Report No. 3556-CO

Economic Position and Prospects of Colombia(In Two Volumes)

Volume 1: Main Report

September 17, 1981

Latin America and Caribbean Regional Office

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit: Peso

Exchange Rate Effective September_4, 1981

US$1.00 = Col$55.77

Col$1.00 = US$0.0179

Average Exchange Rate (Buying)

1977 1978 1979

US$1.00 = Col$36.775 US$1.00 = Col$39.095 US$1.00 = Col$42.550Col$1.00 = US$0.0272 Col$1.00 = US$0.0256 Col$1.00 = US$0.0235

1980

US$1.00 = Col$47.280Col$1.00 = US$0.0212

FOR OFFICIAL USE ONLY

This report is based on the findings of a mission which visited

Colombia on April 1981. The mission was led by Mr. Jose Sokol and included

Mr. Mario Blejer, Mrs. Sushma Ganguly, Mr. Angel Antonaya and Ms. Consuelo

Cruz. In addition, the report includes contributions from a Public Sector

Investment mission which visited Colombia in November 1980 composed of

Messrs. Jose Sokol, Ali Ezzati, Luis Marco, Constantinos Doultsinos and

Branko Grdjic. Mr. Wolfgang Schaeffer contributed a background paper for

that mission.

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.

TABLE OF CONTENTS

Page No.

VOLUME I - THE MAIN REPORT

MAPCOUNTRY DATASUMMARY AND CONCLUSIONS i - xv

I. BACKGROUND ................................................. 1

A. Introduction .. 1......................................... B. Recent Economic Developments, 1974-79 .................. 2C. Economic Developments in 1980 .......................... 6D. Short Term Outlook ...... ............ ................... 14

II. DEVELOPMENT ISSUES AND STRATEGY ............................ 17

A. Introduction ........................................... 17B. The Process of Import Liberalization ................... 19C. Energy ................................................. 22D. Transportation ......................................... 26

E. Agriculture ............................................ 28F. The Social Sectors ..................................... 31

III. PUBLIC SECTOR INVESTMENT PROGRAM ........................... 36

A. Public Sector Investment ............................... 36B. Financing of Public Sector Investment .................. 43

IV. ECONOMIC PROSPECTS ...... ............ .. ..................... 47

A. Output and Expenditure ................................. 47B. Balance of Payments .................................... 49C. External Capital Requirements .......................... 53D. Debt Management and Creditworthiness ................... 55

VOLUME II - STATISTICAL APPENDIX

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Page 1 of 2 pages

COUNTRY DATA - COLOMBIA

AREA 2/ POPULATION DENSITY1,138,900 knr (total) 26.7 million (mid- 1980) 22.9 lper km2/

232,000 (arable) Rate of Growth: 2.3% (from 1975 to 1980) 110.2 lper km/of arable land

POPULATION CHARACTERISTICS HEALTH L/Crude Birth Rate (per 1,000) 30 Population per physician 1967Crude Death Rate (per 1,000) 8 Population per hospitaL bed 019Infant MortaiiLy (per 1,000 live births) 65

INCOME DISTRIBUTION (1974) DISTRIBUTION OF LAND OWNERSHIP (1971)% of national income, highest quintile 54 % owned by top 10% of oywners 80.0

lowest quintile 5 % owned by smallest 10% of owners 0.2

ACCESS TO PIPED WATER- ACCESS TO ELECTRICITY 1973)7D of population - urban 73 7. of population - urban 87.5

- rural 46 - rural 13.2

NUTRITION EDUCATIONCalorie intake as % of requirements 102.0 Adult literacy rate %, 1970 80.8Per capita protein intake 52.0 Primary school enrollment ratio 1/ 124.0

2/GNP PER CAPITA in 1980 US $1,180

GROSS NATIONAL PRODUCT IN 19 8 3/ ANNUAL RATE OF GROWTH QX. constant prices)

US $ Mln. % 1960-65 1965-70 1970-75 1975-79 1980

GNP at Market Prices 32,524 100.0 4.5 5.5 6.4 6.0 4.2Gross Domestic investment 7,997 24.6 1.8 8.1 0.6 9.4 14.0Gross National Saving 7,802 24.0 2.1 10.8 3.6 14.3 2.6Current Account Balance -195 -0.6 . .

Exports of Goods, NPS 5,327 16.4 2.1 4.1 5.9 8.3 5.3Imports of Goods, NPS 5,376 16.5 1.9 10.2 '].1 11.1 19.9

OUTPUT, LABOR FORCE ANDPRODUCTIVITY IN 1975

Value Added Labor Force V. A. Per WorkerUS $ tln. % mln. % US $ %

Agriculture and Mining 3,791 30.4 1.6137 25.4 2,349 119.3Manufacturing and 3,213 25.7 0.9911 15.6 3,242 165.0

ConstructionOther 5.480 43.9 3.7484 59.0 1,462 74.4

Total Weighted Average 12,484 100.0 6.3532 100.0 1,965 100.0

GOVERNMENT FINANCEPublic Sector Central Government

(Col$ Mln.) % of GDP (Col$ Mln.L % of GDP1980 1980 1975-79 1960 1980 1975-79

Current Receipts 397,729 25.7 23.7 187,304 12.1 11.2Current Expenditure 269 405 17.4 16.5 127.601 8.2 7-0Current Surplus 128,324 8.3 7.2 59,703 3.9 4.2Capital Expenditures 147,491 9.5 8.7 71,288 4.6 3.8External Assistance (net) 36,941 2.4 1.2 7,724

1/ Between 1976 and 1979.2/ The per capita GNP estimate is calculated by the conversion technique in the World Bank Atlas.

All other conversions to dollars in this table are at the average exchange rate prevailing duringthe period covered.

3/ Prplimiro,rv.

Page 2 of 2 pages

COUNTRY DATA - COLOMBIA

MONEY. CREDIT and PRICES 1975 1977 1978 1979/ 1980A'(Million CoTrToutstanding end period)

Money and Quasi Money 90,146 125,336 164,804 219,884 280,246 425,652Bank Credit to Public Sector 10,157 8,381 12,795 3,540 -23,962 -32,606Bank Credit to Private Sector 119,507 153,558 194,993 252,912 317,122

(Percentages or Index Numbers)

Money and Quasi Money as % of GDP 21.8 23.5 22.9 24.0 23.5 27.5Consumer Price Index (Dec. 1978=100) 49.7 59.6 80.3 93.7 117.0 148.8Annual percentage changes in:

Consumer Price Index 23.6 19.9 34.7 16.7 24.9 27.2Money and Quasi Money 35.1 39.0 31.5 33.4 27.5 51.9Bank credit to Public Sector 21.0 -17.5 52.7 -72.3 -576.9 -36.1Bank credit to Private Sector 25.9 28.5 27.0 29.7 25.4

BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE1978-80 )

1/1978 1979 19801- US $Mln %

(Millions US $)

Exports of Goods, NFS 4,005 4,741 5,327 Coffee 2,172 56.1Imports of Goods, NFS 3.390 4,136 5.376 Major Non-Coffee Agriculture 432 11.2Resource Gap (deficit = -) 615 605 -49 Major Manufactured Goods 623 16.1

Petroleum Derivatives 187 4.8Factor Service Income (net) -258 -199 -172 All other commodities 455 11.oInterest Payments (net) (-172) (-185) (-195) Total 3,869 100.0

Other Factor Payments (net) ( 86) ( 14) ( 23) i/Net Transfers 29 4 26 EXTERNAL DEBT, DECEMBER 31,1980-Balance on Current Account 386 410 -195

US $ MlnDirect Foreign Investment 67 124 234Net MLT Borrowing 47 645 838 Public Debt, incl. guaranteed 4,062

Disbursement (391) (1,134) (1,144) Non-Guaranteed Private DebtAmortization (344) ( -4S9) ( -306) Total outstanding & Disbursed 4,062

Capital n.e.i. (net) 110 34 240 3/ I/Increase in Reserves (-) -610 -1,237 -1,141 DEBT SERVICE RATIO for 1980-'~ -

2 %Gross Reserves (end year)'- 2,493 4,113 5,420 Amortization of Public Debt 4.3Net Reserves (end year) 2,482 4,106 5,416 Net Interest on Public Debt 5.1

Total 9.4

RATE OF EXCHANGE IBRD/IDA LENDING, (Dec. 31, 1980) (Million US$):

Dec. 31, 1980 IBRD IDAUS$1.00 = Col$50.92

Col$1.00= us$0.0196 Outstanding & Disbursed 990.7 21.3Undisbursed 696.8 -

June 4, 1981 Outstanding incl. Undisbursed 1,687.5 21.3US$1.00 = Col$53.69Col$1.00= US$0.0186

1/ Preliminary Data.O/ official Reserves only.

3/ Ratio of Debt Service to Exports of Goods and all Services.

not available

not applicable

SUMMARY AND CONCLUSIONS 1/

Background

i. The Colombian economy has become more resilient to external shocksas a result of the structural changes that have occurred over the past 30years. Rapid economic growth has resulted in a substantial structuraltransformation of the country from a predominantly rural and largely agricul-tural economy to a more diversified urban, industrial, services and a moreopen one. Colombia has reached a point where population pressure on land nolonger increases much, if at all. Public sector investment and output nowplay a greater role, primarily as a result of increased activity on the partof decentralized agencies and public enterprises. Also, greater emphasis onforeign trade has allowed the external sector to grow with non-coffeeexports, particularly exports of manufactured goods, expanding rapidly andthe range of products sold abroad widening considerably. The growingurban-industrial-services oriented economic activity and a rapid expansionof surplus labor in rural areas attracted by higher wages and better serviceshas given rise to rapid rural--urban migration as rural labor has sought totake advantage of higher productivity and better paying jobs in the majorurban centers. This phenomenon has been instrumental in reducing poverty andimproving income and distribution over time. Financial and capital marketshave evolved pari-passu with the growing financial needs of the economy, andColombia has become an active participant in international capital markets,

ii Real GDP per capita rose by 2.4% p.a. on average during the 1950-80period, with each succeeding decade registering greater gains in per capitaincome. This was the result of lower population growth, combined with morerapid GDP growth. Population growth, which had remained in the 3.0% to 3.5%range during the 1950s and early 1960s, declined dramatically after 1965 asa consequence of a sharp fall in the fertility rate. Greater economic andeducational opportunities for women, rapid rural-urban migration, rising percapita income and increased effectiveness of family planning programs contri-buted to the decline in fertility. Colombia's population is currently growingat an annual rate of 2.1%. As a result of the high proportion of women nowentering childbearing years, this rate of population growth is likely tocontinue until the early 1990s.

iii. The combination of rising per capita income and expanded publicservices has brought about a significant improvement in the welfare of thepoorest income groups, in both absolute and relative terms. As a result ofincreased sanitation control, improved diets and better health care, the crudedeath rate fell by about 50% and life expectancy rose from 48 years in theearly 1950s to 63 years currently. The child mortality rate declined from10 per thousand in the early 1960s to 8 per thousand in the late 1970s.Infant mortality, one of the best indicators of welfare, fell to 65 perthousand in the late 1970s, from about 124 per thousand in the early 1950s.School enrollment ratios have increased substantially at all grade levels

1/ The extended Summary and Conclusions which follows has been prepared forthe use of the Colombia Consultative Group.

- ii -

since 1960, and by the late 1970s, 91% of urban children aged 7 to 14 wereenrolled in school. The poorest income groups have experienced the greatestincreases in electricity and water services in recent years and have benefittedmore than the average of the population from services of the national healthsystem. In spite of this progress, Colombia still has a relatively smallmodern sector superimposed on a broad, traditional and economically poor base.Development has been concentrated in relatively few areas of the country,public services are still not available to many of the rural and urban popu-lations and unemployment and underemployment are relatively high. The coverageof health care and water supply requires continuous improvement and adequatehousing is not available to a substantial proportion of the population. Rapidmigration to the large and medium-sized cities has created urban developmentproblems, with attendant social difficulties. Moreover, in spite of thesteady increase in per capita income over the past 30 years, substantialefforts are still required to improve and extend the benefits of developmentto the poorest income groups.

iv. In large part, the achievements of the past thirty years were theresult of government efforts to stimulate the productive sectors, providethe required economic and social infrastructure and establish an effectiveinstitutional base in the economy. In the 1950s and early 1960s, developmentpolicy favored import substitution supported by high tariff protection and theprovision of economic infrastructure by the public sector. It was duringthis period that the country's major communication and transportation networkswere developed and the transformation to semi-industrial economic structurebegan in earnest. By the mid-1960s, the prospects for further import substi-tution were substantially diminished and the country was confronted withgreat economic uncertainty, arising from the fact that economic activity andthe balance of payments were heavily influenced by developments in the worldcoffee market. In order to ease this constraint, during 1967 the authoritiesadopted an outward-looking development strategy, expanding and diversifyingexports to world markets and increasingly tapping the Andean Group countries'markets. Export promotion policies, including frequent exchange rate devalu-ations, export tax rebates and other export incentives were introduced andthe authorities began lowering tariffs somewhat and freeing capital marketsfrom controls as means of raising efficiency and increasing the competitive-ness of Colombian goods in external markets. These measures were highlysuccessful in relieving the foreign exchange constraint and stimulating growthand employment.

v. The economy was subjected to severe economic strains in 1974 whichbegan to affect its previously high growth rate. The public sector financeswhich had performed strongly since 1967, began deteriorating in 1972 becauseof a highly inelastic tax system, excessive use of export tax credits (CATS)and administrative deficiencies. As a result, net current receipts of theNational Government dropped from 9.4% of GDP in 1971 to 8.3% in 1974. Thedeterioration in National Government savings was accompanied by increaseddomestic borrowing, cutbacks in National Governmental investment, and infla-tion. At the same time, excess demand increased imports and created balanceof payments difficulties, which were exacerbated by unfavorable coffee pricesand reduced demand for Colombia's manufactured exports because of the world

- iii -

recession. The quadrupling of world petroleum prices had further seriousimplications for Colombia's long-term balance of payments and growth prospectsjust as the country was about to be confronted with the prospect of becominga net petroleum importer.

vi. In late 1974, the Government introduced wide-ranging fiscal andmonetary policies designed to correct the structural and policy weaknessesprevailing at that time. Before these reforms were fully put to effect, theeconomy began to be affected by the sharp and unexpected improvement in theColombian terms of trade in the mid-70s, originating from the coffee boom,which stimulated the growth of the economy during the latter part of thedecade and increased foreign exchange reserves. However, the monetizationof the foreign exchange receipts induced rapid monetary growth and infla-tionary pressures, which were compounded by the expansionary effects ofincreasingly financing fiscal expenditures with revenues obtained from theforeign sector. In order to curb inflation, and because of the unexpectedreceipts from coffee and illegal exports which were thought of as transitory,the Government slowed the rate of devaluation, lowered its capital expendi-tures further, reduced the ability of private banks to increase commercialcredit, and by actively intervening in the open market, reduced the volume ofnet domestic credit for private use. These policy measures were successful inavoiding an acceleration in the rate of inflation. They resulted, however, ina decrease in the rate of growth of the economy towards the end of the decade.This occurred because of the slower accumulation of capital in the publicsector; and the lower rate of private investment resulting from the increasein interest rates arising from the Government's intervention in the capitalmarkets. The high rates of nominal interest also had an offsetting effecton the attempts to curb liquidity because, given the lower rate of devalua-tion, they attracted large short-term capital inflows from abroad, despite thepresence of exchange controls. The decrease in the rate of devaluation alsoresulted in a real appreciation of the exchange rate which, together with aslowdown in the world economy ;and an overall fall of output per person employedin the manufacturing sector during the 1970s, affected the industrial develop-ment of the country. Colombia's terms of trade declined sharply in 1979 as aresult of the rapid increase in world oil prices.

