idb - country strategy_ colombia

8/22/2019 Idb - Country Strategy_ Colombia

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DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

COLOMBIA

THE BANK'S COUNTRY STRATEGY

(EBP)

AUGUST 2003

This document was prepared by the project team consisting of: Jean Marc Aboussouan (PRI);Geovana Acosta (RE3/OD5); Raimundo Arroio (RE3/SC3); Fernando Cosso (COF); AmandaGlassman (RE3/SO3); Luis Giorgio (RE3/OD5); Roberto Manrique (RE3/FI3); JosefinaMonteagudo (INT/ITD); Fernando Montenegro (COF); Gabriel Montes (RE3/EN3); MarianaOrloff (RE3/OD5); Carlos Perafn (SDS/IND); Patricia Reyna (RE3/OD5); Ral Snchez(PRI); and Javier Len (RE3/OD5), Team Leader.


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CONTENTS

EXECUTIVE SUMMARY AND STRATEGY MATRIX

INTRODUCTION

I. KEYDEVELOPMENT CHALLENGES .................................................................................1

A. Reduce poverty and inequality...............................................................................1B. Revive the economy and jump-start growth...........................................................5C. Reduce and contain the fiscal deficit......................................................................7D. Containing the conflict...........................................................................................9E. Strengthen governance.........................................................................................11F. The governments strategy...................................................................................11

II. EVALUATION OF THE PREVIOUSSTRATEGY AND PORTFOLIO ISSUES .............................12

A. The previous strategy...........................................................................................12B. Policy-based and emergency lending...................................................................16C. Portfolio performance overview...........................................................................18D. Lessons learned and good practices .....................................................................19E. Colombia country program evaluation, 1990-2002: main findings and

recommendations.................................................................................................20

III. THE BANKS COUNTRY STRATEGY...............................................................................23

A. Lay the foundations for economic revival and jump-starting growth....................25B. Reduce poverty, inequality, and social exclusion.................................................31C. Strengthen governance and further modernization of the State.............................34D. Support to alleviate the identified constraints.......................................................36E. Implementation of the 2003-2006 strategy...........................................................37F. The country strategy: Monitoring of implementation indicators...........................40G. Risks for the country strategys implementation..................................................42H. Country dialogue agenda .....................................................................................43


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ANNEXES

Annex I Economic and financial indicators, 1998-2002

Annex II Debt sustainability

Annex III Implementation of the 2003-2006 operations program

Annex IV Summary of the Banks 2003-2006 operations program

Annex V Nonlending products, 2003

Annex VI Implementation of the Banks Country Strategy and active loans

Annex VII Active portfolio by the Banks country strategic BCS area

Annex VIII Fund flow scenarios, 2003-2004

Annex IX Banks Country Strategy: Monitoring of implementation indicatorsAnnex X Nature and agendas of consultation events

Annex XI Consultations with civil society

Annex XII References consulted for background in developing the Banks Country

Strategy


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- iii -

ABBREVIATIONS

BCS Bank country strategy

CAF Andean Development CorporationCPE Country Program EvaluationCONPES Consejo de Poltica Econmica y Social [Economic and Social Policy

Council]DANE National Statistics DepartmentDNP National Planning DepartmentFINDETER Financiera de Desarrollo TerritorialFTAA Free Trade Area of the AmericasGDP gross domestic productIIC Inter-American Investment CorporationIIRSA Initiative for the Integration of South American Regional Infrastructure

IMF International Monetary FundINURBE Instituto Nacional de Vivienda Social y Reforma Urbana [National SocialHousing and Urban Renewal Authority]

MDG Millennium Development GoalsMSMEs microenterprise and small and medium-sized enterprisesNAFTA North American Free Trade AgreementNDP National Development PlanODA Official development assistanceOECD Organization for Economic Cooperation and DevelopmentOVE IDB Office of Evaluation and OversightPBL(s) policy-based loan(s)

PRI Private Sector DepartmentSBA IMF Standby ArrangementSENA Servicio Nacional de Aprendizaje [National Apprenticeship Service]UNDP United Nations Development Programme


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EXECUTIVE SUMMARY ANDSTRATEGYMATRIX

Colombia is one of Latin Americas most established democracies, distinguished by continuity in presidential succession, stableeconomic policy management, and steady improvements in the caliber of its human capital. Paradoxically in such a democraticsetting, the country is plagued by problems with violence that are standing in the way of social and economic progress andinstitutional development. This creates special challenges for Bank support to Colombia, not just because of the impact on thecountry but impacts on neighboring countries as well.

The Banks country strategy (BCS) identifies three overarching objectives that constitute the frame of reference for Bankactivities: (i) lay the foundations for economic revival and jump -starting growth; (ii) foster social progress and make sure societysmost vulnerable are protected; and (iii) strengthen governance and further modernization of the State.

To help reinvigorate the economy the Bank will: (i) foster competitiveness and (ii) support agricultural development and naturalresources management. The aim of Bank actions to foster social progress and ensure that societys most vulnerable areprotected will be to improve: (i) social protection systems, to leave low-income groups less vulnerable, and (ii) the coverage,quality, and efficiency of essential social services, including employment avenues. In the governance and modernization of theState sphere the Bank will support: (i) national public sector reform, (ii) local management capacity building, (iii) initiatives tofoster transparency and combat corruption, and (iv) judicial branch reform.

Two constraints for the strategys viability are the countrys fiscal shortfalls and the escalating armed conflict. Fiscal deficitshave made it difficult for Colombia to tap the markets, heightened its economys sensitivity to external and domestic shocks, and

diminished the space for public investment programs. The second constraint, the armed conflict, is hurting the private investmentclimate, weakening the States national presence, exacerbating fiscal problems, and fraying the social fabric. From the Banksstandpoint these twin constraints have implications for the size of the lending program, the mix of lending and nonlending products,and prospects for achieving the strategy objectives.

Within its possibilities the Bank will help mitigate these constraints . To help redress the fiscal deficit it will provide funding toease the fiscal accounts and help purs ue reforms that, in the medium term, will lessen pressures on the fiscal balance and debt stock.Given the political nature of some actions entailed in settling the conflict and combating drug trafficking, the Bank will confineitself to complementary activitiesconsultative group coordination, strengthening of the justice system, support for development ofthe conflict zones, and fostering of peaceable coexistence.

Lending program. Seven operations totaling US$2.04 billion have been identified for 2003 in line with the thrust of the BCS. Twoquick-disbursing loans for US$1.65 billion for structural reform programs will pursue the aim of easing public-finance constraints.

Three investment loans totaling US$246 million and a policy-based loan for policy reform consolidation have been identified for2004. Considering the dynamic nature of the development process, a 10-operation pipeline has been assembled for 2005-2006 andother operations developed during the annual programming exercise will be added subsequently to the pipeline.

Sequencing of the strategy. Priorities in 2003 are to: (i) cushion the impact of the stalled economy on vulnerable groups andcontinue supporting reforms needed to assure the delivery of social services; (ii) support Colombias efforts to stimulate itseconomy by way of small operations with strong catalytic potential; and (iii) alleviate fiscal constraints and implement reforms tomake for more balanced management of the public finances and a sustainable debt stock. Assuming that satisfactory progress ismade on structural reforms and with the conflict resolution strategy, in 2004 the Bank will support further efforts in the areas of:(i) governance and a heightened State presence across the country; (ii) assistance to vulnerable groups, and (iii) government actionsto jump-start the economy and make it more competitive. In 2005-2006, assuming the State has asserted its presence in the nationalterritory and the public accounts have improved, enabling the government to boost public investment spending, the emphasis will beon: (i) national infrastructure works projects, (ii) support for other initiatives to make Colombia more competitive, and (iii) supportfor agriculture sector restructuring. Given the complex set of circumstances at work in Colombia, an expanded version of the

programming memorandum will be produced before the end of 2004 for consideration by the Programming Committee ofManagement, with an in-depth examination of: (i) the countrys economic performance and political developments, (ii) state of theconflict, the referendum outcome, and state of the debt profile and of the public finances; (iii) progress made in implementing thecore strategy areas and a review of their relevance; and (iv) adjustments needed, if any, to the 2005-2006 operations program. Thesefindings will be presented also in the annual country strategy update sent to the Board of Executive Directors for consideration.

Coordination with other multilateral organizations . The BCS has been developed and will be pursued in continual coordinationwith the International Monetary Fund, the World Bank, and the Andean Development Corporation.

The strategys implementation risks have to do with how successful the country is in remedying fiscal shortfalls and tackling theescalating conflict, which will entail achieving a political consensus around the reforms. A further contingency is the performanceof world economies and global markets.


