Document of

The World Bank

FOR OMCAL USE ONLY

Repmt No. P-4195-CO

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTER!;ATIONAL BANK- FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON

A PROPOSED L')AN

IN AN AMOUNT EQUIVALENT TO US$ 250 MILLION

TO

THE REPUBLIC OF COLOMBIA

FOR A

TRADE AND AGRICULTURAL POLICY LOAN

March 27, 1986

This documeut b a reted distio. ad may be ose by recipients only in the perfoanance ofther effidl dudes Its coot.- -ay u thdmewise be dbeloed witbout Worltd Bmck aborizon.

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CURRENCY EQUIVALENT

Currency Unit = Colombian Peso (Col$)Col$142.5 = US$1.00 (1985 average)Col$178.1 = US$1.00 (March 1, 1986)Col$1.00 = US$0.006 (March 1, 1986)

WEIGETS AND EWASURES

Metric System

FISCAL YEAR

January 1 - December 31

GLDSSARY OF ABBREVIATIONS

BOR - Banco de la Republica (Central Bank)BONOS DE PRENDA - Storage creditCAJA AGRARIA - Caja de Credito Agraria, Industrial y Minero

(Agricultural, Industrial and Mining Credit Bank)CERT - Certificado de Reembolso Tributario

(Tax Reimbursement Certificate for Exporters)CPI - Consumer price indexDNP - Departamento Nacional de Planeacion

(National Planning Department)DRI - Programa de Desarrollo Rural Integrado

(Integrated Rural Development Program)FEDERACAFE - Federacion Nacional de Cafeteros de Colombia

(National Federation of Colombian Coffee Growers)FFAP - Fondo Financiero Agro.-cuario (Agricultural Financial Fund)HIMAT - Instituto de Hidrologia, Meteorologia y Adecuaciones

de Tierras(Institute for Hydrology, Meteorology and Land Improvement)

ICA - Instituto Colombiano Agropecuario(Colombian Agricultural Institute)

IDEMA - Instituto de Mercadeo Agropecuario(Agricultural Marketing Institute)

INCOMEX - Instituto de Comercio Exterior (Foreign Trade Institute)INCORA - Institutc Colombiano de la Reforma Agraria

(Colombian Institute for Agrarian Reform)INDERENA - Instituto Nacional de los Recursos Naturales

Renovables y del Ambiente(National Institute for Renewable Natural Resources and theEnvironment)

MOA - Ministry of AgricultureOPSA - Oficina de Planeamiento del Sector Agropecuario

(Planning Office, Ministry of Agriculture)PLAN VALLEJO (PV/SIEX)- Import duty drawback and exemption schemes for exportersPROEXPO - Fondo de Promocion de Exportaciones (Export Promotion Fund)TPED - Trade Policy and Export DiversificationTAP - Trade and Agricultural Policy

FOR OFFICIAL USE ONLY

COLOMBIA

TRADE AND AGRICULTURAL POLICY LOAN

SUMKARY

Borrower: Republic of Colombia

Executing Agency: Ministry of Agriculture and INCOMEX

Amount: US$250 million equivalent

Terms: 17 years, including four years of grace at the standardvariable int'erest rate.

ProjectDescription: The operation provides further support to Colombia's

medium-term, growth-oriented, structural adjustment pro-gram by: (i) deepening reforms in the macroeconomic,trade and public investment areas; and (ii) reducing tradeand sectoral distortions in agriculture. These effortsare expected to provide a sounder basis for export-oriented growth. The reviews in the context of the loanassist in monitoring the economic program and in promotingthe participation of the external financial community inthe program. The loan would: (a) support trade liberal-ization, including a further reduction of export restric-tions, a progressive reduction of import restrictions andduties, and improvements in the use of duty exemptions forexporters; (b) rationalize trade and price interventionpolicies in agriculture; (c) support coffee policy inbalancing the incentives between coffee and non-coffeeagriculture; (d) support reforms to improve agriculturalcredit availability at more realistic interest rates; and(e) review efficiency in public investments in the agri-cultural and rural sectors, and provide institutionalsupport to the Ministry of Agriculture.

Project Risks: Import liberalization of agricultural inputs may hurtdomestic producers who are unable to adjust to thechange. This risk, however, is minor considering that thedomestic producers would also benefit from the liberaliza-tion of imported raw materials; moreover, the contributionof this subsector to employment is relatively small.Measures affecting protection for the import-competingcommodities could potentially hurt small farmers special-izing in these categories; but the policy changes aregradual and provide for offsetting cost reductions andincreased investments. Finally, there are the usual risksof continuity in policies, especially regarding incentivesfor minor exports even in the event of a sizeable expan-sion in export earnings from coffee, petroleum and coal.

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.

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The understandings for the loan's second tranche, and theGovernment's awareness of this issue in the light of theexperience with the previous coffee boom should minimizethis risk.

EstimatedDisbursements: Out of a first tranche of US$125 million, US$25 million

would be released to an export account upon loan effec-tiveness. The remaining US$100 million would be availableupon effectiveness to be disbursed by reimbursing 30Z ofimport payments for imports of agricultural inputs,machinery and equipment. The second tranebe of US$125million would be released provided the review of theeconomic program, trade and agricultural policies inNovember, 1986 demonstrates satisfactory implementation ofthe agreed program.

Appraisal Report: This is the combined President's and Staff AppraisalReport.

Nap: IBID No. 18370

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS

ON A PROPOSED LOAN TOTHE REPUBLIC OF COLOMBIA

FOR THETRADE AND AGRICULTURAL POLICY LOAN

1. I submit the following report and recommendation on a proposed loanto the Republic of Colombia for the equivalent of USS250 million to helpfinance a Trade and Agricultural Policy Loan. The loan would have a term of17 years, including four years of grace, with interest at the Bank's standardvariable rate.

PART I - THE ECONOMY

2. An economic mission visited Colombia in July 1982 and its report(4444-CO) was distributed to the Executive Directors in August 1983. Amission to review the external sector and agriculture visited Colombia duringApril/May 1983, and its report (4981-CO) was distributed to the ExecutiveDirectors in April 1984. A review of macroeconomic developments was con-tained in the President's Report for the Trade Policy and ExportDiversification Loan (P-4055-CO) of May 1985. Country data sheets arepresented in Annex I.

A. Background

3. The Colombian economy has made considerable progress since theearly 1950s, evolving from a largely agricultural and rural base into onethat is more open, integrated and industrialized. The growing economicactivity, rapid rural-urban migration, increased participation of women inthe labor force, and expanded public services have contributed to reductionsin poverty and improvements in income distribution. Financial and capitalmarkets have evolved pari passu with the growing needs of the economy, andthe country has become an active participant in international capitalmarkets. State enterprises are few, follow, on the whole, adequate pricingpolicies, and many have some form of private sector participation. Thecountry's energy balance has been changing in recent years and Colombia isexpected to become a net petroleum exporter this year and, increasingly, anexporter of thermal coal.

4. Export promotion has been a concern of Colombian authorities forsome time. Beginning in 1967 the authorities adopted an outward-lookingdevelopment strategy, expanding and diversifying exports. Export promotionpolicies, including frequent small devaluations of the peso, export taxrebates and other incentives were introduced. The authorities also beganlowering tariffs somewhat and relaxing domestic capital market controls as ameans of raising efficiency and increasing the competitiveness of Colombiangoods in external markets. These measures were successful in relievingforeign exchange constraints and stimulating growth and employment.

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B. Economic Performance During the 1970s

5. In the mid-1970s the economy faced strong inflationary pressuresfrom a sharp increase in world coffee prices. The increased coffee exportreceipts, together with some official surrender of foreign exchange fromillegal exports, caused a turn-around in the balance of payments. Incomesrose rapidly stimulating aggregate demand, and inflation accelerated.Economic growth also rose, and unemployment fell substantially in rural andurban areas. Largely as a consequence of increased coffee tax revenues, thepublic finances generated surpluses averaging about 1% of GDP during 1976-78and, by the end of 1979, net official international reserves had risen toabout US$4.1 billion, nearly eleven months equivalent of that year's importsof goods and services.

6. While beneficial in many respects, the foreign exchange boom hadsome negative effects. The rate of currency devaluation was slowed and theconversion of export receipts into pesos was delayed to moderate the growthof domestic demand, with adverse effects on non-coffee exports. TheGovernment also sought to check inflation by maintaining high reserverequirements and expanding controls over credit thereby reducing, in realterms, the financing available to the private sector through the formalcapital market.

7. The 1977-79 economic program was partially successful in restrain-ing aggregate demand growth, but relatively high inflation persisted. Inresponse to the increasing restraint on aggregate demand, troublesome finan-cial market distortions and disincentives to non-coffee exports from theexchange rate appreciation, the authorities began in late 1979 to -djust theprogram. The rate of peso devaluation was advanced somewhat, and in early1980 credit restraints were relaxed. At the same time, interest -ates oncertificates of deposit--and on lending therefromr-were freed from controls.To offset the inflationary effects of these measures, the authorities furtherliberalized import payments and adopted the policy of not expanding the sub-sidized selective credit operations of the Central Bank in excess of theresources captured from private savings for this purpose. Real GDP growthdecelerated to 4% in 1980 from an average of almost 6% since 1960, unemploy-ment started to creep up, and inflationary pressures continued.

C. Recent Economic Developments

8. During 1981-83 the economic situation took a turn for the worse inpart on account of external factors, with real GDP growth slowing down to2.3% in 1981 and 1.2% on average in 1982-1983. Agricultural output was hard-hit as a result of low international prices, reduced input use from decliningprofitability and adverse weather. Industrial activity deteriorated onaccount of depressed aggregate demand, and unutilized capacity continued toincrease, particularly in manufacturing. Unemployment reached almost 14% ofthe labor force at the end of the year, up from about 7% at the end of 1981.Inflation, however, slowed down in 1983 to a 20% average for the year, downfrom 28% in 1981 and 25% in 1982.

9. After experiencing a surplus for six years, a deficit of aboutUS$1.5 billion emerged in the resource balance in 1981 and it increased to anaverage of about US$2.2 billion in 1982-83. These deficits resulted mainly

from a drop in exports at constant prices: in addition to domestic factors,major reasons were the slowdown in world demand, large devaluations andimport restrictions in neighboring countries, and the reduction of Colombia'scoffee exports from their previous high levels. Net foreign exchangereserves declined by about US$1.8 billion in 1983 to about US$3.1 billion,equivalent to about five months of imports of goods and services in thatyear. On the fiscal side, a slowdown in revenue growth, together withincreased current expenditures resulting from automatic transfers to depart-ments and municipalities and large infrastructure investments in energy andtransport led to growing deficits: the Central Government cash deficit grewfrom 2.1% of GDP in 1980 to 4.1% in 1983, while that of the consolidatedpublic sector rose from 3.6% to 7.6%.

10. In 1983 the Government introduced policies to stimulate aggregatedemand and expand non-coffee exports. The rate of peso devaluation wasaccelerated; housing construction was provided with incentives to mobilizemore resources; and selective credit operations to the productive sectorswere expanded. Temporary import restrictions were introduced for balance ofpayments stabilization, ir- addition to measures to reduce the fiscal deficitand to ease distortions in the financial system. These efforts were insuffi-cient to reverse the deteriorating balance of payments trends particularly inview of the tight international capital market. Colombia, unlike some otherLatin American countries, has not had a debt problem because of a relativelylow debt-level, the high share of debt from multilateral institutions intotal debt outstanding, and the term structure of such debt. However, theLatin American debt problem produced a sharp reduction in the credit linesavailable to Colombia and difficulties in obtaining medium-term loans forongoing projects, which contributed to further declines in foreign exchangereserves and to strains in the financial system.

11. During 1984-85 Government policy began to focus increasingly on:additional revenue and expenditure measures to contain the fiscal deficit andmonetary expansion: acceleration of the exchange rate devaluations andfurther increased incentives to exports; measures to improve the profitabil-ity of the commercial banking and to resolve the external debt problems ofthe private sector. The policy reforms began to take hold during the secondhalf of 1984. Real GDP growth increased to 3.2%, the unemployment rate fellto 13% of the labor force at year's end from its increased levels during1983-84, while inflation was brought down to 16.4% on average in 1984.Merchandise exports grew at about 12%; the current account deficit in thebalance of payments was reduced by nearly US$1 billion to 5.3% of GDP, andreserves remained at about US$1.8 b,llion at year end (about three and one-half months of 1984's imports of goods and services).

12. Macroeconomic policy reforms were deepened in 1985. The economicprogram has contributed to a sharp and sustained adjustment thus far. Thecurrent account in the balance of payment registered a significant impr9ve-ment in 1985 declining to a deficit of nearly 4.0% of GDP. Inflationremained under control in 1985 at less than 23%, while economic growth con-tinued at a modest rate below 3%, although the unemployment rate remainedhigher than in recent years. In contrast with a US$1.3 billion fall in 1984and a previously projected fall of US$50 million in 1985, net reservesincreased by US$271 million in 1985.

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D. Growth and Balance of Payments

13. With further policy improvements (see Part II), Colombia's growthprospects for the rest of the decade would be good. At this stage, projec-tions are made difficult by the recently emerging international coffee situa-tion, which could mean a foreign exchange boom of additional receipts depend-ing on the severity of the Brazilian drought and production shortfall. Pre-liminary calculations suggest, however, that the medium-term scenarios wouldnot be affected substantially: 1986-and possibly 1987-on the other hand,should witness a greater reserve accumulation and increased debt repayments.According to present projections, the current account deficit of the balanceof payments would average some US$800 million per year (less than 2.5% ofGDP), and real GDP growth nearly 3.5% during 1985-86. By end-1986 netofficial international reserves would be over four and one-half months of1986 imports of goods and services. Total investment would need to be main-tained at about 19% of GDP to complete energy and mining projects, and grossnational savings about 17.3% of GDP compared to 14.3% during 1981-84, withthe public sector generating a significant part of the additional savings.Beyond 1986 real GDP growth should resume at near historical rates, averaging4.0-5.0% per year during 1986-90. The current account deficit should remainmodest as a result of increasing export proceeds from new non-traditionalexports (particularly crude petroleum and coal), declining to less than 2% ofGDP by 1990.

14. Total gross external medium- and long-term capital requirementsare projected to total about US$6 billion for the 1985-86 period. Netforeign investment is expected to account for about US$1.0 billion during1985-86, most of which would be to complete existing energy projects. AboutUS$2.5 billion is expected from multilaterdl, bilateral and other officialsources. A similar amount is expected from private sources during 1985-S6,including about one-half of the US$1 billion new money signed with the com-mercial banks in December 1985 mainly to complete petroleum and coal projectsfor export. At the end of 1984 Colombia's public and publicly guaranteedM&LT external debt, disbursed and outstanding, amounted to US$8.0 billion(21% of GDP). The Bank share of this external debt (excluding non-guaranteedprivate) was 22.8% in 1984 which is expected to reach an average of about 25%during 1987-90. The public debt service ratio in 1984 was 23.5% and, basedon assumptions of the current program, it is expected to peak at about 30% in1987 and then decline below 30% after 1990. The Bank's share in M&LT publicdebt service (excluding non-guaranteed private) was 25.3% in 1984 and it isexpected to average aboi 23% during 1987-90. With sound management and thenew export activities referred to above, Colombia is expected to maintain itscreditworthiness through and beyond 1985-90.

E. Medium-Term Policy and Bank Strategy

15. The country's medium-term prospects would be related co the relaxa-tion of key developmental constraints. Central to rapid growth and employ-ment generation would be diversification of exports and production that canbe achieved through the execution of an outward-looking strategy. Governmentpolicy and public sector management have been addressing these issues. Bankpresence in Colombia seeks to underpin a sound macroeconomic program foradjustment with growth, and support policy improvements at the sectoral

level. A three-pronged approach is envisaged, of providing assistancethrough policy-based macroeconomic operations, sector loans and the moretraditional projects. The policies and financing are expected to support arevitalization of export-oriented growth over the medium-term.

16. Support for the economic program was initially provided through theBank's Trade Policy and Export Diversification (TPED) Loan. The present pro-posal is a follow-up operation as part of a financing package to help imple-ment the program. This loan deals with three policy areas: (i) macro-economic policy; (ii) general trade reform; and (iii) trade and agriculturalpolicy. The second tranche of the TPED Loan was released on March 27, 1986,thereby enabling the release of a part of the US$1 billion from the commer-cial banks. This loan also will be released in two tranches, one upon effec-tiveness and the second following a review of policy in November 1986.Future operations are envisioned to follow-up further on agricultuiral policyreform, and extend the impact of macroeconomic improvements in other sectorssuch as energy and transport as well.

PART II - THE ADJUSTMENT PROGRAM

A. Macroeconomic Measures

17. The Government has been reorienting trade policies towards outward-looking growth and revising public investments and pricing policies. Keyelements of this program, supported by the TPED Loan for 1985-86, would beextended through 1986 and 1987 and supported by this loan (also see Annex4). The 1985 program was successful in achieving adjustment with growth, andthe targets of the Colombian program being monitored by the IMF have beenmet. The figures below for 1986 reflect the macroeconomic program theGovernment has discussed with the IMF and the Bank. Selected aspects of pastperformance, recent policy adjustments and future outlook are highlighted inTable 1.

18. Fiscal Policy. The 1985-86 program includes: measures to elimi-nate deductions in the income tax, a broader base for the value-added tax, anincrease in stamp taxes, and an additional temporary 8% import tax.Together, these measures are estimated to have resulted in additional netrevenues for the Central Government of 43% during 1985. Public sectorsalaries approved for 1985 implied an average salary reduction of about 13%in real terms. Public sector subsidies in transport were reduced and ascaling down of the investment program was initiated. As a result of thesemeasures, fiscal performance strengthened substantially and the overallpublic sector deficit as a percentage of GDP was reduced by more than one-third to 4.6% in 1985. These policies are envisaged to stay in place in1986. Settlements of public sector salaries and minimum wages for 1986 seemto have avoided real increases for this year. A further reduction of thepublic sector deficit to about 2.2% of GDP in 1986 and a similar level for1987 are envisaged, in part due to increased coffee revenues.

19. Monetary Policy. A rapid decline in the Central Government cashdeficit allowed for a reduction in monetary financing to the public sector in1985 from the high 1984 level of about Col$150 billion. Central Bank

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financi&g of the deficiL was kept to dabouee Col$35 billion in 1985, and it isexpected that the Central Government would require no Central Bank financingin 1986. This would permit the banking system to expand credit to theprivate sector in line with the growth in nominal GDP. Such an outcome wouldreduce the pressure in the growth of the monetary base during a period whenreserves will be recovering. With a fiscal policy as discussed above and amoderate expansion of credit to the private sector, the growth in themonetary base and money supply should be in line with the expected growth ofnominal GDP.

20. Exchange Rate Policy. With the acceleration of the crawling pegdevaluation starting in 1983, Colombia achieved a significant real deprecia-tion of its exchange rate. However, at the end of 1984, the trade-weightedreal exchange rate index still stood at only 82 compared to the 1975.equilibrium" base (the highest level achieved in several decades). The 1985program envisaged a recovery of the 1975 real level by the end of the year.Towards this goal, the Government sharply accelerated the rate of the crawl-ing peg to 51.3% in 1985, as compared to 27.8% during 1984. Exchange ratepolicy was ext-;emely successful during 1985; as inflation was contained to22.6% during the 12 months ending December and with the weakening of theU.S. dollar vis-a-vis other major currencies during the second half of 1985,the real exchange rate index increased to 7% in excess of the 1975 baselevel, i.e., a 30.5% real depreciation of the peso. Current Governmentpolicy is to maintain the real rate reached in December 1985 even in theevent of sizeable increases in export earnings from coffee, petroleum andcoal. Performance of non-coffee exports in 1986 in response to the signific-antly depreciated peso should provide evidence on the adequacy of the presentreal exchange rate and the basis for any further adjustment in real terms.

21. Investment and Borrowing Program. Reviews of the investment pro-gram were initiated in early 1985 utilizing the criteria of encouragingquick-yielding investments with significant and positive impact on produc-tion, resource mobilization and the balance of payments. A scaling down ofthe investment program has been necessary, including the postponement orcancellation of all new large scale power generation and a number of largetransport projects. The revised program, which implies containing publicsector investment to less than 10% of GDP during 1985-87 compared to 10.5%during 1983-84, consists largely of projects which are already in executionor for which loans have been contracted. The investment program is dominatedby the mining and power sectors. The mining investments of nearly US$1.8billion inclu'e ECOPETROL's (National Petroleum Company) petroleum productionand development program in association with foreign partners, and CARBOCOL's(Public Company for Coal Resources) ongoing El Cerrejon Coal project, a jointventure with EXXON. Both should contribute to a significant increase inexport earnings from 1986 onwards.