Economic Developments in 1980

vii. The external situation changed significantly in 1980 as a resultof sharply falling coffee prices and declining manufactured exports. Receiptsfrom coffee exports which still accounted for slightly over half of totalexport value, decreased by about 3% as a result of rapidly falling prices.However, Colombia's relative market share for coffee exports to quota countriesbecame controlled under the International Coffee Agreement. Inflationarypressures and the slowdown in the growth of real output continued along with amarked increase in the overall fiscal deficit, a turnaround in the currentaccount of the balance of payments from a US$498 million surplus in 1979 toUS$195 million deficit in 1980, and a large increase in capital inflowsbecause of an interest rate differential resulting in a substantial accumula-tion of foreign exchange. Although the stabilization effort continued havinghigh priority, it was adjusted for the purpose of giving a greater role topublic investment. In addition, a number of other adjustments were made to

- iv -

monetary and financial policies in an attempt to correct distortions withinthe banking system. The rate of devaluation was speeded up to reverse thetrend of real appreciation of the Peso.

viii. After a period (1975-79) of restricted capital expenditure growth,the National Government introduced the National Integration Plan (PIN), whichbecame the instrument of the Government's countercyclical policy to expandpublic sector investment, deemed necessary to stimulate aggregate demand.Investment expenditures doubled in nominal terms (60% real increase) andrepresented 31% of total public expenditures compared with 23% in 1979.Since current revenues did not expand as rapidly as in 1979 and currenttransfers increased at a fast pace, the growth of the National Government'scurrent account surplus was not sufficient to finance the increase in publicinvestment and an overall fiscal deficit emerged for the first time infive years. In order to finance the deficit, the National Government usedfunds previously deposited in the Central Bank and borrowed commerciallyabroad. Both of these sources'of financing led to an increase in the moneysupply.

ix. In order to avoid an exacerbation of the inflationary pressures,it was necessary to contain the expansion of the money supply originatingfrom deficit financing. At the same time, it became evident that the pro-longed and heavy restrictions on marginal reserve requirements and interestrates were being evaded and the Central Bank was losing control over the moremeaningful monetary aggregates. Although the Central Bank exerted nominalcontrol over the money supply, the financial system had generated a number ofalternative instruments producing similar liquidity pressures. Thus, thebanking system was liberalized to enable it to regain its traditional inter-mediation role, utilizing policy instruments conducive to the exercise of anactive control over the money supply without hampering intermediation activity.As a whole, the new measures were successful in moderating the expansion of themoney supply and avoiding an acceleration in inflation. Inflation was lower in1980 (26.5%) than in 1979 (29.8%).

x. Real GDP growth for the 1980 is estimated to have reached 4% comparedto 5% in 1979 and 6% on average during 1974-78. Despite the slowdown, thisgrowth rate was still higher than that registered in most Latin Americancountries in 1980 and in 1974-79. Aggregate demand, which was particularlyaffected by the rapid fall in coffee prices, slowed the growth of income. Onthe supply side, most of the slowdown originated in the agriculture, manufac-turing and construction sectors. In agriculture, a prolonged drought, whichbegan in 1979, delayed and affected acreage planted and output. Theseproblems were compounded by the rapidly rising price o. inputs relative tothe price of output (slowing down the use of Eertilizer and machinery andthereby improvements in productivity)> The situatiLn -in agriculture clearlyhad an effect on infl.tion, since food accounts fo- about half :f the weightin the consumer price index. In the manufacturing -ector, low growth wasaccounted for by the weakening of domestic demand, Door export performance,low private investment growth because of high nominal and real interest rates

- v -

and continued power shortages. The import-competing sectors also had seriousproblems, particularly the textile and automotive industries, which facedlarge-scale foreign competition as a result of an opening up of imports.Construction, which had fallen sharply in 1979, continued to slacken, affectedby a recession in private sector construction caused by both demanLd andsupply factors. However, by the end of the year, the recession had bottomedout. On a more positive note, mining activity expanded in excess of GDP as aresult of increased petroleum and gold production in response to higher worldprices. The Government's continued encouragement of joint venture agreements,in addition to price incentives granted in May for old and incremental oil(whose prices had remained frozen over most of the last decade--see paragraph49.) stimulated investment and resulted in a 1% overall output increase whichreversed the declining trend of the last decade. At the same time, oilconsumption was curtailed to a 2% annual growth, partly as a consequence ofoil price increases in excess of inflation. Open unemployment in the urbanareas continued creeping up, reaching 10%, compared to 8% in 1978. Underem-ployment, which had been maintained at a constant percentage of the laborforce, showed an apparent upward trend by the end of the year.

xi. Since in 1980, the accumulation of reserves was lower than in1979 and, therefore, the pressures for monetizing foreign exchange receiptswere not as strong, it was possible to accelerate the rate of devaluation.The Peso was devalued by 15.7% in 1980 compared to 7.3% in 1979, a 1.7%devaluation in real terms. Still, the Colombian Peso has appreciated inreal terms as a consequence of the low rate of devaluation during 1977-79.Nevertheless, the Government's policy is to attain a long-term equilibriumreal exchange rate in line with its growth, balance of payments 'and employ-ment objectives.

xii. Increased investment efforts by the public and private sectorsshould provide a stimulus for an improved growth performance in 1981. A rateof real GDP growth -of 4.5% is likely to be attained. Nevertheless, the majorchallenge facing the authorities is to continue with the growth orientedpolicies without exacerbating inflationary pressures. To achieve this,increased coordination between the different government policies -- growth,employment, incomes, trade, monetary and fiscal, including the cocirdinationof public investments -- will be necessary as well as giving increasedconsideration to their tradeoffs.

Conclusion

xiii. Developments over the last six years have posed a tremen,douschallenge to Colombia's policymakers to solve short-term problems con-fronting the economy without sacrificing long-term objectives. In theface of unexpected and constantly changing external conditions, theGovernment has demonstrated its resiliency and adaptability. Overall,

- vi -

the authorities have managed the economy with conservative economicpolicies and with sufficient pragmatism that has taken due account ofthe constraints, the tradeoffs and the consequences which they werewilling to accept. The compatibility of economic policies has not beeneasily achieved. Nevertheless, the authorities opted to pursue policieswhich combined growth with stability. The result of this has been: arate of inflation which, although relatively high, has remained at manage-able levels; a rate of economic growth higher than that registered in mostother Latin American countries; the containment of unemployment at manage-able levels despite a sharp demographic shift to urban areas; an importanteffort in pricing policy; a foreign exchange position which will allow them tosatisfy the import requirements of the economy; and an improved income distri-bution. There are difficult issues ahead; nevertheless, it is within theColombians' capability to tackle them successfully.

Development Issues and Strategy

xiv. The Government's stated economic strategy is directed towardincreasing the rate of growth of the economy, lessening the constraints tolonger term growth, and avoiding balance of payments difficulties in thelate 1980s, as a means of expanding employment opportunities for the growinglabor force, improving the distribution of income and providing greaterwelfare for all Colombians. At the same time, the Government is equallycommitted to a stabilization program designed to reduce inflationary pres-sures and prevent the building up of high inflationary expectations. Thecombination of these two policies -- one dealing with short-term managementproblems of stabilizing the economy; the other with restoring the economy'slong-term growth path and eliminating the constraints which prevent thisfrom being possible -- requires careful use of policy options and the timelycoordination of policy instruments.

xv. The continued expansion of the Government's investment programshould increase aggregate demand and result in a higher rate of growth forthe economy. It could also, however, increase the existing inflationarypressures since an important part of its financing originates from themonetization of foreign commercial borrowing to finance local costs. 1/ Thepolicy alternatives to avoid an increase in inflation are: (a) to reduce thereal level of current public expenditures starting in 1982; and (b) to increasepublic revenues from domestic sources. These alternatives would involveadjustments in the Government's fiscal policies, including a major effort inimproving expenditure efficiency and new revenue generating initiatives.Fiscal problems could become serious in the future. However, the Governmentis cognizant of this and has prepared the corresponding legislation in aneffort to anticipate and solve these problems.

l/ An offsetting element, however, is the decrease in the relative price ofcoffee which will tend to slow the growth of income, and will alsoreduce the accumulation of foreign exchange and the increase in themoney supply.

- vii -

xvi. Options to induce more rapid real economic growth and help theprocess of industrialization include measures to improve the qual:ity andquantity of output in the manufacturing and agricultural sector and a flex-ible attitude to the exchange rate. During recent years, the Government hasemphasized demand management. However, an important option that meritsattention is to focus more emphasis on policies to increase the supply ofgoods, including import liberalization, energy development and expandingagricultural production. The present level of the real exchange rate alsoreduces the potential rate of growth by hampering the development of exportsectors. An acceleration in the rate of devaluation in order to achieve achange in the real exchange rate may, therefore, induce more rapid growth andhelp the process of industrialization and agricultural developmenl. Moreover,it will tend to increase prices of tradeable goods and cost of imported inputsand also create liquidity effects given the stocks of foreign exchange beingheld in private banks. However, a more rapid devaluation will decrease theinflow of speculative capital reducing liquidity pressures from that source.In addition, the direct cost and price effects of the exchange rate adjust-ments can be diminished by intensifying the import liberalization program andmay, in fact, assist in carrying out the latter policy without creating largedisturbances in the economy, particularly regarding the issues of employmentand industrialization.

xvii. Urban unemployment is likely to become a major development issuein the country during the 1980s. Although population growth has currentlystabilized itself at about 2% per year, the labor force is now absorbing anincreasing number of new entrants born during the 1960s, a period whenColombia's population was increasing at a faster pace. The rapidly growingworking age population (3% per year), compounded by continuing migrationfrom the rural to the urban areas and by increases in the participation ofwomen in the labor force, could soon become a deterrent to further improve-ments in welfare if sufficient employment opportunities are not available. Tooffset these developments and increase its employment generation potential,Colombia's economy needs to grow in real terms at nearly 6% per year on asustained basis during this decade. The country's development strategyshould then emphasize those activities where the country has a comparativeadvantage as well as where a potential for a dynamic expansion exists with theknowledge that Colombia's population will be increasingly concentrated inthe urban areas. Over the medium term this implies rapid development ofenergy and mineral resources, expansion of agriculture and agroinclustry,improved industrial productivity, particularly in industry with exportpotential, and upgrading the efficiency of transport services. Over thelonger term, expansion of service activities, development of cheap electricityresources for energy-based industries, including semi-processing cf minerals,increased mineral development, a more intensive development of Colombia'sAtlantic Region's resources and location potential and the strengthening ofeconomic activities in the small and medium-sized cities are needed.

- viii -

xviii. Petroleum accounted for half of total primary energy supplied in1980. During the same year, Colombia's overall energy trade balance resultedin a deficit of about US$500 million, or about 17% of merchandise exports.In this connection, the Government can exercise several options related to itslonger-term energy balance. One is to maintain petroleum's relative shareat its present level and expand energy exports modestly. Another is todecrease it rapidly to about a third of total primary energy supply andincrease energy exports significantly by 1990. The first scenario wouldresult in an unsustainable energy trade balance deficit of US$4 billion by1990. The second one would reverse the current deficit to a surplus ofUS$1.5 billion, or 11% of merchandise exports. Recent actions by the Govern-ment indicate its intention of moving toward an energy balance similar to thatpresented in the second alternative.

xix. Investments in the social sectors (nutrition and health, watersupply and sewerage, housing and education) are expected to continue to rise.Policy coordination and efficient resource use are major problems in thesesectors. The Government is cognizant of this and is increasing its efforts tostrengthen policy coordination along with a gradual improvement in the qualityand efficiency of resource use.

xx. Given the present favorable balance of payments position, low debtservice ratio and ratio of external debt to GDP, the Government's medium-termstrategy of raising public sector investment rapidly to reduce substantiallythe energy and transport constraints on growth while continuing to emphasizeprogress in the social sectors, together with the adoption of sectoral policiesthat would facilitate rapid expansion of agricultural, industrial and mineralproduction, stands a good chance of producing significant results by the midand late 1980s, including a rise in the growth rate of the economy and thecreation of substantial employment opportunities. In support of this strategy,Colombia will be borrowing heavily from external sources during 1981-85 tofinance a large part of the foreign costs of its investment program. However,to finance the local costs and some of the foreign exchange costs, the Govern-ment will have to adopt timely measures to assure an adequate level of publicsector savings to ensure the financial viability of its investment program.Moreover, if overall investment is to be increased and the productive capacityof the economy is to be improved without straining the absorptive capacity ofthe public sector, increased private sector involvement in the energy andmineral sectors will be necessary, particularly to develop petroleum, naturalgas and coal resources and to modernize industry.

xxi. During the '950s and 1960s, Colombia followed a policy of imports ibstitution, giving high protection to the domestic production of manufac-tured goods in an effort -o foster industr:alization. En 1967, The Government^cduced or removed bf Tbarrierc and r!ualtitative .strols on imported-aputs and iuvestment -oods req-uired for export promoti-on. The :limination ofimport controls increased the degree of capital uti'ization in industry andpromoted emplovment growth. By Lhe mid-1970s. a process of opening up and

