Colombia - Current economic position and prospects

RESTRICTED Report No. WH-197a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS OF COLOMBIA February 10, 1970 South America Department  CURRENCY EQUIVALENTS (Certificate Market Selling Rate of Exchange) End 1968: 1 US$ = 16.91 Pesos 1 Peso (Col$) = US$0.05913 1 Million Pesos = US$59,130 End 1969: 1 US$ = 17.90 Pesos 1 Peso (Col$) = uS$o.o5586 1 Million Pesos = US$55,860  PREFATORY NOTE The last economic report on Colombia, "Current Economic Position and Prospects of Colombia" (Vrl-18a8% December 30, 1968) anialysed the longer term development problems and prospects. The purpose of this report is to inform members of the Consultative Group of principal economic developinents during 1969 and prospects for 1970. The report reflects the findings of a mission which visited Colombia during October 1969, composed of Messrs. Ben E. Lehbert, Gary L. Hyde and Jose D. Teigeiro.  TABLE OF CONTENTS Page Paragraph No, No. PREFATORY NOCTE BASIC DATA i - ii SU1,DWZY AMD CONCLUSIONS i -iii CURREIT ECONOMIC POSITION AND PROSPECTS Economic Growth 1 The Coffee Outloook 2 5 - 7 Money, Credit, and Prices 2 8 - 12 Central Government Finances 3 13 - 20 Sector Policy Developments 1968-69 6 21 - 29 Future Prospects and Creditworthiness 8 30 - 50 APPENDIX 1 6 Coffee Policies and Financial Arrangements (8 tables) APPENDIX 2 1-2 Estimation of Tax Revenues and Excpenditures APPEEDIX 3 Withholding at the Source of Income Tax (1 table) 1 - 3 STATISTICAL APPENDIX 2w National Accounts (2.1 to 2.04) 3. Trade and Payments (3.1 to 3.19) 40 External Debt (4.1 and 4.2) 5. Fiscal Statistics (5e1) 6. Money and Credit (6.1 to 6,7) 9. Prices (9e1 to 9h4)  COLOMBIA: BASIC DATA h're.a 439,825 square nriles Popolation Estimate, mid-1969: 20.9 million; Growth Rate 3.3 percent C-ros:s Domestic Product Total GDP in 1968: Col$94.,705 million Approxinate US$ Eouivalent: US$ 5,775 million Real Growrth in 1968: 5.5 Dercent Average Real Growth, 91064-68: 5.0 percent Per Capita GDP in 1968: US$ 285 Percentage Contribution to GDP: l958 1967 Agriculture 37.3 305 Manufacturing ,6.?2 17e2 Othier 46 a5 52e3 Saving ad Investment Gross Fixed Domestic Investment as Percentage of' GDP: 1.966 1967 1968 1508 16.2 16.6 l'ercentage Composition of Investment and Saving in 1967: Gross Fixed "omestic Investment 96.0 Construction 63 5 Trac.-sportation Equipmert 7.7 Machinery and Other Equipment 21,,.8 Inventory Change 4.0 Gross Domestic Investment 100l 0 Corporate Saving 12.8 Personal Saving 7.9 Covernment Saving 26.1 Current Account Deficit 6.8 Capital Consumption Allowance 46.4 Central Government Finances 1967 1968 1969 Current Revenues 6,688 8,057 9,290 Current Expenditures 4 L293 5P183 6,55o Current Surplus 2,395 2,874 2,,740 Investment Outlays 2,626 3,710 4,147 Overall Deficit 231 836 1,407  End End 3.967 3968 1969 Millions of Pesos: 13,l50 15,)435 18,060 Prices 1967 1968 1969 National Consumer Price Index (Annual Averages, 1958-100) 262 281 305 l!holesale Price Index (A-nnual Averages, 1958-100) 252 267 290 EchanMe lRate End End End 1967 1968 1969 Principal Exchange Rate, Selling (Pesos per U.S. Dollar) 1582 16.91 17,86 Balance of Pa.ents in 1968 Ofillions of U.S. Dollars) F.o,b. Merchandise Exports 613.9 (Of wrhich, coffee) (351.L) F.o.b. oMerchandise Imports -615.1 Net Services - 77-n Factor Payments to Foreigners -113.3 Net Transfers 31,5 Current Account Balance -165.' Net Private Capital 47. Net Public Capital 111.5 Errors and Omissions 26.9 Increase in Central Bank Reserves - 7114 Decrease in Commercial Bank Reserves 51.0 External Public Debt Thillions of U.S. Dollars) End 1967 End 1968 IBRD TOTAL IBRD TOTAL- Disbursed 264 794 290 si4 Undisbursed 97 292 J.63 Total 361 1,g T3 1,27ii-. Debt Ser-vice Ratio 1967 1968 1969 10.6 13.7 13o0 Yet International Reserves of the Central Bank (Mi:lons of U.S. Dollars) End End End 1967 1968 1969 -36 35 95 IIT' Pos-.tion at end of 1969 Quota US$125 million Net Drawings US$139 million Fund Holdings of Pesos Col$233 million Fnld Holdings of Pescs  SUMMARY AND CONCLUSIONS 11 The purpose of this report is to update the last Bank economic report on Colombia (WH-188a of December 1968), with respect to those a.spects of economic policy and performance identified in that report as being of cri.tical significance for Colombials future prospects0 Report NIo. WH-188a had identified, against a background of long-term trends, the major financial and development policy issues facing Colombia in the next three to five years and their implications for Colombia's development prospects and external capital requirements in this period. Its principal conclusion was that if the quality of Colombia's response to problems continued to be as good in the preVious two years, substantial external support of its accelerating development effof-t would be warrantedO. The 1969 economic mission, examiriig the implications of the recent increases in coffee prices and the rmodifi- cations in Colombia's development program now emerging, found nothing which would alter this conclusion. 