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STRATEGY MATRPage 1 o

THEBANKS COUNTRYSTRATEGY MATRIX

Bank activitiesObjectives Government strategy Country targets

Activities of other

donorsBank strategy

In progress ProgrammedStrategy implementatio

I. Lay the foundations for economic revival and jump-starting growth

Transportation: Lower transportation costs and

increase safety. Reorganize and redelineate

transportation-sectorresponsibilities to avoidoverlaps and duplication.

Program of integratedtransportation systems in mid-sized cities.

Complete Transmilenioexpansion in Bogota.

Improvement of 59 of the 170regional airports.

35% reduction in accident rates intargeted corridors.

35% reduction in public transportoperating costs in targeted corridors. US$500 million increase in private

investment.

WB: Halt road infra-structure deterioration.Create mechanisms tomaximize private

investment in the varioussectors. Lower transporta-tion and communicationcosts.CAF: Road systems

program. Restorenavigability of MagdalenaRiver. Airstrip repairs.Urban transit in Cali,Bogota, Pereira and othercities.

Rehabilitate non-concessionable roads and

bridges. Work with subnational

governments for feeder andlocal road maintenance. Institutional strengthening of

Superintendency andRegulatory Commission.

Improve urban transit in mid-sized cities.

Help develop IIRSA regionalprojects.

Privatization andconcessions

Cundinamarca roads andinstitution-strengthening

program

MI F:Improvement ofairport security

Privatization andconcessions program II

Urban transit Arterial and feeder roads

Foster

competitiveness.

Infrastructure

development

Energy: Spur private investment in oil

industry. Dismantle fuel subsidy. Create a new regulatory

framework for petroleumproducts.

Expand electricity service inon-grid areas.

3% increase in electricity coveragein on-grid areas, from 88% to90.8%.

1.4% increase in electricitycoverage in off-grid areas, from33.3% to 34.69%.

85.6% increase in number of naturalgas customers in areas on the pipeddistribution system, from 230,000consumers to 427,000.

Support the natural ga sindustry liberalization

process. Assist in reforms of Public

Utilities Superintendency andEnergy and Gas RegulatoryCommission.

Support governmentinitiatives to expand servicein off-grid rural areas .

Support finalization ofelectricity sector

privatizations.

Privatization andconcessions

Privatization andconcessions program II

Public utilities sectorprogram

Foster

competitiveness.Enlar ge ma rkets

and improve thecompetitive

supp ly of g oods

and services

Integration: Strengthen negotiating capacity

of public and privateinstitutions.

Revamp export developmentpolicy and tax treatment of freezones.

Assess macroeconomicimpacts.

Identify social adjustmentneeds ensuing from integration

processes. Policy to help SMEs share in

integrations benefits.

US$1 billion increase in exports to

the U.S.A. of products benefitingfrom the Andean Group tariff

preference agreement, fromUS$841 million to US$1.841

billion.

CAF: Development of

ground, river and airtransportation infra-structure, which will havea strong impact onColombias domestic andexternal markets.

Ensure that the different

negotiations operateconcurrently and are mutuallycomplementary.

Build technical capacity forinteragency coordination.

MI F: Internet-based

export information system.Foreign investment

promotion. TC: Strengthening of

External Relations

Ministry

MI F: Competitiveness

and productivity policy.Creation of an export

culture. Strengthening the.industrial property system

NLP: Public debt and

raising of external funds.

Comparative analysis ofsectoral competitiveness

progra ms.

3.22% average annual GDgrowth in 20032006

(baseline: 1.6% growth i

2002) with a continued ri

over that interval.

Increase in total investme

as a percentage of GDP

from 15.1% of GDP in 20

to 16% in 2006.

Increase in overall expor

from 21.7 % of GDP in

2002 to 23.9% of GDP in2006.

Improvement of

Colombias position in th

World Economic ForumGlobal Growth

Competitiveness Index,

rising from 10th

place

among the L atin Americcountries ranked in 2002

6th

place in 2006.

Improvement of

Colombias position in thtechnology subindex of th

World Economic Forum

Global GrowthCompetitiveness Index,

rising from 12th

place

among the Latin America

countries ranked in 20028

thplace in 2006.


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STRATEGY MATRIXPage 2 of 5


Activities of otherdonors

Bank strategyIn progress Programmed

Strategy implementatio

Microenterprise and SMEs : Modernize legislation. Develop consistent

complementary credit reportingsystem.

Create legal mechanisms toexpedite fund recoveries.

Enhance efficiency inmicroenterprise and SME loanadministration.

367,480 million pesos inmicrolending via the financialsystem.

WB: Enhance thebusiness climate andfoster productivity.

Revamp microenterprise andSME regulation.

Provide technical support tothe financial system toheighten its presence in themicroenterprise sector.

Develop innovative projectclusters.

MI F: Advisory support

and technical training formicroenterprises.

Technical training for the

paper industry.

Accounting and financialinformation.. Environ-

mental quality control in

SMEs. Marketingcompany for

microenterprise owners,

Atlantic region. Business

clusters in graphic

industry. Support forbusiness development

Microenterprise and SMEprogram Sectoral competitivenessprogram

MI F: Plan to create a

business culture. Integra-tion of small business

owners into the production

chain via the governmentprocurement system

TC: Network of tropical

seed produce rs and

marketers. Female-owned

fish processing andmarketing enterprises.

Development of Colom-

bian youth entrepreneurs

Science and technology:

Institution-strengthening in thesector to increase efficiencyand attract private capital.

Increase funding to regain 1995investment levels.

Increase in number of researchers,from 125 per million population to160 per million.

Increase in public and privateinvestment in science, technology,and innovation activities, from0.44% of GDP in 2002 to 0.6% ofGDP in 2006.

WB: Technologydevelopment andinnovation in rural areas.

Improvement of science andtechnology legislation

Continue supporting creationof national technologydevelopment funds.

Science and technologyprogram

Science and technologyprogram II

Financial sector:

Rationalize the role ofgovernment as financialintermediary.

Train oversight agency staff. Make private capital a part of

capital market growth. Improve reporting systems and

foster good corporategovernance.

367,480 million pesos inmicrolending via the financialsystem..

Increase, from 412,353 millionpesos to 968,838 million pesos, inloan recoveries and sale of Centralde Inversiones S.A. property.

WB : Restructuring andprivatization of State-owned financialinstitutions. Capitalmarket development.Pension and socialsecurity system reforms.

Financial sector regulation Legal uncertainty and

guarantees Financial development for

handling of remittances

MI F: Strengthening of

credit union system.

Credit institution

administrative andoperational efficiency.

Cutting red tape for

business. Institutional

strengthening FinancieraCompartir. Institutional

strengthening Finamrica.

Promotion of cooperative

ventures. Capital market

strengthening

MI F: Remittances and

increased use of bank

services by lower-income

populations NLP: Economic

importance of remittances.

Development bank reform.

Diagnostic assessment offinancial sector

Support

agricultural

development and

natur al resources

management

Agricultural development: Improve productivity and

competitiveness by adoptingmodern technology.

Help small-scale farmers adoptmodern business forms to playa larger role in transformingagricultural production patternsand agricultural export trade.

Restructure the coffee market.

27,000 campesino householdsengaged in legal activities inmedium- and long-rangeagroforestry and agricultural

projects; at least 76,350 hectareskept free of illicit crops.

50,000 families acting as forestmonitors; at least 60,000 hectares inthe targeted areas kept free of illicitcrops.

Increase in coffee exports from0.9% of GDP in 2002 to 1.4% ofGDP in 2006.

380,000 hectares reclaimed foragriculture and consequent creationof 150,000 new permanent rural

jobs and 75,000 jobs in alliedactivities.

WB: Strengthen localleadership and localorganizations. Assistsmall farmers hurt by thecoffee crisis. Promotechange in production

patterns in coffee-growingareas. Support ruraleducation and training

programs.

Technology transfer andproductive innovation policy

Restructuring of coffeeindustry

Support activities for small-scale agriculture, in areas oftechnology transfer,infrastructure works, anddevelopment of nontradi-tional agricultural products.

Business training inagricultural and agribusinesstopics

Land management Alternative development Titling and registry

modernization MI F: Assistance for

Cauca Valley agriculture.

Isabella grape

agribusiness project

Program of support forcoffee sector

Rural developmentprogram

TC: Sustainable coffeeindustry in Colombia


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Natural resources:

Redelineate and manage forestreserves.

Build management capacity inagencies comprising the

National EnvironmentalSystem (SINA) and tighteninteragency coordination.

One million hectares of naturalforests zoned and being managed.

120,000-hectare increase inprotective and productive forestplantations in basins that arepotable-water sources, from130,000 to 250,000 hectares.

165,000-hectare increase inNational Parks System protectedareas, from10.3 million to10.5 million hectares.

WB: Sustainabledevelopment. Technicalassistance for restruc-turing of SINA.Improvement ofenvironmental protectionlaws.

