Statement by Khaled M. Al-Aboodi at the meeting of November 18, 1999

87524 international Bank for Reconstruction and Development International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICl.\L USE ONLY CONFIDENTIAL EDS99-331 November 18, 1999 09:22:02AM Statement by Khaled M. Al-Aboodi Date ofMeeting: November 18, 1999 COLOMBIA: Country Assistance Strategy Progress Report Financial Sector Adjustment Loan I have a number of comments on the two documents, starting with the CAS Progress Report. It is clear that the Pastrana administration is intent on addressing seriously the difficult development challenges that it has inherited when it came into office in August a year ago. The preparation of the National Development Plan and Plan Colombia, and the stabilization measures it took immediately after taking office, attest to this. Nonetheless, despite these efforts, the economic situation continued to deteriorate -the fiscal and current account deficits widened, unemployment rose, and GDP growth fell sharply. The agreement with the IMF on an Extended Fund Facility (EFF) for US$2. 7 billion is indeed encouraging. When implemented successfully, the EFF should reduce the fiscal deficit, bring down the current account deficit to levels that can be sustainably financed, strengthen the fmancial system, lower interest rates, and put the economy back on a sustainable growth path. In this context, I am pleased to note that the program would allow spending of about US$300 million a year for three years on new social safety programs, which could be supported by the Bank and the IDB. Of course, the difficult external environment, the recent earthquake in the coffee producing regions, and domestic violence, have all contributed to making economic ~agcment difficult, and to the deterioration in the macroeconomic framework and poverty Situation in the country. To this end, I support the main CAS objectives, which, as the progre!ls report states, remain valid. These are poverty reduction and social development; and SUStainable growth . .. ··~? This dl)l 11 111l2nt has a restrict~d distribution a..'ld may be used by recipients only in the\ ~rfom 1 · 111 · ·~of their official dL:ti:::;;. I[s contents may not otherv..:ise be disclosed w·ithoutjl • ~\ orld 1\ , h . . { '''· :1ut onz:1uon.  Of course macroeconomic stabilization is a pre-requisite for achieving both objectives. In addition, poverty reduction would ultimately depend on the promotion of peace, and the development of the countryside. Sustainable growth would also depend on improving public sector management, removing infrastructure bottlenecks. The report indicates that progress on these fronts have been slow. Let me now turn to the Bank's lending strategy. The report recommends moving from the base case to the high case scenario. It cites some good reasons for doing so, including the difficult external environment, the recent earthquake, and the Government's commitment to undertake a serious fiscal adjustment program and structural reforms. However, my understanding is that moving to the higher case depends on performance and not on intentions. On this basis, it would be more appropriate to move to the low case. However, given that some of the reasons for poor performance are not under the control of the Government, staying in the base case would be justified. Waiting to see how the IMP program is implemented, to set a track record, before moving to the high case, would be more appropriate. Let me now turn to the Financial Sector Adjustment Loan. I can support the major elements of the operation, although the size of this operation is already much larger than the average for three years even in the high case. I particularly endorse the special economic emergency and earthquake relief programs supported under this operation. These would go a long way in helping the most vulnerable groups affected by the crisis, namely low-income mortgage borrowers and depositors in the cooperatives system. Clearly, the success of these programs will depend on the speed of bringing down real interest rates in the economy, and their level. I have noted, however, from paragraph 30 that there have been modifications to the decree issued by the Constitutional Court. I would like clarification from staff on the importance of these modifications. Finally, I wish the authorities success in addressing the difficult challenge of their development agenda . ..............--------------------------