22. Even with reductions in the current account deficit and the modestscaling down of the share of public investment in GDP, gross medium- andlong-term capital disbursements (including net foreign investment) areexpected to average about US$3 billion p.a. in 1935-87 compared to about US$2billion in 1980-84. As part of these overall capital requirements, a loanfor US$1 billion was signed at the end of 1985, about one-half of which isexpected to be utilized in 1986 and the rest available in 1987 if needed.The country would require maintenance of the short-term credit lines from its

Table Is COLONBIA: ECONOMIC PERFORIMCE, ADJUSTMIET AkD CRaOVr, 1970-1987

(annu I averages)

Record of the 1970s Early 1950s The Nld-ISBUsExport-Led Coffee EconomIc Beginning of Beginning of

Growth Boom Sat-back Policy Concern Adjustnt Adjustmnt wIth Growth

1970-7S 1976-SO 1981-63 1983 1984 19S5 * 1986 p 1987 p

1. Perormnene IndIcators

Aversa Growth Rate a/

GOP, conmtant price 5.7 5.5 1.3 1.6 3.2 2.9 4.0 4.6

Experts CUIWS), constant 6.9 7.4 -5.2 -I1.9 9.1 13.9 22.1 5.8

price

Inports CGSNFS), constant 2.2 1".1 3.2 - 8.4 -7.0 0.8 2.5 1.1

price

Inflation (CPI, average) 17.1 24.5 24.9 19.8 16.4 22.6 22.0 18.0

Average Ratio (percent)

Current Account/COP -2.9 1.2 -6.5 -7.3 -5.3 -3.9 -1.0 -3.2

Year-end Reserves (USsn) 360 3,000 4,533 3,079 1,795 2,066 2,966 3.366

Months, Imports of C S t2.7) (8.1) (7.9) (5.0) (3.1) (3.5) (4.6) (4.8)

Total Debt Service Ratio b/ 22.7 14.7 31.1 36.9 37.2 38.2 31.6 37.4

Public Debt Service RatIo 13.2 10.4 16.8 21.2 23.5 27.0 24.2 30.0

Total Investnt/G0P 19.1 I6.4 20.3 19.9 I.7 19.2 19.4 19.5

II. External Factors

Nominal Coffee Price C/

(1970-100) B4 133 88 89 98 99 Jac 12S

Net Capital Inflow CUSsm5 )d/ 284 543 1.699 1,014 710 1,576 1.239 1,594

OECO Growth Rate a 2.3 3.6 3.3 2.3 4.7 3.0 3.0 3.0

III. Domstc PeolIcy

Real Excbhnge

Rte (1975 - 100) / 89 85 75 75 82 107 g9 .. 9/

Money Base Growth 23 35 18 14 18 27 28 24

Central Covern_nt

DafIcIt/q;OP 1.1 0.4 3.9 4.1 5.0 2.8 1.7 1.5

Overall Pub.Snctor Oeficith/ 3.0 5.5 6.8 7.6 7.6 4.6 2.2 2.0

CWFS ImportsGCOP IS IS 17 16 14 16 17 17

* - preliminary estimate

p - projection

&/ Note that average growth rates Include the rates In the and years.

b/ Includes non-guaranteed and short-tern debt.

c/ World Bank figures as of January 1986.

d' Capital account balance, Including errors and omissions.

eo For 1970 - 1975 figure. growth rate for 173 - 1975 was taken from IMF's World Economic Outlook, 1982; 1975-83 figures were derived

from World Bank's World Dovelop_ent Report, 1982; and 1984-86 aro from OECD3 Outlook.

f/ The calculations ucs 1975-84 estimated non-coffee trade weIghts; the 1983 and 1984 figures utlIze estimated weighted

average exchange rates and Inflation rates for Venezuela.

g/ MaIntain reaI exchange rate and revlew Its adequcy In view of balance of paymnts evidence.

h/ Central Government plus docentralized agencles.

Source: M1inIstry of Finance, lIF and World Bank estlmtes

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major external bank creditors at least at levels prevailing at end-1984,roughly US$1.5 billion; the Government is satisfied with developments andprospects in this respect.

B. Trade Policy

23. As a result of actions during 1983-84 in response to a worseningforeign exchange situation, the trade regime became more restrictive than ina long period of time. Few items remained in the free license regime, whilethe share of items under import licensing and prohibition increased sharply;the tariff regime was characterized by increasing average levels and disper-sion, while export restrictions remained in effect. The trade policy changesof the adjustment program have been three-fold: (i) reduce import prohibi-tions, licences, tariff dispersion arnd tariff levels, build in substantialautomaticity and uniformity in the access to export incentives and eliminaterestrictions to exporting; and (ii) initiate more detailed studies of theimpact of trade policies and incentives on export performance providing thebasis for a medium-term action program; and (iii) put together a policy andfinancial package in support of exports, fostering the resumption of commer-cial bank flows to Colombia.

24. The adjustment program has produced results in gradually opening upthe import and expcrt regimes and strengthening trade performance. The shareof imports that can be freely imported has been rising, first includingincreasing magnitudes of inputs and raw materials in this share and subse-quently selected finished products as well. The tariff regime has been inthe process of being rationalized and the access to export incentivesimproved. Together with the significant depreciation of the real exchangerate, export performance has been strengthened. Although it might be earlyfor an evaluation, recent policies seem to have contributed to improvedexport performance. Non-coffee exports are estimated to have risen by nearly14% in 1985 after a poor performance in the early 1980s and picking up in1984; preliminary indications suggest that a process of diversification inexports is underway.

25. As will be detailed in Part IV, the present loan supports theextension of trade actions by: (i) increasing free imports; (ii) furtherrationalizing tariffs; and (iii) reducing further biases against exports.These reforms would carry forward the process of liberalizing the export andimport regimes, in a manner that can be sustained and deepened over time,giving Colombia a significantly st:engthened external sector. Based on thefindings of studies underway, a medium-term action program is expected to beformulated later this year which could serve to guide future policy. TheGovernment envisages continued attention to issues of liberalization ofexports and imports, effective protection and efficiency.

9

PART III - TRADE AND AGRICULTURE

A. Policy Issues

26. Key areas for policy improvements in the general trade area overthe medium-term include import restrictions, tariff reform and export incen-tives. First, quantitative controls on imports have varied substantiallyover time, and policy reversals have often left the import regime restric-tive. At the end of 1984 only 23 items (out of a total of 5,011 customspositions) belonged to the free license regime. The reform program has beenaddressing this problem. Imports needed for exports under the special exportschemes are already freely imported, although further improvements can bemade in streamlining procedures. The Government has been transferring moreitems to the free license regime; imports of raw material and intermediateinputs have been generally liberalized; the next steps are to reduce furtherthe discretionary element in the import regime through a steady and sustainedincrease in the share that can be freely imported. Inclusion of progres-sively more finished products would provide greater competition to domesticproduction.

27. Second, the level and variation in tariffs represent another areafor reform. In 1984 tariff dispersion amounted to a standard deviation of29%, and the weighted average tariff rate was 36%. Actions already takenhave reduced the average tariff levels, and their dispersion. A maJor com-ponent in the tariff incidence concerns a surcharge of 8% which was temporar-ily introduced in 1984. Complementary to the envisaged phasing out of thissurcharge in 1986-87, a full evaluation of remaining tariffs would be needed,beginning with the November 1986 review.

28. Third, a key element of the medium-term strategy would be theelimination of restrictions and disincentives to export. The performance ofnon-coffee exports has fluctuated significantly in the past hurting the long-term performance of the external sector. The reasons have partly been exportrestrictions and other disincentives, and partly exchange rate overvaluationparticularly in periods of high coffee earnings. While significant progresshas been made, elimination of export restrictions, except those on non-economic grounds related to national security, cultural heritage, environmentand similar, and minimization of administrative approval procedures areneeded reforms.

29. In addition to these general trade reforms, agriculture requiresspecial attention. Colombian agriculture has considerable potential withfavorable soil and climatic conditions, proximity to major internationalmarkets and a resourceful rural population. While yields of crops such asrice, sugar and coffee are high by international standards, there is substan-tial potential in a variety of other products which can be realized throughinvestments in technology, infrastructure and marketing, and through policyimprovements. The sector accounts for 20% of GDP, provides about 25% oftotal employment, and contributes some two-thirds of the export revenues,including one-half of total exports constituted by coffee. Imports of agri-cultural products represented 7.5% of total imports in 1983, following agrowing trend from 1970, approximately 30% of which imports are accounted forby wheat. Within non-coffee agriculture, an export-oriented segment(bananas, flowers, sugar, tobacco, rice, cotton, etc.) accounts for roughly

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28% of agricultural GDP and covers 19% of the area under cultivation; animport substitution part (mainly cereals) contributes approximately 18% toagricultural GDP and uses more than 25% of the area under cultivation, and adomestic sector (potato, yucca, plantain, etc.) produces mostly for homeconsumption.

30. In addition to coffee policy (Annex 8), government interventions inthe sector have included: (i) export restrictions, import policies and pricesupports for import-competing products; (ii) import and price policies forinputs; (iii) credit policy; and (iv) public investments and institutionalaspects. Export restrictions have been in effect, although they have been inthe process of being lifted over the past year. Import substitution cropsenjoy protection through the import controls of the Government's marketingagency, IDEMA, which until recently has had a monopoly in their internationaltrade. IDEMA also sets minimum guaranteed support prices for several importcrops, which has led to financial costs ultimately covered by the CentralGovernment.

31. Agricultural machinery, fertilizers, pesticides and seeds arelargely imported and represent more than 40% of farm budgets for some cropssuch as sorghum, rice, cotton and potato. Approximately two-thirds of thetotal costs of compound fertilizers and pesticides are imported materials.Installed capacity of compound products and most urea imports are controlledby two companies, and some 50% of their distribution by Caja Agraria andFEDERACAFE. Over 70% of production and distribution of pesticides is con-trolled by six firms, reflecting the internationally oligopolistic structureof the industry. Import duties involving a tariff for each category (around20% on average in 1984) plus a surcharge of up to 18%, and licensing for theagricultural inputs and machinery provide additional protection to thedomestic industry. Importers have also incurred additional fiaiancial charges(about 8% p.a. of the c.i.f. import price) due to an obligatory system ofdelayed import payments (minimum of six months for fertilizer and pesticidesand three years for capital goods in 1984) at the exchange rate prevailing atthe time of payment.

32. Agricultural credit has been made available during recent years viaa system of forced credit under which private banks are required to contrib-ute to an agricultural fund (FFAP) receiving interest rates well below marketrates. Financial intermediaries can draw from this fund for agriculturallending at rates which were often negative in real terms until recentreforms. The Government has also made available subsidized interest ratesfor storage of agricultural commodities (bonos de prenda). These subsidies,in contrast with FFAP subsidies, are partially financed by direct monetaryemission, and are enjoyed by a small number of producers and processors.

33. The participation of public investment directly or indirectly bene-fitting agriculture in total public investment has decreased dramaticallysince 1970. Agriculture-related public investment as a proportion of totalpublic investment was 25% in 1970, 12% in 1975 and only 8% in 1985. At thesame time important increases in personnel took place, implying lower levelsof capital funds available for each job created. The Ministry's capacity todirect agricultural investments and policy is also at issue.

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B. Constraints to Performance

34. After expanding at satisfactory rates of above 4% during most ofthe seventies, the growth rate in agriculture fell to only 1.3% during1980-84. While in the seventies export growth was a very important source ofgrowth, in the more recent period export performance has had a negativeimpact. During the first half of the seventies agricultural growth was basedon the dynamism of non-coffee exports which expanded at an average annualrate of nearly 10% in real terms. In the second half of the seventies thecoffee boom became the driving force while non-coffee exports decreased itsexpansion to less than 7% per annum. In contrast, during 1981-84 coffeeexports have been greatly affected by negative factors depressing the inter-national markets while non-coffee exports have shown a negative growth rate.The decline of coffee and non-coffee exports explains almost 80% of the fal'.of agricultural GDP growth that took place in the 1981-84 period.

35. Three sets of forces explain the decline in exports and overallperformance and provide bases for medium-term adjustments. First, unfavor-able international conditions for agricultural commodities implied a ratherdramatic fall in prices of commodities exported by Colombia. Coffee exportssuffered a drastic decline in 1981 as indicated earlier. Sugar exports havedeclined substantially mainly because of prevailing protectionist policies inthe USA and European Community countries. Exports of cotton fiber and freshmeats have also suffered large reductions in the early 1980s due in part tounfavorable external market conditions. Second, macroeconomic policies inthe latter part of the seventies led to a significant appreciation of theexchange rate and to a reduced emphasis on export promotion.

36. Third,. trade and agricultural policies described in the previoussection have had a critical impact especially on the export-oriented sector.

Export restrictions, aimed inter alia at assuring minimum domesticavailability, have hurt the export potential of certain crops suchas rice and cocoa. Inadequate supply of imported inputs andcapital goods and lack of access of agricultural exports to exportpromotion schemes have also impaired the development of agricul-tural exports. Import restrictions and support prices for theimport substituting crops have provided some incentives to thesector, although these efforts have meant price distortions infavor of import substitution, and import inflexibility contributingto inflation. The degree of such distortion and its coverage inColombia, however, has been moderate compared to other countries.Support prices in 1985 for various commodities were between 25% and45% above international c.i.f. prices including port charges andtransportation, although market prices represent somewhat higherprotection via the import controls.

Coffee policy and incentives have affected the relative profit-ability of other products. Following the 1976-80 coffee price boomand the technological advances in coffee production, the impliedincentives for non-coffee exports have been an area of concern.Future non-coffee development would depend on coffee incentivesbeing kept within reasonable levels--given international marketprospects for coffee-and on direct incentives for diversification;

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recent international events, however, have made domestic priceincreases for coffee inevitable.

Given the interest rate subsidy for the FFAP funds, excess demandand arbitrary allocations among agricultural producers of theseresources and increased administrative costs for banks and otherfinancial intermediaries result. Furthermore, the situation com-bined with the lack of dynamism of Caja Agraria (an institutiondesigned to serve small producers), has implied that small pro-ducers have been mostly unable to obtain adequate credit. Anotherproblem is related to the lack of flexibility of the agriculturalcredit system which has caused credit to be concentrated in short-term loans (approximately 60%), largely because interest rates forlong-term loans are required to be constant throughout the periodof the loan. Finally, evidence from the 1970-84 period suggeststhat the storage credit subsidy, originally intended to inducegreater price stability, might have actually exacerbated commodityprice fluctuations.

The notable reduction of government investments in agriculturesince the mid-1970s and inadequate institutional capacity of theMinistry of Agriculture to direct these investments have had adetrimental effect on production conditions. A significantreversal of this trend would be justified in view of the sector'spotential to contribute to growth and employment generation. Thecomposition of investment would also require more careful reviewsthan in the past. The Ministry's institutional capacity for policyanalysis and execution need to be significantly strengthened.

PART 1V - THE LOM

A. Loan History and Objectives

37. The loan continues support of the Government's macroeconomic andtrade adjustment program spelt out in Part II. It helps to extend theadjustment process in the trade and agriculture area, and to address themedium-term issues raised in Part III. Discussions with the Government havei-._l-ed issues affecting trade and agricultural development (Report No.`93i-CO dated April 20, 1984) and agricultural strategy (Report No. 4275-COdated January 31, 1983). The loan was appraised in September 1985. Negotia-tions were held in Washington in December, 1985. The Colombian delegationwas led by Jorge Ospina Sardi, Director of DNP. Supplementary loan data areprovided in Annex 3.

38. This operation would underpin policy reforms at a critical point inthe adjustment process when its effects on resource allocation are beingfelt, and when temporary increases in coffee earnings need to be handled.The loan is intended to reinforce a package of actions by the Government(Annex 7) and to support policy monitoring and the mobilization of externalprivate financing for Colombia. Envisioned is a deepening of reformspreviously 7nitiated in trade policy and macroeconomic management, and anextension of the program to the sectoral level through reforms in agriculturedesigned to restore the sector's competitiveness. In addition to adjustments

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in fiscal, monetary, exchange rate, investment and external borrowing, andmedium-term trade policies discussed in Part II, the following trade andagricultural areas are addressed: (a) import liberalization; (b) tariffreform; (c) export policy; (d) agricultural input trade policy; (e)agricultural output trade policy; (f) coffee policy; (g) credit policy; (h)public investment in the sector; and (i) institutional strengthening.

B. Measures Supported by the Loan (Annex 4)

39. Import Liberalization. The number of items under the free licenseregime was increased by 1,135 during the course of 1985. With these actionsthe share of free imports reached 56% of the total value of imports inDecember 1985 from just over 30% at the beginning of the year. (Free importsinclude imports under the free license regime, imports under export promotionschemes, imports under international agreements, e.g., Andean Group, andthrough free ports, and non-reimbursable imports primarily goods financed bymedium- and long-term foreign loans and private investment). Subsequently,an additional 653 items have been moved to the free license regime of whichmore than half belong to the finished category. Consequently the share offree imports in the total has reached 67Z by February. This share isexpected to increase to 69% by April and it is envisaged to be maintained andreviewed in November 1986 for further actions. During the recent process ofliberalization the number of prohibited items has declined from 828 (17% ofthe total) at the beginning of 1985 to 119 at effectiveness of the TPED Loanand to 69 (1.4% of total) at present.

40. In line wwith the gradual liberalization of the import regime thereal depreciation of the exchange rate and the improvement of the foreignexchange situation, the level of import approvals was increased during 1985.Initially, the monthly budget for approvals of imports that are not extern-ally financed was set at US$250 million per month, implying an annual importlevel, inclusive of externally financed imports, of US$4.0 billion, the sameas in 1984. The monthly budget for approvals was increased to US$300 millionfrom about the middle of the year. In all, total import approvals, includingexternally financed imports, reached close to US$4.7 billion in 1985, or 17%more than in 1984. Given the lag between approvals and importation, importarrivals were only slightly above the 1984 level, while import payments werelower than in 1984 because of a requirement introduced at the end of 1984 tomaintain a minimum period before credit repayment. With the strengthening ofthe foreign exchange situation and the normalization of commercial creditlines, this requirement has been abolished effective January 1, 1986. For1986, non-oil imports are expected to increase by about 15% over the 1985level.

41. Tariff Reform. The import tariff regime was significantly rationa-lized in the course of 1985. Through the reduction of peak tariffs and theelimination of many ad hoc tariff discounts, tariff dispersion was reducedto a standard deviation of 16% in 1985 (from 29% in 1984) while the weightedaverage nominal tariff level was reduced to 28% in 1985 (from 36% in 1984).Import tariff surcharges, including a temporary component of 8%, currentlyamount to up to 18% on top of the 28% tariff level. Actual collections of.duties, inclusive of surcharges, however, amounted to only close to 20% oftotal value of imports. Inefficiencies of customs and the exemption from

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duties and surcharges of most public sector imports explain the divergencebetween nominal rates of duties and surcharges, and collections as a share oftotal imports. Further rationalization of the duty regime and strengtheningof customs administration would be required if Colombia is to successfullymove further in reducing dependence on the license regime to protect domesticindustry. Progress in these areas would be assessed in the course of thesupervision of the TAP Loan and during the November 1986 review.

42. Export Policy. The Government has been simplifying the access toduty concessions on imports for exports, and significantly reducing therestrictions to exports. In 1985 the number of items subject to restric-tions, including prior approvals (vistos buenos), has been reduced from 729to 175. (Within this total, the number of explicitly prohibited items wasreduced from 93 to zero). Most of the remaining restrictions represent non-economic concerns. The Government has agreed in principle to take thefollowing further actions. For the 70 items subject to prior approval of theenvironmental agency, INDERENA, a permanent register of producers andexporters would be established rather than requiring prior approval for eachexport transaction. The list of items subject to prior approval by theMinistry of Agriculture (31) would be significantly reduced. Finally, in thecase of rice and cotton, which are subject to export quotas, completeliberalization could have unacceptable fiscal implications since both haverelatively high levels of CERT (indirect tax rebates for exporters); theGovernment agrees in principle, subject to further review of legal implica-tions, to allow these crops to be exported freely in excess of establishedquota levels without CERT payments. At the end of 1985, the Governmentreduced the average of CERT rates applicable to exports, reducing both dis-persion and the number of rates applied from 7 to 4 levels. This measure wasjustified by the sigificant real depreciation of the exchange rate achievedduring 1985. Even with the lower CERT rates, the real effective exchangerate (i.e., including the export incentive) is estimated to roughly equal the1975 level.

43. The Government has also extended access for farmers to the PV/SIEXschemes, which allow import duty exemptions and drawback and automatic accessto imported raw materials and intermediate goods used in export activities.In practice, since in agriculture this has been implementable only in caseswhere the importer and exporter is essentially the same entity, a large partof agriculture was excluded on account of the complex linkages betweenimporters and exporters. Only banana and flower producers with a continuousexport record have benefited from the scheme. A more liberal interpretationof procedures established by INCOMEX in 1985 has now begun to allow moreexport-oriented crops, especially rice and cotton in addition to bananas andflowers, to benefit by enabling producers' associations who import the inputsand export the products to access these schemes.

44. Agricultural Inputs. In 1985 about 85% of fertilizer imports werefreed from licensing as opposed to none previously. Total import duties(tariffs plus surcharges) were also reduced for fertilizers from a weightedaverage of 23% to 13% of the c.i.f. value mainly via an exemption from the 8%surcharge. For pesticides total duties were reduced from a weighted averageof Z9% to just over 23%. For agricultural machinery the decrease was from aweighted average of 36Z to 32%. Finally the requirement of having minimumperiods for repayment of external credits has been eliminated. Thesemeasures reduce effective protection to local producers of agriculturalInputs. At the same time, trade barriers are being reduced both for raw

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materials to supplier industries and for finished fertilizers, pesticides andagricultural imaplements. During 1986 a study will examine the effects ofchanges in import restrictions on the effective protection of industriessupplying agricultural inputs (see Annex 6) to guide further adjustments totariffs and import licensing. Beginning in 1986 the Government intends tophase out the 8% surcharge on imports imposed by Law 50, 1984.