Support SINA institutionaldevelopment process.

Help develop a facility fornatural disaster prevention atsubnational governmentlevel.

Environment program MI F: Environmental

management, clean

technologies

TC: Pilot socioenviron-

mental program. Solidwaste management in

coffee-growing region.

System of environmentalaccounts

Environmental investmentprogram

Manizales program NLP: Prioritization of

environmental investments

II. Foster social progress and make sure society's most vulnerable are protected

Strengthen social

assistance

programs and

make sure

society' s poorest

are pr otected

Social protection system: Gradually decentralize program

management. Protect internally displacedpersons through programs tohelp them return home, securehousing finance, and receiveloans for rural productiveactivities.

Institutional strengthening ofSISBEN beneficiary-targetingsystem.

100% of nutrition programs targetedusing the SISBEN system.

840 new social infrastructure worksin viole nce-plagued municipalities.

500,000 new jobs created throughsocial protection system.

500,000 increase in number ofschool lunch program beneficiaries,from 800,000 to 1.3 million

WB: Supportstrengthening of thesocial protection systemand foster human capitaldevelopment and jobcreation programs.

Support actions to cushionthe social impact of fiscaladjustment and of theconflict.

Reorganize and strengthenthe organizational apparatusof social sector agencies.

Improve social -expenditureprotection and targetinginstruments.

Social Support Network Pacific Coast sustainable

development Social reform TC: Social reform Peaceful coexistence and

citizen security Social infrastructure and

community-basedmanagement for peace

TC: Design of social

protection program.

Reform of drug treatment

centers. Domesticviolence prevention

models. Social reform

program. Businessactivities for low-income

women. Pacific Coast

sustainable development

Emergency social program Health and social security

reform program Social Support Network II TC: NGO information

system NLP: Market for family

benefit associations.

Poverty strategy. Social

impact of the armedconflict

Education:

Modernize national,departmental, and municipal

education administration. Increase enrollments and

improve quality of preschool,basic, and secondary education.

Improve quality and relevanceof post-secondary education

programs for the low-incomepopulation.

Increase in preschool, basic, andsecondary education enrollmentratio from 82% to 92% by creating

1,500,000 school places. 59.8 percentage point increase in

municipalities that haveadministered skills assessment teststo grades 5 -9, from 32.5% to 95%.

3 percentage point reduction inlabor force participation rate ofyouth aged 12 to 17, from 12.7% to10%.

WB: Support educationsystem decentralizationand promote enrollment

increases and qualityimprovements.CAF: School plantinvestments in Bogota.

Improve quality and increaseenrollments in basic andsecondary education.

Support implementation ofLaw 715 and subnationalgovernment management.

Reform of education forinternally displaced

population in urban areas Employment training for low-

income youth.

New school systemprogram

TC: Intercultural

bilingual educationprogram

Local governance program Support for national

information and census

system

Expan d coverage

and in crease

quality and

effi ciency of socialservice deli very

Health:

Improve the contributory andsubsidized insurance systems.

Improve access and servicedelivery.

Execute priority public healthand institution-strengtheningactions.

50% reduction in evasion andavoidance of social-insurance healthsystem (SGSSS) obligations, from36% to 18%.

Modernize hospitals, from 275 to480.

44.2% increase in subsidized planenrollment, from 11.3 million to16.3 million members.

WB: Foster SGSSSfinancial sustainabilityand efficiency andsupport restructuring of

public hospitals.

Support for health reform TC: Reorganization ofhealth care networks.System of health satelliteaccounts.

Modernization of healthcare networks

Health and social securityreform program

Decline in overall poverty

rate from 60% in 2000 to

58% in 2006.

Increase in preschool, basi

and secondary school

enrollment ratio from 82%2001 to 92% in 2006.

Increase in number of

municipalities in which ski

assessment tests have beenadministered to grades 5 -9

from 35% of the total in 20

to 95% in 2006.

Increase in number offinancially viable hospital

networks delivering efficie

service, from 21 in 2002 to54 in 2005.

44.2% increase in

participants in subsidized

health insurance plan, from11.3 million in 2001 to 16.3

million in 2006.

Decline in under-five

mortality rate from 23 per1,000 live births in 2000 to

18 per 1,000 in 2006.

Increase in population with

piped water service from91% in 2001 to 95% in 200

30% increase in rural

population with sewerservice, from 2.9 million in

2002 to 3.9 million in 2006.


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STRATEGY MATRIXPage 4 of 5





Water and sanitation:

Expand and improve waterservice.

Prevent and curtail pollutionwith sewage management plan.

Design sewage dischargeassessment approach, sanitationand waste management plans.

Develop National WaterResources Law.

Double the number ofmunicipalities employing adequatewaste management practices, from350 to 700.

184 community providers of waterand sewer services.

1 million increase in number ofrural dwellers with sewer service,from 2.9 million to 3.9 milli on.

WB: Extend the watersystem and improvesanitation in remote areas.

CAF: Water andsanitation sector operation

Strengthen regulatory system. Create direct subsidy

system for low-incomecustomers (end cross-subsidies).

Improve operation ofFINDETER.

Step up technical assistanceto utility providers.

Heighten private-sectorparticipation in the sector.

Environmental sa nitationupper Bogota River basin

Pereira water supply andsanitation

Cartagena sewer system MI F: Bucaramanga

water supply

TC: Development of

water subsidy program

National Water Plan Southwest Bogota

sanitation program Public utilities sectorprogram

Low-income housing: Improve targeting, subsidy, and

programmed savings systems. Institution-strengthening in the

sector.

40,000 low-cost dwellings financed. 67,300 increase in housing loans

disbursed, from 40,300 to 104,000.

Delivery of subsidies Strengthening of housing

policy and oversight agencies

TC: Housing sectormodernization in

Manizales

National social housingprogram

TC: Housing market

indicators

III. Strengthen governance and further modernization of the State

Support r eform of

the national public

sector

Vertical reforms: improveefficiency and organizationaleffectiveness.

Horizontal measures:rationalize public sectoremployment, streamline

bureaucracy and nationalinformation system. Improvelegal defense of the State andasset management.

10% or greater reduction in currentexpenditures of national executive.

Improvement in Colombiasranking in the Institutions andEfficiency subindex ofTransparencia por ColombiasIntegrity Index of PublicInstitutions, in the form of anincrease in number of agenciesscoring over 90, from 2 agencies in2002 to 5 agencies in 2006.

WB: Budgetmanagement,government procure-ment, rationalization oftax revenues.

Rebuild governance capacity. Improve the public finances. Increase efficiency of service

delivery. Improve information systems

that underpin public policymaking and socialexpenditure targeting.

TC: S econd phase of the

project bank. Diagnosticassessment of

Superintendency of

Industry and Commerce

National public sectorreform program

Support for nationalinformation and censussystem

TC: Moderniz ation of

national public sector

NLP: Co untry financialaccountability assessment

Strengthen local

management

capacity

Create an incentives system tospur local authorities to boosttheir revenue collectioncapacity.

Solidify local governmentsadministrative and institutionalcapacity.

Institutional strengthening of126 subnational governments(raising the total from 17 to 143),with revenue increases, adjustmentof financial information and of

pension system and recording Sustainability assurances for

adjustment processes previouslylaunched in 364 subnationalgovernments.

At least 30 decentralized agenciesrestructured.

Improve subnationalgovernment revenuemanagement and continuesupporting development ofnew revenue sources.

Institution-strengthening withan emphasis on planning and

management capacity ingovernment agencies

PBL for subnational fiscalreform

Subnational developmentprogram

Strengthening subnationalgovernment financialinformation system

Subnational developmentprogram II Institutional reform,

Bogota District Cundinamarca roads and

institution-strengtheningprogram

TC: Comprehensive

renewal of historicdistricts. Control of

government external

borrowing.

Support for localgovernance

TC: Downtown Bogota

zoning plan

NLP: The unfinisheddecentralization agenda.

Royalties: Allocation, use

and public efficiency.Bogota city pap er

Improvement of Colombia

position in TransparencyInternationals Corruption

Perceptions Index, rising

from 9th

position among th

Latin American countriesranked in 2002 to 6

thplace

2006.

Improvement of Colombiaposition in transparency

subindex ofTransparencia

por Colombias Integrity

Index of Public Institutionin the form of an increase i

number of agencies scorin

over 90, from 4 in 2002 to

2006.


position in Institutions and

Efficiency subindex of

Transparencia por Colombi

Integrity Index of Public

Institutions, in the form of

increase in number ofinstitutions scoring over 90

from 2 in 2002 to 5 in 2006


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Foster

transparency and

curb corruption

Revamp the governmentprocurement and contractingsystem.

Strengthen State and citizenoversight bodies.

Improve informationtransparency.