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simplifying the import regime was initiated. Since then, the implementationand effects of the liberalization policy have varied widely in response tochanging economic conditions and constrained by the Andean Pact limitations.Nevertheless, the gradual move toward a more open economy in the 1970s probablyfavored employment by encouraging labor intensive exports, and this improvedthe income of the poor. 1/ The first stage of the import liberalizationprocess was to reduce the impact of quantitative controls by shift:ing itemsfrom prior licensing to free registration. Although in theory the processhas been in effect since 1975, in practice it was effectively blocked during1975-77, since many new difficulties were introduced into administ:rativeregistration procedures. During 1978-79, the formal elimination of restric-tions continued, although at a slower pace. However, in 1980, the adminis-trative procedures were simplified and streamlined considerably. The moreliberal regime of 1980 has not resulted, however, in a much larger volume ofregistered imports (in the items shifted to free registration). The rate ofeffective protection continues to be high, many administrative restrictionsare still in effect, and the inefficiency and bottlenecks existing in Colombianports have increased the effective price of imports. The growing contrabandhas helped somewhat to open up the economy, but not sufficiently. An increasein imports would raise the availability of goods, ease inflationary pressuresand promote more competition. Employment considerations have limited thespeed with which liberalization has been achieved. However, a faster liberal-ization could promote increased exports, lead to more rapid real economicgrowth, and produce beneficial effects on employment creation, as was the casein the late 1960s and in most of the 1970s. Moreover, even when effectiveprotection is actually reduced, the flow of imports has not increased imme-diately because uncertainties regarding the policy-s execution have preventedthe development of the institutional and organizational mechanisms; needed tochannel new imports. That is so because those mechanisms are cost:ly and thereturns are uncertain as long as the continuity of the policy is subject todiscussion. Therefore, a clear definition of this policy is required to takeadvantage of the benefits which the import liberalization process can provide.

xxii. In spite of the positive Government actions in recent years toincrease domestic energy prices, there remains a need to develop a long-termpricing policy which, within the Government-s broader objectives, wouldprovide adequate incentives to developing existing hydrocarbon resources in arational manner, reflect more precisely the economic costs of bringing energyproducts to the consumer, and establish interfuel price relationships reflect-ing the opportunity cost of competing fuels. In addition, the Governmentshould take upon itself the task of: (a) achieving and maintaining financialviability of public agencies in this sector; (b) undertaking a comprehensiveapproach to the development of coal and natural gas resources; (c) developmentof the Northern and Central blocks of the El Cerrejon coal project: as quickly

1/ Miguel Urrutia, Winners and Losers in Colombias Recent GrowthExperience, World Bank.

x

as possible; (d) stepped up efforts to foster technically and economicallyefficient private coal developments; and (e) developing and carrying out aneffective strategy for dealing with serious shortages of firewood and relatedproblems of rural household fuel supply, erosion, and siltation in waterwaysand reservoirs.

xxiii. At current traffic levels, no major transport bottlenecks exist inColombia, except for ports and areas which are poorly connected, or notconnected at all, particularly by rural roads. However, in order to increasethe efficiency of carrying the present traffic flows, and to permit a leastcost transport of new traffic over the 1980s a number of actions are required.In transport policy, there are two areas to be considered. The first oneconcerns service levels. The existing infrastructure is sufficient to carrycurrent traffic demand. What is required is an upgrading of existing servicelevels. This is more important than pricing policies for intermodal allocation.Price increases of gasoline, public transport and railway rates do not changetraffic allocation much at the margin. However, they serve to increasepublic sector revenues, guide investment decisions of private truckers andreduce spatial opportunities for location of economic activities. Pricingpolicies introduced by the Government should be complemented by loweringbarriers to the importation and operation of trucks, discouraging the use ofautomobiles in urban transport and improving the efficiency of the ports andrailways. The second one concerns the way investment decisions are made.Most of these seem to favor roads over ports and railways, because most roadprojects can be identified, executed and completed over a relatively shortperiod of time. A railway or port rehabilitation program, because of sheertechnological constraints, may take up to 10 years to execute successfully.The MOPT Sectoral Planning Office had been, until its reorganization inmid-1980, a planning unit for highways (demanding most of its resources) andother transport modes excluding pipelines and airways. The Planning Office isnow a programming and budgeting office responsible for all transport needs,currently analyzing investments of about $500 million a year. More attentionshould be given to strengthening the planning operation and the investmentdecision process, particularly the size and timing of investments. In roads,good construction projects are scarce. However, the project preparation andexecution capacity is very good, and for this reason road construction projectsmanage to absorb a large amount of resources. An overdue backlog of roadmaintenance exists which requires attention. In ports and railways, low laborproductivity and overdue maintenance have allowed their operations to deterio-rate and significant efforts are required to improve services to adequatelevels.

xxiv. Despite agriculture-s importance, its full potential has yet tobe developed. The sector is endowed with good land resources and some ofthe best entrepreneuria'l and technical talent Jn the cojintry is engaged inagricultural aciiVities. Clearly, IL is a seccor where a large comparativeadvantage exists. However, there are still several areas where improvementscould be made. Of Darticular concern is the need to improve crop yields andincrease acreage planted. This is especially true of the subsistence farm

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subsector. Furthermore, more competitive crops could be introduced andimproved varieties developed; both can lead to productivity gains. This,however, will require an expansion of the sector-s capacity to provideresearch and extension services. The irrigation and drainage system needsconsiderable improvement, rehabilitation and expansion. Conservation ofnatural resources has become increasingly important. Strengthening of thepresent system of regulating prices and markets, including steps to establishnew and expand existing agro-industries, are also needed. Finally, givenappropriate pricing policies for feed grain and a more aggressive itapping offoreign markets, livestock production and consequently exports could also beincreased.

xxv. Since the early 1960s, the authorities have directed a substantialpart of their expenditure toward the social sectors. The Government'scommitment is evidenced by the fact that nearly two-fifths of public sectorexpenditure has supported programs which have succeeded in improving consider-ably the welfare levels in many areas of the country. During the lastdecade, total expenditures in health and education increased by about 7% peryear on average in real terms, of which current expenditure real growth wasnearly 10% per year on average reflecting the increased coverage of servicesand the recurrent costs necessary to service new investments. These develop-ments contributed to a real improvement in welfare for the poor during the19 70s. Further improvements in welfare can be envisaged for the 1'980s. Themajor challenge facing the Government is how to improve the consumptioncapacity of the poor on a permanent basis. This requires a two-prongedapproach. On the one hand, increasing employment opportunities and laborproductivity to allow for increases in real income. On the other, increasingthe provision of social services in quantity and quality. In the case ofthe former, data on income distribution in Colombia are fragmentary and canat best only give an imptession of the trends. They suggest that thedistribution may have worsened in the early 1970s and then improved duringthe rest of the decade. Moreover, when looking at the entire decade, thedata imply that income distribution improved significantly for the verypoorest while at the same time the richest 5% did not suffer any loss intheir share. This suggests that the Colombian authorities have been takingsteps to improve income distribution and that their experience is notsignificantly different from that of other countries with similar intentions.As for social services, the on-going health and nutrition programs need tobe continued and their coverage extended to a larger proportion of therural population. Public services in water supply and sewerage facilities,electricity services to the poor and basic education also require to beimproved considerably. These objectives can be achieved through betterintegration of services and efforts to improve the efficiency of publicagencies involved in the execution of social programs, particularly withrespect to current expenditure resources. Notwithstanding the above,and because of its stabilization program the Government has opted to financefrom abroad only those projects with a high import component and financefrom its own resources most of the expenditures in the social sectors.

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The major problem facing the Government is not one of lack of resources, butof strengthening policy coordination, along with using existing resources moreeffectively and of moderating, through improved management, the impact onrecurrent costs which the investment program generates.

Public Sector Investment Program

xxvi. As noted, during the latter part of the past decade, public sectorinvestment efforts were substantially curtailed because of the prioritygiven to stabilization and the containment of inflationary pressures. Thepublic sector's gross fixed investment share of GDP remained below 6% during1975-78, averaging 5.7% per year, compared to over 8% during 1970-75. Thegrowth of the public capital stock was curtailed, the development of potentialgrowth activities was delayed, energy and other infrastructure constraintsemerged rapidly and affected potential private investment expansion, part ofthe existing infrastructure deteriorated and the long-term growth potential ofthe economy was adversely affected. Notwithstanding these developments, thecountry made some progress in increasing the infrastructure in the socialsectors and substantial investments took place in agriculture, particularlyin coffee; private sector investment activity continued, and a series ofinnovative programs designed to meet the basic needs of the poor in the areasof housing, rural and urban development, health, nutrition and education wereintroduced.

xxvii. With the publication of the PIN in 1980, the authorities opted topursue a more ambitious course covering the 1979-82 plan period by acceleratingthe execution of the ongoing investments and initiating a large number ofprojects, many of which are to be completed beyond 1982. With this informa-tion, in addition to the project list supplied by the Government to be present-ed to the Colombia Consultative Group, the mission prepared public sectorinvestment projections for the 1981-85 period. Disbursements under the publicsector investment program for 1981-85 are projected to amount to Col$1,712billion over the five-year period -- an average of Col$342 billion or 9% ofGDP per year. The Central Government is expected to execute only 16% of theinvestment program, with the rest of the public sector responsible for theremaining 84%. Approximately 94% of the investment program consists of fixedcapital formation (8% of GDP per year on average), with the remaining 6%consisting of financial investments.

xxviii. Half of the proposed investment program is expected to occur inenergy. However, significant increases in investment are also expected inthe productive sectors (agriculture, mining and industry) and in the socialsectors (nutrition and health, education and water and sewerage). Publicsector investment in energy will emphasize development of the country'svast hydropower resources, the exploration and development of petroleumand natural gas resources, and the exploitation of large coal depositsprimarily for export. Transport sector investments emphasize road construc-tion, rehabilitation and maintenance of highway and railway networks, expan-sion of the feeder road construction program, railway construction and port

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improvement. The primary objectives of public investment in agriculture areto rehabilitate and expand existing irrigation infrastructure, increase thestorage and marketing capacity, expand food supplies, increase exports andimprove the welfare of small farmers.

xxix. To finance the 1981-85 public sector investment program as well asthe external debt amortization payments, a determined effort to mobilizepublic sector savings will be necessary. Public sector savings are expectedto reach Col$1,111 billion (US$14.5 billion) and average 6% of GDP during thefive year period. Capital revenues should finance Col$78 billion. Net domes-tic borrowing by the public sector is expected to provide Col$89 billion.Since amortization payments would total Col$211 billion, Col$1,067 million indomestic resources would be left to finance the investment program. Inorder to finance fully the projected Col$1,712 billion (US$22 billion) inpublic sector capital expenditures during 1981-85, the gross external inflowsof medium and long-term capital to the public sector should amount to Col$644billion (US$8.2 billion), an annual average requirement of Col$129 billion(US$1.6 billion). Of this amount, disbursements against loan commlitmentsprior to 1981 are projected at Col$96 billion (US$1.4 billion). I'his leavesCol$548 billion (US$6.8 billion) to be sought. Of the new commitments,Col$177 billion (US$2.2 billion) is expected to come from multilateraland bilateral sources, with the remaining Col$371 billion (US$4.6 billion)from suppliers and financial credits.

.XX. Traditiorial sources of public sector investment financirLg inColombia have consisted of central government savings, savings frcom the restof the public sector and external borrowing. Domestic borrowing has alwaysbeen used sparingly because the absence of a well-developed medium andlong-term capital market has limited financing from this source. The devel-opment of such a market is of crucial importance to finance both public andprivate sector investments. Thus, the financing of the public sector capitalexpenditure program during the five-year period will require an improvementin the savings generating potential of the public sector with particularemphasis on strengthening the finances of the national nonfinancial publicenterprises, departments and municipalities through increases in taxes,public service tariffs and increased restraint of current expenditure growthso as to reduce gradually the current and capital transfers from the NationalGovernment. Moreover, the finances of the social security institutionsrequire increasing scrutiny; there is a need for better use of resources andpossibly increases in contributions. In addition, National Governmentfinances will require strengthening. Unless revenues and savings performanceare strengthened, the financial viability of the projected level of capitalexpenditures will not be assured. The alternative is to execute a reducedprogram from that projected in Table 5, page 44. By exercising such anoption, the growth and employment potential of the economy and the balance ofpayments prospects in the late 1980s could be affected adversely. Some of theeffects on the above could be offset depending on the size and composition ofpossible investment cuts, and on sufficient encouragement to increase privatesector investment.

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Economic Prospects

xxxi. The country's success in exploiting additional energy resources, thedevelopments in world coffee output and price prospects, and the rate ofgrowth of Colombia's major trading partners will be the major factors influenc-ing the country's balance of payments during this decade. Low growth of theworld economy (particularly Venezuela), falling productivity in the manufactur-ing sector and an appreciated exchange rate are expected to affect the demandfor Colombia's exports, especially of manufactured goods. With the relativemarket share in coffee controlled under the International Coffee Agreement,Colombia's comparative advantage and export potential lies in rapidly developingits energy exports, particularly coal, and in expanding its agricultural andagroindustrial export capacity. Pricing policies could dampen the growth ofthe large amount of petroleum imports by increasing conservation. Moreover,recent petroleum discoveries appear to indicate the existence of sufficientoil reserves which could make Colombia self-sufficient in oil toward the endof the decade. The current high level of foreign exchange reserves provides acushion to support rising imports until the mid-1980s. Nevertheless, seriousbalance of payments constraints on growth may be likely by then if the develop-ment of the coal, petroleum, and hydropower resources is delayed.

xxxii. Successful balance of payments management over 1981-85 will requirethe achievement of several objectives in addition to the rapid developmentof the country's energy resources. These include: (1) acceleration ofimport liberalization policies designed to increase efficiency so as toimprove Colombian industry's ability to compete in external markets. Thesepolicies should emphasize gradual dismantling of import restrictions andadministrative controls combined with progressive reductions of importtariffs; (2) timely adjustments of the exchange rate geared to balance ofpayments and employment objectives rather than price stabilization; (3)policies to increase direct foreign investment, particularly in export acti-vities with the purpose of introducing modern production technologies; (4)fiscal and other incentives to attain higher levels of labor productivity andreplace technologically obsolete capital equipment; and (5) elimination ofexternal commercial borrowing by the public sector to finance the overallNational Government deficit which in turn should be eliminated by increasingpublic sector savings. Although the Government has already begun to takesome of the actions required to achieve these objectives, timely effortswill continue to be necessary to develop the export sector's potentialand maintain a strong balance of payments position.

xxxiii. The urgent need to relieve the pressure on aggregace demand arisingfrom the recent growth of foreign exchange and the need to increase imports todevelop the country's resource potential atnd restore highe. economic growthrequires a turnaround in the balance of payments -r a m a small current accountdeficit of US$195 million in 1980 (0.5% of GDP) to a orojected currentaccount deficit of US$1,063 million in 1981 (2.8% of GDP) by opening upimports other than oi'l. Over the entire 1981-85 period, the current accountdeficits are projected to average US$1,865 million. Based on expected avail-