45. Output Pricing. As a first step, the Government has terminatedIDEMA's monopoly in wheat imports, while interventions have been reduced inthe cases of barley and soya. The private sector can now import the bulk ofthese commodities directly within global quotas. Support price increasesannounced for the first semester of 1986 have been substantially less thanthe domestic inflation rates. The annual rate of growth of the support pricefor wheat announced for the first semester of 1986 was 16% versus 36% for thesecond semester of 1985, for soybeans 9.7% versus 41%, for corn 15.5% versus33% and for barley 16% versus 36%. Domestic wholesale prices of commoditiessubject to import quotas, however, were still growing faster than domesticinflation and above peso international prices in the first semester of 1985.Wholesale prices of soybeans, corn and barley, for example, increased at anannual rate of approximately 35% while dry beans prices increased more than80% annual rate; the wholesale price of wheat increased by only 20%. Supportprices announced for the second semester of 1986 are below the inflationrate.

46. Given their existing level of protection, domestic prices of theimport-competing crops would not increase in real terms on account of importand price support policies. Understandings for the second tranche envisagethat the 1986-87 support prices would not, by and large, increase beyond therate of inflation. Imports would be allowed by private importers for allcommodities (in addition to wheat, barley and soya) subject to global quotas,if necessary. Import quotas would be adjusted so as to avoid real priceincreases for wheat, beans, barley, soybeans and sorghum. Import quotaswould be distributed among importers in a less discretionary and more market-based manner than at present: the private sector would import, directly orindirectly, at least 80% of the quota, which would be negotiated by thetraders amongst themselves with minimal government intervention. IDEMA wouldcontinue to reduce its participation in domestic purchases and storage.

47. Coffee Policy. Under the Agricultural Diversification Loan(2453-CO) an understanding was reached with FEDERACAFE on the incentives fordiversification. Since then a consensus has been established with theFederation and the Government inter alia on not raising the domestic realprices of coffee (see Annex 8). World coffee prices, however, have increasedvery sharply in recent months, and it appears that they will remain highduring 1986 in view of shortfalls in the Brazilian production. This altersthe assumptions on which the previous consensus on domestic prices wasbased. In view of this new situation the Federation has decided to raise theinternal price by about 37% in real terms during the 1986 coffee year. Giventhe increase of international prices and the rapid peso depreciation, never-theless, the share of the domestic producer in the external price is stillbelow 45%, one of the lowest shares historically. Other measures carried outto maintain a balance between coffee and non-coffee production are: (i)elimination of the subsidy for fertilizers and for coffee plantings to coffeegrowers; (ii) incentives for stumping the high yielding caturra variety, bothto postpone output modestly and to protect long term yields; and (iii)

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increase funds for coffee d versification. The domestic price increases werenecessary inter alia to prevent large-scale smuggling and the consequent lossof participation of the Federation in the market arising from a large diver-gency between domestic and international prices.

48. In order to avoid price signals for overproduction, a temporaryvariable bonus scheme has been introduced, linking the temporary bonuses overand above the guaranteed price in a proportion to any further increases inthe external price. The policy of a variable bonus if strengthened andimplemented, could make price policy more flexible in allowing downwardadjustments in coffee receipts of producers when world prices fall. TheNational Coffee Fund is expected to remain self-financed and unsubsidized;the Federation would lend to and borrow from the Government according to thecycles of coffee revenues. Under the proposed loan the Federation has pre-sented the key elements of coffee strategy and has agreed to follow-up onthis matter periodically. Current policies in handling increased coffeerevenues are satisfactory, and continued vigilence on the part of the Government in sustaining incentives for non-coffee activities in the future wouldbe needed.

49. Credit Policy. The Bank and the Government have been analyzing thefinancial sector policies. In agriculture the following measures have beenanalyzed with a view to reducing distortions: (a) increase the average ratesof interest associated with the agricultural fund (FFAP loans) to approachgradually market rates; (b) introduce partially variable interest rates; (c)improve the margins of financial intermediaries; and (d) reduce the subsidyto interest rates for -bonos de prenda (storage). While an across-the-boardapproach is eventually necessary to improve credit policies, two policychanges have been carried out immediately as a first step towards reducingreliance on forced credit. First the average rate of interest on FFAP toborrowers has been raised by 1.5X on average, and thus the effective ratebecame positive in real terms. Second, a system of partially variableinterest rates, linked to the market CDT rates, has been introduced on mostmedium- and long-term FFAP loans. The second tranche would seek adjustmentsof the FFAP and other agricultural rates to make them more competitive. Sub-sequent operations in agriculture are envisaged to address further the issueof phasing out the system of forced credit and improving the access to creditfor small farmers.

50. Public Investments. The Government plans to upgrade public invest-ments in agriculture, to strengthen institutions and carry out studies.Based on experience of the past decade an investment program for the subsec-tors has been agreed upon. The 1986-87 public investment budget would regainits 1983 level in real terms. The 1986-87 program has been found satisfac-tory based on economic criteria, and it gives priority to: (a) projectsalready underway; (b) high-priority projects for which implementation isabout to begin; (c) a few selected projects currently under negotiation; (d)priority investments under the National Rehabilitation Plan, a multi-sectoralprogram to increase investments in neglected rural areas; and (e) someresources to enhance the investment and operations of the decentralizedagencies of the MOA. This program can be implemented without significantincreases in personnel-as human resources are presently underutilized forlack of funds--and many of the investment activities, especially in infra-structure, will be subcontracted with the private sector.

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51. The 1986-87 program gives priority to irrigation rehabilitation andsmall-scale irrigation development by HIMAT, agricultural research by ICA,and land titling, colonization, and agricultural credit for agrarian reformbeneficiaries by INCORA. Additional funds would be allocated to the multi-sectoral activities of the Regional Development Corporations, the DRI, and toimprove agricultural statistics, and better control of pests and animal andplant diseases. No major new investments would be started in 1986 that arenot already appraised and financed, and those in 1987-88 would be reviewedbefore the second tranche, in accordance to the criteria indicated in theprevious paragraph. A three-year investment program is envisioned to bereviewed by mid-1987.

52. Institutionatl Strengthening. The Government has decided to streng-then agricultural planning by establishing a national agricultural policyboard chaired by the Minister of Agriculture. It would be supported by atechnical unit of high level staff and be responsible for periodicallyreviewing the medium-term agricultural strategy, including the followingareas: agricultural credit, public sector investment, marketing of agricul-tural products, and price policy. The Government has decided to upgrade theplanning and policy analysis capabilities of the MOA, and its capacity toidentify, prepare and monitor projects. Before the second tranche release,the Government would develop a plan to reorganize the OPSA of the MOA. Inaddition, measures would be taken to improve the financial efficiency ofMOA's decentralized agencies and their budgetary, monitoring and controlcapabilities. OPSA and the DNP would contract international consultants forstrengthening policy analysis and for arranging short-term training coursesand international study visits for their staff. A schedule of actions wasfinalized during negotiations.

53. Part of the loan (US$2 million) has been set aside for the above-mentioned technical assistance component and to finance specific studies tobe completed by OPSA and the DNP before second tranche release (see Annex6). The studies are: (a) analysis of demand and supply elasticities foragricultural products and inputs to estimate the response of the sector topolicy changes; (b) possibilities of increasing the internally-generatedresources of public agricultural institutions; (c) a feasibility study on aline of credit for agricultural marketing and processing; (d) the cost ofproduction of selected crops; and (e) effective protection of selected agri-cultural inouts. These more detailed studies are necessary in order tounderstand -more quantitatively the potential for deepening the policy reformscurrently proposed. The method of selecting consultants, timetable and feeswere reviewed during negotiations. Selected staff of the MOA and DNP wouldparticipate in these studies so as to receive on-the-job training.

C. Expected Effects of Policy Changes

54. Lower Farm Costs. Given the high import dependence of agriculturalinputs, the reduction of import harriers would reduce prices to the farmer.Lower tariffs, more liberal import licensing and the elimination of foreigncredit payment periods are expected to reduce prices on the order of 15% onaverage for agricultural inputs. Cost reductions are expected to be passedon to farmers given that: (a) internal distribution of agricultural

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machinery is competitive; and (b) price controls in fertilizers and pesti-cides would take into account reductions in producers' costs, which shouldnot increase given the excess capacity in these industries. Furthermore,introduction of competition from imported finished agricultural inputs islikely to reduce prices further.

55. Increase Production and Employment. Productivity gains are alsoexpected from an acceleration of coftee diversification, a reduction in dis-tortions against agriculture, the recuperation of public investments and thedepreciation of the real exchange rate. For reasonable supply elasticities,the indicated fall in the average cost of production alone could increaseagricultural growth by over 2% on an annual basis. Despite some offsettingeffect of the increased use of farm machinery, the effect of increased outputon employment could be of the order of 25-30 thousand additional jobs (0.2%of the labor force).

56. Lower Food Prices and Inflation. This is expected to result fromlower farm costs and a change in the import policy of food commodities. Areduction in the monopoly of IDEMA and a change in support price policyshould reduce the price of wheat and at least stabilize the price of othercereals and legumes. Assuming an agricultural supply elasticity of 0.5 and afood demand elasticity of -0.3, the reduction in the cost of production andthe other measures indicated above should decrease the food prices by 4Z andthus the overall CPI by close to two percentage points.

57. Exports and Balance of Payments. The adjustment of the exchangerate and changes in agricultural commodity pricing are expected to increasethe relative profitability of exports. Increased imports of inputs wouldlower input prices and stimulate exports. The net effect of the measures,including increased export earnings and increased importation of inputs andmachinery, is expected to be significantly positive during 1986-88 (Annex 5).

58. Social Costs and Benefits. Expected social benefits would be sig-nificant since improved agricultural performance would assist the poorer com-munities in Colombia as producers and consumers. Small producers (farmerswith less than 20 hectares) constitute an important proportion of the farmpopulation (around one million producers), and they mainly produce importsubstitutes and traditional crops such as potatoes and other tubers. Some ofthe proposed policies may reduce the protection currently afforded to theseproducers, which could cause a reduction in their income if shiftingresources to other activities is difficult. This problem, however, would bemitigated by employment-generation expected from export-oriented activitiesand the increase in investment and cost reductions. Another potential costfor the farm labor force may be associated with increased mechanization thatwill occur as a consequence of increasing imports of agricultural machinery.The expansion of production, however, should compensate for this substitutioneffect.

D. Risks

59. Import liberalization of agricultural inputs, implements andmachinery could reduce the protection to the domestic producers of these

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goods, and hurt producers who are unable to adjust to the change. This risk,however, may be minor given the prospect that the domestic producers wouldalso benefit from the lower cost of imported raw materials; moreover the con-tribution of this subsector to employment is relatively small. Furthermore,lower input prices would expand demand, thus enabling a more efficientutilization of excess capacity present in the pesticides and (to a lesserextent) the fertilizer industries.

60. A potential risk could also concern the economic and social effectsof the measures affecting the import substituting crops produced by smallfarmers. This possible risk, however, would be mitigated by the gradualnature of the proposals and the prospect that the loan would induce lowercosts of production through lower input prices and more governmentinvestments.

61. There are the usual risks concerning continuity in policy given thata new Government will take office next year. The mechanism of two tranchesand possible future policy loans address this risk. A sizeable expansion offoreign exchange from petroleum, coal and coffee could votentially reversethe current export orientation for other products. The authorities, however,believe that export incentives should not be hurt by temporary booms ofspecific commodities, particularly in light of the experience with theprevious coffee boom. In the wake of recent coffee price increases, debtprepayment is being planned for, and the real exchange rate is beingprotected.

E. Loan Features and Operations

62. A US$250 million Bank loan is proposed based on the estimatedincremental foreign exchange requirements for inputs, machinery and equipmentfor the agricultural and rural sectors during 1986-87. US$198 million wouldbe used to finance these categories for the agricultural and rural sectors;US$50 million would be channelled through the export account establishedunder the TPED Loan to finance inputs for exporters that participate in thePV/SIEX export promotion schemes, and the balance--US$2 million-to financetechnical assistance.

63. Contracts for the procurement of import of inputs, intermediate andfinished goods for agricultural production estimated to cost the equivalentof US$5.0 million or more would be awarded through ICB in accordance withBank guidelines as in the TPED. Equipment for the technical assistance com-ponent, estimated not to cost more than US$100,000 in total, would be throughlocal shopping in accordance with Bank guidelines. All other goods would beawarded on the basis of normal commercial procurement procedures of the pur-chasers of goods. Consulting services would be contracted in accordance w-thBank guidelines.

64. The Government of Colombia would be the Borrower of the proposedloan. The proceeds of the loan would be made available to and administeredby BOR, except tor the technical assistance component which would be madeavailable to the MOA and the DNP. BOR will maintain separate accounts torecord and monitor loan disbursements against payments for eligible importsfor the agricultural sector. These accounts will be audited each fiscal year

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in accordance with sound auditing principles by independent auditors accept-able to the Bank. The Government would maintain a separate account to recordthe use of counterpart funds for investment.

65. The loan proceeds would be disbursed in two tranches. The firsttranche of US$125 million would be available upon loan effectiveness andwould comprise: (i) US$25.0 million as an initial deposit into the ExportAccount for imports for exporters under the export promotion schemes;(ii) US$99.0 million for direct and indirect imports of inputs and machineryfor the agricultural and rural sectors to be disbursed by reimbursing 30% ofpayments of imports of the relevant categories, which is equivalent to theestimated incremental imports of those categories in 1986. Of this amount upto US$25 million would represent retroactive financing of eligible importsincurred between January 1, 1986 and the date of lorn signing in view ofpolicy reforms that are in place, and the 1986 import and investment programunderway; and (iii) US$1.0 million for studies and the technical assistancecomponent. The second tranche of US$125 million would be released upon asatisfactory review of second tranche conditions in early 1987, utilizing thesame criteria as in the first tranche. All disbursements under the twotranches would be made against certified statements of expenditures. Thecorresponding documentation would be retained by BOR and periodicallyreviewed by Bank staff, except for the documentation pertaining to the ExportPromotion Schemes that will be periodically forwarded to the Bank.

F. Monitoring

66. To monitor the trade and macroeconomic variables under the adjust-ment program, the Social-Economic Committee of the Cabinet (CONPES), headedby the President of the Republic and comprising Cabinet ministers, will meetregularly to review progress, and to decide on appropriate actions to ensuretimely implementation. The agricultural policy reforms, the measures forinstitutional strengthening and the agricultural investment program will beperiodically reviewed by OPSA and the DNP.

67. The monitoring of the export promotion measures for agriculturalproducts would be based on a report to be prepared by INCOMEX at the end ofthe first year of the loan regarding the use of such schemes for agriculturalexports. INCOMEX plans to report on the number of final agricultural importswhose inputs are liberalized as well ax on the raw materials for domesticinput production set on the free list. For those products still subject toimport quotas, the value of their imports would be used to determine whetheradditional imports availabilities have been adequately allocated betweenfinished inputs and raw materials.

69. IDEMA would provide annual progress reports concerning its decreas-ing participation in purchases and storage in regions of commercial agricul-ture and on the level of imports of agricultural products. A biannual con-trol of support prices would be made to verify that these do not increasebeyond the overall inflation rate. A monitoring of the FFAP interest rateswould be implemented. The investment program would be followed by periodicprogress reports to be issued by the MOA, and the CY1987 public agriculturalinvestment program and recurrent expenditures would be reviewed before thesecond tranche release, relating performance and expenditures to objectivesand targets.

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70. Under the two tranche releases the Bank plans to review andmonitor: (1) the adequacy of the 1986-87 macroeconomic program; (ii) thespecific agreements on trade and agricultural policy reforms; and (iii)agreement on the public sector investment and external borrowing program(Table 2, pages 14-15). The assessment of the macroeconomic program wouldtake into account the findings of the IMF on stabilization, particularly asit relates to targets on net international reserves, total credit of theCentral Bank, net credit of the Central Bank to the public sector and thelevel of public sector external debt on a quarterly basis. As part of thisprocess, the Government would prepare and send to the Bank two reports,summarizing the status of implementation of the program, the first in October1986 and the second in June 1987. The first status report should also serveas a basis for a mid-term review which in turn would form the basis for therelease of the second tranche of the loan.

PART V - BANK GROUP OPERArIONS IN COLOMBIA

71. The proposed loan, the 119th to be made to Colomlia, would bringthe total amount of Bank loans to Colombia to US$5,455.2 million (net ofcancellations). Of this amount the Bank held, as of September 30, 1985,US$3,758.3 million; IDA made one credit of US$19.5 million for highways in1961. Disbursements have been completed on 72 loans and the IDA credit.Before 1979, disbursements averaged US$86 million equivalent per year, buthad increased to US$286 million in FY84 and to US$591 million in FY85,reflecting in part the higher level of commitments in the late 1970s andefforts to build the pipeline. While disbursements in Colombia have beenslower than those recorded in the Latin American Region for similar projects,concentrated efforts to overcome problems to initiate project execution haveresulted in a significant increase in disbursements during FY84 and FY85.Improving performance of social sector institutions in the execution of Bank-financed projects, the gradual containment of inflationary pressures and theeffects of the recently-introduced fiscal reforms, which should improvecounterpart funding, all point to a higher level of disbursements for pro-jects in the future. IFC has made investments and underwriting commitmentsof US$144.2 million in 29 enterprises and as of September 30, 1985, it heldUS$67.3 million. Annex Ti contains a summary statement of Bank loans, theIDA credit and IFC investments as of September 30, 1985.

72. Since the initial loan in 1949, Bank lending to Colombia has becomequite diversified. Although through the mid-1960s, 88% of the loans madewere for power or transport, since then the Bank has broadened its participa-tion in lending for agriculture and industry, and initiated lending forirrigation and watershed management, education, water supply, telecommunica-tions, urban development, petroleum development, export diversification,nutrition and health. By the late 1970s, 53% of the loans made to Colombiawere for projects other than transport and power. Of the loans made since1978, 37% were for power and transport, 15% for industry, 18% for agricultureand irrigation, 9% for water supply, 6% for urban, 4% for telecommunications,2% each for petroleum development and export diversification and 7% foreducation, nutrition, health and multipurpose projects. The diversificationwas indeed a desirable aim as it helped provide close contact with a broaderrange of Colombia's development problems. The experience gained has served

- 22 -

to identify areas in which the Bank's role can only be a marginal one and,thus, to enable lending to be focussed upon sectors in which the Bank'spresence can have a meaningful impact.

73. The Bank's dialogue with the Government has focused upon the needto mobilize additional domestic resources, to diversify and expand exports,to develop rapidly the country's energy resources, and to free the economyfrom excessive controls. The discussions involved fiscal, interest rate andpricing policies, as well as incentives for exports and reduction in thelevel of effective protection. Positive results have been obtained parti-cularly in the power sector, where power rates were increased sharply and aleast-cost expansion was formulated and launched. Similar results have beenachieved in respect of some other public services, including appropriatecharges for water for irrigation and domestic use and petroleum prices.

74. The Bank has been supporting the Government's efforts to increaseeconomic growth and exports with financial stability, raise utilization ofdomestic energy sources, provide key infrastructure, and improve the livingconditions of the poor. More recently, in response to Colombia's adjustmentprocess the thrust of the Bank's support has shifted towards loans to financedirectly productive activities, such as agriculture and industry, supportefforts to raise productivity, income and employment, increase and diversifyexports and help develop renewable sources of energy through lending forhydropower and arranging associated cofinancing. Loans recently approved bythe Board and in advanced stage of preparation reflect the emphasis on: (i)increasing output rapidly; (ii) reorienting production towards exports andefficient import-competing goods; (iii) supporting quick-yielding infrastruc-ture investments, particularly those that enable the use of existing facili-ties more intensively; and (iv) increasing resource mobilization.

75. The Bank's lending in FY85 consisted of loans for agriculturaldiversification, small-scale industry, petroleum, development banking, watersupply and sewerage and trade policy and export diversification totallingUS$707.5 million. The TPED Loan is designed to support the first phase oftrade policy adjustments in Colombia. In addition to the loan presented inthis report, the current program comprises the already approved loans forpublic health, port rehabilitation, electricity distribution, water supplyand sewerage, rural transport and irrigation rehabilitation. Work is under-way on projects for power and energy sector development, agriculturaltechnology transfer, and financial and public sector management. In infra-structure, the Bank is stressing rehabilitation, modernization and a moreintensive use of the existing facilities in port improvement, water supplyand highways maintenance. Finally, several projects in preparation will alsosupport the Government's efforts to help the poorer segments of the popula-tion. Proposed lending for further rural development, agricultural credit,and water supply and waste, will help improve the standard of living of thepoor, while being designed to make better use of existing capacity and reducelosses.