Foster actions to enlist theprivate sector in the anti-corruption drive.

Improvement of Colombiasranking in TransparencyInternationals CorruptionPerceptions Index, moving from57th place in 2002 to 45 th in 2006.

Publish a monthly corruption indexto track changes by sector andgeographically.

WB: Curb political andeconomic cronyism ingovernment

Support fiscal oversight,criminal justice, anddisciplinary agencies.

Assist in development of theIntegrity Index at the nationaland local levels.

Foster good corporategovernance in the privatesector.

Strengthening ofComptroller GeneralsOffice

TC loan Modernization ofjustice administration

Program to strengthen theAttorney-Generals Office

MI F: Good corporate

governance TC: Exp ansion of the

Integrity Index NLP: Anti-corruption

mission

Justi ce system

reform

Broaden access to justice. Consolidate operational,

administrative, and budget

autonomy of the judicialbranch.

Mechanisms to disciplinejudicial public servants.

Advisory assistance to the highcourts.

Reporting on state of the publicsector.

Shorten average time for propertyappropriation/confiscation rulingsfrom 8 years to 1 year.

Start up 40 community Houses ofJustice with budgets.

WB: Remedy theproblem of c ongestedcourts and sentencing

backlogs and improvethe quality and

productivity of j udicialbusiness .

Strengthen judicial branch. Technical assistance to the

high courts.

TC loan Modernizationof justice administration

TC: Coordination of

indigenous jurisdiction

and the legal system

Justice sector reformprogram


position in Oversight andDisciplinary Action subind

of Integrity Index of Public

Institutions developed by

Transparencia por Colombi

with an increase from 28

agencies scoring over 90 in

2002 to 38 in 2006.

Risks and mitigating actions Fiscal shortfalls

Fi scal shortfall s Launch a package of reforms tocontain growth in inflexible

budget expenditures andstabilize revenues.

Resolve the problem of short-term finance.

68.7% increase in tax receiptsthanks to management efficiencygains, from 1.6 billion to 2.7 billion.

Drop in central governmentoperating expenditures as a

percentage of GDP from 4.37% to3.01% .

Quickly and effectivelycomplement financial support

provided by other multilateralorganizations to cushionexternal and domestic shocks.

Support implementation ofgovernment spendingreforms.

Fiscal reform sectorprogram Social reform program TC: Support for

Government Revenues

Mission

Emergency social program Health and social security

reform program Modernization of health

care networks Public sector reformprogram Sectoral competitivenessprogram Public utilities sectorprogram

Reduction in the public

sector deficit from 3.6% GDP in 2002 to 1.2% of

GDP in 2006.

Reduction of the public

debt from 48.9% of GDP2002 to 47.7% of GDP in

2006.

Risks and mitigating actions Escalation of the conflict

Escalation of the

conflict

Control the national territory.Combat drug trafficking andorganized crime.

Strengthen justiceadministration.

Develop depressed areas andconflict zones.

Protect human rights. Strengthen civic coexistence

and values. External relations and inter-

national cooperation policy.

157 police stations reopened inmunicipalities where they had beendestroyed.

1 million Colombians trained indispute resolution and values.

300 municipalities supplied withlibraries, benefiting 4 million

people. 5,000 persons trained as readingpromoters.

The Bank will work closelywith Colombia and donorcountries to organizeconsultative groups to elicit

political and financialbacking for initiatives tobring an end to the conflictand minimize its impact onthe population.

Pacific Coast sustainabledevelopment program

Peaceable coexistence andcitizen security

Social Support Network Social infrastructure and

community-basedmanagement for peace

TC: Peaceable coexist-

ence. Urban crime and

impunity in Colombia.Creation of Investment

Fund for Peace.

Social Support Network II Support for local

governance Coordination (consulta-

tive) group NLP: Analysis of crime-

and violence-preventionactivities

50% reduction in numbe

of municipalities rated as

having medium or lolevels of violence, from

252 in 2002 to 126 in 200

CAF Andean Development CorporationMIF Multilateral Investment Fund

NLP Nonlending productTC Technical cooperationWB World Bank


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INTRODUCTION

The object of this paper is to identify Colombias key development challenges and establisha new strategy and operations program by way of which the Bank can effectively deliver

support to the country. The strategys 2003-2006 life span coincides with the administrationof President lvaro Uribe Vlez, who in August 2002 began a four-year term in office.

Considerations in deciding on overarching BCS focuses for Bank support were the Banksinstitutional strategy, the evaluation conducted of the previous country strategy,recommendations from the Banks Office of Oversight and Evaluation (OVE), andColombias National Development Plan. The operations program was developed with dueregard to the countrys borrowing and implementing capacity, the Banks comparativeadvantages, complementarity of proposed Bank activities with those of other multilateraland bilateral agencies, and lessons learned from the Banks Colombia portfolio performancein recent years.

Two facets in the BCSs development were a series of diagnostic assessments and analysesof Colombian issues and extensive consultations with the government, other donors, andcivil society. The following were among the main activities in those areas:1 (i) macro-economic, social, institutional, and sector-specific diagnostic assessments; (ii) dialogueswith representative political groups, academics, and business and financial sectorrepresentatives; (iii) sectoral meetings with government officials, and (iv) Bank, MIF andPRI programming missions and portfolio review missions. An early draft of the strategypaper was reviewed in civil-society consultations in four Colombian cities (Bogot,Medelln, Cali, and Cartagena) and with the government. The governments comments on apreliminary draft have been taken into account in this paper.

The Bank has kept up a continuous coordination dialogue with staff of the InternationalMonetary Fund, World Bank, Andean Development Corporation, and bilateral agenciessuch as the United States Agency for International Development, the Japan Bank forInternational Cooperation, and the European Community. These consultations createdsynergies and enabled the agencies to coordinate their priority focuses to make sure theiractivities would complement one another and avoid overlaps in the key strategy areas. Therehas been ongoing dialogue as well with OVE as it prepared the country program evaluation(CPE) document. Pertinent CPE (RE-208) recommendations have been incorporated intothis strategy paper.

The paper is divided into three sections. The first examines Colombias recent economic

performance, identifies the most pressing challenges facing the country, and outlines thegovernments strategy. Section II assesses the Banks current country strategy and discussesthe most serious portfolio execution problems. The third section presents the proposed

1 See Annexes X, XI, and XII.


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strategy and the operations program developed to carry it through, the implementationsequencing, monitoring arrangements, and associated risks.


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I. KEY DEVELOPMENT CHALLENGES

1.1 Colombia is one of Latin Americas most established democracies, distinguished bythe continuity of presidential succession, stable economic policy management, and

steady improvements in the caliber of its human capital. Paradoxically in such ademocratic setting, the country is plagued by problems with violence that areconstricting population patterns and holding back social and economic progress andinstitutional development. This creates special challenges for Bank support toColombia not just because of the impact on the country but impacts on neighboringcountries as well.

1.2 On the social and economic front Colombia has posted no gains in social indicatorsof poverty, inequality, or access to services; in some areas it has lost ground. It hasexperienced negative per capita GDP growth and amassed huge fiscal deficits thathave created a public debt problem. Meanwhile, the legitimacy of the State and

governance have been eroded by the armed conflict, corruption and cronyism, amanagement crisis, and the fragmentation of Colombian territory.

1.3 The following are Colombias current development challenges: (i) reducepoverty, income inequality, and social exclusion to make sure that all Colombiansreceive their fair share of the fruits of development; (ii) revive the economy andjump-start growth to take economic growth rates back up to historic levels;(iii) reduce and contain the fiscal deficit to make growth sustainable; (iv) controlthe escalation of the armed conflict which is limiting the States presence in someparts of the country, and (v) improve governance, to make the aforelisted objectivesworkable.

A. Reduce poverty and inequality

1.4 In the early 1990s Colombia made impressive strides in improving the lives ofits people. Thanks to rapid increases in education enrollmentsparticularly at thesecondary school leveland in health care coverage between 1993 and 1997, andas more and more of the population gained access to utility and other publicservices, the percentage of Colombians with unmet basic needs shrankconsiderably. There also was a significant improvement in expenditure targeting,reflected in the income distribution.

1.5 Poverty and inequality and the 1998 crisis. The 1998-1999 economic crisis put

an end to the above-mentioned gains, and in more than one sphere the country lostground. As growth slowed the unemployment rate climbed (19% in December2002), particularly among youth and women. When household income plummeted,many families had to cut back on human capital investment and lost some of theirassets. Between 1997 and 2000 the number of people surviving below the povertyline mounted, as did the numbers living in extreme poverty, especially in urbanareas (Table I-1). Income inequality measured by the Gini coefficient worsenedbetween 1996 and 2000 from 0.540 to 0.566.