2, Colombia's growth objectives are likely to be reached in 1969. Real growth of GDP will probably increase from 5.5 percent in 1968 to 6.5 percent in 1969, thus exceeding the 6 percent target set by the Government0 The drive for export diversification away from heavy reliance on coffee also has made further progress as minor export registrations are likely to reach US$200 million, an increase of 26 percent over 1968. The current account surplus of the central government did not show the expected increase in 1969 but an increase of 30 percent in real terms is expected in 1970 and of 8 percent in 1971. On this basis, public revenues will be sufficient in 1970 to present the financing of a level of public investment 15 percent higher in real terms than in 1969. However, the further growth of publ.i.c investment by 11 percent in real terms in 1971 will require a contribution from the central government beyond that which is likely to be forthcoming from the existing tax base, the required increase being of the order of up to 7 percent-in central government revenues (or Ps 900 million in current prices). 3. Recent developments have departed from the projections made in the last report in one significant respect, namely the rise in the price for Colombian coffee which began in September 1969. The last economic report asstuned a coffee price of 42 //lb in 19$9-73 but there are now good prospects for sustainirng the price for Colombian coffee at least at 50 //lb through 1970e As coffee still represents over half of Colombia's export earnings, this increase in coffee prices could raise Colombig's economic growth rate -- at least in the short run above the 6.5 percent rate provisionally estimated for 1969 if Government policies rGmain sound and foreign asistance to Colombia's development effort continues at the levels achieved in the last two years.  4.Thether higher growth rates can be achieved over tbe longer run w:ll depend on the ability of the Govermnaent to exploi the benefits of the coffee boom so as to improve the basis for long tenn economic grow,zth irrespective of the vagaries of the coffee market, and of course on Colombia's ccntiriuing ability to maintain long term eLternal loan disbursements at levels consistent with growrth targets on the one hand, and creditworthiness considerations on the other,- 5. The coffee sector is already heavily taxed (51 percent up to a coffee price of 57 /llb), but the Government has recently succeeded in negotiating an agreement with coffee growers that any increase in the coffee price above 57 //lb will be split after taxes have been deducted between the National Coffee FInrid (30%), the departmental coffee comriLttees and the Rotating Fund of the Banco Ganadero (35%) and the growers (35$)0 6e lqh^,Wile the National Coffee Fund is likely to use most of its additional income to retire its debt and while the small coffee growers, representing about half of coffee output, will spend such income on consumer goods, most of thle remainder of the additional inflow of funds is likely to find its way into investments, be it in agriculture or industry. 7e As the coffee boom stirulates the entire economy, ongoing efforts to mobilize private savings should be intensified and the selective credit programs already established can be used to channel savings to the sectors promising the highest return on investment. As a boom tends to stimulate demand particularly for manufactured products, industry is likely to become the leading growth sector. Policies shoul.d therefore be directed at facilitating industrial growth, mainly tthrough J.mprcving possibilities of self-financing, easing import restrictions on important industrial inputs and lifting price controls on some industrial products. 