73. While IBRD, IDB and bilateral sources provided about 75% of totalexternal financing to Colombia in the 1961-72 period, their share hasdecreased since then to some 49% for the 1975-82 period and is expected todecline further to about 40% of external capital requirements during theeighties. IDB has given increased emphasis to energy-related projects, in

- 23 -

addition to those for low-cost housing, urban and rural development, agrarianreform, university education, water supply, rural electrification and landerosion control, which are aimed at improving living standards of the lower-income population. In the future, it proposes to assist Colombia in develop-ing sources of domestic energy and in expanding productive sector activitiesto help generate increased employment. USAID has supported programs ineducation, rural development and small farm development, but is phasing outits program in Colombia. The Government of Canada, the Federal Republic ofGermany and the Netherlands have also provided concessional financing forbasic needs and regional integration projects.

ART VIn - UCOMqED&TTION

74. I am satisfied that the proposed loan would comply with theArticles of Agreement of the Bank and recommend that the Executive Directorsapprove the proposed loan.

A. W. ClausenPresident

Attachments

Washington, D.C.March 27, 1986

- 24 -AMUEX I

L*.LLLJ, ?ata 1 of 6

,w IM : mA NN.,a usc

NL t 91131.3 11".9 111.9£ORIWIU3hL 250."5 50.5 330..

M G C) .. .. 1430.0 17n.9 a1".5

- ma amCfUS of oIL am 33u) 23.0 95.0 GO e.e Ms.&

,031A!n.T1Ma MOM4) 13724.0 2126.3 21511.093643 Pe3Ahf (I 0 WOT .2 7.2 6.1 7.X7 47.5

TOUAUI3 P36Wl1106

rAnIWA eeeiam C t= 30.0POPLAIZI - Ui

P2 3o. 23. 134 13.7 24.2 41.0 64.7rma IQ. IN. AmI. 133 '5.0 60.7 73.4 91.1 164.3

vuusmA1 AMNUCIU CZ)0-14 as3 46.7 "4. 37.7 31.5 21.215.44 Wu3 50.2 51.0 56.6 57.1 61.545 AM ANOW 2.3 2.7 3.6 4.2 7.2

P0331.4216 atom Pam (I)TOTAL 3.1 3.0 2.0 2.4332am 3.7 3.2 2.7 3. 32.7

1 Km am CPU Two) 47.2 334A 2.0 30.9 22A*6 3NAMI 3Az3 (PU 23I) 1.4 9.7 7.3 6.0 6.9

Go6 UCTzO am 3.3 2A 1.0 2.0 1.5

v*Anl PLAl4MACC1P3, MOM. CT ) .. 115.4 1924

2 CZ 0r x31 tm .. 34.0 . 5.0 45.3

£b0 or ro P1O. PU. C P S(1949 -71-100) 100.0 n9o 117.0 103.4 109.1

-: CAPU rSWMLl 01CMALY CX or E2pIo0131) 102.0 63.0 110.0 113.2 131.IP303D1 (CUM PS& D04) 54.0 48.0 57.0 4.4 92.4

OF 2CM aMAL Me. MM3 26.0 24.0 25.0 /4 34.2 34.5

O3ILD (t3 1-4) 2*13 nu 9.4 4.4 3.0 4.8 4.7

LUZI WIMP . AT 31TR (TUN) 53.1 56.9 44.1 6.8 *7.21"71 IlT. 63 CPU Tom) 93.5 70.5 53.0 59.7 53.3

ACCES 10 5*3 snWA (X10)TOTAL 30.0 63.0 92.0 /c 43.3 70.2

DJ3* 54.9 U.0 io0. 7 76.5 69.4UIUL hJ 23.0 79.0 7& 44.2 57.0

A=33 TO 11CSh DISPOSALCX Of POPMLAXTOM)

TOTAL .. 47.0 45.0 IC 54.3 S9.4U" .. 75.0 ioo.o 7- 73.4 bS.3U3*L .. 3.0 4.0 25.5 47.6

POPULATIOM P11 FSI.AN 240.0 2330.0 1710.0 /a 1909.7 1070.6POP. Xt NUI PER" 4220.0 It 730.0 3oo.0 - 606.2 769.5Pop. U IDSPITAL 3m

TOTAL 360.0 430.0 50.0 362.0 326.3311 .. 380.0 490.0 422.0 201.9

RDEAL .. .. .. 2714.7 4519.7

*25O31ms 1n HPITAL D .. 22.9 29.8 Id 27.1 20.0

4Vn1g SLl2 Or HOUCS3L0TOTAL .. 5.7 Dlm .. 45 1 .

RURAL .. 5..9.

AVUMI N0. O0 P1101/30TOTAL .. I..Vann .. 1.4 ..RURaL .. 12.4 .

PIIUC.TAG1 oP DWULLUIS Ux ILEC.TOTAL 47.0 /h S4.I /tUNA1 S3.0 7ii 37.5 ..RURAL xo 7° 13.2k

- 25- AKNB £

T A-R L 7 U Paxe 2 of 6

1960k 1970L EIUTUIAl~ U. 41C44 CARo

AOJUS?RD UOlUUIIJ ATI OSRDIMt TOTAL 77.0 103.0 130.0 106.7 101.9

MALZ 77.0 107.0 12.0 108.3 106.2FEMLC 77.0 110.0 132.0 10.6 97.5

SECOlMAT TOTL 12.0 23.0 45.0 '4.2 57.5WALR 13.0 23.0 45.0 *2.7 ".9WNL 11.0 24.0 51.0 44.9 50.0

VOCATOUM.I (1 01 UCOWAR!) 30.5 11 20.2 21.6 /d 13.3 21.0

PIPIL-TEACE RA3*7P3111 36.0 38.0 31.0 29.9 23.1SICOWAr 11.0 17.0 20.0 16.7 19.1

PAXUSN CARS/T05ANDS PO U 5.7 11.2 18.6 Id 46.0 54.2RnIo REcRITNIOSN rPOP 125.1 104.3 131.7- 328.3 170.7TV REOSIVEUTusAUP0P 9.5 38.1 U 6.9 /c 112.4 149.3urnAP C"DM= GSVZRALumEaN) c rU0

? 111UUUDPOPDATIU 50.0 108.7 41.0 81.1 97.0UINDA AOUA L A3IcRW .. .. 2.6 2.4 2.7

70A LABOR FOUO (TUOUS) 4727.0 6353.0 9064.0FEMAL CPERT) 19.2 24.8 24.6 23.6 36.3AImCLTh CPERCT) 51.4 37.9 25.8 Ic 31.4 40.SSoOsIR {PETr) 19.2 21.0 21.2I 24.3 23.3

PAUICPATIOU RA2E (PERUT)TOTAL 30.0 29.9 33.0 33.5 43.1KAZ 48.8 45.1 49.4 51.3 55.1FEMALS 11.5 14.8 16.1 15.9 31.4

caN=OIC OCE RMAIO 1.7 1.6 1.3 1.3 0.9

133MW? oP RIATE INCONRWIVED ST

RICUST 5S or ucIRI 41.2 lb 31.9 .RiGST ZOS or usx m 62J7 7F 60.1 _ . ....LO=GEST 20S or zoGsU.lS 67.7 0.1 *-

oST4 OS F DS 6J /l.1 10.1 .

-OV sr c-TMT ASS0LMZ IOVEETV INCOSM

LEVEL (UsS PER cA?nAURlmN .. .. 214.0 Id 288.3RL .. .. 197.0 Id 165.3

I ATED RELATV POUR!! ICNLEVEL CUSS PE CAIA)

.. .. 267.0 fd 519.8RAL .. .. 122.0 7I 359.7

csTrTD POP. BMWPOVErTr isCoE LEVEL (I)

URN .. .. 34.0 /dRUmAL .. ..

.. wr AYAuAL

.NOr APPICULN O T C S

-Tb grop avrage for each indicator are popuULiou.eeLghted aieettc maem. Covera 0 onemong the Indceators depe_cs on avalebLty of de and In not unfor .

/b Unleag othbriwe noted. 'Data for 1960" retor to any year betwon 1959 and 1961; Data for 1970" b-et1969 and 1971; and data for 'Most Recent Eatimec" between 1981 and 1963.

/c l9B0. /d 1077; /o 1978; /f 1962; !A 1973; /b 1964; /I Including teacher trainig at the tertlarylevel; -a EcZooa ly actt population.

.i. 1985

- 26 -Page 3 of 6

DEFINONS OF SOCIAL INDECATORS

|ote, Although the data are dramwn fromn sourms gener lly judged the moat authontauve and relablc. it should aso be noted that they may not be inhernatonalycompaabit becaue of the lack o1f sdardized defnitions and concr usd by diffeent countrne in colectcng tht data The data are, nonetheLk, usful todescnbt ordcn of magntude indiate trends, ad charctenie certin major difercnces betwen ecountnes.The referenCe Voups ar 1t) tbe smate country group of the sbject country and i2 a country group with somewhat higher a vea incom than the countrygroup of the subject country (excpt for -High Income Oil Exportes group where -Midl Inome North Afrca and Middle East" is cboen because o strongerusc-cultural danitiesl. In the reference group data the averagcs are popuution uciabted anthuseuc ncams for ach idicator and shown only when molontyof the countrs ins group hu data for tha mndictor. Siam the coverag ocountries among the ndictuon depends on the availtility of dait andsa not uforni.

i cauuon must be cereisd in relag averas ofone indircat to another. These averaes ar only useful in companrng the value done imnicator at a utwe anongL the rouyw and referents groups.

AREA (thousand sq.knL) Crd eiJsh Rate (pershohusmuld-Numberorlive births in the yearToeul-Total surfacc area comprising land area and inland waters; per thousand or mid-year population; 1960. 1970. and 1983 dara.1960. 1970 and 1983 data. Crue Death Rate (per tzhousdj-Number of dcaths in the year

Agrkcarwt-Estimate of agriultural area tusd temporarily or per thousand of mid-year population; 1960. 1970. and 1913 data.permanently for crops. pastures, market and kitcebcn gardens or to Gros AReprdcdoa Ra-Average number of daughters a womanlie fallow. 1960. 1970 and 1982 data. will bear in her normal reproductive period if she experiences

present age-specific fertility rates; usualy five-year averages endingGNI PER CAPITA (USS)-GNP per capita estimates at current in 1960. 1970. and 1983.market prices, alculated by same conversion metbod as World 5Iifr Planuiqr-Acceptors. Ana (theusaudiJ-Annual mum-Bank Atlas (1981493 basis); 1983 data. ber of acceptors of birth-control devices under auspices of national

ENEtGY CONSUMPTION PER CAPITA-Annual apparent family planning program.consumption of commercial primary energy (coal and lignite. FSdiJy Phniaut4Iss (percenr of wled wa n)-The percn-petroleum. natural gas and hydro-. nuclear and geothermal elec- tage or married women of child-bearing age who are practicing ortricity) in kilograms of oil equivalent per capita: 1960. 1970, and whose husbands are practicing any formn of contraception. Women1982 data. of child-bearing age are generally women aged 15 49. althougb for

some countries contraceptive usage is measured for other agePOPULATION AND VITAL STATISIICS groups

Total Popuffaim. Mid-Yer (hatsaudr)-As of July 1; 1960. 1970. FOOD AND NJTRMONand 1983 data.:-^rr Populadw (percent of tejJzi)- Ratio of urban to total *Index ofFod Product Per Capita ( 1969-TI a I00-inde dof perpopulation.dpfferent (piretitioran of urban armma etcom capita annual production of all food commoditis. Productionabiputi ofdata amont countities 1960. 1970u and m983 dataf excludes animal feed and seed for agriculture. Food commodities

ability of datamamong ountries 1970.an1983data.include primary commodities (e.g. sugarcane instead of sugar)Ppuuo Ptojenioa which are edible and contin nutrients (e g. coffee and tea are

Populatnon in year 200-The projection of population for 2000 excluded): they comprise ccreals. root crops. pulses, oil seeds.made for each economy separately. Starting with information on vegetables. fruits. nuts. sugarcane and sugar beets, livestock, andtotal population by age and sex. fertility rates. mortality rates. and livestock products Aggregate production of each country is basedinternational migration in the base year 1980. these parameters on national average producer price weights 196145. 1970. andwere projected at five-year intervals on the basis of generalized 1982 dataassumpuons until the population became stationary. Per Capita Suwp of Calories (Percent gf revqirenses)-Comput-Stationary population-Is one in which age- and sex-specific mor- ed from calorie equivalent of net food supphes available in countrytality rates have not changed over a long period. while age-specific per capita per day. Available supplies comprise domestic produc-fcrtility rates have simultaneously remained at replacement klvel tion. imports less exports. and changes in stock. Net supplies(net reproduction rate = I I In such a populaton. the birth rate is exclude animal feed. seeds for use in agriculture, quantities used inconstant and equal to the death rate. the age structure is also food processing. and losses in distribution. Requirements wereconstant. and the growth rate is zero. The stationary population estimated by FAO based on physiological needs for normal activitytize was estimated on the basis of the projected characteristics of and health constdenng environmental temperature, body weights,the populauon in the year 2000. and the ate of decline of fcrtility ate and sex distribution of population. and allowing 10 percent forrate to replacement level, waste at household level: 191. 1970 and 1982 data.Populaiwon Momerrum- Is the tendency for population growth to Per Capa Supply of Proein (grm per day)-Protein content ofcontinue beyond the time that replacement-level fertility has been per capita net supply of food per dav Net supply of food is definedachieved: that is. even after the net reproduction rate has reached as above Requirements for all countnes established by USDAunity. Tht momentum of a population in the year i is measured as provide for minimum allowances of 60 grams of total protein pera ratio of the uitimate stationary populauon to the population m day and 210 grams of animal and pulse protein, of which 10 gramsthe year :. given the assumption that fertility remauns at replace- should be animal protein. These standards are lower than those ofment level from year r onward. 1985 data. 75 grams of total protein and 23 grams of animal protein as anPopulats DeNsity average for the world, proposed by FAO in the Third World FoodPer sqkm.-Mid-year population per square kilometer 1100 hec- Suppil: 1961. 1970 and 1982 data.tare.) of total area: 1960. 1970. and 1983 data. Per Capit-a Proe Supply From Auiud and Pbse- -Protein supplyPer sq.knt. agricuftwat land-Computed as above for agricultural offood derived from animals and pulses in grams per day: 1961-65.land only. 1960. 1970. and 1982 data. 1970 and 1977 data.Populati .Age Structure (percet)--Children tO-14 yearsp. work- Cil (ages 1-4) Deark Rate (per thousand)-- Number ofdeaths ofing age (I 5-64 years). and retired (65 years and over) as percentage children aged 1-4 years per thousand children in the same ageof mid-year population; 1960. 1970. and 1983 data. group tn a given year. For most developing countries data denvedPopuation Growth Raze (percexl-oroal--Annual growth rates of from life tables; 1960. 1970 and 1983 datatotal mid-year population for 1950-60. 1960-70. and 1970-83. HEALTH

Population Gratdi Rate (percenr)-arban---Annual growth rates Life Expectancy at Birthk (yers)- Number of years a newbornof urban population for 1950-60. 1960-70. and 1970-83 data. infant would live if prevailing pattcrns of mortality for all people

- 27 - ANNEX IPage 4 of b

at the hU of of its birdt we to way the - thirougout its llf; AljueAr atio - prb.wy. ,d ae dap-Total students en-1960.1970 and 1983 datL rold in primay and scondary level divided by numben ofluuf Meorumbt Roe (pe r*m)-Numbr of nfan who die tecers In the corrsonding kveLbefore reahg oam yar of lp tho usad live birhs in a giveyear, 190, 1970 od 1983 daU CONSUMPTIONAca- v Si* Wow (pww M" W, aid Auseqr Cm's (per ebmead lapeuie. nger Cars co_n-_wd-Nubr oI prope (l u and n) wpe motor Cars tiDng le than eight peron: exclude ambul-scms to dfe water supply (inude uatd surfac watn or ncas. bhea and militaur veiclsLuntatd but ---onmamt wat such dtt from Vactd I AR& Reca a (pr thowesadpapsimtiso-All. types of recrisbor_holes, sng ad sai18ty wdls) a p=ntage of dr Qrt for radio broadcas to gnal public per thousad of population;tive populions. In a uban a a public fountain or s_ndpost ex :ladoncsed rceivers in counties and il years. wbenloced not mom ta 2D mOm fIo a houe may be conider re ation of radio se was in effect; data tor recent years mays baing within reasonable ior tht bot In rurat ar not be cmparable since most countries abolih lising.

rao ablesswould imply that the housewifleormemnbersorthe TVWsmp, 6cvsfobraebouelhold do not1 to uped a dspmpc3onag pu of t bday tolcend pVur per thouup ppru-TV rateon ers for broadcTin feshn tke famc hpily' p r tho~ua popuao;ecds unlicesd TVAc feubsg t_ fie mqmr (pca incut as d, yea when registration of TV st wasad wad-Number of people (total. urban and ruralerd by u excreta disposal perental f their respecti populatios.kEcre dispoal may incude the coulction and diposayl wFt or ag -rclatm o daily gene itee newsppr deind as andtout tmatmL of human excet ad wasnoter by watr- periodical pubbctnon d n pfimayily to rcdig gnal news.

bore systems or the uw of pit prvies and similar isalaons It is considered to be daly if it appeat Lest four tmc a wvck.p-etim pmr Phpsic--opution divdked by aber of prac- C AAwd Aat.Amt p C4r iS per Yi_-Based on theasing phyidans qualified fom a medical schoolat university klvel number of tdet sold during the year. incudig admisons to

Pp.lra p_r Neavg Pesn-Pulation divided by numnber of drive-in cinema and mobile imitLpraccg male and female raduat nures asstant nurses, LABI FORCEpractc nuse and nursing auwilires._Ai-e pm r a a'~ -ae.oI wg_ _ *w-irtmio ,- LaM Rac (rhuua -conoznicaly active persons, in-totaL urbn- , and rual) dividind by th d respective u n umeludo armed forces and unemployed but cwluding houwwve.

hoptal hbe anabl a din by thpri ep d l o students, etc. coverng population of al ags Defimtions inhoqpddos c. Ybd in couni ar not comparl 1960.1970 and 1983 data.

prmanenly staffd by at Wt one physicisn Estblsments prov- F_ (prce -iimalc lbor force as peromage of total lboriding prncipaly custodial car are not inluded. Rura bospitals. faoe.however. inlude bhath and medicalcnters not pemanenty taffed A _daMw (perwt)-Labor fore in farming, fonsty. huntmigby a physi an (but by a medicd as_it nuse, niidwf etc.) and fishing as percentage of tota labor fome; 1960, 1970 and 1980which offer in-paient acommodation and provide a limited rang daOf medird filitis IAsry (perceat)-Labor force in mining. constuction. manu-Admdssim per Hrepa Brd-Totat number of admisions to or facturing and dectricity. water and ps as percn tage of total labordischarges from bospitals divided by tbe number of beds force; 1960. 1970 and 1980 data.

P'rcipro. Rae (paccesQ-1tra, mm&, awdfewalf-ParticipationHOUSING or activity rates are compuged as totl. mak and female labor formAveqe .Mire of HoeoU (peams po hoau ehoU-4etal, rban, as percntages of totaL male and female population of all agesand.mal-A houschold consist of a group of individuals who share respectively; 1960. 1970. and 1983 data. These arc based on ILOsliving quarters and their main meals. A boarder or lodger may or participation rates reflting age-sex structure ofthe populato andmay nOt be inluded in the household for statistical purposes. ong time trend. A few estimates are from national sources.Aere N&arer of Pers per Roaos--el. when, aid rral- Econeonic Dependency Ratio-Ratio of population under 15. andAveage number of persons per room in all urban, and rural 65 and over. to the working age population (those aged 15-64).occupied conventional dwellngs. nspeively. Dwlings excludenon-permanent structures and unoccupied pans. INCOME DlSTlIBUTIONPeeage of Drvus inr_ Electricity-ttal, rban, an rural- Perenage, of Teos D2posabl AKconse (both in cash and kiad)-Conventional dwellings with electricity in living quarters as percen- Accruing to percentile groups of households ranked by total house-tage of totaL urban, and rural dwellings respectively. hold income.