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Table I-1

Poverty and inequality indicators, 2000

Urban Rural Total

Population below poverty line 51.0% 82.6% 59.8%Population below indigence line 15.8% 43.4% 23.0%

Unmet basic needs (% of households) 16.4% 40.0% 23.0%

Gini coefficient 0.566

Source: National Planning Department

1.6 Conflict and internal displacement. The worsening of strife in the last two yearsand forced internal displacements have exacerbated social problems in Colombia,dramatically altering the population distribution pattern and adding to socialdemands. According to National Planning Department (DNP) figures,approximately 939,000 persons were forcibly displaced between 1996 and 2002.

1.7 Minority groups . Though there are no conclusive statistics on ColombiasAfrodescendant and indigenous populations,2 their quality of life is worse than inthe rest of the country. Illiteracy rates are high in these communities; only a smallpercentage of them have access to schooling or basic infrastructure services. Mosthave tenuous access to health care. They also face problems involving land tenure,the spread of illegal crops, and internal displacements triggered by the armedconflict.

1. Social spending

1.8 Increases in social expenditure over the course of the 1990s attested to Colombiasresolve to protect social sector funding, particularly for health care and education. 3However, the increase was not enough to cushion the effects of the late-1990s crisison the welfare and human capital accumulation of the poor. In recent years socialprogram expenditure targeted to vulnerable groups has declined, reducing coverageprecisely at a time when it would need to be protected if not increased.4 The countrywill need to strive to deliver services more efficiently and sharpen expendituretargeting. Recent reforms such as Law 715 of 2001 and pension reform are creatingan enabling environment for a reorganization of sector finances and moves toensure that essential social services are duly delivered.

2 According to the 1993 national census, Colombias black community numbered 4.8 million (12.8% of thetotal population). Estimates in the DNP document Hacia una Nacin pluritnica y multicultural 1998-2002(Toward a Pluri-ethnic and Multicultural Nation, 1998-2002) presented in December 1998 put the total at10.5 million (26.2% of the population). The National Statistics Department estimates the indigenouspopulation at 700,000 (1.75% of total population).

3 Government social spending climbed from 8% of GDP in 1991 to 13% in 1999.4 Among the variables that have made for inefficient spending are politicization, violence, corruption,

inadequate targeting, and management shortcomings.


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% population living in extreme poverty

05

101520

25

1990 2001 2015

GoalProgress

% enrollment basic primary education

02040

6080

100120

1990 2000 2015

GoalProgress

Ratio girls/boys primary and secondary

education

80859095

100105110115120

1990 2000 2015

GoalProgress

2. The Millennium Development Goals: Status report and challenges5

1.9 A look at the millennium indicators shows that, except for the objective oferadicating extreme poverty, Colombia is on track to attain the MillenniumDevelopment Goals (MDG). The achievement of these goals was a priority in theprevious country strategy and remains a priority in the strategy proposed here. Thegains posted to date are the result of initiatives to protect vulnerable groups,advance education and health reforms, and fund water and sanitation systems. Thegovernments National Development Plan charts even more ambitious targets forthe education and health sectors and protection of vulnerable groups over the nextfour years. However, efforts on that front will have to be balanced with thegovernments ongoing fiscal adjustment moves.

1.10 Eradicate extreme poverty and hunger. Thepercentage of Colombians living in extreme poverty

climbed from 20.4% in 1991 to 23% in 2001. Tohalve the proportion of people whose income is lessthan one dollar a day the economy would need togrow approximately 3.4%, on average, until 2015.Colombia reduced its under-five malnutrition ratefrom 10.1% in 1990 to 6.7% in 2000.

1.11 Achieve universal basic primary education. Despitethe economic crisis, enrollments of children aged 5 to11 continue to rise, the strongest increases beingamong females and urban residents. Between 1990

and 2000 the net primary enrollment ratio jumpedfrom 68.7% to 83.6%, though repetition and dropoutrates continue to be a concern.

1.12 Eliminate gender disparity in primary andsecondary education by 2005 and at all levels of

education by 2015. The sharp rise in enrollment andliteracy rates in Colombia over the past two decadeshas considerably narrowed gender and urban-ruralgaps.6 However, increases in female enrollment ratiosin the last ten years have not necessarily translated

into higher incomes for women. One of the reasons

5 The MDGs, embraced by 189 nations at the 2000 United Nations Millennium Assembly, are a set of goals,targets, and indicators to be attained by 2015 to achieve substantial improvements in the areas of povertyreduction, health care coverage and education enrollments, and environmental protection.

6 Between 1978 and 1998 the female urban enrollment ratio rose from 55% to 70%. The rural enrollment rateclimbed from 37% to 51%.


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Maternal mortality per 100,000 live births

020

406080100120140

1995 2000 2015

GoalProgress

Child mortality rate per 1,000 per live births

0

5101520253035

1990 2000 2015

GoalProgress

Recorded AIDS cases

300400500600700800900

1000

1990 1992 1994 1996 1998 2001

for this behavior is that the countrys internal conflicthas had an extremely adverse effect on women.

1.13 Reduce the maternal mortality ratio by threequarters . An increase in the number of medicallyassisted births in the second half of the 1990s is onefactor in the declining maternal mortality rate.

1.14 Reduce the under-five mortality rate by two thirds . Colombia has postedimpressive gains in child mortality figures andprenatal care.7 However, late-1990s cuts in fundingfor public health programs and initiatives dramaticallylowered immunization rates. Between 1997 and 2001immunization coverage for tuberculosis dropped from97.9% to 84.8%, for DPT from 83.9% to 77.6%, and

for polio from 84.8% to 80.5%.

1.15 Halt and begin to reverse the spread ofHIV/AIDS and the incidence of malaria andother diseases. In 2001 the incidence rates of AIDSand malaria in Colombia were 2.3 and 766 per100,000 population, respectively. By the late 1990sthe country had brought malaria under control, butin less than four years1999 to 2002the numberof reported cases doubled from 71,000 to 139,000.Rural parts of the country are at greatest risk for this

disease.8

1.16 Develop a world association for market development and access. While thepoor countries are committed to better governance in order to mobilize andadminister resources more effectively and equitably, the rich countries arecommitted to providing more aid, promoting debt relief, and facilitating marketaccess and technology transfer. Specifically, the commitments that these countrieshave assumed are (i) to adopt an open, regulated, and nondiscriminatory tradesystem; (ii) to address the issues of access to free trade and export quotas on goodsfrom less developed countries; (iii) to respond to the development needs oflandlocked states; (iv) to take up the issue of developing country debt in order to

ensure their sustainability; (v) to prepare and apply strategies that accord youngpeople decent and productive work; (vi) to provide access to emergency medicines;and (vii) to ensure that these nations can tap the benefits of new technologies.

7 Between 1990 and 2000 the mortality rate dropped from 30.4 to 19.5 per 1,000 live births.8 The data show an increase in recorded AIDS cases, but this attests also to improvements in reporting and

tracking systems.


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1.17 According to the most recent United Nations Development Programme (UNDP)9report, official development assistance (ODA) declined between 1990 and 2001from 0.33% to 0.22% as a percentage of donor country gross national income.

Since the Millennium Develoment Goalswere adopted in 2000 this trend has reversedand ODA rose by 5% from 2001 to 2002 dueto the Monterrey Conference commitment toincrease aid by US$16,000 annually to theyear 2006.

1.18 Nonetheless, with this increase total ODA isstill only 0.26% of gross national income ofthe OECD Development AssistanceCommittees 23 member states, well belowwhat is considered necessary to achieve theMDGs (approximately 0.43% of these countries gross national income).

B. Revive the economy and jump-start growth

1.19 From steady growth to slow growth. Colombias average annual growth rateslipped from 5% in 1950-1980 to 3% in 1980-2000. Productivity declines were thechief reason for the early-1980s turning point in the growth trend, though the rise indrug trafficking and buildup of violent groups played a part as well.

1.20 Another set of factors at work in the late 1980s pushed up household, business, andgovernment expenditures, notably: (i) the surge in illegal exports; (ii) the discovery

of oil deposits which triggered heavy funds flows and also made it easier to secureexternal credit; (iii) an influx of highly speculative capital attracted by betterinterest rates in Colombia, and (iv) increased public spending on education, health,social security, and government operations to comply with mandates in the 1991Constitution and associated laws.