8e, 'The thrust of these industrial policies should help in developilng industries that are likely to gradually emerge as export industries, since rapid growth of minor exports will remain the central precondition for sustaining a higher overali growth rate in the long run. Therefore, existing polici.es to encourage minor exports shou:Ld be pursued vigorously, particularly with regard to maintaining an adequate exchange rate and keeping export incentives under constant review to assure their effectivencss. 9. With respect to debt service, the last economic report had orecast that, aking account of new commitments, the ratio of debt service to export earxings would reach 16-17 percent in 1973, and could only level. off thereafter if the annual amount of new borrowing were to be sharply reduced after 1973, However: on the basis of improved debt information it is forecast that the debt service ratio will increase from 13 percent in 1969 to only 14 percent in 1973, rather than the 16-17 percent previously forecast. Looking further ahead, the debt service ratio mray  - iii - be expected to peak at about 18 percent in the early 1980's and decline thiereafter, without the need for any drastic reduction in the level of external. borroring after 173, but simply with a gradual decline asso- ciated with a substantial rate of economic growth. This prediction is possihle only because of the exceptionally favorable structure of Colomibia?s existing external debt; it asstumes that the discipline which Colombian Governments have hitherto exercised over external borrowing wLll -continue in the future in a manner to prevent any deterioration in the terms of.borrowingo  CURROW iMNOIAIC POSITIONT AND PROSPECTS Ec romi.c Growth le After growi.ng at a rate of 4,4 percent in real terms during the three years 1965-67 Colombia's gross domestic product rose by 5-5 percent in 1968. Preliminary estimates irdicate a real growth of 6.5 percent in 1969, which would raise the 1965-69 average to 5.0 percent, With the recent sharp improvement experienced in world coffee prices Colombia may achi.eve 7.5 percent real growth in 1970. 20 The causes for this acceleration in growth are complex and interrelated, but a few stand out, First, since the end of 1965, major inprovements have occurred in government policies in such fields as monetary, fiscal, exchange rate, wage and price policies, as wiell as in administrative procedures and planning of major public institutions. A.lthough nmuch remains to be done, these improvements have decisively altered the economic climate in Colombia, Second, since 1968 rising fixed domestic investment expendi.Lture9 supported by rising dom.estic savings, have laid the basis for achieving a higher growth rate, Third, the success of the minor export drive provided some relief regardi.ng Colombiats most serious development constraint, as it helped to increase import capacity. Fourth, foreign assis-ance to Colombia's daveloprment effort increased very substantially, also contributing to increase .mport capacity, As the coffee boom promises further improve- rLiDnts in exchlange earnings, a further increase in the growth rate should be possible., 3, Even if the current coffee boom lasts no longer than eighteen months the country has excellent prospects for achieving at least the planned mi.nimum average growth rate of 6,0 percent average in the 1970-74 period. This would raise per capita GDP by 2.7 percent a year, as compared with 1,7 percent recorded during the 1965-69 interval. Per capita GDP (in constant 1968 prices) would reach approximately US$336 by 1974, up from US$294 in 1969 and US$270 in 196h. 4. Gross fixed domestic investment rose by an estimated 8&1 percent in real terms during 1968, significantly above the average growth rate of 2,9 percent attained in the 1965-67 period. The public sector made one-fourth of total fixed investment in 1968, the same proportion as in 1967 but the government investment effort is likely to have played an inmportant role in achieving the increase4l/ Gross fixed domestic invest- ment represented 16.6 percent of GDP in 1968 as compared wAith 16c2 percent in 1967, 158 percent in 1966, 1505 percent in 1965, and 17,0 percent in 1963.2, The rate of capital formation is lower than the rate of 20 percent 2/ Public sector as defined for the national accounts, iae., Government plus Government Enterprises. 2/ Investment coefficients computed from expenditure data in 1958 prices.  - 2 - a...vaer during the coffee boom of the early fifties, and a substantial ir.crease should be possibJe if t,he present coffee boom iasts5 The CofThe Outlook 5. The New York price of Colom'bian r,lild coffees rose from 42 cents per pound at the end of Augost 1569 to 57 cents per pound at the end of October, an ircrease of 36 percent in two months. Prices eased slightly in November to 55 cents per pound, but started to increase again in early January 1970, With coffee production accounting for nearly 8 percent of GDP, two-thirds of foreign exchange earnings; and 10 percent of Government revenues, the impact of such a price increase is substantjaal,i/ 4. The price increase occurred because of supply uncertainties associated with severe frost3 that hit the Brazilian coffee-prz ducing states of Sao Paulo and Parana last July0 Reports are that t'ha 1970/71 and 1971/72 Brazilian harvests will be sharply reduced as a result of tree &amage, and the current 1969/70 crop will also fall below expected levels because of the frost and drought conditions that prevailed for several months last summer. Brazil apparently has sufficient coffee cn hand to meet International Coffee Organization (ICO) quotas in the next few years, but it appears likely that its stockpile will be exhausted by 19720 Elimrnation of the overhang of Brazilian stocks from the marcet will heve a buoyant effect on world prices. It is possible that the improved prices of the recent past will prevail for 3-4 years, buit as a minimum they should last for 18 months0 7. The original CO quota for Colombia during the October 1969 - September 1970 coffee year was set at 5,721,OOO bags of 60 kilograms eachO Adding 250,0O0 bags for sales to non-traditional markets raises the total to iust under 6O0 million 'zags, an amount that would yield gross sales revenue of US$333 million at an average price of 42 cents per pound in New York. But assuming three ICO selectivity increases and three reserve releases (as now seem probable) raises Colombia's vc_lumie to 6.7 million bags, which would yield US$443 million at an average price o01 50 cents per pound. The exchange surrender and central Government export tAx receipts associated with these higher volume and price estimates would be rcughly US$400 million and Col$l,135 million, respectively2 36 percent higher than previously estimatec2, Money, Credit, and Prices 80 Colombia's monetary program for 1970 continues the policies that worked well during the 1967-69 period. It is designed to preserve reasonable price stability while permitting an adequate expansion of credit to the private sector. The program also aims at increased domestic saving and an improved allocation of credit to key economic sectorso l/ See Appendix 1 for a description of Colombia's coffee policies and "hi?i reebeni v  -3- 9. In 1968 the money supply, i.e., currency in circulation plus demand deposits, rose by 14.8 percent, considerably less than the 21.9 percent increase of 1967. During the first nine months of 1969 the money supply rose by 10.1-percent, as compared to 7.0 percent for the comparable period of 1968. The 1969 gain occurred mainly because of an increase in the central bank's net international reserves, as the expansion of net domestic assets was kept within the ceiling established in Colombia's stand-by agreement with the International Monetary Fund. 10. The overall expansion of credit in 1968 was held to the level of the previous year, but efforts were made to direct a greater share of available funds to agriculture and construction, mainly for housing. During the first half of 1969 the banking systemts portfolio increased by 8.0 percent, with most of the gain taking place in the Agrarian Bank, the Livestock Bank, and the Central Mortgage Bank. Expansion in the portfolio of commercial banks was held to 4 percent. llU Efforts to increase domestic saving are continuing. A National Savings Fund has been set up to receive severance reserves for public employees, and the government has successfully introduced a series of constant-value bonds. Interest rates on term deposits and deposits without fixed term were increased late in 1969. 