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ability and use of external financing, net international reserves of thebanking system are projected to fall from their present level of a year'simports to about three months of imports in 1985 and remain at that level(an adequate level for Colombia); net official reserves are projected tofall to about 3.9 months of imports during the same period. Imports ofgoods and nonfactor services are projected to rise to 17% of GDP for the1981-85 period, from 16% in 1980. Beginning in 1986, the current accountbalance should improve as a result of increased export proceeds (coal) and alevelling off of imports, the current account deficit reversing frDm 3% ofGDP in 1986, to a surplus of 0.4% in 1990.

xxxiv. Gross external capital requirements are projected to total US$10.3billion in current prices for the 1981-85 period, with an average annualrequirement of approximately US$2.1 billion. Of this amount, private foreigninvestment should provide about 16% of gross external financing. M4ultilateraland bilateral agencies are expected to provide US$686 million p.a. onaverage, about 33% of total external capital requirements, and the remainingUS$1,036 million, or 51% of the total, is expected to come from privatebanks and suppliers credits.

xxxv. Under these assumptions, the Colombian economy is projected to growby 5.8% per annum in real terms, or about 3.2% average per capita growth ofGNP over the 1981-85 period. The leading growth sectors are expected to bemining, services and power. Gross domestic investment will have to expandgradually to about 24% of GDP on average, up from 18% in the early 1970s and21% in 1980 to support this rate of economic growth. Public investment isexpected to increase as a proportion of total investment in view of thesizeable investments to be undertaken. The relatively high level of investmentwill require that the share of consumption decrease from 77% of GDP in 1980to 74% in 1985, although consumption will still grow at about 4% per year.Gross national saving would have to average about 22% of GDP during 1981-85in order to avoid too high an increase in foreign indebtedness. Tlhis isabout the same level of savings achieved in recent years, but significantlyhigher than that registered in the early 1970s and will have to be maintainedin the face of declining terms of trade.

xxxvi. Colombia-s public external debt, repayable in foreign cu-rrencyamounted to US$6.4 billion at the end of 1980, of which US$4.1 billionwas disbursed and outstanding. By 1985, this debt is expected to *rise toabout 16% of GDP, from 12% of GDP at the end of 1980. The public lebtservice ratio is projected to increase to about 17% in 1985, from 9% in1980. Projections past 1985 show Colombia-s debt service ratio peaking ataround 19.8% in 1988, as the country begins to pay off the heavy borrowingof previous years. Given the continuation of sound economic and financialmanagement, Colombia is expected to maintain its creditworthiness throughand beyond the 1980-1990 period.

I. BACKGROUND

A. Introduction

1. The Colombian economy has become more resilient to external shocksas a result of the structural changes that have occurred over the past30 years. Rapid economic growth has resulted in a substantial structuraltransformation of the country from a predominantly rural and largely agricul-tural economy to a more diversified urban, industrial, services and open one.Colombia has reached a point where population pressure on land no longerincreases much, if at all. Public sector investment and output now play agreater role, primarily as a result of increased activity on the part ofdecentralized agencies and public enterprises. Also, greater emphasis onforeign trade has allowed the external sector to grow with non-coffee exports,particularly exports of manufactured goods, expanding rapidly and the rangeof products sold abroad widening considerably. The growing urban-industrial-services oriented economic activity and a rapid expansion of surplus labor inrural areas attracted by higher wages and better services has given rise torapid rural-urban migration as rural labor has sought to take advantage ofhigher productivity and better paying jobs in the major urban centers. Thisphenomenon has been instrumental in reducing poverty and improving incomedistribution over time. Financial and capital markets have evolved pari-passuwith the growing financial needs of the economy, and Colombia has become anactive participant in international capital markets.

2. Real GDP per capita rose by 2.4% p.a. on average during the1950-80 period, with each succeeding decade registering greater gains inper capita income. This was the result of lower population growth, combinedwith more rapid GDP growth. Population growth, which had remained in the3.0% to 3.5% range during the 1950s and early 1960s, declined dramaticallyafter 1965 as a consequence of a sharp fall in the fertility rate. Greatereconomic and educational opportunities for women, rapid rural-urban migration,rising per capita income and increased effectiveness of family planningprograms contributed to the decline in fertility. Colombia-s population iscurrently growing at an annual rate of 2.1%. As a result of the highproportion of women now entering childbearing years, this rate of populationgrowth is likely to continue until the early 1990s.

3. The combination of rising per capita income and expanded publicservices has brought about a significant improvement in the welfare of the

poorest income groups, in both absolute and relative terms. As a result ofincreased sanitation control, improved diets and better health care, the crudedeath rate fell by about 50% and life expectancy rose from 48 years in theearly 1950s to 63 years currently. The child mortality rate declined from10 per thousand in the early 1960s to 8 per thousand in the late 1970s. Infantmortality, one of the best indicators of welfare, fell to 65 per thousand inthe late 1970s, from about 124 per thousand in the early 1950s. School enroll-ment ratios have increased substantially at all grade levels since 1960, and bythe late 1970s, 91% of urban children aged 7 to 14 were enrolled in school. Thepoorest income groups have experienced the greatest increases in electricity and

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water services in recent years and have benefitted more than the averageof the population from services of the national health system. In spiteof this progress, Colombia still has a relatively small modern sector super-imposed on a broad, traditional and economically poor base. Development hasbeen concentrated in relatively few areas of the country, public services arenot available to a large proportion of the rural and urban populations andunemployment and underemployment are relatively high. The coverage of healthcare and water supply is still deficient and adequate housing is not availableto a substantial proportion of the population. Rapid migration to the largeand medium-sized cities has created urban development problems, with attendantsocial difficulties. Moreover, in spite of the steady increase in per capitaincome over the past 30 years, substantial efforts are still required toimprove and extend the benefits of development to the poorest income groups.

4. In large part, the achievements of the past thirty years were theresult of government efforts to stimulate the productive sectors, providethe required economic and social infrastructure and establish an effectiveinstitutional base in the economy. In the 1950s and early 1960s, developmentpolicy favored import substitution supported by high tariff protection and theprovision of economic infrastructure by the public sector. It was duringthis period that the country's major communication and transportation networkswere developed and the transformation to semi-industrial economic structurebegan in earnest. By the mid-1960s, the prospects for further import substi-tution were substantially diminished and the country was confronted withgreat economic uncertainty arising from the fact that economic activity andthe balance of payments were heavily influenced by developments in the worldcoffee market. In order to ease this constraint, during 1967 the authoritiesadopted an outward-looking development strategy, expandingly diversifyingexports to world markets and increasingly tapping the Andean Group countries'markets. Export promotion policies, including frequent exchange rate devalua-tions, export tax rebates and other export incentives were introduced and theauthorities began lowering tariffs somewhat and freeing capital markets fromcontrols as means of raising efficiency and increasing the competitiveness ofColombian goods in external markets. These measures were highly successful inrelieving the foreign exchange constraint and stimulating growth and employment.

B. Recent Economic Developments, 1974-79

5. The economy was subjected to severe economic strains in 1974 whichbegan to affect its previously high growth rate. The public sector financeswhich had performed strongly since 1967, began deteriorating in 1972 becauseof a highly inelastic tax system, excessive use of export tax credits (CATS)and administrative deficiencies. As a result, net current receipts of theNational Government dropped from 9.4% of GDP in 1971 to 8.3% in 1974. Thedeterioration in National Government savings was accompanied by increaseddomestic borrowing, cutbacks in National Governmental investment, and inflation.At the same time, excess demand increased imports and created balance ofpayments difficulties, which were exacerbated by unfavorable coffee prices

and reduced demand for Colombia's manufactured exports because of t:he worldrecession. The quadrupling of world petroleum prices had further seriousimplications for Colombia's long-term balance of payments and growl:h prospectsjust as the country was about to be confronted with the prospect of becoming anet petroleum importer.

6. In late 1974, the Government introduced a wide range of fiscal andmonetary policies designed to correct the structural and policy weaknessesprevailing at that time. Before these reforms were fully put into effect, theeconomy began to be affected by strong inflationary pressures. These pressures,which started in 1975-76 and continued through 1980, arose initially from alarge balance of payments surplus caused by a combination of sharp increasesin prices and Colombia's share in the world coffee market.l/ Moreover, duringthe same period there was also a marked rise in illegal exports, and, after1979, a large increase in both public and private capital inflows. Thesedevelopments, which had not been anticipated and were thought of as transitory,produced a rapid growth of foreign exchange receipts which consequentlyexpanded the money supply and stimulated aggregate demand. Cost factors,including rising costs of agricultural products, energy prices and prices ofpublic services also contributed to the inflationary pressures.

7. The Government identified the balance of payments surplus as thecentral source of inflationary pressures. The obvious response would havebeen to increase imports. However, only a modest increase took place becauseof an inward looking strategy characterized by high protection given todomestic production of inputs and final goods. The Government undertooka number of policies in the fiscal, monetary, commercial and exchange rateareas aimed at neutralizing its effects. An important part of the fiscaleffort was an attempt to restrain the expansionary effects that the foreignexchange surplus could have on private sector demand and simultaneously tolower the impact of government expenditure on aggregate demand by reducing theoverall public sector deficit. Public sector investment was particularlyaffected by these policies. 2/ On the other hand, the revenues collected bythe special exchange account increased almost sevenfold in nominal terms

1/ A damaging frost in Brazil½s major coffee growing areas in late 1975caused a fourfold increase in world prices. Another frost in 1979 alsoaffected prices. Coffee exports, which in 1975 were estimated at 8.2million 60 Kg. bags, increased to 11.1 million bags in 1980.

2/ The level of investment expenditures of the National Government in realterms was lower during 1975-79 than in 1974. For the public sector asa whole, real investment expenditures grew by about 3% per year onaverage.

during 1975-79 and their importance in financing the National Governmentbudget rose significantly. 1/

8. Since the fiscal measures were not sufficient to contain the infla-tionary pressures, traditional monetary measures were introduced in 1977-79with the purpose of slowing down, or at least to avoid speeding up, the growthof the money supply. Part of the effort consisted in delaying the impact ofthe foreign exchange on the growth of the monetary base by introducing thecertificates of exchange. The main thrust, however, was to reduce themoney multiplier in order to contain the expansion of the money supply. Forthat purpose, 100% marginal reserve requirements on demand deposits wereintroduced in 1977 and interest rate ceilings on time deposits by mid-1978.In 1979 the authorities intensified substantially the use of open marketoperations, by issuing new participation notes. They also raised reserverequirements and increased credit restrictions. These measures contributedto avoid an acceleration in the growth of the money supply and were successfulin avoiding a sharp increase in inflation. 2/

9. The 1978-79 monetary measures created distortions in the banking andfinancial systems, as new financial instruments and institutions emerged withthe purpose of avoiding the mass of regulations. Financial disintermediation aswell as nonconventional forms of banking operations became widespread by theend of 1979 with the consequent rise in interest rates. The excess of regula-tions also resulted in a partial loss of control by the monetary authorityover the level of liquidity in the system.

10. Another result of the stabilization policy was the real appreciationof the exchange rate with its consequent negative effects on non-traditionalexports and on the ability of the Government to liberalize imports. The Pesowas devalued by 7.5% per year on average during 1976-79, substantially belowthe inflation differential between Colombia and its main trading partners.Although there were some grounds for a real revaluation, given the persistentimprovement in the terms of trade which originated from the coffee bonanza,the apparent permanent increase in Colombia's share of the market, and illegalexports, the slow pace of devaluation stemmed from the need to avoid sharpincreases in the domestic price of imports and the refusal to use the balance

1/ The special exchange account consists of revenues arising from theforeign sector and includes a variable rate export tax on coffee, thereturns from the foreign exchange portfolio of the Central Bank and themargin of intermediation in foreign exchange operations. It increasedfrom 9.5% of current revenue in 1975 to 21% in 1979. The growth of thespecial exchange account was pivotal in improving the fiscal situation.

2/ During 1976-79, Ml (the narrow definition of the money supply equivalentto currency plus demand deposits) grew below 20% on average as opposedto 25% for the monetary base. Inflation rose from 17.8% in 1978 to 29.8%in 1979 while the Central Bank-s holdings of foreign exchange increasedby 65%.

of payments cushion to lower protection and ameliorate pressures from the costside, and, more important, to reduce the domestic currency value of foreignassets transferred to the country by the private sector, mainly through thecurrent account. The low rate of devaluation also increased the money supplyby inducing capital inflows (mainly disguised in the service and goods accounts)attracted by the differential in interest rates. This was clearly the casein 1979, the year when the capital account also registered a large surplusand the increase in foreign exchange reserves reached a peak of more thanUS$1.6 billion.

11. It is also apparent that given the priority of the stabilizationeffort, the economy did not take full advantage of the external transferof resources to increase its rate of real growth and capital accumulation tohigher levels. Public investment expansion was limited. The growth andcomposition of private investment were not conducive to create large improve-ments in productivity (particularly in manufacturing) l/ or to result insignificant rises in real growth and employment. There was insufficientindustrial investment, in part because of the restrictions imposed by theAndean Pact, and a low transfer of resources from the coffee sector to thepublic sector for investments in energy. A fairly large part was investedin the coffee industry, partially justified by the higher prices and largershare captured in the world market. However, the financial and constructionsectors were able to expand rapidly, the latter reflecting the widespreaduse of real estate and other accumulations of inventories as a hedge againstinflation.

12. Economic conditions started to change by mid-1979. The economybegan slowing down, inflationary pressures surfaced after a year's respiteand the balance of payments outlook began moving toward a deterioration ofthe current account. Colombia's terms of trade declined sharply in 1979 as aresult of the rapid increase in world oil prices. Adjustments in the existingpolicies became necessary, particularly in the monetary and fiscal areas, inorder to avoid additional losses in efficiency and to correct existing distor-tions.

1/ During 1970-1976 productivity (defined as value-added per personengaged) in the manufacturing sector in Colombia declined by 1% perannum on average. The value-added per person engaged in the manufactur-ing sector declined in the following export industries -- food andbeverages, textile mill products, clothing and other fabric textiles,leather and products, footwear, lumber and wood products, furniture andfixtures, paper and products, petroleum and coal products, metal andmetal products and mechanical and electrical equipment.