1.21 The combination of steady productivity declines and rising spending that wasoutpacing revenues triggered structural imbalances and left the economy highlyvulnerable. A string of external shocks starting in 1998 ushered in a recession.Persistent deficits between agents (flows problem) were funded through newborrowings, swelling the debt and leaving the economy financially vulnerable

(stocks problem).1.22 Recession and stagnation. In late 1998, after a brief growth bubble in 1997,

Colombias economy was plunged into its deepest crisis in 70 years (see Annex I).Throughout 1999 and 2000 the country had to contend simultaneously with GDP

9 UNDP. The Millennium Development Goals: A pact Among Nations to End Human Poverty/HumanDevelopment Report 2003.

Official development aid (ODA)As a % of donor country GNP

0.33%

0.22%

0.09%0.05%

0.00%

0.10%

0.20%

0.30%

0.40%

1990 2001 1990 2001To developing countries To less developed countries


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declines, financial system upheaval and serious problems with mortgage borrowers,a fiscal crunch in the subnational governments, contingent liabilities for pensionsand concessional infrastructure guarantees, a widening central government deficit,

the dearth of external financing, and a sharp escalation in violent groups activities.1.23 Trimming the private and subnational government deficits. The above-

mentioned events forced businesses and households to adjust their finances in lightof their new liability and asset situation and to respond to new economic signals. By2001 the private deficit had been largely erased, the financial crisis had passed, andthe government was bringing in a program to put subnational government financesin order. Though the year had started off with a slow recovery, the growth rateended up a modest 1.4%, the result of political factors and external events. In thepolitical sphere, the stalled negotiations with violent groups and political clashesbetween the executive branch and legislature consumed the governments attention.Internationally, the downturn in the advanced economies and difficulties in theemerging economies depressed external demand. In these circumstances thegovernments efforts to narrow the deficit (including tax reform) proved to beinsufficient, with serious implications for the medium term.

1.24 The international environment and its impact on Colombia. An importantconsideration when examining Colombias situation is that as its economy hasopened up in a globalizing world it has become increasingly sensitive to slowdownsin the industrial economies, instability and financial turbulence elsewhere in theregion, fluctuating terms of trade, and volatility in capital flows. When Ecuadorsuspended payments to banks in 1999, for instance, it became more difficult toobtain external credit, and the recession in Venezuela affected Colombian exports.

Oil and coffee prices fluctuated sharply in 2000; in 2001 the global recessiondeepened in the wake of the events of September 11. Severe economic turbulencein Argentina, Brazil, Paraguay, and Uruguay in 2002 hurt international marketborrowing prospects.

1.25 In short, the Colombian economy is sensitive to developments in the emergingeconomies, particularly in Latin America; to the growth performance of its tradingpartners, principally the United States, and to commodity price fluctuations. Themoderate global growth forecast for the coming years thus has implications foreconomic recovery in Colombia.

1.26 With a new government, new expectations. The new administration that tookoffice in August 2002 mapped out a strategy to deal with the conflict and astructural reform plan to rein in the deficit and stimulate the economy. Thistriggered a shift in expectations, with signs of productive-sector reactivation.Though the economy grew barely 1.6% in 2002 (a slight improvement over 2001),expectations for the coming years are moderately positive and improving.


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C. Reduce and contain the fiscal deficit

1.27 Fiscal shortfalls: the unfinished reform agenda . The sharp increase ingovernment spending since the early 1990s is associated with moves to reform theColombian State. For one thing, in a resolute effort to pay part of its social debtColombia substantially increased education and health transfer payments tosubnational governments. With the passage of Law 100, the governments pensionliabilitynow explicit in the public accountssoared. 10 Defense spending alsomounted as the conflict intensified. By virtue of these increases, public-sectorcurrent and capital spending as a percentage of GDP doubled in 11 years, from16.8% of GDP in 1990 to 33.5% in 2001. Apart from steadily rising, these outlaysbecame inflexible budget envelopes. On the revenue side, in the early 1990scurrent revenues had been high enough to defray expenditures, but because of a taxlag the government had to revamp the tax system six times in the space of ten yearsto boost tax receipts. As a result, the budget deficit widened from 0.3% of GDP in1995 to 5% in 1999, then moved back to 3.6% of GDP in 2002.

1.28 The government funded the deficit chiefly through external and domesticborrowings. The nonfinancial public sector debt stock as a percentage of GDPmore than doubled between 1996 and 2001, from 22.9% of GDP to 47.7%.11 In2002 the government had to contend with a number of challenges: (i) difficulties inaccessing domestic and international markets; (ii) an inflexible debt budget line;12and (iii) uncertainty as to the sustainability of the public debt given the dynamic ofinflexible budget expenditure, the magnitude of the debt relative to GDP, and therepayment profile.

1.29 Sustainability of the public debt. Between 2003 and 2006 an estimated 50% ofColombias aggregate public debt will come due. The most onerous years in termsof maturities will be 2003 and 2005. Such a repayment profile in a slow-growthenvironment has further jeopardized the sustainability of the public debt. Accordingto the estimates, for the debt to be sustainable the country would need to post aprimary surplus of between 1% and 3.5% of GDP, depending on assumptions aboutgrowth and interest rates (see Annex II).

1.30 Accordingly, Colombia is faced with both a flow problem and a stock problem.The government is focusing its efforts on: (i) containing the growth of inflexiblebudget expenditures; (ii) eliminating the fiscal shortfall through changes to the tax

structure and more efficient administration of tax revenue; (iii) resolving theproblem of short-term finance so the country can continue to service its debt;

10 The disproportion in benefits and shortfall in reserves to deliver on these pension obligations also wererevealed.

11 Successive exchange-rate devaluations from 1999 onward had much to do with the increase in the debtstock.

12 Debt service payments in 2002 absorbed 42.5% of overall public sector revenues.


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(iv) improving the debt profile; (v) easing debt repayments, and (vi) stimulatingeconomic growth with the aim of lowering the debt-to-GDP ratio.

1.31 Remedying fiscal shortfalls: Standby Arrangement (SBA) with the IMF. TheUS$2.2 billion IMF standby credit approved in January 2003 is the framework forColombian macroeconomic policy for the next two years. The program assumes2% economic growth in 2003 and 3.3% the following year. The inflation, current-account deficit, and fiscal deficit targets are shown in Table I-2.13

Table I-2

SBA targets

2002 2003 2004

Annual percentage change

Real GDP 1.6 2.0 3.3

Inflation 6.0 5.5 4.0

As a percentage of GDP

Current-account deficit -1.7 -0.8 -1.6

Overall public-sector deficit -3.6 -2.5 -2.1

Source: IMF

1.32 Medium-term economic outlook. Table I-3 presents IMF projections in thescenario discussed above, assuming successful implementation of the fiscaladjustment program and structural reforms. The forecast is as follows: (i) theoverall public sector deficit will come down to stand at 1.1% of GDP in 2006;(ii) the external debt stock as a percentage of GDP will drop more than six

percentage points over that interval and the public debt stock will trend downsimilarly; and (iii) external funding will once again be scarce in 2003 and,consequently, the current-account deficit as a percentage of GDP in 2003(0.8%) will be less than half the 2002 figure of 1.7%; the situation will improve in2004 and 2005 as more external finance becomes available, easing the current-account deficit.

13 Though the SBA is for two years, the IMF and other multilateral agencies are expected to be tracking themacroeconomic and structural targets throughout the entire period.


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Table I-3. Medium-range outlook

2003 2004 2005 2006

GDP and prices (annual percentage change)Real GDP 2.0 3.3 3.7 3.9

Consumer prices 5.5 4.0 4.0 3.0

Saving and investment (percentage of GDP)

Gross saving 12.2 12.4 12.8 13.0

Private sector 7.5 7.2 6.9 6.9

Public sector 4.7 5.2 5.8 6.1

Gross investment 13.0 14.0 14.6 14.8

Private sector 7.5 6.8 7.4 7.6

Public sector 4.7 7.2 7.2 7.2

Overall public sector (percentage of GDP)

Balance -2.5 -2.1 -1.4 -1.1

Balance of payments (annual percentage change)Current-account balance -0.8 -1.6 -1.8 -1.8

Capital-account balance 1.2 2.0 3.2 2.9

Overall balance 0.3 0.5 1.4 1.1

Debt stock(percentage of GDP)

External debt 51.3 48.2 46.7 44.9

Public 31.3 30.1 29.6 28.7

Private 20.0 18.1 17.2 16.2

Public debt 55.5 54.3 52.6 50.6

Domestic 24.2 24.2 23.0 22.0

External 31.3 30.1 29.6 28.7

D. Containing the conflict

1.33 Roots of the conflict. The armed civil strife that has been playing out in Colombiafor close to 40 years has been characterized by successive rounds of violence ofdiffering degrees of intensity. The two most powerful violent groups are FuerzasArmadas Revolucionarias de Colombia [Revolutionary Armed Forces of Colombia](FARC) and Ejrcito de Liberacin Nacional [National Liberation Army] (ELN). Inthe first few years following the advent of these groups their numbers grew little ifat all. They operated out of marginal areas of the country; they were small, poorlyfinanced and ill-equipped for military confrontation, and had a meager communitysupport base. Meanwhile, paramilitary bands with many different roots, fundingavenues, popular support bases, and partisan leanings began to take shape.