EDUCATION POVERTY TARGET GROUPSA4aued fEolinen Ratios The following estimnates are very approximate measures of povertyPrfnary chool - ttalo. mae aid Gfema-Gross total male and levels, and should be interpreted with consdierable caution.feniale enrollment of al ages at tbe primary lIvel as p rcentage of EstimdAbsae Fbverty IWcmw LelUS percavpita-mhrectve primary school-age populations. While many countries and rar.-Absolute povertv income level is that income levelconsider primary school age to be 6-11 years. others do not. 'he below which a ipinimal nutritionally adequate diet plus essentiaidifferences in country pracis in the ages and duration of school non-food requirements is not affordable.are rflected in the ratios given. For some countries with universal Estuated Refli Poverty Inconw Lerd (USS per eqepa)-arhaneducation. gross enrollment may exceed 100 per nt since sonme and rrl-Rural relative poverty income level is one-third ofpupils are below or above the country's standard primary-school average per capita personal income of the country. Urban level isagec- derived from the rural level with adjustment for higher cost ofSeconday scAd - toal. nale andfemal-Coriputed as above: living in urban areas.secondary education requires at least four yeas of approved pri- fig.ed Poplaon Bow .dhsote Po"ry ncesme Levd (per-mary instruction; providxl general vocationaL or teacher taining cent)-ran and rura- Frcent of population (urban and ruralinsuctions for pupils usually of 12 to 17 years of age; correspond- who are "absolute poor.'ence courses are geeay exduded.Vocaional Enrollmt (percent of secoidrq)--Vocational iostitu- Comparative Analysis and Data Divisiontions include technical, industriaL or other programs which operate Economic Analysis and Projecions Departmentndekpcndently or as departments of secondary insfitutions June 1985

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*um. ima-sai a- n miamaml e 4edseftId P110111 0 do P on* as aftmi l^v WW " MNIIIN- L

I P I dow M100J."m.s

P.Iatlam 3.16M (ldoiift) tlMA O Pa6W5i6, "m . UWITAL M U!) AM3 I3W hr Capita wNM.u. iuNs)t 4.ll.. 1 d1 sunS patrll Pops o da

4.6.1 praisted

1" 1Ism 1s17 No m it It0111 1 tm t4 1"a MM 1 no lm

bu_rta o gedl a*1 a4mr sank.. 2.11 2,%03 3,44 4.0 401 5747 4M1 4,71351 4,090 6.03 tiU 6.3 6,66 163 30.03Isurts of gS am me4e_te mrani 21 23 1 * ,73 3143 3.03,-437 6i,2n1 7.03 46122 5,43 53 53 *6,0 3IA"7 13640

_ur_em thm. U 04 4 717 IS -,7 1537 1.02, C - S 5 33ott faeb Owns C 4313 3 -331 -2t1 413 -AV -1,- -3.7 4.31 -. 5M 4.3 4,237 4.33

llbt af t i ta a 3 3n 22 io IG 2us au 3) MD 7 s

Ct ewt Asmet hi...c- 235 4Z 557 la lta -4.13 -tin 4,7 3 -1,133 S430 C 4,13 -1.3 -1.,1

lIt dirnet 1nrel Ioeelwat N 14 a a 1s 51 m S3 514 411 7J Sg a 40 41111

ft_ d I_t 1em, .. (l1) 73 ISO m 1m1 gm 1,431 Iu.ns 10s 1.M 1.3u u,u I',m is 731to peEls enser 154 41333 dunt ens Ism2 n73 u,mz0 11 f1733 ( l,3 (l3,3) £10) (u,1333 £M) (656)

ta print. s.cta CM (7) (an cut (357 can CM) (31331 (3 4 mUy (0l l3t0 (44) £1451

Ot_ enpt

l -tNt 3 isY as U o m in 3 -s116s -u.7n -52 -i1.1u -1 5so T5

Capital Aset blame 227 32 46 a3 s I,m u.in 2,13 u 1u,14 its 1, 31 Iu." ,33 3,zm u

Cahg Ins Is.rme C- - esats) 43 C 43 45 -1231 -1.310 434 13 1,132 1,x4 -an 4 -410 _03 C.4

0.t letabetlal ,..ar.s £.41t.l,3 u4S 1.407 24 23 4,15 5,36 5,03 4,31 38.1 11 u.7is 7.0 1 3.4 4,3116 4,314

*emn., as at of staw (p4ds _ f.e3 s.0 7.3 Ft.l 32.S 33.6 30.3 85 40 40 4*. GA Si .7 sS

Offici. gal pet. Gres dl mh at .1 l a 37 2 2a7 35 31 go 1,013 13,33 12. 1312 1.13

cosmselw.. 2 a 4 25 5 u is a 14 s a 4mbllateral 1401 1403 1 tlI (40 (a2 II3 C) 7 tII (3SIiLS (-3 (-3 I-3 4-1 (-3 I-) (-3 (-3 (-3 (-1Or Itit rdant CZ) 33 (63 463 (6) U 371 01) (33) (3t3 021

-serae.1al1 35 214 m3 2S7 43 in2 u.2 t,2In u.31 1,713Itenal t enlt cr1Ias (153 (13 4W43 [la3 140 (3043 (5) ctm £2um £313

IS (loss (753 (s5 Ca3 £131 1233 £253 (271 CZ" 44 DOtaer ItIltaaI CM) (211 e3) (333 £36 47 1l (33 (1241 (345)PrI_ta 03) [it3) DII £1043 £m1 g1) (C6 cis) wIl (3t

WOeM. OM r a t partd bjbut femt.Iaed .5 dlshrai 271? 21,476 2411 2,37 3,D3 4,04 4.83 5,06 46,S 1.12

Offkltl 1.716 1.01 1,_ 2,006 2.147 2.7 2.15 3,014 3650 471= £26D4 £61 4713 C5) goo £t21 (3,365) C(,6a £1,5131 (337

ICA CM) CM2 CM2 (223 () (23) 233 C23) £133 1133tEam (3.00 £1,117) (1.l42 43.231) (1,271 C£t, (1,431 £1.640) 3j5n2 M.2=31

Pritat 641 6l 5 3T 6 - 1.13 5,06 2,40 2.372 3.44 3.515U'_ _6, 0cow so g5 I.z 1.50 1.5 2.45 2,90 3,.7 3,707 4.60

Teal debt aelte pqn-d 23_ 270 316 a 1 or 5so G2 3 S 13.5at s.ta Iltart 115 125 40 tI 270 2m9 4Jt 51 t 5t s

Par-sta - I maperta o pea asall sarlses ¶0.7 5.2 91.0 .3 321 8.5 t2.6 10.5 21.2 2.S

PapeelmemlOp 3.3 13 IJ 1.3 2.3 1.6 IJ I 2.3 2.4 5J

Aag. Isirat rta m a- 3_ I_ C 7.s 47 7.3 7.9 30L. 133 12.0 1066 l0i 10.4

Off IcEd (0L33 (543 CM.2 (7.63 (3.73 "Al8 (7.63 (5.5) £11.113 (ea.)PrIet. ta3 (7.3 CT.43 (0.63 (3113 (3S.73 (34.01 £12.9, (,7) (a..)

Aram -twmyl of _Inca s is's 14. ELI 14.3 1.0 14.8 3, 14.6 14.1 137

Oflctal £20.3) (22.3 (3I.43 (36.3 (17.3), C37.73 (3683 £146.3) 413.8) (e,a.3Meet. (8.3) (0.63 £7.13 (MG6 (¶0.03 (12.93 cul.8) £593 (0.53 1e...)

m OtDD iel DID 2C.7 27.n 26 20.7 24,S 24.3 26 22L5 213. 22.8

IO dshroweatafeatal gr.. dlteem-tw D 3 3t 2S27 a" 24.1 21.4 3. 2.4 21.2 23.3

IS 4m emnelearl.tal debt sanle l J 31. 23.5 23J l35.5 ZJ.2 24.0 21J 25, 22.3

ID OSlabi D 0.3 0.9 Lo 3 0.6 DJ 1 0D 4 0.3 0.3 0.2

IDA aa rpn dlda -at - - - - - - - - -

ISM debt sarlecbal 1 &searetca 0.3 02 .3 0.1 . a0.3 0.3 0.1 0.1 0.1 a .3

t _Id leb atl_ _-U PrtlS ry -tkta

et Pdlc. .etsIy wds_

_e6e S311117att Oll.taad

- 30 - ANNEX IIPage 1 of 4

STATUS OF BANK OPERATIONS

A. STATEMENT OF BANK LOANS AND IDA CREDITS IN COLOMBIA (as of September 30, 1985)

(US$million)Loan Amount (less Cancellation)Number Year Borrower Purpose Bank IDA Undisbursed

72 fully disbursed loans and one IDA credit 1,743.8 23.5 1/ -

1450 1977 Empresa Nacional deTelecomunicaciones Communications 57.6 14.7

1471 1977 Colombia Highways 90.0 2.61487 1978 Colombia Nutrition 25.0 0.51558 1978 Colombia Urban Develop-

ment 24.8 3.41582 1978 Interconexion Electrica, S.A. Power 126.0 4.11583 1978 Colombia Power 50.0 10.41593 1978 Zona Franca Industrial y Industrial

Comercial de Cartagena Export 15.0 1.91694 1979 Colombia Urban Develop-

ment 13.5 6.21697 1979 Empresa de Acueducto y

Alcantarillado de Bogota Water Supply 27.9 0.11725 1979 Interconexion Electrica, S.A. Power 72.0 10.21726 1979 Instituto Nacional de Fomento

Municipal Water Supply 30.5 7.31737 1979 Instituto Colombiano de la

Reforma Agraria Agriculture Cr. 20.0 4.71807 1980 Empresa de Energia Electrica

de Bogota Power 84.6 32.61825 1980 Empresas Publicas de Medellin Communications 44.0 3.21857 1980 Banco de la Republica Industrial Cr. 150.0 32.41868 1980 Empresas Publicas de Medellin Power 124.9 48.51953 1981 Empresas Publicas de Medellin Power 85.0 64.91966 1981 Colombia Rural Roads 33.0 10.01996 1981 Instituto Colombiano de

Hidrologia Irrigation 37.0 13.9

1/ Includes exchange adjustment of US$4.0 million.

The status of the projects listed in Part A is described in a separate report on allBank/IDA financed projects in execution, which is updated twice yearly and circulatedto the Executive Directors on April 30 and October 31.

- 31 -

ANNEX IIPage 2 of 4

A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30, 1985)

Number Year Borrower Purpose Bank MDA Undisbursed

1999 1981 Corporacion Electrica de laCosta Atlantica Power 36.0 15.0

2008 1981 Empresa de Energia ElecLricade Bogota Power 359.0 171.7

2069 1981 Instituto Nacior'ral de InsRecursos NaturalesRenovables y del Medio WatershedAmbiente Management 9.0 7.2

2090 1982 Ferrocarriles Nacionales deColombia Railways 73.8 63.7

2121 1982 Fondo Vial Nacional Highways 149.6 86.22174 1982 Colombia Rural Develop-

ment 53.0 44.82192 1982 Fondo del Ministerio de

Educacion Rural Education 15.0 12.02303 1983 Instituto Colombiano Agricultural

Agropecuario Research 63.4 57.62349 1983 Carbones de Colombia, S.A. Coal

Exploration 9.5 8.72379 1984 Colombia Earthquake Re-

construction 40.0 24.62401 1984 Financiera Electrica Nbcional Power Develop-

ment Finance 170.0 54.32449 1984 Empresas Publicas de Medellin Multipurpose

power & watersupply 164.5 150.2

2453 1984 Federacion Nacional de AgriculturalCafeteros de Colombiano diversifi- 50.0 46.3

cation2464 1984 Banco de la Republica Lndustrial Cr. 40.0 30.4

2470 1984 Empresas Municipales Water Supply 18.5 17.3de Cucuta

2476 1984 Empresa Colombiana de Petrol Petroleum 130.0 106.22477 1984 Banco de la Republica Development

Banking 90.0 82.72512 1985 Empresa Acueducto Water Supply 129.0 120.9

Alcantarillo de Bogota2551 1985 Republic of Colombia Trade Pblicy 300.0 185.5

Export Diver-sification

26111/ 1985 Republic of Colombia Health ServicesIntegration 36.5 36.5

TOTAL 4,791.4 23.5Of which has been repaid 1,033.1 5.1

Total now outstanding 3,758.3 18.4

Amount sold 51.0 -Of which has been repaid 51.0 -

Total now held by Bank and IDA 3,758.3 18.4

Total undisbursed 1,593.4

1/ Not yet effective.

- 32 -

ANNEX IIPage 3 of 4

B. STATEMENT OF IFC INVESTMENTS (as of September 30, 1985

Fiscal Type of Amount in US$ MillionYear Obligor Business Loan Equity Total

1959 Laminas del Caribe, S.A. Fiber-board .50 .501960-1965 Industrias Alimenticias

Noel, S.A. Food products 1.98 .08 2.061961 Envases Colombianos, S.A. Metal cans .70 - .701961-1968 Morfeo-Productos para el

Hogar, S.A. Home furniture .08 .09 .171961 Electromanufacturas, S.A. Electrical equipment .50 - .501962-85 Corporacion Financiera Development

Colombiana financing 6.00 2.02 8.021962-1963-85 Corporacion Financiera Development

Nacional financing 6.00 2.04 8.041963-1967 Compania Colombiana de Textiles 1.98 .15 2.131968-1969 Tejidos, S.A.1964-1970 Corporacion Financiera de Development

Caldas financing - .81 .811964-1968 Forjas de Colombia, S.A. Steel forging - 1.27 1.271966 Almacenes Generales de Warehousing 1.00 - 1.00

Deposito Santa Fe, S.A.1966 Industria Ganadera Livestock 1.00 .58 1.58

Colombiana, S.A.1967-70-74-85 ENKA de Colombia, S.A. Textiles 11.75 2.61 14.361969 Compania de Desarrollo de Tourism - .01 .01

Hoteles y Turismo, Ltda.CHOTURISMO)

1969-1973 Corporacion Financiera del DevelopmentNorte financing - .45 .45

1969-85 Corporacion Financiera del DevelopmentValle financing 6.00 .43 6.43

1970 Promotora de Hoteles de Tourism .23 .11 .34Turismo Medellin, S.A.

1970-1977 Pro-Hoteles, S.A. Tourism .80 .24 1.041973-1975 Corporacion Colombiana de Housing - .46 .46

Ahorro y Vivienda1974 Cementos Boyaca, S.A. Cement 1.50 - 1.501975 Cementos del Caribe, S.A. Cement 3.60 - 3.601976 Las Brisas Mining 6.00 - 6.001977 Promotora de la Interconexion

de los Gasoductos de laCosta Atlantica S.A. Utilities 13.00 2.00 15.00

1977 Compania Colombiana de Clinker, Cement andS.A. Construction

Material 0.49 2.24 2.73

- 33 -ANNEX IIPage 4 of 4

B. STATEMENT OF IFC INVESTMENTS (as of September 30, 1985) (Continued)

Fiscal Type of Amount in US$ MillionYear Obligor Business Loan Equity Total

1981-1985 Leas;..ng Bolivar Leasing 9.00 .20 9.201981-198; Petroleos Colombianos Ltd. Chemicals and

Petrochemicals 12.15 3.86 16.011983 Frigorificos Colombianos, S.A. Food Processing 1.00 0.54 1.541984 Cementos Rioclaro S.A. Cement and

ConstructionMaterial 21.86 5.00 26.86

1984 Carbones del Caribe S.A. Mining 10.24 1.64 11.88

Total Gross Commitments 117.36 26.83 144.19Less cancellations, termina-

tions, repayments and sales 67.34 9.59 76.93

Total commitments now held by IFC 50.02 17.24 67.26

Total undisbursed (including 45.39 6.36 51.75participants) -

- 34 -

ANNEX 3

COLOMBIA

Trade and Agricultural Policy Loan

Supplementary Project Data Sheet

Section I: Timetable of Key Events

(a) Time taken to prepare project: eight months (May to December 1985).(b) Departure of Appraisal Mission: September 24, 1985(c) Completion of Negotiations: December 17, 1985(d) Planned Date of Effectiveness: May 12, 1986

Section II: Special Bank Implementation Actions

By September 30, 1986 and June 30, 1987 or other agreed date, theBank would review the progress achieved in carrying out the reform program.

Section III: Special Conditions

Release of the $125 million secord tranche of the loan would becontingent upon:

(a) Satisfactory review of the macroeconomic policies-fiscal, publicinvestment, monetary exchange rate and trade, and externalborrowing-and maintenance of export liberalization.

(b) Agreement on trade measures based on October/November 1986review. Deepening of import liberalization to include finishedproducts.

(c) Effectiveness of the modified PV/SIEX programs for agriculturalexports.

(d) Commitment to deepen the market-based system to allocate importquotas for cereals. Effectiveness of measures to maintainsupport and market prices increases of imported cereals broadlybelow inflacion.

Ce) Implementation of a temporary bonus scheme to compensate coffeegrowers if world prices increase sharply.

(f) Setting more competitive rates for FFAP and "storage creditloans; and

(g) Implementation of recommendations of studies initiated under theloan, and satisfactory review of institutional reforms underway.

- 35 -

am 4

Pegs I efta

scala. sawer raus amtieanm or aes siaiam.re

Ioamma Piintau ris ttpw mm urns MMKC inMne guEs uKCs WAN mIDA.erOy tuewE.ly OM)

1. weere.nc Psl y is tieadut. dnsenat o 11 padte tlrlsg o nesgunodc btledfsuy reel.. me lb Ibeelb g sm ddlpnas A

wCe amd 1ti plan In final. pubtl dseiwns. i mribise Is 7-ar tbre.-ynr reel - osil l._s.lt prre,

isestabea. ,tay. cnier rate, e aid b. snarled seL

nel trabe, S_ chsl benoq

pellts.. Ieoii baa tea pl_d -te email .1 eieknlbet publk

1ies_kt fe 1tU7.

It. bevel Trad lPeicy

Twrt Pillcy Eihld @ulnf sat all sa-_te r Uint dstiise toeli st m tlrir Seletlelnlty rise ef selt lbmflt tsietole.perlibteistae.

triclm uaset Ibsen n _ec ti_n a sesAC _peel.. aIls

*_Ss. A detalin km bee len toedldes, ti tellrily Ob tn ralelop

_nenke ntrictliCs, P_ee lt

prlm etobiltJelsA pegs- Is pestpsd

Uti l-thi seinttsaof lbo fitnl

ad MiHcro of IsIs IMtwite tben.

_sgell restrictins d ee fl I_srta a tl l1 Shael f fe Mrts I. 156 td Isprta AI t far iade _a_ IwtIntn . tl sped actile pjegre

eIl Imnd Ir_e S In _bea 1 mine tn by *er11 155. irsa . aid be inld bend " tlb teb Js p__1e Pressaci t wata iibereil te.

IS toe d1tu befle tBS te LU Gm l b nest d laf -ilp Ihefis 1mg meefte. teislais l

Ibs Fbiniy tIed. F .isad peach ma sas _bel Ilale Ia ¢ wet. _ ijk t eare el lie Ibrts bi t alas ebeleg lisi dSd Me rKemtnesse In topic Steen. imene 1$ pus .1 inost GE ad atikr p oUe

edr st be rin feelt prbeVan of gad. ~ free_ hqts 6 lain fe twete to be -si btw by sltI

sOi. The f_et p eslag bsmt let sied fiished pretats. Iman Ieo besd orte ttbwsdiseet

Newts IislsgW ebb" St e_ursi v Islisi I _ fa r let rtss pr si 1tim reele,

fle-oie1 SM te mt S _ ent tnes. 5.-edl Insert. Imneas br

prestin csI I_risd fdi $2111 SL

d111 atio 31 tile pa-n1. owing

.s l aled~ pe_ t purled fw

tates s *s1iosets.

_r-1 t1 W 1ifod ei_ of et ei tarff, m s el ef tariff iulley. Additimael twtfl attn Usbteg lof Ibla o tariff Petilc.

retmed he 30 Is t I16 s rsedels of stadtis rsldtr

tl I Les

lil. Agrtimtble Tin Pilley

YEpst Prntte ltti bee eified SMewtfled _ ISE XeltIled et. is. Jtwapsdled Effetlee_s, of tb dfratisid _lIS balineS twin lb sfeetlees o tsl.

Pr,ere. of et - 1 byetB lot SM dad by eiresihetl _segts. sslamisd by It. sfIcmtte a pulicy.

sare lVWSiEJO lkt W1i able w qriaatltItse1 _ etr l_ ctr

- -are of s limitmal segrts ta SM settee.

barft frn daly _ _ SM

nas t rs _twetd l_gt_.

fdpurtI of Ajilucee ifl be iibststcd twa-tea ftarl. Al l. wtb by priele wat S er indt Ioat-ra It I-bn tsd slle a tUI aid eole_, Iag tlb nkIt-

nemdity barley ad s by_e by psalttig Cerieals _ ISPEq eaject a g1Jc*b at tcert qabe a11itte byeit bet _ebr. and m_clge It dfltic

twa bytlk pl1 _dte _ s Ier.tale _ee. Gradaelly il deam a sett- by primta ecr of adirtswltu pwcs S_ srepf.-les _ *isames,e

g1tb1 _t. Sgpprt prime _sned based setu of distrbtIhteg twsrt ubJets e.*jeet to 1_11t* _Ut fIr d of Pe Icy *1 st le-nsig swot Sa

for 155 hae Inrsed bela idIsis tHomess I, preBwte et t ir we el teat lse. Cffeeliva csest rIt prtce.

rote. Agset. lMst icresc1_ me r _ asp prima begrse iMetg a be mend o In lk diestd nomare,

rtat prie_ f d e bse _ l_Iy. Iwo,. diret _tr to seor Itoe is esctluss ib se*ldlqg rNel

go aSd aspess. 215 *1 lk -in of hsts flJct to iser1e in saperSM stat primes

ts. Sepst prime let _IUti f*r l4 t- Ueit crep 1e1 aid

slject tIs lk mesl of 11, aId ridce Ita mi. is ametic pt ass_

et lacse 1t ret teIs. wta of M ed *tg _ctl_a

_bet. _es. sriey. nm__w _M

seybweeatd be r.gualtsd is a a

my t ae tat lklr be_ t prtse

an t Incrasee Is mi tless

'egmta or Adriillta ot $ tlertllli e frelaty id Wty fl peaft .*is. sih l metr e twa I ibMilzetion of ltnetals, sI lb ard _seree.