12. The high rate of price increases (16 to 17 percent) in the early sixties had been brought down to manageable rates in 1967 and 1968. Depending on what price index is used - wholesale or consumer prices index for workers - the increase in 1967 was 6.8 percent and 8.1 respectively. This was brought down further in 1968 to 6.2 and 7.4 percent. In 1969, the increase of prices will be between 8 and 9 percent partly due to the buoyant economic situation and partly to selected freeing of controlled pricesp such as for cement, pharmaceuticals and chocolate. Central Government Finances 13. In the period between 1963 and 1968 Colombia's central governmznt finances underwent a radical change as revenues were increased sharply through new tax measures and by sustained efforts at better assessment and collection. Although the rate of increase slowed down in 1969 a further improvement is likely in 1970 and 1971. (See table 5.1 of the Statistical Appendix.) 14. Revenues not only increased in absolute terms but also in relation to GDP, from 7.1 percent in 1963 to 8.5 percent of GDP in 1968. At the same time the growth of current expenditures was kept within reasonable limits, and as a consequence the surplus on current account increaaed from 18.2 percent to 35.7 percent of current revenues between 1963 and 1968, and trebled in real terms during this period.  The substantial current surpluses were used mainly to help finiance large increases in the central government's investment budget, with the exception of the year 1966 when part of the surplus was used to retire a large amount of internal debt to the central Bank as part of a successful effort to reduce the rate of inflation. Thus, the percentage of' the central government's investment budget covered by the current surplus rose from 51 percent in 1963 to 71 percent in 1964 and 1965, and then to an unprecedented 136 percent in 1966. Subsequentl-y, the percentage of the central government's investment budget covered by the surplus declined again to 91 percent in 1967 and 77 percent in 1968. The rapid build-up of central government investment started in 1967, and between 1966 and 1968 investments more than doubled in real terms. 16. Although current revenues are likely to increase in 1969, a decline in the current surplus is to be expected and investments will grow by o-nly 3% in real terms. The 1969 slowdown was due first, to a lag in customs duty receipts on imports early in the year as a result of the New York dock strike and of restrictions on the eligibility of goods for AID financing./ The related shortfall in the generation of counterpart funds reduced the amount of financing available for public inv-estmrent. Second, current expenditures in 1969 are likely to exceed planned figures by some Col$200 million because of unforeseen outlays connected with the administrative reform, which included a long overdue revision of public salary levels, especially for key personnel. 17t Prospects for 1970 and 1971 are better. The recent increase in the price for Colcmoian coffee will lead to substantial increases of central govermnent revenues, both directly through custom duty receipts and increased revenues in the special exchange account and indirectly through generally higher revenues resulting from a buoyant economy. At the sane time substantial additions to income tax revenues can be expected for a few years as the effect of the shift of these taxes to a pay-as-you-go basis gains momentum. However, this element of the Drcjections contains a considerable margin of error due to the uncertainty regarding the degree to which tax liabilities arising from the shlift w111 be actually collected.?/ 18. As a result of improved coffee prices and the potential additions to tax collections from withholding at the source, revenues can be expected to show sharp increases in 1970 and 1971 in real terms, and as a percentage of GDP are likely to increase from 8.5 percent in 1969 to 9.4 percent in 1970 and 9.6 percent in 1971.j In spite of substantial 1/ Imports financed by AID program loans are restricted to a positive list of US goods that can be purchased under these loans. A note showing the implications of the withholding effect is attached as Appendix 3. 3/ If the surcharge effect of withholding is discounted, the percentagc wouli still rise to 9 percent in both years.  