1.34 The 1980s: the end of hibernation. In the early 1980s, following what could betermed a 20-year hibernation, there was a surge in growth of violent groups whomoved into areas of critical economic and geostrategic importance to the country.To sustain their growth these groups financed their operations with money fromillegal activities (the drug trade) and from corporations associated with the


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extractive industries (oil, coal, gold) and export agriculture, and through extortionand kidnappings.14

1.35 Recent escalation of the armed conflict and attempts at dialogue . The escalationof the armed strife starting in the 1990s attests to the military power these groupshave gained and their growing self-sufficiency, notably on the funding side.15Between 1998 and 2002 talks were held between the government and these violentgroups, with little progress of note. In February 2002 negotiations with the FARCbroke down and the demilitarized zone was dismantled. The escalating conflictsince that point has taken a severe toll on the civilian population and economicinfrastructure.

1.36 Effects of the violence and strife. The conflict zone has broadened: in 1991-1994it took in 223 municipalities; it now encompasses more than 400. In 2001 and 2002an average of 115 municipalities came under attack. The civilian population also

has paid the price of this escalation, with increased attacks on local communities,murders, massacres and kidnappings. Since 1995 the number of civilian casualtiesof the violence has tripled. According to National Planning Department figures,75,730 families were internally displaced in 2002. The nations economicinfrastructureelectricity, roads, and communications systemsalso has beendamaged in the fighting. Attacks on oil pipelines have doubled in the past threeyears, inflicting close to US$500 million in losses in 2001 alone. The worseningconflict and increases in drug-related violence have indisputably affected theeconomy, discouraging investors, leaving production centers in disarray, pushingup transaction costs, and eroding human and productive capital.

1.37 Defense and democratic security policy. The core objective of the governmentspresent defense and security policy is to restore security and reassert the Stateslegitimacy where these conditions are absent. As the policy acknowledges, this willrequire a concerted effort with involvement of the armed forces and justiceadministration, education and health care delivery, and the capacity to create anenabling environment for productive activity. The policy is slated forimplementation in three phases. First, the armed forces are to regain control of areaswhere violent groups are least active. Once the State has reasserted its presence,other government agencies will go into each area with aid and developmentprograms, coordinating their work with law enforcement agencies. The final phasetargets the most inaccessible areas, in which the same strategy will be pursued.

Thus, little by little, social investment, governance, and State legitimacy will berestored across the country.

14 The FARC financed its operations through its control of areas where illegal crops were grown, the ELNthrough the mining industry.

15 Paramilitary groups also have mushroomed in recent years, from 2,500 militants in 1996 to 12,500 in 2001.


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E. Strengthen governance

1.38 Twin crises of the State . If Colombia is to rekindle economic growth and reducepoverty, inequality, and social exclusion at a time of fiscal restraint it will have tostrengthen its governance and resource management capabilities. At present theColombian State is contending with two crisesone involving its ability to makeofficial decisions work on the ground, the other its inability to impose a basic socialcompact underpinned by legitimate institutions and respect for the law and rights.

1.39 Driving the management crisis are a shortage of human resources and the absenceof the requisite financial and administrative conditions and regulatory frameworkfor government agencies to discharge their responsibilities. Because of bureaucracycosts, mounting public spending, and inefficient management the State is unable torespond adequately to societys needs. For another thing, the decentralizationprocess is taking time. Many subnational governments have stabilized their finances

since the 1998 financial crisis; the next step is to build capacity to manage theirown development. There still are weak points in their institutional apparatus aswell, in the areas of information flows, decision-making, and responsibilityallocation.

1.40 At the heart of the governance crisis are corruption and cronyism which underminethe publics trust in institutions. A compounding factor is that the countrys judicialapparatus does not have the necessary toolsinstitutional and managementarrangementsfor efficient and effective proceedings. The resulting court backlogsweaken the rule of law and foster impunity.

F. The governments strategy

1.41 The governments official strategy roadmap is its National Development Plan(NDP), entitled Toward a Communitarian State. The governments four primeaction focuses for 2003-2006 are: (i) instilling democratic security; (ii) spurringsustainable economic growth and job creation; (iii) building social equity, and(iv) enhancing State transparency and efficiency. According to the NDP, theleading domestic causes of the nations sluggish economy and the halt in socialgains are: (i) the intensification of the armed conflict, (ii) the burgeoning fiscaldeficit, and (iii) deteriorating external conditions. In accordance with that diagnosticassessment, the starting premise for the Uribe administrations strategy is that by

quickly closing the fiscal gap and resolving the armed strife and security problemsthe country can move toward economic recovery and improve social conditions.


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II. EVALUATION OF THE PREVIOUS STRATEGY AND PORTFOLIO ISSUES

2.1 This section reviews the outcomes of the 1998-2002 strategy and lessons learned inits implementation. The conclusions drawn have served as inputs to improve theproject programming, preparation, and implementation process for the 2003-2006strategy. This exercise is all the more relevant given the continuity in the priorityfocuses of Bank support.

A. The previous strategy

2.2 The country paper approved by the Banks Board of Executive Directors in August1999 set out five thematic areas as priority focuses for Bank activities: (i) supportfor the peace process; (ii) poverty reduction and equity enhancement;

(iii) consolidation of the decentralization process; (iv) furthering modernization ofthe State; and (v) fostering sustainable growth. As discussed in the first chapter ofthis paper, the keynotes of the economic and political backdrop for the previousstrategys implementation were deep recession and a stalled economy that took aheavy toll on societal welfare; escalation of the armed conflict and breakdown ofdialogue, and an adverse international environment. In those circumstances theobligatory focuses of attention for both the Bank and the country were the peaceprocess, in light of the escalating strife; poverty, because of the toll the crisis wastaking on the countrys most vulnerable, and decentralization because of thefinancial and management crisis in subnational governments. Meanwhile, asColombia found itself shut out of external markets and its fiscal accounts

deteriorated, it needed considerable volumes of funding to cushion the effects of thecrisis.

2.3 On the operations side, the Banks 1998-2002 strategy was implemented by way of31 projects, most of them (34% of approvals by lending volume) providing supportfor poverty reduction and equity enhancement programs. Operations to furthersustainable growth, modernization of the State, and decentralization accounted for,respectively, 23%, 21%, and 16% of funding approved over that interval. TheUS$120 million approved to further the peace process made up the remaining 6%. 16

2.4 The country paper approved in 1999 marked the first attempt at defining outcomeindicators for each priority action area. Referencing that exercise, the following

paragraphs present a rough measure of the strategys implementation progress.Table II-1 summarizes the goals set for each strategy focus, outcome indicators,progress made by the country in Bank-supported areas, and projects by way ofwhich the support was delivered. Most of those programs are now in progress;

16 Though at first glance this figure might suggest that this area came in for little attention, in fact a sizableshare of the Banks support for the peace process was delivered by way of nonreimbursable technicalcooperation and consultative groups.


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many of the activities have contributed significantly to the achievement of theproposed objectives and thus warrant mention.

2.5 Strategy focus: support for the peace process. The Bank continued to participateactively with the international community in initiatives to further the peace processand help make it credible. Specifically, the Bank supported: (i) conceptual andinstitutional design of the Plan Colombia Investment Fund for Peace;(ii) organization of three meetings of the Consultative Group in Support of thePeace Process;17 and (iii) project identification and profile development foroperations for the Investment Fund for Peace. Though the peace accord goal wasnot attained, these initiatives did facilitate the dialogue and involve the internationalcommunity in the peace process. The urban violence prevention programsimplemented in three of Colombias largest cities in pursuit of the peaceablecoexistence objective have achieved substantive quality-of-life improvements incommunities contending with violence and insecurity. 18 To help further reform ofthe State the Bank supported basic infrastructure programs for municipalitiesaffected by the violence. Reducing impunity was a focus of support in the area ofjustice administration, through programs to strengthen oversight agencies and thecriminal justice system. 19 No moves were made toward privatizing Colombiascorrectional services, the government not having considered this a priority.

2.6 Strategy focus: support for poverty reduction and social equi ty enhancement.Over half the Bank projects approved between 1998 and 2002 and 34% of the totalvolume of funding were poverty and equity targeted. In the education sphere theBank focused on key improvements in education quality, the system of centralgovernment transfers to subnational governments, and employment training

programs for low-income youth. Plans to revamp the National ApprenticeshipService (SENA) were deferred because of the political difficulty of putting throughradical training-system reforms at a time of high unemployment. The emphasis ofBank support for the health sector was assistance to low-income groups, expansionof coverage of the subsidized and contributory health insurance systems,immunization programs, and social assistance for the low-income elderly andchildren. 20 What started out as a pilot initiative with hospital reform will need to beconsolidated with the reform of health care networks and a shift from a supply-side

17 These meetings also served as a platform for presentation of the peace-building issue at the international

level and to help the country access US$1.2 billion in funding for violence prevention programs.18 Homicide rates in Cali and Bogota have been declining since 2000.19 According to Transparency International, the corruption perception level in Colombia declined between

1997 and 2001, taking the country from the first decile of the countries ranked (those where the corruptionperception was highest) to the fifth decile.