Iepa ta-e. Inserl detis Ihr bpartl ef I-lkr rIttem Is sffectse pr_es- ftrtlilias s-d pstides ilctating

fkvtizt arr,demd Ire 23 I to 139 tl_I isnia. f1ste*d rdets.

6$ talr ci.f. sate ra pesticide Pa- tar_egol lep I Inesles end

dettn sat eascen fine rsiep, of mincess Se egprei ftr I Inoesi2a .a2a. nith qrIfl, Is were puita. tisctesi

SM moledt bermsers. tescter-hekeIfte2wints St.1e sis ur tuuisdtsp

wes islead P_fneah.

-36 -

Paps .of

l1F1lI am wisgTIm nu Flra rum. W mUm ma maiarly El Sarly 1.71

IV. Iwal Ptis,

V "ff_ Pley labin o_ *r I 1 om_n_ In D. bia of t9 werisbia be l mi IntoS isqo l rolo of . . Peilay. air_ of OWN plls.wrd .99. prism, as U _dwali be to be mold I ',_ n It VA _1d

d.94.1 t1 t .V labMi b Atl prim of 9 millos.._ ti mes InPviIV by t_nt mim* i IN MI rlW nr i stl igea 1 6t. t9w

III II; .. ryi. PerUlIn_ . _ anU _

mi hdaiiad .It 9w plaitlg. areel isdmbl and * mS im for tl t .

*aIq ad disralfimtlmln_oo& A wvwy ar iti bints

asm of .dtls prim Ilwmanlatrs5.N1

Irt.ilt P11y n.h. sispi by _I ts have nl a"1 bal 1_t rIllt e Icy. knllt ma _tlil t rute robs 9w 6. *rl t wowallt pllop

by I-. m_ amrep am .99.61 fles ~r tWarlMblll I. aod bM lb

mld 366tl1 to resa tam. fPrtially -.

eulvubia lItavasl rake is. baa Il

bea m_ mt _I_w.9 iar-la.. 1 W

I_m

.Ialtiotlnal

Swooqlb-Inq

'Io.mq ad Pailay Ttb O,WMis bn dnClad tt a*t_gb Swml v riciarily awgsN w e winl_ E6kblii "Sul £991.1 bI_i Pailst Sari. litibtimil Iairqinmw^ilmbu on arimiusi p ia.lq meami.. in lebdlq t ab l bn r_plna.. or bail. wl_tm ral ammIJm or

griasigi. by r abbii g a sla ai a atl tUs agrWlslt.las, is t am s pg atmi ad e_i mU_ wklo..

agrimibrtl Palley b1 rd Is sbr of Iitiativea policy. and blsqy awmys

clrwllutiq awiley raw. Ints t. lIsnan bow of mi- r_ i.Iqas of ap.idlbul cradit. pabli of l b i1sistrft *.slaizsean _abt. .ittllq. a rIhg spasl ls.Uhpoll gale klogand

phll. _ of gI.lbrtl _maltiU_. l.tlltlmil t_I _ MP

TOM of rIwam low Ns celic .6i9

pragar Om. .fti-b msolbawie

aflaan mm lalatsla s* e sils

bilg atrl*roL

PIs_ I Pliqae _d Tab actma beaaa lb a 6m or lb akW fk. afl1_ 1 ptab_lg and _tibrl_.

dsl=lrlog bad. _ ti 1dule rwil 6 lb 5o1" fIalal rlpamlgsdl stl _ I_U_ata.i i-ilag.

aamm a_l IUtI. of 9_ far m_t-arley hwy. Fiancal _ttkiayat lbea ic ra VIn i. lat ta year. l.aba ltad at_ia of lU M* ada *rapas to I a_i lb _llb1 Ior bar bodplly tdlri a" wished

9q fw i_ am 1.17 In _speified ewagailtie Cwvy wts ra a N lb

lallitia, ad ra.e bas been cm twasbl pp . v_ _ s

_epatdret. relatla, rfamm ad

_ Iadltbm in abjasli. ad earga._

- 37 -

ANNEX 5

Colombia: Expected Effects of the Measures Supportedby the TAP Loan

1986 1987 1988

Net Balance of rayments Contribution1l 34.0 50.0 75.0(in US$ millions)

Agricultural Production2/ 2.5% 2.7% 3.0%

Agricultural Employment3/ 0.2% 0.4% 0.6%

Consumer Prices (CPI percentage points)4/ -2.0 -1.0 -1.0

l The net balance of payments contribution considers the effects on exportsof cost reduction associated with trade liberalization of inputs andmachinery for the sector, and adjustments in the exchange rate. Theadditional foreign exchange required to support the liberalization ofimport substitutes of agricultural commodities and inputs is alsoincluded.

2/ The effect of the loan on agricultural production accounts for the addi-tional output levels induced as a percentage of the total agriculturalGDP.

3/ The employment effect is also accounted as net additional employmentinduced by the Loan as a percentage of total agricultural employment.

4/ The effects on consumer prices (CPI) indicate the number of percentagepoints by which inflation would be reduced as a consequence of the policymeasures supported by the loan.

- 38 -

ANNEX 6Page 1 of 6

TERMS OF REFERENCE #1

Study on the Responsiveness of the Agricultural Sectorto Economic Incentives and Policy

I. Rationale and Objectives

The design of a comprehensive and consistent po] cy program for theagricultural and related sectors necessarily requires a deep understanding ofthe flexibility with which these sectors are able to respond to policychanges. This requires not only qualitative insights Ut also empiricalmeasurement of the fundamental parameters determining the performance ofthese sectors. Moreover, the design and implementation of a coherent policyprogram requiLes a suitable capacitation of key government personnel. It istherefore essential that Colombian personnel be closely involved in theproject in conjunction with the university to be participating in it not onlyin the policy analysis process but also in the required technical studies.

The central objectives of this project are the following: (a) tomeasure the response of the sector to changes in relative prices of outputsand inputs, government investments, and credit availability. In particular,the emphasis will be on substitution possibilities among major products,input substitution, and private investment changes in response to changes inthe abovementioned variables; (b) to analyze using the empirical results tobe obtained from (a), the implications of trade policy changes, price supportpolicies, other price policies and government investments on the structure ofproduction, growth and employment in the sector; (c) to develop workshops andseminars with the participation of personn-1 from the Government of Colombiaand the university to be involved in the study as well as short courses toenable Colombians to upgrade their technical and policy analysis capabili-ties; and (d) to prepare basic guidelines for a policy program with the aimto be considered in the national plan.

II. Methodology

The technical study will consist of an econometric analysis involv-ing estimation of a set of supply, demand and investment equations utilizingflexible functional forms. The policy analysis will be based on suitablesimulations using the estimated equations.

III. Responsibilities

The study will be the responsibility of Direccion Nacional dePlanificacion (DNP) jointly with the Ministry of Agriculture. They willimplement the study in conjunction with a university which can offer highlyqualified professional expertise.

IV. Pe_ sonnel

The study will require one senior economist responsible for theproject from DNP, four resource economists (DNP and the Ministry of

- 39 -

ANNEX 6Page 2 of 6

Agriculture), and three research assistants also from DNP and the Ministry ofAgriculture. The participating university should provide four facultymembers at 25% of their time for one year and two research assistants.

V. Cost and Time of the Study

The study should be completed within two years. A preliminaryreport should be available within the first year. The total cost will bearound US$300,000 of which approximately US$220,000 will be used to contractthe assistance of a university. The latter figure should cover the salariesof one staff-year faculty member (four individuals at 25% of their time forone year), two research assistants, travel and accommodation of universitypersonnel, computation, secretarial assistance, and university overhead.

VI. Expected Results

It is expected to obtain the necessary empirical parameters topermit indepth analyses of the implications of price policies, trade policyand Government investment policies for the growth potential, employment,resource allocation of the sector and effective protection. Furthermore, itis also expected to obtain guidelines for the development of a coherentpolicy package for the sector. Finally, a substantial upgrading of theskills of Government personnel is expected.

TERMS OF REFERENCE

Study on the Possibilities to Increase the Degree ofSelf-financing of the Entities Ascribed to the Ministry of Agriculture

(ICA, IDEMA~, INDERENA, INCORA, HIMAT)

Objectives

A study would be carried out to determine whether user charges areappropriate in light of their costs and externalities and whether some ofthese services could not be provided in a more cost-effective way through theprivate sector.

The entities ascribed to the Ministry of Agriculture (ICA, IDEMA,INDkPENA, INCORA, HIMAT) depend for their investment requirements andrecurrant expenditures largely on the national budget, although they offersei.rices at user charges. In the past, these user charges have not beenperiodical.y adjusted to reflect increases in their costs, and today theybear little relationship to costs. Estimation of adequate user charges mayrequire changes in the accounting system of the respective utilities to allowmore precise cost accounting, taking into account the externalities from theservices (e.g., sanitary measures that prevent the spreading of diseases).On the other hand, some of these services are also provided by the privatesector (e.g., soil analysis for fertilizer recommendations and specificseeds) and a review would be in order to determine whether delivery of theseservices through the public sector is cost-effective.

- 40 -

ANNEX 6Page 3 of 6

Methodology and Expected Results

The legal basis for these services would be reviewed and statis-tical series would be analyzed to determine cost recoveries in real terms.In collaboration with the respective entities, the study would determine whatthe actual costs for providing these services are and whether and how theycould be reduced. Finally, the demand for these services would be estimatedto determine possible increases in the fees currently charged without dis-couraging their use. This study would be carried out on the basis of avail-able accounting data, and if necessary, actual cost data would be obtainedthrough specific site inspections. Based on the findings of this study,recommendations would be made on a new fee structure to cover as far aspossible the costs of providing these services and to reduce or eliminatethose services that could be provided in a more cost-effective way by theprivate sector.

Responsibility

The planning offices in the Ministry of Agriculture and theNational Planning Department would prepare detailed terms of reference andcontract and supervise a consulting firm or individual consultant to carryout the study. The consulting firm or individual consultants would needample experience in public sector and cost accounting and financial analysis.

Cost and Time Required: US$200,000; six months.

TERMS OF REFERENCE #3

Study on the Design of a Marketing and AgroindustrialCredit Line of FFAP to Implement Law 21

Objectives

To prepare a feasibility study for an agricultural marketing andagroindustrial credit project to be implemented through FFAP with internaland external resources.

Methodology

The study should be based on credit demand estimates for agricul-tural marketing and agroindustries of cooperatives, producer federation andsmall marketing and rural transport enterpreneurs.

Responsibility

Detailed terms of reference would be prepared jointly by the plan-ning offices of the Ministry of Agriculture and the National PlanningDepartment, the Agricultural Financing Fund of the Central Bank (FFAP) andthe Colombia Agricultural Producer Organization (SAC). The study would becontracted by the Ministry of Agriculture and its execution would be super-vised by a review committee consisting of members of DNP, FFAP and SAC.

- 41--

ANNEX 6Page 4 of 6

Personnel and Qualifications

The consulting firm should have ample experience in the fields ofmarketing, agroindustries and credit and be fully familiar with the Colombianlaws and regulations affecting credit.

Costs and Required Time: US$150,000; six months.

Expected Results

The study should identify the major bottlenecks in agriculturalmarketing and specifically the situation with regard to the demand and supplyfor marketing and agroindustrial credit. The report should provide detailedinformation on credit demand by marketing activities and groups of agricul-tural products and regions and propose complementary lines of credit to thosethat exist under Law 21. For these new lines of credit proposals should bemade on how to operate them in a manner consistent with credit deregulationand the reduction in subsidies. The report should also estimate totalproject costs by components and in terms of local/foreign expenditures andinclude a financing plan.

TERMS OF REFERENCE #4

Study on the Cost of Production of Selected Crops

I. Rationale and Objectives

Estimates of the cost of production for various crops are essentialfor the Government to be able to monitor the evolution of the competitivenessof agriculture both in terms of import substitution and export markets.Moreover, the design of price support policies and the programming of importquotas (indirectly affecting domestic prices) require appropriate estimatesof domestic cost of production. Some unofficial estimates of the cost ofproduction for some agricultural products are currently available. However,most of these use accounting procedures and ignore substitution possibilitiesin response to change in relative prices of imports, neglect consideration ofthe scale of production on unit costs and do not consider the effects of pro-ductivity growth.

The olojective of this study is to estimate satisfactorily economiccost of product:.on for a group of selected commodities for the most importproduction regicins of the country, considering inter alia the effects ofchanges in relative input prices, scale of production and productivity growthoriginated in technological progress or Government investment in infrastruc-ture (irrigation, storage facilities, etc.).

II. Methodology

The technical study will assemble the best data available and willinclude an analysis involving estimation of a cost function using as explana-tory variables input prices, output levels, productive Government investments

- 42 -

ANNEX 6Page 5 of 6

in the region and an index of technological change. The study will be per-formed for selected crops in homogenous production areas using time seriesdata.

III. Responsibilities

The study will be the responsibility of DNP and the Ministry ofAgriculture. They will obtain the necessary assistance from qualifiedconsultants.

IV. Personnel

The study will require cwo senior economists from DNP/Ministry ofAgriculture, three research assistants and one consultant.

V. Cost and Time of the Study

The study will be completed within one year with a total cost ofapproximately US$100,000 of which approximately US$25,000-30,000 will be usedto contract the assistance of a consultant.

VI. Expected Results

It is expected to obtain the necessary parameters of cost functionswhich can be automatically updated as input prices, scale of production andproductivity changes. More reliable, official estimates of production costsfor major products are expected to result from the study.

TERMS OF REFERENCE #5

Study on the Measurement of Effective Protection ofSelected Manufactured Inputs Used in Agriculture

I. Rationale and Objectives

The domestic prices of several inputs used by the agricultural sec-tor are substantially higher than prices paid by farmers in other countries.It is, therefore. important to be able to analyze the causes of such a situa-tion and whether it is due to a high rate of effective protection of thelocal producers of those inputs.

The basic objective of the study is to measure effective protectionof major domestically-produced inputs used by the agricultural sector. Thesewill include pesticides, agricultural machinery and implements, feeds, andfertilizers.

II. Methodology

The studv will consider tariff and non-tariff barriers affectingthe domestic manufacturers of agricultural inputs as well as nominalprotection.

- 43 -

ANNEX 6Page 6 of 6

III. Responsibilities

The study will he condu:ted by DNP and the Ministry of Agriculturewith the assistance of one consultant.

IV. Cost and Time of the Study

The study will be completed in one year at a total approximate costof US$80,000 of which US$15-20,000 will be spent in hiring a consultant.

VI. Expected Results

It is expected to identify the level and variation of effectiveprotection to domestic production of agricultural inputs and machinery. Thiswould, in turn, allow the Government to take the necessary measures toaddress the issue of protection and high production costs in agriculture.

- 44 -

;,X} ANNEX 7RIPUBLICA DE COLOMBIA Page 1 of 17

Bogot'a, March 18th, 1986

Mr. A.W. CLAUSENPresidentThe World Bank1818 H St., N.W.Washington, D.C. 20433

Dear Mr. Clausen:

1. The Government of Colombia wishes to request a WorldBank loan to support a program of macroeconomic and trade policyreforms initiated under the Trade Policy and Export DiversificationLoan and its associated Action Program as per letter dated February27, with emphasis on policy changes affecting the agriculturalsector.

2. The Government's strategy seeks to strengthen agriculturalperformance and efficiency. Given the sector's importance in theeconomy, its export dynamism and price stability cruciallyinfluence the success of the macroeconomic and trade reforms.In turn, the macroeconomic adjustments benefit the sector. Ofparticular importance are the adjustments of the real exchangerate, fiscal and monetary restraint, and trade reforms includingaugmenting imports of agricultural inputs, machinery and spareparts. These policies are being complemented with suitablesectoral measures.

3. Before turning to the specific action program, we wouldfirst like to refer to recent developments in the Co'.ombianeconomy. These events have led to the ongoing process of adjust-ment for growth and stabilization purposes begun in 1983-84.T'a deepening of the adjustment in 1985 provides the macroeconomicframework for the additional policies that the Government willadopt under this present loan.

A. Development Patterns of the Colombian Economy

4. Over the long term, the Colombian economy has had anexcellent development record. Between 1960 and 1981, for example,real GDP increased at an average annual rate of nearly 6% andGNP per capita grew over 3% per annum. In addition to rapid growthin output and income, the Colombian society also benefited fromsustained social progress.

- 45 -

PUL) ORCOLOMBIAANNEX 7R aPUDLIm OOW MBA Page 2 of 17

2

5. During 1976-78, increased receipts from coffee and otherexports produced balarce of payments surpluses leading to risesin incomes, aggregate demand, and inflation. To restrain thegrowth in aggregate demand, the monetary authority lagged theexchange rate and the conversion of export receipts into pesoswas delayed. Although the demand management objectives wereachieved, export development suffered a setback. Paradoxically,the export boom eventually left the country with a moreinward-looking structure of incentives.

6. The passing of the coffee boom and the adverse evolutionin the international economic environment in the 1980s-international recession, the international debt crisis, majordevaluation and import restrictions in neighboring countries-contributed to a deterioration of Colombia's economic situation.Real CDP growth slowed down to 2.5% in 1981 and about 1% onaverage in 1982-83. After experiencing a surplus for six years,a deficit of about US$1.4 billion emerged in the resource balancein 1981 and it increased to an average of about US$1.8 billionin 1982-83. Net foreign exchange reserves declined by about US$1.8billion in 1983 to approximately USS3.1 billion, and to aboutUS$1.9 billion in 1984; since tLiei, however, have remained stable.On the fiscal side, a slowdown in revenue growth, together withincreased current expenditures resulting fro.3 automatic transfersand large infrastructure investments in energy and transport ledto growing deficits: the overall cash deficit of the consolidatedpublic sector rose from about 5% in the late 1970 to over 7.0%during 1983-84.

7. The performance of the agricultural sector has followedthat of the economy, heavily affected by macroeconomic and tradepolicies and by external events. The sector expanded atsatisfactory rates during most of the seventies attaining anaverage growth well above 4% p.a. Towards the end of the decadeagricultural growth decelerated significantly and for the 1980-84period the average annual agricultural growth rate fell to only1.3%. A major difference between the growth patterns of the sectorduring the latter part of the sixties and most of the seventieson the one hand, and those of the eighties on the other, concernsthe expansion of non-coffee exports. While in the former period,export growth was an important source of sectoral growth, in themore recent period (1981-83) exports decreased in real terms thushaving a negative impact on the performance of the sector. Thatis, failure to continue developing exports explains much of thefall of agricultural GDP growth that took place in the period1979-83.

- 46 -

{,X) ~ANNEX 7RCPUBUCA D COLOMBIA

Page 3 of 17

3

B. Adjustment Process 1984-85 and Program of Growth with Stabili-zation Beyond 1985

8. During 1984-85 Government policy began to increasinglyfocus on: additional revenue and expenditure measures to containthe fiscal deficit and monetary expansion; acceleration of theexchange rate devaluations, further increased incentives toexports. The policy reforms contributed to a GDP growth of 3.1%,declining inflation to 16.4%, and a reduction in the currentaccount deficit in the balance of payments by about US$1 billionto 5% of GDP in 1984. During 1985 the current account deficitin the balance of payments was further reduced by US$600 millionto 4.0% of GDP, while growth was maintained, with real GDP growthat close to 3%.

9. The current Government strategy emphasizes growth whilemaintaining stability and consolidating the adjustment alreadyachieved in 1985. A program for adjustment with growth has beenexecuted in 1985 and a program with emphasis on growth withstability which is expected to result in real GDP growth of 4.5%,has been initiated in 1986. Five elements of the program arespelt out below.

10. Fiscal Policy. The 1984-85 program comprised additionalmeasures to eliminate deductions in the income tax, a broaderbase for the value-added tax, an increase in stamp taxes and anadditional temporary 8% import tax, which together contributedto an increase in Central Government's net revenues of 43% in1985. Public sector salaries approved for 1985 implied an averagesalary reduction of about 12% in real terms and a careful andsustainable salary policy has been adopted for 1986 with weightedaverage increases below the actual average inflation rate of 24%in 1985. Combined with the rationalization of the publicinvestment program and real increases in revenues of publicenterprises (in part as a result of tariff policy), the overallpublic sector deficit as a share of GDP was reduced by more thanone-third to about 4.5% of GDP in 1985, and a further reductionto less than 3% in 1986 and a similar level for 1987 is envisaged.

11. Investment Program. The rationalization of the investmentprogram that has taken place included the rostponement orcancellation of new large scale power generation and a numberof large transport projects. The revised program, consists largely

- 47 -

REPUSUCA Dg GOLOMUIA 'iX) ANNEX 7Pa2e 4 of 17

4

of projects which are already in execution or for which loanshave been contracted including major exort projects in the miningsector. With respect to new projects emphasis has been placedon those that are quick-yielding, low on capital intensity, makeuse of existing Dhysical infrastructure and have a direct effecton the productive sectors. The 1986-87 investment program andassociated external borrowing program are presented as Annex 2.It is our intention to review the 1987-88 program in late 1986,and by mid-1987 be able to examine a three-year program.

