmert/GOP 17.0 19.0 23.5 23.4 Exports dgoodsandnon-factorservices)GOP 15.8 13.8 17.4 16.6 OpenWsSof tscOfKirny Gross domestic savings/GOP 18.8 20.3 19.4 20.5 Gross national savings/GOP 16.4 18.9 17.2 17.5 Current account balancetGOP .. -4.6 -5.4 -5.3 Irterest payrnents/GOP 1.0 25 1.4 1.9 Savirgs Total debtGOP 28.7 40.8 265 27.2 Total debt seNrce/exports 143 40.0 31.8 41.9 Presert value of debtUGDP . . .. . Presernt value ofdebtexpons. . . .. 1iU8 1# 6 lowS IN 1S97044 GOP 3.9 4.3 5.4 Z1 4.1 -Cdawbia GNPpercapita 1.5 Z9 26 20 Z8 -Lawr-m idotgiwp Export o goods and rts 2.6 9.3 Z7 5.2 3.6 STRUCTURE oft the cECONOM IIY 1975 1858 1,6 166 growth ofrates outputandlawatente(I AgricUtire 23.9 17.0 18.9 15.9 o industry 29.2 346 23.0 19.5 40 Manufactunng 23.2 21.7 18.8 15.5 Services 46.9 48.4 58.1 64.6 e_ Privae consurnption 723 69.0 70.4 68.8 o. General goverrlnent consumption 8.9 10.7 9.2 10.1 Impons of goods and non-factor serlices 140 1Z5 20.0 19.0 - O O-GOP 197S.84 1138.55 1995 9s6 Growth rates of exports and impoet 1%) (averag, anual growth) Agriculture 3.1 3.3 5.2 1.4 5o Industrv 3.1 3.4 3.7 -1.2 *o Manufacturing Z5 3.4 1.0 -Z5 e. SerAces 4.7 5.1 6.1 3.6 2e _ Private consumption 3.9 Z4 5.1 -Z2 10e General govemmentconsumption 6.8 6.3 5.5 11.0 o. . Gross domesticirvestment 6.4 10.3 9.8 Zs6 so at u w a. as w Imports of goods and non-factorservices 7.4 11.2 7.5 0.5 Gross national product 3.6 4.7 4.5 3.5 ._ Note: 1995 data are preliminary estimates. The diamonds show four key indicators in the country (in bold) compared with its income-group average. f data are missing, the dianond will be incomplete.  Anncz Al Page 2 of 2 Colombia PRICES and GOVERNMENT FIANCE Domestic pile es 1975 1965 1995 1996 l p Coruuw Mmn es( od "age) 229 2420 2099 21.6 imptiot GOP dealtor 229 249 2Q8 21.2 2 ___ aovw enmf inwe 1 (%dG09 Oxret reeiue .. 213 30.4 31.5 0 o nI 0 U 3 Currert budg baoars .. 4.3 6.9 81 G O ldd CPIaV Overall suwplusebfcit .. 46 -1.4 -2.9 1.TRAOE 1975 1915 1995 1996 Etp a od pd W (maf US% Total expots lob) .. 3.650 10,201 10,630 * Cofee .. 1,702 1,832 1.577 n . Pettgeun .. .. Z164 2,889 12050 Ma adures .. .. 5160 4.879 14wo h n r r Total itTWts (cit~~~~~~ .. ~4,140 12Z921 12Z755 4. j)jfg XfifF Fooi 46S 264 - |- 4.0W l4ii Fueland energy 6 5'Lc capital good . 1,165 4.776 4,237 Expoireindex(1987100) .. .. 145 164 ae 3 S 0 5 Im"pot sic x idx (1987=.100) 267 280-mExos Terrns d trade (1987=100) .. 54 63 BALANCE of PAYMENTS 1975 1965 1995 1996 Curent ac tuntnc G O (%I Expoc goos and rno ora wvices 2,105 4,642 13,771 14,545 a Imports of goods and ran-actrservices 2007 4,989 16.211 16,541 _ Resource blance 98 -347 -2439 .1,997 . Netiactor irw e -318 .1,710 -2Z750 -3,401 2 Netcurerttrfers .. 455 797 614 z Curett aooot b ce. . 9e n 12 bdxw dlidal sfem *1,602 *4,393 -4,784 L I iRnancing itm (rt 1.867 )4,715 8,356 ChIages in ret sesvn *62 -265 -1,572 Reserves irclt=rg gold (mit USS) .. 2.197 8,458 10,041 Corwersion sate (k2WaWS11 30.9 1423 944.5 1,036.7 EXTERNAL DEBT and RESOURCE FLOWS S975 1985 1995 1996 6 adt1w | (Millons US$) patm to ea S(nLU3 Total debtWontandnganddsbned 3,758 14245 21,411 23,797 IBRD 634 2399 2548 2177 IDA 23 18 11 10 k 2tz7 1 Total debt service 314 1,98 4,694 6,443 G 5274 lBRO 78 318 60s 519 IDA I 1 1 1 O. 3133 Comnostion of net resource Rlows OCficialgramts 18 20 . .. EA\ s Cifcial cmdotos 1tt 938 482 1,531 Private creditors 216 392 2.694 1,592 Foreign drert irvestnut 37 1,023 2,Q33 3,253 Portfolio eqLty 0 0 a 494 -21 F: 9654 \/,Wd Bar* program| 5C--bM :tr!S es88 492 207 3 A - BR E. iablet Dsbursweflt 105 590 238 152 8- DA a . ousar mutuatea F.r -Ptat Prircipalrepaymrrus 34 165 415 351 | C-IMF G.t | Net flows 71 424 -177 -199 1 _ Irterest payrift 45 153 191 168 Net trnsfers 27 271 -368 -367 Interratiorai EcoraTnxs DePartnart 6297  Annex BI Page I of 16 Colombia-CAS Program Matrix OVERARCHING DEVELOPMENT OBJECTIVE: Attain sustainahbe development wit