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C. Economic Developments in 1980

The Stabilization Program

13. The external situation changed significantly in 1980 as a resultof sharply falling coffee prices and declining manufactured exports. Infla-tionary pressures and the slowdown in the growth of real output continuedalong with a marked increase in the overall fiscal deficit, a turnaround inthe current account of the balance of payments from a US$498 million surplusin 1979 to a US$195 million deficit in 1980, and a large increase in capitalinflows because of an interest rate differential resulting in a substantialaccumulation of foreign exchange. Although the stabilization effort continuedhaving high priority, it was adjusted for the purpose of giving a greater roleto public investment. In addition, a number of other adjustments were made tomonetary and financial policies in an attempt to correct distortions withinthe banking system. The rate of devaluation was speeded up to reverse thetrend of real appreciation of the Peso. 1/

14. After a period (1975-79) of restricted capital expenditure growth,the National Government introduced the National Integration Plan (PIN), whichbecame the instrument of the Government's countercyclical policy to expandpublic sector investment, deemed necessary to stimulate aggregate demand.Investment expenditures doubled in nominal terms (60% real increase) andrepresented 31% of total public expenditures compared with 23% in 1979.Since current revenues did not expand as rapidly as in 1979 and currenttransfers increased at a fast pace, the growth of the National Government'scurrent account surplus was not sufficient to finance the increase in publicinvestment and an.overall fiscal deficit emerged for the first time in fiveyears because of the financing of local costs of projects with externalborrowing. In order to finance the deficit, the National Government usedfunds previously deposited in the Central Bank and borrowed commerciallyabroad. Both of these sources of financing were, however, inflationary, sinceboth led to an increase in the money supply.

15. In order to avoid an exacerbation of the inflationary pressures, itwas necessary to contain the expansion of the money supply originating fromdeficit financing. At the same time, it became evident that the prolonged andheavy restrictions on the banking system were being evaded and the CentralBank was losing control over the more meaningful monetary aggregates. Althoughthe Central Bank exerted nominal control over the money supply, the financialsystem had generated a number of alternative instruments producing similarliquidity pressures. Thus, the banking system was liberalized to enable it toregain its traditional intermediation role.

1! The peso was devalued by 15.7% in 1980 (compared to 7.3% in 1979), a1.7% devaluation in real terms.

16. The liberalization measures enhanced the monetary authority'sability to exert monetary control by developing a more homogeneous capitalmarket with a higher degree of functional specialization of the differenttypes of financial institutions without the costly and inefficient mecha-nisms needed to attract resources circumventing the restrictive regulations.As a whole, the new measures were successful in moderating the expansionof the money supply and avoiding an acceleration in inflation. Inflation wasalso lower in 1980 than in 1979. However, the expansion of the money supplyduring the year was was uneven. The large acceleration in the growth of themoney supply in the last quarter of 1980 (by more than 23% compared to6% between January and September) was one of the factors which stirnulated therelatively rapid inflation during the first quarter of 1981; the others beingthe extended drought which affected food prices sharply and the end of theyear wage readjustments. 1/

17. The high level of nominal interest rates prevailing through the yearreflected inflationary expectations; in real terms, interest ratesreached levels of 15% or more, affecting private sector investment, particularlyin the manufacturing sector. As the real returns of short-term financialinvestments became fairly high, the relative profitability of longer-termcapital investments declined.

Investment and Growth

18. Real GDP growth in 1980 2/ is estimated to have reached 4% comparedto 5% in 1979 and 6% on average during 1974-78. Despite the slowdDwn, thisgrowth rate was still higher than that registered in most Latin American coun--tries in 1980 and in 1974-79. Aggregate demand, which was particularlyaffected by the rapid fall in coffee prices, slowed the growth of income. Onthe supply side, most of the slowdown originated in the agriculture, manufac-turing and construction sectors. In agriculture, a prolonged drought, whichbegan in 1979, delayed and affected acreage planted and output. Theseproblems were compounded by the rapidly rising price of inputs relative tothe price of output (slowing down the use of fertilizer and machinery andthereby, improvements in productivity). The situation in agriculture clearlyhad an effect on inflation, since food accounts for about half of the weightin the consumer price index. In the manufacturing sector, low growth wasaccounted for by the weakening of domestic demand, poor export performance,low private investment growth because of high nominal and real interest rates

1/ The consumer price index (blue collar workers) rose by 26.5% as comparedto 29.8% in 1979. At the end of March 1981, inflation was running at anannual rate of 29.5% compared with 24.9% at the end of the same month in1980.

2/ Preliminary estimate.

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and continued power shortages. The import-competing sectors also had seriousproblems, particularly the textile and automotive industries, which forcedlarge-scale foreign competition as a result of an opening up of imports.Construction, which had fallen sharply in 1979, continued to slacken, affectedby a recession in private sector construction caused by both demand andsupply factors. However, by the end of the year, the recession had bottomedout. On a more positive note, mining activity expanded in excess of GDP as aresult of increased petroleum and gold production in response to higherprices. The Government's continued encouragement of joint venture agreements,in addition to price incentives granted in May for old and incremental oil(whose prices had remained frozen over most of the last decade--see paragraph49.) stimulated investment and resulted in a 1% overall output increase whichreversed the declining trend of the last decade. At the same time, oilconsumption was curtailed to a 2% annual growth, as a consequence of theGovernment's policy of moving toward international prices through oil priceincreases in excess of inflation. Open unemployment in the urban areascontinued creeping up, reaching 10%, compared to 8% in 1978. Underemployment,which had been maintained at a constant percentage of the labor force, showedan apparent upward trend by the end of the year.

19. Gross real fixed investment rose by an estimated 14% in realterms and reached 20% of real GDP compared to 18% in 1979. The privatesector accounted for 75% of gross fixed investment with the public sectoraccounting for the remainder. Public construction activity rebounded withincreased government investment. Net direct foreign investment almostdoubled in 1980, largely as a result of increased exploration and develop-ment of nickel, oil and coal.

Fiscal Policy

20. Colombia's fiscal policy in 1980 was shaped by the need to stimulateaggregate demand, accelerate investments in energy, infrastructure and thesocial sectors and increase public sector savings to finance the expandingexpenditure levels. Both current and capital transfers from the NationalGovernment were rapidly expanded, and although the prices of public servicesand of petroleum derivatives were significantly increased to support theseefforts, they were not raised sufficiently to cover the unfinanced gap.Increased commercial borrowing from abroad financed the overall deficitresulting from higher investment levels.

Table 1 - COLOMBIA: CONSOLIDATED PUBLIC SECTOR FINANCES, 1975-80(Percent of GDP)

1975 1976 1977 1978 1979 1980 1/

Current Revenues 22.5 23.8 23.5 23.6 25.0 25.7Current Expenditures 15.0 16.9 16.5 16.8 17.2 17.4Current Account Savings 7.5 6.9 7.0 6.9 7.8 8.3Total Capital Expenditure 9.8 8.7 8.6 8.1 8.4 9.5of which: Gross Fixed

Investment (5.8) (5.9) (5.6) (5.3) (5.9) (5.9)Capital Revenues 0.7 0.6 0.6 0.5 0.6 0.5Overall Surplus/Deficit (1.6) (1.2) (1.0) (0.7) - (0.7)

1/ Estimated.

Source: Table 2.3 and 5.2, Statistical Appendix.

21. The consolidated public finances generated a significant currentaccount surplus in 1980, reaching 8.3% of GDP as compared to 7.8% in 1979.Despite this performance, serious problems in the use of resources anddeficitary operations in many public agencies took place. Moreover, thissuplus was not sufficiently high to finance all of the capital expenditureundertaken during the year. Central Government savings contributed moderatelyto this effort, rising only slightly as a percentage of GDP, because of theweakening in the growth of revenues from the coffee tax from the NationalGovernment operations. 1/ Current savings from the rest of the public sectorimproved significantly, supported by the increased transfer from the CentralGovernment and rising service charges. Capital expenditures rose substan-tially, reaching 9.5% of GDP (See Table 5.2, Statistical Appendix).

1/ The Central Government includes the operations of the National Government,National Highway Fund, National Feeder Roads Fund, and the Social SecurityInstitutions.

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Table 2 - COLOMBIA: NATIONAL GOVERNMENT SUMMARY OPERATIONS, 1975-80

(Percent of GDP)

1975 1976 1977 1978 1979 1980 1/

Current revenue 9.3 9.1 8.8 9.2 9.7 10.0Current expenditure 6.1 6.0 5.8 6.2 7.2 7.5Current surplus 3.2 3.1 3.0 3.0 2.5 2.5Capital expenditure 3.2 2.3 2.3 2.3 2.2 3.5of which (grossfixed investment) (0.4) (0.3) (0.3) (0.3) (0.3) (0.6)

Overall surplus or deficit - 0.8 0.8 0.7 0.3 (1.0)Overall surplus or deficit 3.1 4.2 4.4 4.4 4.8 3.7

(without current transfersand internal interestpayments)

1/ Estimated.

Source: Tables 2.3 and 5.3, Statistical Appendix.

22. The finances of the National Government registered a largeoverall deficit in 1980 (1.0% of GDP) after four years of overall surpluses,as a result of a twofold increase in capital transfers and a slower currentrevenue growth than that of current expenditures (See Table 5.3, StatisticalAppendix). The increase in current revenues originated primarily in customsand income taxes, reflecting the effects of inflation, while revenues fromthe special exchange account and sales tax weakened. The rapid rise incurrent expenditures originated from substantial transfers to the rest ofthe public sector (which absorbed about 70% of current savings of the NationalGovernment) and from an almost doubling of interest payments. Direct invest-ment expenditures by the National Government constituted about a fifth oftotal public sector fixed investment; most of the expenditures being in theform of transfers to the rest of the public sector, in reflection of theGovernment's decision to accelerate the execution of the PIN, with the conse-quent strain on the National Government's finances and insufficient effort onthe part of the rest of the public sector to reduce its reliance on capitaltransfers. A continuation of the transfer policy in the absence of newrevenue generating measures, increased control in expenditure growth andimproved efficiency in the use of resources will deteriorate the NationalGovernment's finances and jeopardize the stabilization efforts. Of particularconcern is the earmarking of revenues to the departments and municipalities.Earmarking reduces the efficient allocation of resources in the public sectorand eliminates "de facto" setting of expenditure priorities. One such case isthe "Situado Fiscal" (earmarking of growth of National Government revenues foreducation and health), which has fostered inefficient and unproductive use ofexisting resources. The Situado Fiscal has been the main cause of the large

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increases in transfers to the rest of the public sector. Unless earmarking iseliminated, the transfers will continue increasing in the future and theGovernment will increasingly be constrained in its ability to finance thelocal costs of investment expenditures. Problems in public expenditure arederived from the efficiency with which resources are distributed, transferredand utilized. Revenue efforts require a counterbalancing effect on controllingexpenditure growth and better surveillance in the use of resources and theimproved allocation of these.

23. The revenues of the National Decentralized Agencies performedstrongly in 1980 as a result of increases in charges and fees. However,their buoyancy declined slightly (See Table 5.5, Statistical Appendix). Thus,additional increases in charges will be necessary to strengthen their financialposition, particularly ECOPETROL, whose finances remain in a precarious statewhile requiring to substantially increase its investment program. In ECOPETROL-scase, increases of consumer prices, with sufficient revenues going to thisagency, is a necessary step to ensure its financial viability. Moreover,improvements in efficiency will also be necessary to strengthen the financialposition of the agencies.

24. The revenues collected by the departments and municipalities togetheraccounted for 23% of total public sector revenues. This ratio has been declin-ing continuously over the past years while at the same time, the growth oftheir current expenditures has been in excess of a 35% annual average, produciLnga continuing deficit, particularly in the departments -- equivalent to 1% ofGDP in 1980. The financing of this deficit requires massive transfers from theNational Government. An alternative is to strengthen the finances of thedepartments and municipalities by adopting economy measures which will restrainexpenditure growth and improve the use of existing resources, simultaneouslywith revenue measures that lead to increases in land taxes and indirect taxes,and in contributions from the private sector to finance public works thatbenefit them such as roads, streets, water supply and sewerage systems, inaddition to the elimination of earmarking of revenues.

Balance of Payments

25. Colombia's balance of payments registered an overall surplus ofover US$1,100 million in 1980. For the first time since 1976, the surplusoriginated solely from the capital account, a result of increases in bothprivate and public net capital inflows and short-term capital attracted byhigh interest rates. Direct foreign investment almost doubled because ofincreased nickel and petroleum investments, while the net drawdown of privateexternal loans was reduced almost by half. Net public capital inflows rosesharply, from US$42 million in 1979 to US$781 million in 1980, reflectingincreased disbursements of official capital and commercial bank borrowing.Short-term capital in the amount of US$240 million entered the country despitemore rapid exchange rate adjustments to eliminate the differential betweendomestic and international interest rates. The resource and current accountbalances, however, were in deficit of US$49 million and US$195 million respec--tively, equivalent to 0.1% and 0.5% of GDP (see Table 5). In 1979, these

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ratios were positive and equal to 2.2% and 1.5% of GDP respectively. Slowgrowth in export receipts (12%), originating from a sharp drop in manufacturedexports, and an increase in import payments (30%), emanating primarily fromincreased purchases of consumer and capital goods and gasoline, were the majorcauses of the turnabout in these accounts. As a result of these developments,net international reserves of the banking system increased to US$4.4 billionat the end of the year and net official reserves to US$5.4 billion; thelatter, the equivalent of about 11 months of imports of goods and services.

26. Foreign exchange earnings from merchandise exports increased by13% in nominal terms in 1980, compared to 20% in 1979. Receipts from coffeeexports, which still accounted for slightly over half of total exportvalue, decreased by about 3% in 1980 as a result of rapidly falling pricesdespite volume increases. However, Colombia's relative market share forcoffee exports to quota countries became controlled under the InternationalCoffee Agreement and was set at a level below the pre-quota exports.

27. The performance of non-coffee exports was mixed. Major manufacturedgoods decreased by about 5% in US dollar terms from their 1979 level. On aproduct by product basis, leather and hides, metallic products and cement,together decreased by over 35% in current value. The export industries werespecially hard-hit by a combination of factors, which included the slowdown ofthe world economy, a fall of nearly a quarter of the export value to theAndean Group markets (because of a recession in Venezuela), an appreciatedexchange rate and declines in productivity which reduced their competitiveness.On the other hand, the growth of non-coffee agricultural exports was impressive,rising by nearly 60% in current terms, including bananas, rice, shrimp andshellfish, flowers, cotton and sugar exports. Particularly significant was thethreefold rise in sugar exports because of its high international price whichrose from US$0.08 per pound in 1979 to US$0.27 in 1980. Apart from favorableinternational prices and increased volumes, improved marketing in the US andEurope made possible this exceptional growth. Tobacco and cattle were theonly exceptions. Receipts from tobacco exports fell as a result of thedecline in international prices while cattle and beef exports were affectedbecause Venezuela, the country-s major importer, limited such imports fromColombia. Among mineral exports, sales of fuel oil increased by half amillion barrels to 9.5 million barrels for the year, with prices risingsharply. Gold exports rose sharply to US$315 million from US$75 millionin 1979. On the other hand, coal shipments abroad were reduced to less than100,000 tons from 330,000 in 1979, as a consequence of transport tariffdisagreements. With regard to the direction of trade, exports to the AndeanGroup countries declined sharply, while sales to Europe, including the easternblock countries (coffee exports), North America and the rest of Latin Americaincreased moderately.