incietea^s in current expenditure, mainly for education and publl.ic health,. the pey-centage of revenue saved will be 32 percent in both years, 19. In the three year plan presented to Congress in December 1969 (see paragraph 25), the Government proposed three alternative levels of public investment, associated with alternative rates of economic growth. The high alternative was adopted for 1970, implying an increase of 15 percent in real public investment4/ Assuming that the high alternative will also be adopted in 1971, investmeats would rise by 7 percent in real terms over 1970. Although there will be no particular difficulty in financirLg these investments in 1970, some fiscal action would appear to be needed effective in 1971l CENTHAL GOVERNMENT CASH OPERATIONS, 1967-71 (Millions of Current Pesos) Actual Estimate Pr2fLections 1967 1968 1969 1970 1971 Current PLevenues 65688 8,057 9,290 12,080 14,325 Curr .. t Expenditure h 293 5 183 6 550 8170 9 7L0 Current Account Surplus f 2- 3,910 -Tt8 Investment 2,626 3,710 4,147 5,300 6,170 Amortization 899 1,111 678 900 1,150 Internal (613) (850) (398) (583) (775) External (286) (261) (280) (317) (.3725) Total 3,525 h,821 4,825 6,200 7,320 Surplus -2,3L5 -2 874 -2,740 -_3,10 -4k,85 Deficit 1,130 1,974 2,085 2,290 2,735 Financing2grs1 ,130 1,974 2,085 2,290 2,735 Counterpart funds 605 1,229 1,500 1,500 1,000 External credit h8 95 230 620 770 Domestic credit (non BOR) 477 623 355 To be financed - - - 170 965 Projected price index 100 108.5 118.8 1289 j The 1970 budget approved by Congress recently provides for higher investments than the plan, and therefore, the budget figure has bee. chosen here.  20. The table indicates that to cover the high alternative plan target for public investment, Ps 170 million of additional financing would be re4red in 1970, and Ps 965 million in 1971. As no allowance has been made in these forecasts for any gross domestic borrowing from thle private sector by bond issues etc, which have been running at rates of Ps 4oo.-600 million annua-1..y in recent years, it is evident that the continuance of such borrowing at a modest level would cover the finan- cial gap in 1970, and reduce it in 1971e However, some additional revenue measure may be needed to complete the financing of the budget in 1971, Sector PolicyDevelopments in 1968-69 21. The successful Colombian development effort since 1967 has been backed by a number of important policy innovrations in various sectors, most of which have been described in the last economic report (WH 188a). The major thrust of these innovations was in the direction of reorgani- zation of existing and creation of new institutions, frequently combined with closing down of too numerous and inefficient older institutions. Thus, in the field of agricultural policies almost 30 public institutions were reduced to 10, each with fairly clear-cut lines of responsibility. The National Planning Department was considerably strengthened and has recently produced, in collaboration with the respective ministries and institutions, a three-year development plan with some detail on eleven different sectors 4/ 22. In most cases the time elapsed since the changes were made is too short to pass a judgment on their effectiveness. Also, in some sectors it would be urnrealistic to expect spectacular results in the short run, since the problems to be solved are fundamental in character, as for instance the fact that only some 15 percent of the total area planted to crops is in the category of commercial agriculture, the rest being in subsistence farming. 23. The most important sector policy developments since the last economic report occured in agriculture, industry and public utilities. In agriculture there was a notable increase in credit to the sector as indicated by an increase of 27 percent in the Caja Agraria's portfolic in the twelve months ending October 1969. The Caja also expanded its credit to smallagro-based industries in small and medium-sized towns, which is being made at interest rates varying between 9 and 11 percent. j Education, Health, Justice, Housing, Agriculture and Livestock, IndustTy, Enlergy, Transport, Water and Sewerage, Natural Resources, Tourism  - 7 - 24. Another significant policy development in 1969 was the expansion and intensification of the activities of INDERENA, the Institute for the Development of Renewable Resources. Funds available to the Institute have been increased considerably over the past few years, mainly through increased contributions from the central government's budget,, which grew from Col$26 million in 1968 to Col$43 million in 1.969 and to an initial appropriation of Col$74 million for 1970G The Instl.tute at present is most active in forestry. The basic problems in this sector are indis- criminate clearing of forests by the rural population, theft of timber, and plague and storm damage to forests, These problems are compounded by the lack of skilled personnel in the field. At present IND