continuous redudion olpoventy and Improvement of social conditions in an environment of peace STRA TEGIC DEVELOPMENT OBJECII VE: PROMOTING PEACEAND DEVELOPMENT Diagnosis Strategy/Actions Progress Benchmarks Instntments Related Activities Colombia Colombia/IBRD IBRDIIFC/EDI IDB Colombia is one ofthe most violent Develop a comptehensive inter- . Homicides decreae at a rate of . Critical aes of policy (sectoral * ESW on peace nd devlopment * ESW on Costs of countries in the worid In 1995 the sectoral policy tht includes frt- S%per anum. and social pauticipation) strategy anlyze violence (98) Violence homicides rate per 100,000 priotity sectoral initiatives whose identified thdouhg ESW and inhabitants was: overall inmact may contribute to . Abuse and taerpersonal ehr lending service . Iternational Conference on LAtin Arntican 92 Coloabia create an envirotnent conducive to violence decrease at a rate of Peace nd Development in Conference on Urban 20 Brazil civic coexistence and peace and to Io,,W per a_ nun Progress in policy Colombia (98) Violence (possibly in 10 USA promote it ihpkmetation in a implamentation. Bogotu) 5 Argentina consistent and sustainable way. * Decrease of violent deaths Policy note on Peace and 3 Chile kidnappings and disappearances . Evidence of increased Developrnent (98) * Technical Cooperation In areas where there is low presence of civilians associated with comunitunent of relevant social to suppo t Peace and Direct costs imposed to society by of state institutions, a nmajor arned groups actors with peace and socia * Developrent and Peace Project Development Process illegal activities (guerrilla, narco- initiative should consist in the coexistence policies, for the Mlagdalena Medio * (98) (impl.) trafficking, homicides, crimes) are building ofpublic uistitutionality * Akoholism incience decreases equivalent to 15% ofGDP, one-third with a high degree ofparticipation at a rate of 10%per annum * Main cities experience solution * Project to suppoet public/private * Project of Altnive of which is related to public und from tdie miterested communities nd from the curote kvel of 7% of ofconflicts through alternative sector iniciatives to reduce Solution of Disputes, private expenditures in security and civil socidy actom the popuation level, meeanisms urban violence in Bogoli, with emphasis on justice. Deeo odelwt edellits Cali aNd Pereira (99) * coammercial disputes .Develp capacity to dal with * Ahns posseessioa decreases at * hiunidpalities of lMagdalene (impl.) Increased violence -80Y ofwhich is conflict resolution through pacific inter-personal violene, not related to eans at the local kvel: () promote anfannul rateof20 ledio experience the solution * IDFAto suppotcreatio of organized crime or warfar- is the use of alternative mnecham in of conflics through altmative t center on Alternative * CitizensSecutity estintedto have reduced the annual conflict resolution; (2) reduce * Cases resolved at local instances mchanims justice houses, Dispute Resolution mechdnim Project (98) economnic growth rate of Colombia elanents of risk (e.& alcohol, arms increase at a rate of 5% per community peacemakes). (98) by 2% during the 1980s. (3) enh ncepesonl sfety nd un5ut security. and (4) develop a dialogue * Number of training progra on Statistics on violence are not among public agencies, the alternative mechanismn for reliable. goveninent and the civil socesty conflict tesolution in many towards a concested definition of an regions ofthe country. Research nd analytical work on agenda for peace. violence in Colombian society is still incipient lwre is lack of an integral and coherent strategy at the State and civil socidy level in order to face the phenomenon of gaeeralized violence. I Progress benchmarks are differentiated betveen those pertaining to the Country, and being set by the authorities (first column), and those directly linked to t