Table 3 - COLOMBIA: BALANCE OF PAYINTS, 1970, 1975-80

(in Percent of Current GDP)

1970 1975 1976 1977 1978 1979 /1 1980 /1

Exports of Goods and Nonfactor Services 14.1 16.4 18.2 14.0 17.1 16.9 16.3(of which coffee) (6.5) (5.8) (8.5) (8.3) (8.3) (8.3) (6-9)

Imports of Goods and Nonfactor Services 16.2 15.4 15.1 10.6 14.5 14.7 16.4(of which crude petroleum and derivatives) (-) (-) (-) (1.0) (1.1) (2.0) (2.3)

Rcsource Balance -2.1 1.0 3.1 3.4 2.6 2.2 -0.1

Net Factcr Services -2.5 -2.0 -1.8 -1.4 -1.1 -0.7 -0.5

Current Transfers 0.4 0.4 0.2 0.3 0.1 0.0 0.1

Current AccoLnt Balance -4.2 -0.6 1.5 2.3 1.6 1.5 -0.5

Nef Public Medium and long Term Disbursements 2.3 1.9 0.8 1.0 0.3 1.9 2.4Gross PuLblic Mcdium and Long Term Disbursements (3.3) (2.9) (1.8) (1.9) (1.4) (3.4) (3.2)Amortization (-1.0) (-1.0) (-1.0) (-0.9) (-1.1) (-1.5) (-0.8j

Direct Foreign Investment 0.5 0.2 0.1 0.2 0.3 0.4 0.7

Net Private Medium and Long Term Disbursements 0.6 0.4 0.1 - -0.1 0.4 0.2Gross Private Medium and Long Term Disbursements (1.4) (0.8) (0-5) (0.3) (0.3) n.a. n.a.Amortization (-0.8) (-0.4) (-0.4) (-0.3) (-0.4) n.a. n.a.

SDR Allocation _ _ _ _ 0.1 0.1

Other Capital n.e.i. 0.8 -0.9 1.2 0.8 0.5 0.1 0.7

Capital Account Balance 4.2 1.6 2.2 2.0 1.0 2.9 4.1

Overall Balance - -1.0 -3.7 -4.3 -2.6 -4.4 -3.6Change in reserves (-increase) 7(- (-1.0) (-3.7) (-4.3) (-2.6) (-4.4) (-3.6)

/1 Preliminary

n.a. - Not available

Source: Banco de la Republica and Bank staff estimates.

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28. Merchandise imports rose by an estimated 30% in current US dollars.This rapid growth reflected the emphasis given to opening up and simplifyingthe import regime (See paragraphs 43-47). Imports of durable and non-durableconsumer goods more than doubled with respect to 1979 with foodstuffs andelectrodomestic appliances on the rise. Crude petroleum purchases becamemore difficult to arrange as a consequence of a decreased world supplyof crude, because of the Persian Gulf war. Long-term purchases had beenarranged with Iraq, which could not be delivered. Therefore, Colombia had toincrease gasoline imports by one and a half times their 1979 value andoperate its refining facilities substantially below their production capacity.Raw materials and intermediate goods increased by over 20%. Capital goodsimports increased by over a third in value, reflecting an increased need forpetroleum and transport. In 1980, an increasing proportion of importsoriginated from the Andean Group countries, Central America and the Caribbeanand Asia; a lesser share from North America and Europe.

D. Short Term Outlook

29. Increased investment efforts by the public and private sectorsshould provide a stimulus for an improved growth performance in 1981.A rate of real GDP growth of 4.5% is likely to be attained. Nevertheless,the major challenge facing the authorities is to continue with the growthoriented policies without exacerbating inflationary pressures. To achievethis, coordination between the different government policies -- growth,employment, incomes, trade, monetary and fiscal, including the coordination ofpublic investments -- will be necessary as well as increased consideration totheir tradeoffs (See paragraphs 36-38).

30. Manufacturing activity, hemmed in by low international competitive-ness, slow growth in domestic and international demand, particularly by thecontinued weakening of the Venezualan economy, and limited by power shortagesduring the early part of the year, is likely to have a limited growth in theabsence of faster exchange rate adjustments, an improvement in the worldeconomy, and sharp increases in productivity resulting from the introductionof modern technology and equipment. Slower growth in domestic incomes anddemand as coffee prices stay at fairly low levels can be expected to reducethe expansion in personal services and in the growth of commercial activity.On a more positive note, construction activity is expected to recover by end1981. Petroleum production could also increase by 4-6% in response to favor-able price incentives, increased investment and exploration activity is likelyto expand significantly with nearly 80 new drillings--a sizable amount comparedto recent undertakings. Public sector activity is expected to expand, particu-arly the investment program. Although the area planted was reduced in some

crops because of a prolonged drought, the agricultural sector should registerncreased gains particularvy :-offee -n!l rice5 ,;inc>-. weat,er conditions have

.rnroved somewh-at and prodaction of most commodities -s 1ikely _o recoverfrom the drought-affected levels of 1979-80.

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31. Since in 1980, the accumulation of reserves was lower than in 1979and, therefore, the pressures for monetizing foreign exchange receipts werenot as strong, it was possible to accelerate the rate of devaluation. Still,the Colombian Peso has appreciated in real terms as a consequence of the lowrate of devaluation during 1977-79. Nevertheless, the Government's policy isto attain a long-term equilibrium real exchange rate in line with its growth,balance of payments and employment objectives.

32. Merchandise exports are expected to decline by about 11% in 1981following a sharp decrease in coffee and fuel oil exports. Coffee productionis projected to increase to a record 14.2 million bags with inventoriesprojected to double to about 4 million bags as a result of reduced exports.Receipts from coffee exports are expected to decline by 26% in 1981, reflectingboth reduced volumes and a significant drop in the FOB price. Non-coffeeexports are likely to be weak during 1981, increasing by about 6% in currentU.S. dollars. Fuel oil exports are projected at 6.5 million barrels, downfrom 9.5 million in 1980, because of the difficulties encountered early in theyear in arranging long term crude oil purchases.

33. Imports are being facilitated by policy changes. The use of globalexchange licenses has been expanded and authorization to hold foreign exchangebalances widened. An additional 600 import positions have been shifted to thefree registration list. Imports of goods and services have responded somewhatto these policy actions and are likely to increase by 18% by end 1981. Thisshould help alleviate the pressure on aggregate demand arising from the growthof foreign exchange of earlier years. Long term capital inflows, particularlyto the public sector are increasing, and so is net direct foreign investment.Notwithstanding the increase in capital inflows, international reserves beganto decrease during the first quarter of 1981 and could be reduced by about$200 million for the entire year.

34. Colombia's public sector is likely to generate a larger overalldeficit in 1981 than in 1980. Current expenditures of the National Govern-ment are expected to increase sharply, reflecting increases in transfers tothe rest of the public sector and wage readjustments for Government employees.Capital transfers are also likely to increase rapidly to support the investmentprogram. Revenues from the special exchange account are projected to decline.Over the medium and longer term, this source will have to be replaced by otherrevenue sources. Revenues from the sales and income taxes are unlikely toincrease rapidly because of the slowing of income growth and tax reliefmeasures granted in 1980. Customs revenues, on the other hand, should rise inline with increased imports and non-tax revenues should recover. The gasolinetax should rise as a result of additional price increases of petroleum deriva-tives. External commercial sources are expected to finance a decreasing shareof the public sector's 1981 credit requirements in accordance with, the Govern-ment's policy of phasing out borrowing from these sources to cover the overallfiscal deficit. However, the size of the overall deficit may be larger than

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the external resources available (See Table 5.14 - 5.16, Statistical Appendix).To avoid increasing inflationary pressures or slowing down the investmentprogram, a change in the direction of the fiscal policy along the linesindicated in paragraphs 22-24 will be required.

Conclusion

35. Developments over the last six years have posed a tremendouschallenge to Colombia's policymakers to solve short-term problems confrontingthe economy without sacrificing long-term objectives. In the face of unexpect-ed and constantly changing external conditions, the Government has demonstratedits resiliency and adaptability. Overall, the authorities have managed theeconomy with conservative economic policies and with a sufficient pragmatismthat has taken due account of the constraints, the tradeoffs and the consequen-ces which they were willing to accept. The compatibility of economic policieshas not been easy to achieve. Nevertheless, the authorities opted to pursuepolicies which combined growth with stability. The result of this has been: arate of inflation which, although relatively high, has remained at manageablelevels; a rate of economic growth higher than that registered in most LatinAmerican countries; the containment of unemployment at manageable levelsdespite sharp demographic shifts to urban areas; an important effort inpricing policy; a foreign exchange position which will allow them to satisfythe import requirements of the economy; and an improved income distribution.There are difficult issues ahead; nevertheless, it is within the Colombians'capability to tackle them successfully.

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1I. DEVELOPMENT ISSUES AND STRATEGY

A. Introduction

36. The Government's stated economic strategy is directed towardincreasing the rate of growth of the economy, lessening the constraints tolonger-term growth, avoiding balance of payments difficulties in the late1980s, as a means to expanding employment opportunities for the growing laborforce, improving the distribution of income and providing greater welfare forall Colombians. At the same time, the Government is equally committ:ed to astabilization program designed to reduce inflationary pressures and preventthe building up of high inflationary expectations. The combination of thesetwo policies -- one dealing with short-term management problems of stabiliz-ing the economy; the other with restoring the economy's long-term growth pathand eliminating the constraints which prevent this from being possible --requires careful use of policy options and the timely coordination cf policyinstruments.

37. The continued expansion of the Government's investment programshould increase aggregate demand and result in a higher rate of growth forthe economy. It could also, however, increase the existing inflationarypressures since an important part of its financing originates from themonetization of foreign commercial borrowing to finance local costs. 1/ Thepolicy alternatives to avoid an increase in inflation are: (a) to reduce thereal level of current public expenditures starting in 1982; and (b) to in-crease public revenues from domestic sources. These alternatives would in-volve adjustments in the Government's fiscal policies, including a major effortto improve expenditure efficiency and new revenue generating initiatives.Fiscal problems could become serious in the future. However, the Governmentis cognizant of this and has prepared the corresponding legislation in aneffort to anticipate and solve these problems.

38. Options to induce more rapid real economic growth and help theprocess of industrialization include measures to improve the quality andquantity of ouput in the manufacturing and agricultural sector and a flexibleattitude to the exchange rate. During recent years, the Government has em-phasized demand management. However, an important option that merits atten-tion is to focus more emphasis on policies to increase the supply of goods,including import liberalization, energy development and expanding agriculturalproduction. The present level of the real exchange rate also reduces the potentialrate of growth by hampering the development of export sectors. An accelerationin the rate of devaluation in order to achieve a change in the real exchangerate may, therefore, induce more rapid growth and help the process of industri-alization and agricultural development. Moreover, it will tend to increaseprices of tradeable goods and cost of imported inputs and also create liquidityeffects given the stocks of foreign exchange being held in private banks.

1/ An offsetting element, however, is the decrease in the relative price ofcoffee which will tend to slow the growth of income, will also reduce theaccumulation of foreign exchange and the increase in the money supply.

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However, a more rapid devaluation will decrease the inflow of speculativecapital reducing liquidity pressures from that source. In addition, the directcost and price effects of the exchange rate adjustments can be diminished byintensifying the import liberalization program and may, in fact, assist incarrying out the latter policy without creating large disturbances in theeconomy, particularly regarding the issues of employment and industrialization.

39. Urban unemployment is likely to become a major development issue inthe country during the 1980s. Although population growth has currentlystabilized itself at about 2% per year, the labor force is now absorbing anincreasing number of new entrants born during the 1960s, a period whenColombia's population was increasing at a faster pace. The rapidly growingworking age population (3% per year), compounded by continuing migration fromthe rural to the urban areas and by increases in the participation of womenin the labor force, could soon become a deterrent to further improvements inwelfare if sufficient employment opportunities are not available. To offsetthese developments and increase its employment generation potential, Colombia'seconomy needs to grow in real terms at nearly 6% per year on a sustained basisduring this decade. The country's development strategy should then emphasizethose activities where the country has a comparative advantage as well aswhere a potential for a dynamic expansion exists with the knowledge thatColombia's population will be increasingly concentrated in the urban areas.Over the medium term this implies rapid development of energy and mineralresources, expansion of agriculture and agroindustry, improved industrialproductivity, particularly in industry with export potential, and upgradingthe efficiency of transport services. Over the longer term, expansion ofservice activities, development of cheap electricity resources for energy-basedindustries, including semi-processing of minerals, increased mineral develop-ment, a more intensive development of Colombia's Atlantic Region's resourceand location potential and the strengthening of economic activities in thesmall and medium-sized cities are needed.

40. Petroleum accounted for half of total primary energy supplied in1980. During the same year, Colombia's overall energy trade balance resultedin a deficit of about US$500 million, or about 17% of merchandise exports.In this connection, the Government can exercise several options related to itslonger-term energy balance. One is to maintain petroleum's relative shareat its present level and expand energy exports modestly. Another is to de-crease it rapidly to about a third of total primary energy supply and increaseenergy exports significantly by 1990. The first scenario would result in anunsustainable energy trade balance deficit of US$4 billion by 1990. Thesecond one would reverse the current deficit to a surplus of US$1.5 billion,or 11% of merchandise exports. Recent actions by the Government indicate itsintention of moving toward an energy balance similar to that presented in thesecond alternative.

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41. Investments in the social sectors (nutrition and health, watersupply and sewerage, housing and education) are expected to continlue to rise.Policy coordination and efficient resource use are major problems in thesesectors. The Government is cognizant of this and is increasing its efforts tostrengthen policy coordination along with gradual improvement in the qualityand efficiency of resource use.