12. MonetarV Policv. Central Bank financing of the Governmentdeficit was reduced by about three quarters to about Col$35 billion(less than 1% of GDP) in 1985, and it is expected that the CentralGovernment will not require net Central Bank financing in 1986.This permits the banking system to expand credit to the privatesector in line with the growth in nominal GDP. Such outcome wouldreduce the pressure in the growth of the monetary base duringa period when foreign reserves will be recovering. Wiith a fiscalpolicy as discussed above and a sufficient expansion of creditto the private sector -inter-alia to support the financialsystem- the growth in the monetary base is intended to be keptin line with nominal GDP growth during 1986-87.

13. Exchange Rate Policv. After years of steady appreciation,the Colombian peso depreciated in real terms against the U.S.dollar by a large margin during 1983-85. In spite of the rapidappreciation of the U.S. dollar against other major currencies,the peso depreciation against a basket of relevant currencieswas still very significant. With the sharp peso depreciationduring 1985, parity has been more than achieved with respect toa 1975 base, which is the highest in recent history. TheGovernment will maintain an adequate real rate even if significantexport earnings were to accrue from resource-based exports,especially petroleum and coal, and temporary coffee marketdevelopments in order to maintain international competitivenessof minor exports.

14. Import Policy. The persistence of external resourcegaps during 1983-84 forced the Government to rely on quantitativeimport restrictions. However, the Government intends to undertaketheir phased reduction, beginning with the elimination of importcontrols on inputs and intermediate goods for exports. Inaddition, average nominal tariff rates which were fairly stableduring 1979-81, increased in 1983, and again substantially in1984, including an increase in the dispersion. During 1985,however, the weighted average tariff level has been reduced (seepara 17 below), including a decline in the dispersion. Theoutward-looking policy initiated in 1985 will be continued.

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PX) ANNEX 7IEPuuoA Page 5 of 17

5

C. Trade and Agricultural Policy Reforms

15. Apart from macroeconomic policies, the additional reformsto be suported under this loan fall into two major categories:(i) general and agricultural trade measures; and (ii) agriculturalsector specific policies.

The trade policy measures discussed below are part ofthe Action Program to be further developed and agreed upon betweenthe Government and the Bank prior to the second tranche of thisloan, as part of the Program to be carried out. The specifictrade actions below relate to the 1986 component of continuingreform in this area.

16. Trade Measures. The Government has removed almost allexport restrictions, except those on non-economic grounds. Ithas postponed the implementation of its proposed pricestabilization scheme for exports until an evaluation is carriedout of fiscal, balance of payments and trade effects. Since 1984the number of freely importable items have risen from 23 to 1811(out of a total of 5028 items) and 759 which were previouslyprohibited are now importable subject to a prior license. Asa result, the share of free imports rose from 34% of total importvalue in December 1984 to an estimated 55% by December 1985.In relation to the present loan, the share of free imports hasrisen to about 67% of the total annual equivalent value of importsin the year 1985, by February 1986 (See Annex 1).

Apart from reducing quantitative restrictions, theGovernment's policy is to increase gradually foreign eXchangeavailable for imports under licensing, and increase imports underthe free license regime including selected finished products.Agreement on further actions will be reached before the secondtranche of this loan.

17. By end 1985 the weighted average tariff rate had beenreduced to about 28% from 36% in 1984. Actual duties and surchargescollected amounted to about 18% of total imports. Many processedfood items and agricultural inputs have already benefited fromtariff reductions undertaker in the first half of 1985. The fiscalimpact of tariff rate decrease has been reduced by eliminatingad hoc tariff discounts (notas) wherever justified. Finally,a modification in the system of imports for exports (PV/SIEX)will enable more producers of export crops to benefit from dutyexemptions and drawbacks for imported inputs.

- 49 -

REPUBLUCA Di COLOMBA A

ANNEX 7Page 6 of 17

;Ad . ,/ Sjc

6

18. In connection with agricultural input policy, significantmeasures have already been taken during 1985 particularly in viewof the constraints the sector faces in taking advantage of theduty exemption schemes. Import licensing policy now relegatesmost fertilizer imports to a free list as opposed to nonepreviously. Import duties were also reduced for fertilizers from23% to 13% of the c.i.f. value mainly via an exemption from the8% import duty. For pesticides duties are reduced from an averageof 29% to just over 23%. Finally minimum credit payment periodswere reduced to three months (from six months) for fertilizers,and to six m-,nths (from three years) for agricultural machineryin the course of 1985 and minimum credit payment periods wereeliminated for all imports effective January 1, 1986. Furtherfreeing of import licensing and increases in approvals underlicensing have taken place with priorities to spare parts, tractorsand combined harvesters, tractor driven implements and withemphasis on including some finished products so as to reduceeffective protection levels.

19. During 1986 a study will be undertaken to examine thepossibilities of further reduction in protection. Specialattention will be paid to finished pesticides, currently enjoyinga higher degree of protection than raw materials. It is expectedthat the 8% surcharge on all imports imposed by law will begradually phased out starting in 1986.

20. Sectoral Policies. In addition to major improvementsin trade policies affecting inputs for the sector, the Governmenthas been initiating measures to rationalize trade policiesconcerning final products in the sector with a view to ensuringthat the more competitive products are supported over time andthat remaining Government interventions become more efficient.Recent measures have terminated IDEMA's (the Government marketingagency) monopoly in wheat, while Government interventions havebeen reduced in the case of barley and soya. The private sectorcan now import the bulk of these commodities subject to a globalquota. We have decided to extend this policy to most other IDEMAimports in 1986; a market-based system will be gradually introducedbeginning in the first half of 1986 for the distribution to privateimporters of import rights to cover 80% or more of the total valueof the global quotas. Such system would emphasize demand andsupply factors and not rely predominantly on government discretion.Given international prices and their subsidies support priceswill not increase beyond the rate of inflation (except if theproduction cost of a product increases significantly aboveinflation.

- sn -5-- ANNEX 7

spuEuoA an COOLOUIA X) Page 7 of 17

7

Import quotas would be established so as not to allow increasesof real domestic market prices of wheat, beans, barley, sorghumand soybeans (except if production cost of a product increasessignificantly above inflation or international dollar prices risein excess of inflation). In order to determine increases inproduction cost we will construct representative proxy indexesof production cost of food crops, based on official publishedstatistics, which in agreement between the Government and theBank would be used to determine the relationship between productioncost increases and inflation for purpose of the agricultural pricepolicy. Until the cost reduction effects, inter alia, of thisloan begin to take effect, inflation would be the main guide toprice policy, and cost of production would be taken into accountas a basis for exceptional and temporary measures. The evolutionof real prices over the medium-term would be commensurate withproduction cost reductions, inter alia, supported by the loanand with the significant expansion of government investments inagriculture which would be oriented in part to *mprovements ofproduction in marginal areas. Coffee policy would aim at ensuringan adequate balance of incentives between coffee and non-coffeeproduction.

21. W4hile an across -the- board macroeconomic approach iseventually necessary to improve credit policies, since 1983 theGovernment has been taking financial sector policy improvements,and as part of this process it has adjusted interest rate policiesby raising the average agricultural fund (FFAP) rates by 1.5%to positive real levels and introducing partially variable rateson most medium and long term FFAP lines, in order to encouragethe flow of credit to the sector. We will study interest rateson credits for storage (bonos de prenda), including the effectsof the present system on price stability, the role of the privatesector in storage and the competitiveness of rates on these lines.On the basis of the outcome of this study and a review betweenthe Government and the Bank, actions to increase the supply ofcredit for storage will be agreed upon between the Governmentand the Bank prior to the second tranche of this loan, as partof the Program to be carried out-. Such actions would improvethe efficiency of the present mechanisms of credit for storageand complement them with mechanisms that emphasize demand andsupply factors. The Government is currently studying the financialsector and policy improvements are expected to be continued during1986. In agriculture, we will take measures to ensure an adequatesupply of credit to the sector and gradually phase-in and maintaincompetitive rates for agricultural loans. To this end our policiesseek to encourage more domestic resource mobilization inter aliaby improving the profitability of lending to the sector, relyingless on regulatory intervention and taking into account demandconsiderations.

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Lx) ANNEX 7RRPUIIUOA DSOLOMMA t'Page 8 of 17

8

22. A part of the local funds of the loan will be used primalyto help recuperate the level of public investments in the ruralsector which have considerably declined relative to other sectors.These funds will be invested in projects providing a minimum rateof return comparable to the overage rate of return historicallyrachieved by agricultural public investment. The ColombianGovernment has decided on a core investment programn to be financed(see Annex 2).

23. The core public sector investment program in rural areasadopted by the Governm ent is based on the following criteria:a) provision of adequate cournterpart funds to ongoing projectsfinanced from multilaterial sources; b) support to internallyfinanced selected high priority activitivities of the Ministryof Agriculture and its decentralized agencies, c) initiation ofexturnally financed projects which are presently being negotiated,d) execut;on of actiities in rural areas related to the NationalRehabilitation Plan, and e) allocation of adequate resourses tothe decentralized agencies o' the ^,griculture Ministry so thatthey can comply with their statutory obligations. Excution ofthis investment program will be carried out with the existingstaff of the respective executing agencies without staff increases.The Government will review the execution of the program beforethe second tranche release.

24. The Government has decided to strengthen the agriculturalplanning mechanism by establishing a national agricultural policyboard chaired by the Minister of Agriculture. It will be supportedby a technical unit of high quality staff and be responsiblefor periodically reviewing the medium-term agricultural strategy,including the following policy areas: agricultural credit, publicsector investment, internal and external marketing of agriculturalproducts, and price policy. In addition, the Government has decidedto upgrade the strategic planning and policy analysis capabilitiesof the Ministry of Agriculture, and its capacity to identify andprepare projects as well as to monitor the efficient use of publicinvestment expenditures. To this effect and before the releaseof the second tranche, the Government will develop a plan torestructure the Ministry of Agriculture. In addition, and in directsupport of the ojective of the sectoral policy measures referredto above, we will carry out studies in various areas -supplyand demand elasticities in the sector, self-financing of sectoragencies, feasibility of marketing and processing credit line,protection to domestic porduction of inputs, and farm budgetsand production costs.

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NB1UI*DI I ANNEX 7nlPUCLICA DE COLOMBIA Page 9 of 17

9

25. We expect that a coherent program of macroeconomic, tradeand sectoral policies such as the one proposed here will leadto a significant recovery of the agricultural sector. This, inturn, will be a key factor for the success of the ongoingmacroeconomic program as well as to achieve the medium-term goalsof adequate growth and employment.

26. In view of the measures being taken, the ColombianGovernment would appreciate your favorable consideration of itsrequest for a Trade and Agricultural Policy Loan. We look forwardto a continuing exchange of ideas wirh the Bank and to theopportunity to discuss from time to time the progress made inimplementing these reforms.

Sincerely yours,

H'GO dOS MEJIjAMinister of FThance & Public CreddeMinistry of Finance & Pub ic Credit

CA EDOMinister of ricu tu eMinistr of Agricu t e

ANNEX 7-53 Page 10 of 17

ANNEX 1

IMPORT LIBERALIZATION MEASURES

1. With the measures taken by the Government's Executive Foreign TradeCouncil (Consejo Directivo de Comercio Exterior) on December 23, 1985 andFebruary 3, 1986 the share of free imports, as defined in the Loan Agree-ments for the Trade and Export Diversification and Trade and AgriculturalPolicy Projects, is equivalent to 67% of the total annual equivalent valueof imports in the year 1985 1/. From April 1986 this share will reach69% based on decisions taken on February 3, 1986 (see table below). Inmaintaining this latter share the composition of items could vary.

1985 2/ 1986 4/Average December February April

Free 54% 11 59% 67% 69Z

2. Details of the 203 items liberalized on December 23, 1985 and the452 items liberalized on February 3, 1986, including their historic annualvalues for the periods 1980-82 and 1985, which formed the basis for thecalculations of the share of free imports in the table above, have beenprovided separately by Incomex with document dated February 6, 1986 entitled"Registros de Importaci6n por Posiciones Arancelarias Translado al RegimenLibre Mediante Resoluciones 46 de 1985 y 01 de 1986".

1/ For items whose imports were significantly restricted in 1985, averageannual values for the representation period 1980-82 were applied in thecalculations and definitions.

2/ See attachment 1 for details by month.

3/ Includes value for all of 1985 of items liberalized in the course of1985.

4/ Includes values of items liberalized during 1985 and February 3, 1986.

ANNEX 1

Attachment 1

IMPORTS (INCOMEX REGISTERS) 1985

z

Jan.-March April-May June-Sept. October November December

Free Imports 32.9 34.2 41.1 47.6 51.3 59.2

Plan Vallejo (Total) 4.3 4.0 3.6 3.3 3.3 2.8 1

Free reimbursable 9.3 9.8 14.6 23.8 29.0 42.5

Non-reimbursable 19.3 20.4 22.9 20.5 19.0 13.9

Prior license 67.1 65.8 58.9 52.4 48.7 40.8

Total 100.0 100.0 100.0 100.0 100.0 1 Xt

(Value US$ million) (1010.4) (661.0) (1564.3) (412.3) (447.6) (589.7)

(Monthly Average) (336.8) (330.5) (391.1) (412.3) (447.6) (589.7)

S- %J

0

ANNEX 2Page 1

Foreign Medium and Long-Term Loan Disbursements by Sector

(US$ Million)

Disbursements 1986 Disbursemnts 1987 1986 - 1987

Existing 1986 Existing 1986-87 Existing New TotalLoans I/ Loans Total Loans j Loans Total Loans j/ % Lcans % Total %

Productive Sectors 9G 531.3 1494.8 301.4 409.7 711.1 1264.9 (45.4) %4Q (50.8) 22U5.9 (47.5)

Agriculture 62.6 170.0 232.6 72.7 254.0 326.7 135.3 424.0 559.3Industry 249.1 4.0 253.1 65.5 53.0 118.5 314.6 57.0 371.6%4ning 651.8 357.3 1009.1 163.2 102.7 265.9 815.0 460.0 1275.0

Physical Infrastructure 674.2 156.4 830.6 502.3 550.1 1052.4 1176.5 (42.2) 706.5 (38.2) 1883.0 (40.6)

Power 449.0 56.9 505.9 310.0 333.0 643.0 759.0 389.9 1148.9Transportation 187.5 42.9 230.4 176.4 53.7 230.1 363.9 96.6 460.5Cbmunications 37.7 56.6 94.3 15.9 163.4 179.3 53.6 220.0 273.6

Social Infrastructure 152.0 15.8 167.8 195.6 187.6 383.2 347.6 (12.5) 2Q3.4 (11.0) 551.0 (11.,

hater and Sewerage 55.8 4.7 60.5 89.0 60.9 149.9 144.8 65.6 210.4Wducation 42,2 1.1 43.3 45.6 8.5 54.1 87.8 9.6 97.4Healt.h 18.6 0.0 18.6 21.9 45.3 67.2 40.5 45.3 85.8Urban & Regional Dev, 35.4 10.0 45.4 39.1 72.9 112.0 74.5 82.9 157.4

Total 1789. 7 703.5 2493.2 999.3 1147.4 2146.7 2789.0 (100.0) 1850.9 (100.0) 4639.9 (100.0) OQ

N >1I -.

I/ Includes loans signed as of Dec. 31, 1985, as wel as additional LS/EXI loan (US$ 170 million) for Carbocol E1 Cerrejon project to besigned in 1986.Ex icludes ense ($ 195 mLlion).

Financing of Public Investment MIEX 2

(US$ Million)

Foreins Loans 1/ local Rnds 2/ Investnet1936 1987 1986/87 19B6 1987 1986/87 1986 1937 1996/87

A. FroeLcts with ForeiRnFinancinq 2/ 1,682.4 1,785.2 3,467.6 478.0 526.2 1,004.2 2,160,4 2,311.4 4,471.8

Productive Sectors 684.0 349.6 1.033.6 A4.3 86.7 191.0 788.3 43G.3 1.224,6Agriculture 59.6 81.7 141.3 34.8 30.2 65.0 94.4 111.9 206.3Industry 30.5 2.0 32.5 3.5 2.0 5.5 34.0 4.0 38.0%tning 593.9 265.9 859.8 66.0 54.5 120.5 659.9 320.4 9W.3

Physical Infrastructure 830.6 1C52,4 1,8M.0 281.8 300.6 582.4 1,112,4 1,353.0 2,465.4

Pbwer 505.9 643.0 1,148.9 193.5 177.6 371.1 699.4 V20.6 1,520.0'ransportation 230.4 230.1 460.5 62.3 78.0 140.3 292.7 30.1 600.8Ccbnnications 94.3 179.3 273.6 26.0 45.0 71.0 120.3 224.3 344.6

Social Infrastn,cture 167.8 383.2 551.0 91.9 138.9 230.8 259.7 522.1 781.8

kter and S,erage 60.5 149.9 210.4 35.5 58.8 94.3 96.0 208.7 304,71ducation 43.3 54.1 97.4 19.6 31.1 50.7 62.9 85.2 148.1l1wlthl 18.6 67.2 85.8 5.0 5.7 10.7 23.6 72.9 96.5lUran and Regional[Evelojnt 45.4 112.0 157.4 31.8 43.3 75.1 77.2 155.3 232.5

B. Projects without ForeiRnFiniarn2in j/996.2 A 1,826.6 996.2 830.4 1,82L.6

Total (A + B) 1,785.2 34g6" 11474.2 1,356.6 3,15G,6 3,141.8 6,298.4

k/ Ohly ircludes foreign loan disburseits that directly flnance public investt (inclwing FIN loas). Equals total diaurswents 7of public M & LT loans less lons channelled to private sector ard loamns to replace short term debts.2/ Include pesos counterpart proceeds of RI) Trade/Export and Trade/Agriculture loans.3/ Based on DNP docunmt '"rogram de IFdeudairento Extero" of January 1986. The 1986-87 Lorrowing plan by sector and project lbsed2on the docuTent .s attached.4/ Estimated as inrplicit difference betwieen Total Public Ihvesnmt (A + B) ard Tbtal of Projerts with Foreir FExing (A).5/ 'otal lihvesmmt for 19%6-87 based on [WP projections of finances of decentalizedt agenis and Ministry of FLnanoe projections ofCentral Governent finances, with adjustrnts for investmut transfers between Central Govenrmmt arid decentrlized agpecies.

ANNEX 7- 57 Page 14 of 17

() JANNEX 2

Page 3

INVESTMENT PROGRAM AGRICULTURE AND RURAL DEVELOPMENT

(Col$ Billion)

Entity / P-ogram 1984 1985 1986 1987

Actual Estimate Planned Planned

ICA 2.1 3.0 4.1 7.0

INCORA 2.4 3.4 4.3 3.3

INDERENA 1.2 1.0 2.0 2.5

HIMAT 1.9 1.9 3.5 5.9

IDEIA - COFIAGRO 0.9 0.5 0.3 -

DRI 5.8 6.0 7.2 9.2

MINISTRY OF AGRICULTURE 0.3 0.4 0.7 0.7

REGIONAL CORPORATIONS O.6 0.8 1.9 1.9

NATIONAL REHABILITATION PLAN - 2.6 2.7

RURAL ELECTRIFICATION 1/ _ 1.9 2.2

RURAL W'ATER SUPPLY I/ - - 0.3 0.3

STUDIES 0.1 0.1

TOTAL 15.1 17.0 28.8 35.8

1/ Incremental to ongoing programs of electricity and water supply sector entities.

ANNEX 7 ANNEX 2- 58 - Page 15 of 17 Page 4

BORROWING PROGRAM 1986-87

(US $ Million)

Sector Amount of Loan/i1986 1987 Source/5

Agriculture

Irrigation Districts II - HIMAT 110.0 IBRDTechnology Transfer - ICA 35.0 IBRDTrade & Agricultural Policy Program/3 250.0 IBRDCaja Agraria - Credit/3 150.0 IBRDAgricultural Credit-BR-FFAP/3 80.0 IBRDRio Rogota - CAR 40.0 IDBAgricultural Credit B.R.-FFAP/3 200.0 IDBLivestock Development/3 50.0 IDBIrrigation Development-HIMAT 60.0 IDBTolima Triangle 50.0 Govt.Fisheries Research - INDERENA 15.0 Govt.

TOTAL 560.0 480.0

Industry

Financial/Industrial Sector/3 150.0 IBRDMicro-Enterprises BR/3 7.0 IDBSmall-Scale Industry-BR/3 3.8 Govt.

TOTAL 10.8 150.0

Mining

Ecopetrol Investment Program 80.0 Govt.Ecopetrol Investment Program 100.0 IBRDEcopetrol Investment Program 30.0 30.0 Suppl.Rio Zulia-Covenas Oil Pipeline/2 190.0 Govt.Rio Zulia-Covefias Oil Pipeline/2 35.0 CBCanlo Limon-Rio Zulia Oil Pipeline/2 19.5 CBLos Llanos Oil Pipeline/2 55.5 Suppl.Cerrej6n Northern Zone-CARBOCOL/2/4 170.0 Govt.