20 The percentage of Colombians covered by the Social Security Health System increased sharply in the latterhalf of the 1990s in both the contributory insurance plan and the subsidized plan. By 2001 these planscovered 25.7% and 30.9%, respectively, of the population.


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to a demand-side subsidy system so the sector will become financially viable anddeliver services efficiently.

Table II-1

Implementation of the Banks 1998-2002 strategy with Colombia

Strategy focusProposed

objectivesDescription Outcome indicators Progress Loans approved 1998-2002

Signature of peace accord -Civic coexistence

Facilitate dialogue on and implement asustainable national accord Reduction in homicides

and kidnappings n.c.Peaceful coexistence andcitizen security program

Reform of theState

Heighten the States presence as thedecentralization process advances

Public investment invulnerable areas +

Municipal management andsocial infrastructure for peace

Reduction of impunity + Strengthening of ComptrollerGenerals Office

The peace processand itssustainability

Justice

(i) Strengthen Comptroller GeneralsOffice and Attorney Generals Office;(ii) alternative dispute resolutionmethods; (iii) prison reform, probity and

ethics policy

Privatization of

correctional services

Financial autonomy ofschools +

New school system program.

Social Support Networkprogram. Social sector reformprogram

Education

(i) Improve education quality andstrengthen the role of the school;(ii) employment training; (iii) reform ofSENA

Reform of SENA

Health(i) Improve procedures for joining thesubsidized insurance plan; (ii) self-financing hospitals

Increase in subsidized-planmembers +

Social Support Networkprogram. Social sector reformprogram

SanitationSupport for mid-sized cities and forprivate-sector involvement in largecities

Contracts with privatecompanies n.c.

Pereira water supply andsanitation. Cartagena sewersystem

Housing (i) Institution-strengthening assistance;

(ii) reform of InurbeHome loans +

Earthquake in coffee-growingregion. Program to rebuild thatregion

Agriculture(i) Create production infrastructure;(ii) support science and technology;(iii) institutional reform

Investment in ruralmunicipalities

Poverty reductionand equityenhancement

Microenterprise(i) Augment the supply of nonfinancialservices; (ii) increase ruralmicroenterprise finance

Rural microenterprisecredit

Education Strengthen the school as decision-makerand transfer recipientPassage of Regional &Local Govt. Reform Law n.c. New school system program

Health (i) Shift from supply-side to demand-side subsidies; (ii) hospital autonomyRevision of transfercriteria + Social sector reform programConsolidation ofdecentralization

Reform of theState

(i) Regional and local governmentreform; (ii) support for municipalinstitutions

Passage of tax reform law + Sector program for subnationalfiscal reform

Passage of State reformlaw

Reduction of budget lag +Sector program for subnationalfiscal reform

Social sector reform program

Modernization ofthe State apparatus

Reform of theState

(i) Fiscal adjustment; (ii) streamliningthe State; (iii) process reform;(iv) public-spending efficiency;(v) bolstering regulation

Increase in tax burden +


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Table II-1Implementation of the Banks 1998-2002 strategy with Colombia

Strategy focusProposed

objectivesDescription Outcome indicators Progress Loans approved 1998-2002

Infrastructure

(i) Increase in capital productivity withprivate-sector participation; (ii) designof innovative mechanisms to fostersame.

Concession andprivatization contracts n.c. Electric power sector

Merger of second-floorbanks -Financial sector

(i) Reform of State-owned banks;(ii) technical assistance;(iii) strengthening of oversight Provisioning data +

Financial sector reformprogram

Agriculture(i) Creation of production infrastructure;(ii) transformation of productioninfrastructure by region or crop group

Disbursements for ruralmunicipalities

Fostering ofsustainable growth

Environment(i) Local government participation;(ii) water pollution control and solidwaste disposal

Cuts in emissions andtoxic pollutants

* Does not include canceled operations and other financial and nonfinancial products.+ Positive progress- Negative progressn.c. There have been some initiatives but outcomes are not conclusive.Shaded areas denote sectors in which no Bank loan operations were executed.

2.7 In the water and sanitation sector, actions were taken to modernize utilityproviders in mid-sized cities in order to facilitate private-sector participation in thisarea. Unfortunately no program to support this sector in small cities materialized. Inthe area of low-income housing, the Bank provided support for the governmentssocial housing policy, via subsidies, and funds were allocated for urban housingimprovement projects using the SISBEN beneficiary-targeting system. A dialogue

was launched to revamp the institutional apparatus and strengthen management inthis sector. In the agriculture sphere, within the constraints posed by the fighting inrural areas, Bank activities supported regional production projects and fostered thecreation of innovative small strategic partnerships. The Bank did not fund anymicroenterprise projects over this interval since the problem in that area was notone of demand but of improving nonfinancial services.

2.8 Strategy focus: support for decentralization. The Banks support fordecentralization in Colombia took two forms. The first was assistance inimplementing a legislative strategy to stabilize the finances of subnationalgovernments and improve their financial viability following the 1996-1998 crisis in

local government finances;21

the second was activities to help contain increases ingovernment transfer payments to the subnational governments and revamp theeducation and health transfer payment system. One of the Bank actions contributingthe most added value was its support for the complex, difficult decentralizationprocess when local governments were in the throes of fiscal crisis. The Bank

21 The number of financially viable local governments more than doubled between 1998 and 2002, from400 to 850.


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contributed greatly to financial consolidation, gradual institutional reform, anddialogues on technical issues. It also provided support for development of basiclegislation for a reform of the subnational government tax revenue system. The

agenda for entrenching a decentralized institutional apparatus is a medium-rangeundertaking that will require continuous monitoring and support.

2.9 Strategy focus: reform of the State. The Bank supported a proposal to reorganizethe national public sector but the project was not implemented owing to theConstitutional Courts ruling that the reform bill was unconstitutional. The Bankalso fostered initiatives to increase the tax burden, streamline the public sector, andmake public spending more efficient.22

2.10 Strategy focus: f oster sustainable growth. The chief focuses of Bank support inthis area were the financial and electric power sectors. To help remedy the systemiccrisis in the financial sector, various measures were implemented to rewrite laws

and regulations governing financial system institutions. In the electricity sector,regulatory and institutional machinery were strengthened, the involvement ofprivate enterprise was facilitated, and a rural electrification policy was developed.Because of the unfavorable investment climate no progress was made toward theconcessions and privatization goal. The merger of second-floor banks was deferred,and agricultural initiatives with rural municipalities were constrained by theconflict. On the environmental side, there were no activities to reduce toxicresidues.

B. Policy-based and emergency lending

2.11 Between 1998 and 2002 the Bank approved three emergency loans and two policy-based loans (PBLs) to supply government funding needs and help implement a setof structural reforms. These programs were an efficient countercyclical mechanism,furthering reforms primarily in the financial, local government, and social sectors.

22 Tax revenues climbed from 10.8% of GDP in 1997 to 12.4% in 2002.


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Table II-2Policy-based and emergency lending to Colombia, 1998-2002

Program Proposed actions Chief outcome

Electric sector

(1159/OC)

(i) Help make the electric power sector financiallysustainable; (ii) consolidate the electric sector regulatoryfunction; (iii) devise a rural electrification policy for off-gridareas; (iv) facilitate private-sector involvement in nationalpower distribution companies

Support institutional andregulatory improvements

Fiscal sector

reform

(1166/OC)

(i) Increase the tax burden; (ii) streamline the public sectorand make public spending more efficient; (iii) modernize thesocial security system; (iv) minimize duplication in publicspending; (v) help local governments balance their finances

Support fiscal strengthening at atime of crisis

Financial sectorreform

(1231/OC)

(i) Improve laws, regulations, techniques and procedures forbank failure resolution; (ii) build institutional capacity inagencies responsible for bank oversight and failureresolution; (iii) resolve the situation of State-owned first-floor banks and of institutions under the control of orreceiving assistance from the Deposit Insurance Fund

(FOGAFIN).

Contain the financialsystem crisis

Subnational fiscalreform (1335/OC)

(i) Devise and implement mechanisms to strengthen localgovernment (LG) finances; (ii) clarify responsibilityallocation in order to minimize duplication in health andeducation spending; (iii) develop rules that will enable LGsto be fiscally viable; (iv) implement institution-strengtheningprograms for LGs.

Strengthen subnationalgovernment finances and revamp

idb - country strategy_ colombia

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