42. Given the present favorable balance of payments position, lowdebt service ratio and ratio of external debt to GDP, the Government'smedium-term strategy of raising public sector investment rapidly to reducesubstantially the energy and transport constraints on growth while continuingto emphasize progress in the social sectors, together with the adoptionof sectoral policies that would facilitate rapid expansion of agricultural,industrial and mineral production, stands a good chance of producing signi-ficant results by the mid and late 1980s, including a rise in the growth rateof the economy and the creation of substantial employment opportunities. Insupport of this strategy, Colombia will be borrowing heavily from externalsources during 1981-85 to finance a large part of the foreign costs of itsinvestment program. However, to finance the local costs and some of theforeign exchange costs, the Government will have to adopt timely measures toassure an adequate level of public sector savings to ensure the financialviability of its investment program. Moreover, if overall investment is tobe increased and the productive capacity of the economy is to be improvedwithout straining the absorptive capacity of the public sector, increasedprivate sector involvement in the energy and mineral sectors will be neces-sary, particularly to develop petroleum, natural gas and coal resources and tomodernize industry.

B. The Process of Import Liberalization

43. During the 1950s and 1960s, Colombia followed a policy of importsubstitution giving high protection to the domestic production of manufacturedgoods in an effort to foster industrialization. In 1967 the Governmentreduced or removed tariff barriers and quantitative controls on importedinputs and investment goods required for export promotion. The elimination ofimport controls increased the degree of capital utilization in industry andpromoted employment growth. By the mid-1970s, a process of opening up andsimplifying the import regime was initiated. Since then, the implementationand effects of the liberalization have varied widely, in response to changingeconomic conditions and constrained by the Andean Pact limitations. Neverthe-less, the gradual move towards a more open economy in the 1970s probablyfavored employment by encouraging labor intensive exports, and this improvedthe income of the poor. 1/ The rate of effective protection in Colombia has

1/ Miguel Urrutia, Winners and Losers in Colombia's Recent GrowthExperience, World Bank.

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been determined by the level and coverage of nominal tariffs and other importtaxes, by the extent and structure of quantitative restrictions as embodied inthe import licensing regime, by the system of exchange controls which allocateforeign exchange for the payment of authorized imports and, if necessary, setoverall foreign exchange ceilings, and by the real exchange rate of the Pesowhich emerges from the comparison between domestic and foreign inflation andthe changes in the nominal exchange rate of the Peso. The interaction betweenthe above instruments has determined the effective rate of protection appliedto each industry. Liberalization was carried out by altering one or more ofthese instruments, combining them in order to render a lower level of protec-tion, or reducing the incidence of a particular one over a given sector.

44. The main target of the 1975 policy was to reduce the impact ofquantitative controls. In Colombia, quantitative restrictions are imposedthrough a licensing system. There are two main licensing regimes i/ withitems classified in either category: free registration and previous importlicensing. Items classified under the free registration category can befreely imported without quantitative limitations, after a procedure ofadministrative registration is fulfilled. Previous license, on the otherhand, requires specific approval of each import permit and quantitativelimitations can be imposed. In practice, however, the official body res-ponsible for foreign trade -- INCOMEX -- can use a great deal of discre-tion even when commodities included in free registration categories areconsidered. 2/

45. The first stage of the liberalization process was to shift itemsfrom previous licensing to free registration. At the time of initiation in1975, 75% of the commodities required previous licensing while today only28% are subject to that regime. Although in theory the process has been ineffect since 1975, in practice it was effectively blocked during 1975-77,since many new difficulties were introduced into administrative registrationprocedures. Long delays and rejections of permits were common at that timeand the apparent reduction in quantitative controls was not reflected by anincrease or diversification of imports. The basic problem was the difficulty

1/ There is a third category for commodities whose importation is forbidden,such as hazardous materials and others. This category is rarely used forregular imports.

2/ For example, if the price declared for a commodity to be imported underthe free registration regime is considered too low according to INCOMEX'sstandard, the permit will be denied on the grounds of "dumping". More-over, many permits need approval by safety, sanitary, sesurity andother authorities and the process may be highly time consuming. Thereare, therefore, large administrative powers invested in INCOMEX toregulate the volume of imports even if the commodities in question arenot formally subject to quantitative restrictions.

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of coordinating this policy with the other instruments of protection. Asforeign exchange reserves were growing rapidly and the authorities wishedto keep the monetary base from expanding too rapidly, it was not possibleto devalue at a faster pace and avoid a real appreciation of the Peso.Consequently, import-substituting industries were confronted with a lowerdegree of protection because of the appreciation of the peso and the addi-tional opening up of the economy by reductions in quantitative restrictionscould have resulted in the collapse of many industries with consequentemployment problems.

46. During 1978-79, the formal elimination of restrictions continued,although at a slower pace. In September 1979, some additional changes wereintroduced, including a 15% decrease in the average tariff. Since then, onlyslight changes in the tariff structure have occurred, even though the statedaim is to reach the minimum common tariff of the Andean Group. In 1980, theforeign exchange situation started to change with the reversal of the tradeaccount. This allowed a more rapid devaluation of the Peso and permitted amore liberal policy regarding imports. In October 1980, an additional 400items were shifted to the free registration list (particularly capital goods,inputs, and final goods not produced locally) and another 200 were to be shift-ed in 1981. More important, the administrative procedures were simplified andstreamlined considerably.l1 An additional element operating in the directionof a more liberal system is the fact that the large accumulation of foreignreserves has practically eliminated foreign exchange rationing. 2/ The moreliberal regime of 1980 has not resulted, however, in a much larger volume ofregistered imports (in the items shifted to free registration) in 1981,because many of the items shifted were not important in terms of import value.The rate of effective protection continues to be high, many administrativerestrictions are still in effect and the inefficiency and bottlenecks existingin Colombian ports have increased the effective price of imports. An increasein imports would raise the availability of goods, ease inflationary pressuresand promote more competition. Employment considerations have limited thespeed with which liberalization has been achieved. However, a faster liberal-ization should promote increased exports, lead to more rapid real economicgrowth and produce beneficial effects on employment creation, as was the casein the late 1960s and in most of the 1970s. Moreover, even when e!ffectiveprotection is actually reduced, the flow of imports does not increase immediate-

1/ Delays are now shorter for the registration items and about 910% ofprevious licensing requests are granted. Restrictions are heavy in 30-40items, particularly textiles and automobiles where there has actuallybeen an increase in the incidence of restrictions (illegal imports oftextiles have increased considerably; automobiles were both liberalizedand then restricted in 1980). In effect, INCOMEX remains an administrativemeans of directing specific public policy on imports.

2/ Previously, INCOMEX was limited in the amount of import licernses thatcould be granted by a binding allocation of foreign exchange., Thismechanism in operation does not serve any practical purpose t:oday.

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ly because uncertainties regarding the policy's execution and the futurecourse of the exchange rate has prevented the development of the institutionaland organizational mechanisms needed to channel new imports. That is sobecause those mechanisms are costly and the returns are uncertain as long asthe continuity of the policy is subject to discussion. Therefore, a cleardefinition of this policy is required to take advantage of the benefits whichthe import liberalization process can provide.

47. An additional aspect worth mentioning is the high degree of exposureof the industrial sector to foreign competition arising from smuggling opera-tions and illegal trade. Some sectors, including textiles, electronics,alcoholic beverages and tobacco, have been affected by the increase in illegallyimported commodities. These appear to have been on the rise during 1980 and1981. The foreign competition through this avenue has produced -- in somesectors -- effects comparable to those of a more rapid liberalization ofimports.

C. Energy

48. Colombia's energy resources are characterized by substantial hydropotential (100 GW), massive coal reserves (17-30 million metric tons),sizable reserves of natural gas (4.4 trillion cubic feet) and limited knownreserves of crude oil (700 million barrels). Consequently, the main thrust ofgovernment policy had been to increase the share of hydropower, coal andnatural gas in meeting the country's energy requirements. Since the mid1970s, this policy has been pursued with increased emphasis and the net resulthas been a progressive decrease in the share of total energy supplied by oil.In spite of this, oil and petroleum products still remain a dominant source ofenergy, accounting for half of total demand in 1980, followed by coal (22%),gas (21%), and hydroelectricity (7%).

49. Past policies contributed to a deteriorating oil situation, changingColombia from a net exporter up to the mid 1970's to a net importer today (30%of total petroleum demand in 1980). Oil prices to producers were kept artifi-cially low, thus dampening incentives for further exploration. Moreover, asin other parts of the world, the contractual framework offered by the Governmentto the oil companies was not sufficiently attractive to increase significantlythe inadequate and sporadic oil exploration efforts that prevailed since theearly 1960's. In recent years, however, the Government has made a considerableeffort to remedy this situation by moving consumer prices toward internationallevels and by providing adequate incentives to producers. For example,consumer prices of regular gasoline, kerosene and diesel, which comprise mosto.- tae petroleum derivatives consumed, have been increased steadily since1975. The last price increase was effected in October 1980 and brought theprice of low octane regular gasoline to US$0.90 (CoIq44) per gallon. Althoughthis has since bee-n sli,ilty offset K the crawling peg ieva smaL lon which hasbrought the US dollar price equivalent down to US$0.82 per gallon, the 1981world market oil glut has in turn been dampening international Drices. TheGovernment has also re-examined and modified its relationship with foreign andlocal companies in order to stimulate increased exploration and production

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operations; joint venture contracts which introduced international prices in1976, have been encouraged and the older association contracts have beenprovided with adequate pricing incentives. In particular, the state owned oiland gas corporation (ECOPETROL) has been strengthened to enable it to functionas an effective partner in joint ventures with private companies and toexecute an expanded investment program. The results of these initiatives havebeen highly successful, especially in terms of increasing foreign privateinvestment in oil exploration in 1980-81 and increasing petroleum production.These developments, together with the massive coal deposits at El Cerrejon andthe bountiful hydro resources to be developed in the 1980's, form the basisfor guarded medium and long-term optimism about Colombia's energy prospects.Nevertheless, the full realization of this potential continues to dependcritically on adopting a comprehensive energy pricing policy, in a coordinatedinvestment effort based on least-cost solutions, on developing an adequateenergy network path to the final consumer, and on the organizational anddecision-making structure of the public sector agencies (oil, gas, coal andpower). Emphasis must be put on enabling the agencies to generate adequateresources and ensuring their efficient geographical allocation. A clearerdefinition of the development and upgrading of the infrastructure necessaryfor the extraction, processing and transport of the various indigenous energyresources is required. Substantial progress has been achieved in recent yearsby the Government's efforts to improve and strengthen the sector's institu-tional framework, to raise prices toward reflecting opportunity costs, topromote domestic oil, gas and coal exploration and production, and to increasethe hydropower generating capacity. However, it has not been sufficient.Additional efforts are required to develop a national energy planning capa-bility, improve relative energy pricing and further strengthen institutions.

50. In spite of the positive Government actions in recent years toincrease domestic energy prices, there remains a need to develop a long-termpricing policy which, within the Government's broader objectives, wouldprovide adequate incentives to developing existing hydrocarbon resources in arational manner, reflect more precisely the economic costs of bringing energyproducts to the consumer, and establish interfuel price relationships reflect--ing the opportunity cost of competing fuels. In addition, the Governmentshould take upon itself the task of: (a) achieving and maintaining financialviability of public agencies in this sector; (c) developing a comprehensiveapproach to the development of coal and natural gas resources. The key issueappears to be how best to supply heat to industrial and utility boilers in thevarious geographic markets given the complex pattern of local availability andcost, transport costs, and export value of coal, gas and fuel oil; (c) develop-ment of the Northern and Central blocks of the El Cerrejon coal project asquickly as possible. The challenge of marketing the volume of coal anticipatedto be exported should not be ignored; and (d) developing and carrying out aneffective strategy for dealing with serious shortages of firewood and relatedproblems of rural household fuel supply, erosion, and siltation in. waterwaysand reservoirs.

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Petroleum

51. Substitution of petroleum products by hydroelectricity, coaland natural gas will depend on domestic pricing policies, on the speedwith which the price structure is adjusted to favor such substitution,and on the availability of alternative sources and supporting infrastruc-ture required for the transport, production and use of these fuels. Unlessadequate measures are taken in this direction, petroleum will continue toincrease rapidly its share of total imports. Steps to increase prices tointernational levels should continue to be a prime objective of the Govern-ment. Since petroleum is a depletable resource, it should reflect itsopportunity cost. In this respect, international prices are the generallyaccepted measure of what price should be charged. The composition of, andcosts involved in, ECOPETROL's investment program in the refining operationis another issue which requires Government attention. ECOPETROL recentlyfinished expanding the Barrancabermeja refinery, at a cost that appearsunusually high, even compared to the relatively high cost of refineryconversions. Additional refining capacity expansion, in addition to otherinvestments planned for the next 10 years require further analysis. Thetime-phasing of ECOPETROL's investment program should be considered inlight of the expected rate of return on the projects, of ECOPETROL's cashflow requirements and on petroleum prices reaching international levelsincluding the analysis of whether it would be less costly to process im-ported crude than importing refined products.

Natural Gas

52. The gas deposits discovered near the Guajira Peninsula wereestimated at about 3.3 trillion cubic feet at the end of 1979. This levelof reserves could allow a utilization of about 450 million cubic feet perday, an amount which would exhaust proven reserves in about 20 years. Thepotential for new discoveries, which could increase total proven reservesabove current level of about 4.4 trillion cubic feet exists both in theGuajira region and in the middle Magdalena area. However, this potentialis not supported by sufficient incentives to promote increased explorationefforts. Prices for gas from new discoveries are not set in advance, butagreed ex post with producers. This limits the incentives for new explora-tion to take place.

53. The Government has proposed several projects to increase Guajiragas production and to replace the markets that would be lost once naturalgas use in electrical power plants is replaced by coal. These include:a) construction of Gasoducto del Occidente, now apparently substituted bya gasline from Barranquilla to the Barrancabermeja refinery and Cocorna oilfields; b) production of ammonia and urea; and c) production of methanol.Feasibility studies for all of these projects are underway. Their analysis,once completed, sliould provide the basis for adopting decisions on the mostfeasible use of the Atlantic Coast gas resources.

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Electrical Power

54. Although substantial progress has been achieved in the eLectricalpower subsector over the past four years, there are several aspects that willrequire increased attention over the coming years to assure the sector'sability to function efficiently and fulfill its key role in the development ofthe country's energy potential. These include (a) maintaining tariffs atlevels sufficient to permit financing of an important portion of the invest-ment program and debt service, undertaking external borrowing operations tofinance the import costs of these investments, and developing domestic mecha-nisms to tap medium and long-term resources from the domestic market;(b) continuing and intensifying the strengthening of institutions as part ofdeveloping an integrated and interdependent system; (c) ensuring that ISA'sinstitutional, managerial and technical capability is at the level necessaryto fulfill the central role assigned to it, including strengthening itsregulatory responsibilities and establishing a national power dispatch mecha-nism; (d) stepping up efforts in environmental and watershed managementaspects to prevent further adverse siltation and erosion effects upon re-servoir storage capacity; and (e) determining the optimal mix of hydroand coal and gas-fired plants in order to take advantage of the projectedincreased supply of coal to mitigate the system's dependence on hydrologicalconditions.