TOTAL 580.0 130.0

1/ The amount of loans refers to commitments (contracting), not disbursements.2/ Projects which are underway and for which other loans were contracted priorto 19863/ Public sector loans to finance private sector4/ Additional to existing U.S. Exim Loan5/ Note "Government" includes EXIM-type loans

ANNEX 7 ANNEX 2~ 59 E!Amount Io on31 Page 5

Sector 1986 X87 Source

Power

Bogot& Distribution II 171.0 IBRDPower Sector - FEN 200.0 IBRDPower Sector - FEN B-Loan 30.0 IBRDPower Sector - FEN 170.0 CBPower Distribution - FEN 100.0 IDBPower Generation 100.0 IDBTransmission ISA 112.0 IDBTransmission ISA (Co-financing) 50.0 CBTransmission ISA 40.0 Suppl.Rio Grande II EPM/2 20.0 CBCentral-Northern Line ISA/2 2.6 CBGuavio Hydropower EEEB/2 17.7 Govt.Betania Hydropower/2 60.0 Suppl.Termination of ongoingProjects CVC, ICEL, CORELCA,ISA/2 47.4 CB

TOTAL 510.7 610.0

Transportation

Ports Rehabilitation 42.8 IBRDRural Roads II FNCV 62.0 IBRDPick and Shovel Program FNVC 20.0 IDBHighway Rehabilitation & Improvement 100.0 IDBNavigation Equipment DAAC/FAN 14.3 CBNavigation Equipment DAAC/FAN 3.7 Suppl.Airports DAAC/FAN 10.0 Govt.Public Works Equipment Santander 4.0 CBPublic Works Equipment Tolima 2.1 CB

TOTAL 158.9 100.0

Communications

Rural Telephone Program II 93.0 IDBBorder Areas Telecom 42.8 Govt.Expansion Channel 3 Inravision 15.0 Govt.Expansion Channel 3 Inravision 45.8 CBFondane Systems Equipment 6.5 GovtRegistraduria Equipment 3.0 Suppl.Regional TV Inravisi6n 11.0 CBVarious Projects Bogota ETB/6 66.0 Suppl.Various Projects Bogota ETB/6 1.5 CBVarious Projects Emcali/6 19.2 CBVarious Projects Emcali/6 25.1 Suppl.Various Projects Medellin EPM/6 24.0 CBVarious Projects Medellin EPfM/6 6.2 Suppl.Various Projects Telecom/6 59.2 Suppl.Various Projects TeleCartagena/6 1.7 Suppl.Various Projects Telearmenia/TeleCaqueta/6 3.2 Suppl.Various Projects Tele Honda/6 1.0 Suppl.

TOTAL 319.2 105.0

/6 Includes both ongoing and new projects

ANNEX 7Page 17 of 17 ANNEX 2

- 60-Page 6

Amount of Loan/l1986 1987 Source

Water

Water Sector Program FFDU 100.0 IBRDWater Sector Program FFDU 50.0 IDBWater Sector Program FFDU 50.0 Govt.Rural Water Supply - INS 20.0 IDBBogota IV EAAB/2 45.0 Govt.Bogota IV EAAB/2 15.0 CB

TOTAL 20.0 260.0

Education

Education Material & Equipment 42.5 Govt.Secondary Education ICCE 1.1 Suppl.

TOTAL 43.6 -

Health

Health System Consolidation 10.3 Govt.Hospital Equipment ISS 4.5 Covt.Hospital Equipment ISS 0.4 CBHospital Equipment ISS 6.3 Suppl.National Cancer Plan 20.0 Suppl.Laboratories INAS 25.0 Govt.

TOTAL 66.5 -

Urb and Regional Development

Technical Assistance 20.0 IBRD.Urban Infrastructure - BCH 50.0 IDBDevelopment La Guajira 15.0 IDBAguablanca - EMCALI/2 50.0 IDBLots with Services - ICT 45.0 IDBRio Rancheria 22.0 Govt.Aguablanca EICALI/2 8.3 85.0 Govt.Cartagena Canals 6.3 Govt.

TOTAL 79.6 222.0

TOTAL ALL SECTORS/7 2,349.3 2,057.0

/7 Excludes defense

- 61 -

ANNEX 8Page 1 of 7

COFFEE POLICY

Background

1. Sharp increases in world coffee prices beginning in 1976 caused bya serious frost in Brazil led to an acceleration in new plantings andreplantings of the high-yielding caturra variety (which had been introducedin the late 1960s in Colombia). With production reaching some 13.0 millionbags during 1980-84 (Table 1) and the introduction in October 1980 of theInternational Coffee Agreement (ICA) quota regime, stocks accumulated,increasing from 3.5 million bags in 1979/80 to 12.2 million bags in 1983/84.In 1985 Colombia had about 25% of estimated world stocks. Low real producerprices in the early 1980s, however, reduced production and stocks in the lasttwo seasons.

2. When the export unit value more than doubled in US dollar terms in1976, real producer prices rose by almost 70X (Table 2). Since the -boom"years of 1976 and 1977, however, real producer prices have been declining andthe recent prices of 6,500-7,000 Pesos/Carga (in 1980 Pesos) were low byhistorical standards. Producer prices as percent of export unit value,excluding costs involved in exporting coffee, varied between 42% and 77%during 1968/69-1983/84, with an average of 64.1% (see Table 3); in compari-son. The shares in 1984 and in August 1985 were 65% and 54% respectively.

3. The severe drought in Brazil in 1985, which is expected to reduceBrazil's 1986/87 crop substantially, has caused world coffee prices toincrease sharply in recent months. World prices of Colombian coffeeincreased by about 75% between September 1985 and January 1986. World coffeeprices are likely to be much higher in 1986, and possibly in 1987, than in1985. As the authorities recognize, it is important for Colombia not toencourage production excessively by wholly passing recent world prices toproducer prices.

Policy Issues

4. The high international prices in recent months and the suspensionof the ICA quotas have significantly changed the prospects for the Colombiancoffee sector. Major changes include:

(i) the recent declining production and the lifting of the ICA quotasmean that stocks held in Colombia can be reduced substantially inthe next few years;

(ii) high international prices have prompted coffee growers to putpressure on the Colombian authorities to raise producer prices;

(iii) high international prices have encouraged smuggling due to thelarge difference between international and producer prices;

(iv) wide fluctuations in recent Brazilian production have convinced theColombian authorities that future ICA allocations should increasethe quota for Colombia, taking into account relative productioncapacities of the two countries; and

- 62 - ANNEX 8Page 2 of 7

Table 1: COLOMBIA: SUPPLY AND DISTRIBUTION OF COFFEE: 1958/59 TO 1985/86

Coffee ExportsYear COLCM ICA Quota Non-Quota COLX COLX

(Oct/Sept) Production /a Consumption Markets Markets Total Stocks /b

1958/59 7,442 908 6,372 59 6,431 1141959/60 7,648 1,197 5,597 74 5,671 8941960/61 7,500 1,270 5,990 53 6,043 1,0811961/62 8,035 1,526 5,536 58 5,594 1,9961962/63 7,500 1,416 5,952 104 6,056 2,024

1963/64 7,800 1,375 6,228 82 6,310 2,1391964/65 8,547 1,354 5,612 131 5,743 3,5891965/66 8,224 1,202 5,670 195 5,865 4,7461966/67 7,507 1,250 5,421 213 5,634 5,3691967/68 7,995 1,270 6,344 251 6,595 5,499

1968/69 7,375 1,290 6,204 330 6,534 5,0501969/70 8,266 859 6,467 407 6,874 5,5831970/71 6,872 989 6,008 322 6,331 5,1351971/72 5,958 1,035 6,198 289 6,487 3,5711972/73 8,564 1,046 6,046 209 6,255 4,83h

1973/74 7,066 1,252 6,873 535 7,408 3,2401974/75 7,981 1,279 7,102 440 7,542 2,4001975/76 7,804 1,369 6,554 469 7,023 1,8121976/77 8,939 1,305 4,891 401 5,292 4,1541977/78 10,463 1,420 7,144 414 7,558 5,639

1978/79 12,300 1,638 10,714 717 11,431 4,8701979/80 11,848 1,728 10,692 848 11,540 3,4501980/81 13,037 1,478 8,310 721 9,031 5,9781981/82 12,893 1,592 8,052 938 8,990 8,2891982/83 12,810 1,695 8,465 709 9,174 10,230

1983/84 13,464 1,553 9,130 836 9,966 12,1751984/85 10,718 1,775 8,731 917 9,648 11,4701985/86 /c 11,900 2,000 11,000 500 11,500 9,870

/a Reduced production. Series deduced from data on stocks, consumption andexports.

/b Stocks include private holdings./c Estimates.

Source: FEDERACAFE.

- 63 - ANNEX 8Page 3 of 7

Table 2: PRICES PAID TO FARMERS BY THE FEDERATION ANDPRIVATE EXPORTERS: 1960 TO EARLY 1986

(Pesos/Car ga)

Nominal Terms Real Terms /aPrivate Private

Federation Exporters Federation Exporters

1960 430 429 8,431 8,4121961 471 471 8,564 8,5641962 478 478 8,386 8,3861963 55 530 7,400 7,0671964 719 677 8,170 6,693

1965 718 649 7,890 7,1321966 758 681 6,954 6,2481967 759 705 6,432 5,9751968 889 857 7,112 6,8561969 983 943 7,123 6,833

1970 1,304 1,250 8,871 8,5031971 1,246 n.a. 7,739 n.a.1972 1,500 n.a. 8,242 n.a.1973 1,938 1,815 8,809 8,2501974 2,206 2,259 8,051 8,245

1975 2,730 2,950 8,125 8,7801976 5,533 5,828 13,696 14,4261977 7,179 6,946 13,344 12,9111978 7,300 6,946 11,514 10,9561979 7,270 7,179 9,203 9,087

1980 8,663 8,528 8,663 8,5281981 9,453 9,271 7,414 7,2711982 11,171 11,003 7,035 6,9291983 13,010 12,796 6,840 6,7281984 15,499 14,724 7,045 6,6931985 19,694 18,946 7,034 6,7661986 Early Feb. (*) 30,000 n.a. 9,615 /b nea.

(**) 34,800 n.a. 11,154 /b n.a.

/a Nominal Terms deflated by CPI with 1980 as 100./b Estimates

(*} Without TAC(**) With TAC

Source: FEDERACAFE.

- 64 -ANNEX 8Page 4 of 7

(v) with the possibility of the ICA quota system not limitingColombia's exports in the future, Colombia plans to export morecoffee than in the recent past. To do so, the Colombian authori-ties felt a need to raise real producer prices substantially tocompensate for increased production costs arising from "roya"disease treatment.

5. The above factors have prompted the Federation/Government to raisereal producer prices and to aim at obtaining higher production levels in thefuture than were previously planned.

Policy Instruments

6. The Federation of Coffee Growers (FEDERACAFE) is a private organi-zation representing the interest of growers, and it determines coffee policyjointly with the Government. The private traders have the important marketof the United States as the Federation cannot export to this market for legalreasons. On the other hand, the non-ICA member country markets are exclu-sively for the Federation as the private exporters cannot sell their coffeeequally competitively in these markets. In recent years, the Federation hasgiven private exporters ICA "export stamps equivalent to 45-48% of the totalICA quota allocated to Colombia. Because Colombia's exports to non-ICA mem-ber countries are small, once the ICA quota allocated to Colombia is deter-mined, over 90% of Colombia's total exports, over 80% of the Federation'sexports and almost 100% of private exporters' exports are determined. Inexchange for the coffee exported, the Federation and private exportersreceive the cash equivalent of the export unit value multiplied by each enti-ties' export volume.

7. In addition co transportation and preparation costs, the Federationand private exporters have to pay an ad valorem tax to the government, as apercentage of the export revenue. By an agreement, 3.2% of the total coffeeexport revenue is receivea by the National Coffee Fund which is administeredby the Federation and 0.8% by the Federation's Departmental Committees. Inaddition, exporters pay retention quota contributions and pasilla and ripiotaxes to the Federation in kind. The contributions and taxes vary in propor-tion to the quantity exported by the private exporters. The retention quota,pasilla and ripio taxes, and the quantity exported by private exportersdetermine the quantity which private traders purchase in the domesticmarket. They can obtain coffee either from the Federation's stocks ordirectly from the coffee growers. In recent years, as the contribution ofquotas increased sharply, it became very difficult for the private exportersto pay the contribution in kind. Thus a new contribution "cuchilla' to bepaid in cash by the private exporters to the Federation Is currently ineffect.

8. The Federation has a monopoly in selling ecrffee to domesticroasters for domestic consumption purposes. The quality of coffee providedto the domestic market has been lower than that used for exports, but domes-tic sales prices have also been much lower than export prices. The Federa-tion can, through its pricing policy, change the quantity sold to and therevenue derived from this market. The difference between production and thesum of export and domestic consumption is held as stocks by the Federation,which incurs storage costs. Thus surplus coffee, ceteris paribus, increasesthe Federation's expenditures.

- 65 -ANNEX 8Page 5 of 7

9. The main policy instruments are: (a) the exchange rate; (b) theFederation's purchasing price; (c) fertilizer subsidy; (d) the ad-valoremtax; (e) the retention quota; (f) domestic retail prices; (g) credits andsubsidies for stumping, new plantings, renovation, diversification and royatreatment. These policies impact inter alia on production, farmer's revenue,stock levels and the Federation's and private exporter's finances. Withdevaluation of the peso above the inflation rate in recent years, coffeeexport unit values in real peso terms has been stable since 1980/81, in spiteof depressed nominal US dollar prices. The incentive to produce, however, isdetermined by the Federation's purchase price and not the export unit-value.Although the Federation as a private association would like to offer highpurchase prices, it recognizes that so doing would induce overproduction,stock build-up and financial costs. The fertilizer subsidy which has bene-fited coffee production is now being phased out. First, imposed in 1967, thead valorem tax has declined since then from 26% to 6.5% at present; thecoffee sector receives a fixed 4%, the Government receiving the rest. Theretention quota (in kind) and 'cuchilla" (in cash) set the limit on how muchexporters can pay the farmers, given the export price and the ad valorem tax.

10. Due to high international coffee prices, real producer prices wereraised substantially in January 1986. The Federation and the Government havedecided to pay a portion of the payment to growers in bonds; TAC (Titulos deAhorros Cafeteros ).

11. Coffee policy changes agreed between the coffee growers and theGovernment with reg&rd to producer prices are to:

(i) raise producer prices to 30,000 pesos/carga from the late January1986 level which is about 37% over that which prevailed in 1985 inreal terms (see Table 2);

(ii) adjust producer prices every two months to maintain real producerprices at the level of late January 1986; and

(iii) issue bonds (TAC) with face value of 6,000 pesos/carga as a paymentto growers if 60-day moving average of Colombian coffee at New Yorkex-dock exceeds $2.25/lb.

12. The remainder of the windfall profit from the potential coffee boomis to be shared by the Government and the National Coffee Fund.

13. As shown in Table 3, even with the sharp price increase, producerprices in February 1986 as a share of export prices are at the lowest levelfor at least 15 years. Even if TAC is included, producer prices are lessthan half of export prices at present.

Policy Implications

14. This coffee boom has emerged unexpectedly and the allocation of thewindfall profit was understandably influenced by political pressures. Itwould have been difficult to avoid the significant real producer priceincrease, given the high intrrnational prices and increased smuggling. Theauthorities are fully cognizant of the economic effects of price policy.

Tahle 3: SIIARE OF PRODIICFR PRICE IN EXPORT UNIT VAlVIIE IN CnLflMRA: 1q6q TO EARLY IqR6----------------------------------------------------- _.-----___ ___ --------- _ ------------------------ _-____-____-_______________

Share of…___ _ F.x2 ort Unit Vatue (BUY) Producer Price in EUY /b

Less l.ess Gastoa and Gastos Gaston Ad-Valorem Less Gastos Less Caston andGaston Ad-Valorem Tax Rxternos Internos Tax Ad-Valorem Tax

(USo/lb) -------------------------------(Pesos/70kg)………----------------------------- -------------- (2) -----------

1969 48.st 1,304.20 1,207.50 946.66 58.20 38.sn 260.84 63.32 80.761970 48.66 1,384.34 1,283.88 1,007.01 61.96 38.50 276.87 79.00 100.721971 47.23 1,452.07 1,326.91 1,036.50 78.72 46.44 290.41 73.04 9s.501972 59.72 2,015.01 1,R80.53 1,477.53 87.48 47.00 401.n0 62.04 78961973 67974 2,470.51 2,328.95 1,834.85 94.56 47.O0 494.10 64.72 82.15

1974 67.01 2,694.06 2,447.70 1,908.89 156.36 90.00 538.81 70.10 89.88

1975 90,57 4,322.01 4,046.43 3,225.25 185.58 90.00 821.1 52.47 65.s31976 184.32 9,864.49 9,531.98 7,756.37 219,59 112.92 1,775.61 45.15 55.481977 194.16 11,017.31 10,619.85 8,746.91 257.46 140.00 1 872.94 52.58 63.84

1978 160.57 9,685.99 9,108.64 7,558.88 330.40 246.96 1,549.76 62.33 75.11

1979 165.09 10,837.69 10,020.27 8,286.24 417.42 400.00 1,'34.03 56.43 68.24 C1980 134.77 9,830.24 9,7u6.37 7,203.36 555.54 508.33 i,563.01 76.86 93.5419R1 129.88 10,913.22 9,609.85 R,223.24 708.37 600.00 1,386.61 76.51 89.411982 129.18 12,771.07 11,243.12 9,799.99 833.04 694.91 1,443.11 77.28 8M.66

1983 131.13 15,952.24 14,227.19 12,839.34 1,025.05 700.00 1,387.R4 71.12 7R.811984 132.50 20,609.73 18,513.10 17,173.47 1,355.02 741.60 1,339.61 65.*1 70.20

1985 135.0 29,650.89 26,015.89 24,088.58 2,135.00 1,soo0n0 1,927.11 58.90 63.6n

1986 (A) 237.0 64,017.00 58,077.00 54,096.00 2,940.00 3,000.00 3,981.00 40.20 43.10(46.60) /e (50.00) Ic

…----------- -- -------------------------------------------------- --------- ---------------------------------------------------

/a Federation's purchase price./b Estimate./c Including TAC with present value of 4.800 Pesos/Carga or 3,733 Pesoa/70 kg Exelno,

(*) Early February, 1986.

Source: FEDERACAPe.

co0

- 67 -

ANNEX 8Page 7 of 7

15. The present real producer prices, on the other hand, if maintainedfor several years, could result in a substantial increase in production,accumulating stocks and a weak financial position of the National Coffee Fundby the mid-1990s. If the real producer prices are kept at the present leveluntil the early 1990s, Colombia's coffee production could reach 14-15 millionbags by the mid-1990s. In case an international coffee agreement, possibly asuccessor to the present one which expires in September 1969, continues toexist, demand for Colombian coffee in the mid-1990s, according to the Bank'smodel is expected to be about 13 million bags (11 million bags for export and2 million bags for domestic consumption). In the absence of an ICA, since aproduction increase to 14-15 million bags exceeds the expected world demandincrease, Colombia would exert downward pressure on world prices. A risk ofaccumulating one to two million bags of coffee per annum in the mid-1990swould therefore be possible. Another possible impact of continued high realcoffee producer prices is on the diversification program. Although detailedanalysis on the impact of high coffet prices on the profitability of othercrops has not yet been made, they could retard diversification efforts.

16. While recent policy changes have been reasonable and perhaps in-evitable, the Bank has discussed with the Federation how future policiesmight be managed with and without boom conditions. The current pricingpolicies are effective until September 1986. Subsequently, the Colombianauthorities might consider keeping real producer prices at a level of only20% (rather than the 37%) higher than the level which prevailed in 1985, andpay any amount in excess of this as the variable "bonus payment", a policywhich we discussed in December 1985 and has been partly adopted alreadythrough the TAC mechanism. Real producer prices of 20% higher than the 1985level is estimated to enable Colombian production to reach 13 million bags bythe mid-J990s. Such a variable "bonus system" should lessen the pricesignals to producers and should help avoid any overproduction in the 1990s.It would be important to reduce real producer prices when world prices fall,which is expected to occur in mid-1987. In addition, the Federation plans tomaintain the elimination of subsidies on fertilizer, including the subsidy oftransportation costs, to maintain the elimination of subsidized credit forp'lantings and replantings, to continue providing financial assistance forstumping and for containing the "roya- disease, and to encouragediversification for increasing farmers' income from non-coffee sales.

Conclusion and Update

17. Although coffee stocks have remained high in the first half of the1980s, projections of key variables in the coffee sector under recent poli-cies have implied that the sector would continue to be an efficient andimportant part of the economy. Since the end of 1985 sharp ir.creases inworld coffee prices, resulting from the damages of unprecedented drought onthe Brazilian crop, have led to significant domestic price increases. Thenew situation has provided Colombia the opportunity to lower stocks and gainadditional foreign exchange. Nevertheless, given that this recently emergingprice situation is unlikely to be a medium-term phenomenon, the authoritiesrecognize the need to avoid a sharp increase in production through coffeepricing and complementary policies as set forth in this annex.

IBRD 1837CWr 74 i CiJsA MAY 193

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