Coal

55. There are some outstanding issues in the sector which require promptresolution. These include: (a) the efficient development and timing of newgovernment coal projects; (b) the need for export marketing studies; (c) theneed for additional studies required to fully determine the resource's potentialdevelopment in geographical areas; (d) the provision of infrastructure linksrequired to transport and export the coal; (e) stepped up efforts to fostertechnically and economically efficient private coal developments; and (f)future pricing policies and their implications.

56. The most promising thermal coal deposits are located in the ElCerrejon area on which the northern and central blocks are to be developed.The southern block will be left as future reserves. EXXON, which has ajoint-venture contract through INTERCOR, has been arranging the marketing ofcoal to be produced from the northern block. With the development, of largescale projects to supply domestic and international demand, pricing pressuresare likely to develop. International thermal and coking coal prices arecurrently in the neighborhood of US$60-80 a ton FOB, depending on theirrespective calorific values and sulfur content. Prices prevailing in Colombiaare substantially lower; however, transportation costs are fairly highbecause of inadequate infrastructure. Improving the transport infrastructurewill increase the demand for domestically produced coal and increase itsprice. This will contribute to make some small and medium size mining opera-tions profitable and is likely to justify investments to modernize theiroperations, improve safety standards and increase output.

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D. Transportation

57. Colombia's transport system developed geographically around twocorridors moving from north to south -- the Western and Eastern corridors --which followed the most accessible routes along the Cauca and Magdalenarivers and in the mountainous areas. These corridors evolved into threesomewhat interconnected transport systems over time. The highly accessibleWestern system which concentrated a large segment of Colombia's populationand linked major manufacturing centers (Medellin and Cali) and coffee growingareas around Manizales with the Atlantic and Pacific coasts. The highlyinaccessible Eastern system which evolved around Bogota and its areas ofinfluence and developed a fairly self sufficient level of economic activitywith a steadily growing population engaged in services, agriculture and somemanufacturing activities. The rest of the Eastern system developed into adisjointed set of knots connected to Bogota and to the ports of the AtlanticCoast including the areas of heavy industry and of mining activity. Therailway became the most efficient transport system for the Eastern corridorwhile road transport did the same for the Western corridor. It is probablethat over the medium and longer term these systems will continue to be themost efficient in each of the corridors, with connections between them justi-fied by promoting new economic activities and by an active deconcentrationpolicy in Bogota. In addition, Colombia's economic prospects will depend onsubstantial use of coal, which can only be transported by rail. Therefore, aseries of priorities regarding future investments clearly emerges. A possiblelink, the railway connection between Ibague and Armenia across the Centralmountains, should be explored and its feasibility assessed. Over a longerterm, a possible rail link between Medellin and Cali should also be explored,if the exporting activities of Medellin expand sufficiently to require portfacilities in the Pacific. This would require that railways become efficientenough to justify rapid delivery of commodities to the port facilities.

58. At current traffic levels, no major transport bottlenecks existin Colombia. However, in order to increase the efficiency of carryingthe present traffic flows, to permit a least cost transport of new trafficover the 1980s, and to increase the hauling capacity for coal and otherminerals by the mid-1980s, a number of actions are required. In transportpolicy, there are two areas to be considered. The first one concernsservice levels. The existing infrastructure is sufficient to carry traffic.That is required is an upgrading of existing service levels. This is moreimportant than pricing policies for intermodal allocation. Price increasesof gasoline, public transport and railway rates do not change trafficallocation much at the margin. However, they serve ro increase public sectorrevenues, guide investment decisions of private truckers and reduce spatialopportunities for location of economic activities. Pricing policies intro-duced by the Government should be complemented by lowering barriers to theimports and operation of trucks, discouraging the usc of automobiles inurban transport and improving the efficiency of the ports and railways.

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59. The second one concerns the way investment decisions are made.Most of these seem to favor roads over ports and railways, because most roadprojects can be identified, executed and completed over a relatively shortperiod of time. A railway or port rehabilitation program, because of sheertechnological constraints, may take up to 10 years to execute successfully.The MOPT Sectoral Planning Office had been, until its reorganization inmid-1980, a planning unit for highways (demanding most of its resources) andother transport modes excluding pipelines and airways. The Planning Officeis now a programming and budgeting office responsible for all transport needs,currently analyzing investments of about $500 million a year. More attentionshould be given to strengthening the planning operation and the invtestmentdecision process, particularly the size and timing of investments. In roads,good construction projects are scarce. However, the project preparation andexecution capacity is very good, and for this reason road construction projectsmanage to absorb a large amount of resources. An overdue backlog of roadmaintenance exists which requires attention. In ports and railways, low laborproductivity and overdue maintenance have allowed their operations to deterio-rate and significant efforts are required to improve services to adequatelevels.

60. The problems facing the railways stem from lack of maintenance,insufficient rehabilitation and an excessive financial burden resulting frompersonnel and pension expenditures. The number of employees is excessivein relation to the 2,800 km of existing track. Freight transportation ser-vices are poor, the length of trips, reliability and rotation cycles arehighly variable. The existing infrastructure has been deteriorating conti-nuously. Costs per ton hauled are high. The existing equipment is inadequateand insufficient to haul large increases in coal shipments. Major effortsshould be made to operate the system efficiently and to reduce hauling costs.Improvement in railroad operations has to be accompanied by improvements andexpansion of port facilities to increase transportation efficiency. Further-more, additional cost analysis is needed to determine competitive pricingrequired to develop coal deposits in the interior of the country.

61. The Government's intention when preparing its 1979-82 irLvestmentplan was to improve the transport of the existing traffic and to providesufficient capacity to carry the additional traffic over the next decade,including coal. A large part of new investments in railways might thus bejustified by developments in coal mining. The Government is now preparing astudy for this purpose. An important aspect of the study would be to deter-mine under what conditions it would be justified to undertake a coal miningproject. Moreover, the strategy for the transport sector should be directedso as to improve the operations of existing facilities. This entails reor-ganizing working procedures, railways workshops and operations andthe strengthening of management. In addition, railway capacity would have tobe increased to carry coal from the main origins to destinations, mainlySaboya-Carare, La Loma/La Jagua to the Atlantic line, and the Central block ofCerrejon to Bahia de Portete. However, the feasibility of these projectsstill needs to be established.

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E. Agriculture

62. During the last decade, as would be expected in an economy like thatof Colombia, agriculture's contribution to the economy declined steadily withthe sector's share in total output decreasing from 29% in 1970 to 24% in 1980.Notwithstanding this decline, agriculture's real growth remained high, averaging4.7% per year. More than one-fourth of the economically active labor force isemployed in the sector. Since the early 1960s efforts have been intensifiedto diversify production and increase exports of non-coffee commodities whichin 1980 accounted for 10% of total merchandise exports, compared to 6% in1960. Furthermore, with favorable coffee prices prevailing during 1976-79,agriculture's surplus in the balance of trade has been rising steadily. Never-theless, food imports (wheat, vegetables, oils and dry milk) have increased inrecent years, primarily because of a steady rise in the domestic demand forfood without the sector being able to supply it adequately. In severalinstances, productivity gains have been minimal or non-existent. The resulthas been a marked increase in imports and prices relative to non-food items.

63. Despite agriculture's importance, its full potential has yetto be developed. The sector is endowed with good land resources and some ofthe best entrepreneurial and technical talent of the country is engaged inagricultural activities. Clearly, it is a sector wherein a large comparativeadvantage exists. However, there are still several areas where improvementsare required. Of particular concern is the need to improve crop yields andincrease acreage planted. This is especially true of the subsistence farmsubsector. Furthermore, more competitive crops could be introduced andimproved varieties developed; both can lead to productivity gains. This,however, will require an expansion of the sector's capacity to provide re-search and extension services. The irrigation and drainage system needsconsiderable improvement, rehabilitation and expansion. Conservation of thenatural resources has become increasingly important. Strengthening of thepresent system of regulating prices and markets, including steps to establishnew and expand existing agro-industries, are also needed. Finally, givenappropriate pricing policies for feed grain and a more aggressive tapping offoreign markets, livestock production and consequently exports could also beincreased.

64. The sector's institutional support has seriously weakened inrecent years. While in principle the Ministry of Agriculture has theresponsibility for carrying out the Government's objectives, in practiceits planning and coordinating role has weakened. Because of the apparentdiffusion of responsibility among the various agencies, coordination andmanagement of policies has become increasingly difficult. In addition, thereduced scope of action of some agencies, as well as delays and cuts inbudgetary allocations, have led to financial problems in project execution.Budgets of most key agencies have declined in real terms during the decade ofthe 1970s. As a result, the sector's execution ability has been constrained.Although the PIN attempts to address the sector's main issues and state thenecessary policy changes required to improve its performance, insufficient

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attention is given to increasing and accelerating investments in areas whichwill raise productivity, expand food supplies and maintain price stability.

Irrigation

65. There are about 600,000 hectares under irrigation, representingabout 12% of the total cropped area and 66% of the land considered suitablefor irrigation. The Government operates 20 irrigation and drainage districts,,a number of which were established by INCORA in the early 1960s for thebeneficiaries of land reform programs. The net cultivable area in these 20districts totals about 235,000 hectares, of which about half are equipped withirrigation and drainage structures, and slightly more than a third withdrainage structures only. In addition, there are also private schemes designedand operated by autonomous regional corporations or private entities withoutgovernment assistance. These cover a total estimated area of 500,000 hectaresand are reported to be better equipped with irrigation facilities. Whileprivately operated irrigation and drainage facilities are believed generallyto be operating relatively efficiently, the schemes operated by the GovernmentLhave suffered from a series of problems which have impaired their effectiveutilization. The actual area cultivated in public sector districts appearsto be well below its potential, in part because budgetary resources formaintenance and completion of infrastructure as well as tariffs have beeninadequate and proper water control has not been maintained at the farm level.Present efforts concentrated at rehabilitating existing irrigation and drainagedistricts along with efforts to strengthen the Irrigation Administration(HIMAT) can be expected to be a basis for future expansion of the sector withits consequent productivity benefits. Meanwhile, efforts should be initiatedto encourage private sector initiative by groups of farmers in developingmedium-scale irrigation and 'drainage schemes through provision of credit andappropriate supervision and appraisal by HIMAT.

Credit

66. There are two government institutions which provide the vast majorityof credit to agriculture. One is Caja Agraria, which operates through a largenetwork of countrywide offices and lends mainly to the small and medium-scalefarm sector. Caja's financial position has deteriorated and a serious institu-tional effort with Government support will be required for it to operate as anefficient and growing agricultural development bank. The other is the FondoFinanciero Agropecuario (FFAP), a fund operated under the supervision of theCentral Bank from which resources are on-lent through nearly all bankinginstitutions to the commercial farm sector. Other sources of agriculturalcredits include: the Banco Ganadero, which finances livestock development; theBanco Cafetero, which finances coffee and crop diversification in coffeeareas; and the Corporacion Financiera de Fomento Agropecuario y-Exportacioneswhich lends for export agriculture and agroprocessing. Credit to the sector(excluding PROEXPO financing) increased by 27.5% per year on average during1973-80, with a significant part going to coffee and the large-scale commer-

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cial farming sector. However, when adjusted for inflation, the increase hasbeen small -- only 2.7% per year on average -- and far below the sector's

requirements and absorptive capacity. During the same period, the prices ofmost inputs, fertilizer and chemical inputs, and wages in particular, rose farin excess of inflation, reducing the real growth of credit resources going toagriculture. If the sector is to expand in the future, a large expansion ofcredit in real terms to small and medium-sized farmers will be necessary.

Rural Development

67. Until about the mid-1970s, progress to narrow the disparitiesin the quality of life between rural and urban population had been slow.However, in 1976 the Government took steps to provide the needs of the poor inthe rural areas. A comprehensive program was put forward, the IntegratedRural Development Program (DRI). The principal objective of the program is topromote farm investments and raise production. These investments coverdevelopment of infrastructure particularly in areas with the highest agricul-tural potential and increased investments in education, health, water andelectricity. Priority is given to areas with the greatest interest in farmdevelopment. Coordination and supervision is carried out by the PlanningDepartment-s DRI Office, which has played a big role. Despite initial delaysin its execution, the project has had a favorable impact on the rural popula-tion because it has been able to reach a large segment of beneficiaries. Itsbenefits have been impressive not only in terms of executing an investmentprogram and increasing output and incomes dramatically but also in reachingthe poor effectively with urgently needed services in the social and economicareas. This success makes it all the more important to continue strengtheningand expanding this program.

Agroindustries

68. The food and feed sub-sector currently accounts for about 25%of manufacturing output and 15% of manufacturing value added. Its potentialfor expansion is great, particularly to meet export demand. Thus far,agroindustrial activities have been concentrating on food processing ofsuch crops as sugar, cotton, rice, wheat, oils, fats, dairy products, vege-tables and fruits. There are, however, a number of outstanding problemswhich in many ways inhibit the development of agro-industries. These relateto (i) the general lack of integration between agricultural producers andindustrial processors and the need to improve present procedures for chan-nelling agricultural inputs to agro-industry; (ii) the need to identify theexport potential and comparative advantage of those products on which agro-industries should primarily concentrate; (iv) the provision of incentivesto encourage the growth of agro-industries in the rural areas; (v) the needto identify and prepare more agro-industrial projects; and (vi) the strengthen-ing of the present mechanisms which provide credit facilities to the sector.increased attention to resolve these problems will be: required to developfurther the agro-industrial potential.

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Marketing

69. Marketing operations have experienced considerable difficultiesin recent years. The Government agency responsible for these developmentsand for carrying out price policy in regard to agricultural products isthe Institute for Crop and Livestock Marketing (IDEMA). Established in 1968,IDEMA's functions include the fostering of agricultural food stuffs, supportprices to farmers, regulation of food prices and markets, and the promotionof agricultural sales abroad. However, inadequate financial resources andinadequate transport and storage facilities during the last few years havelimited IDEMA's role in most of these areas. Consequently, the agencyhas had limited impact in stabilizing food prices, and usually intervenesonly when a crisis is imminent (i.e., grave shortages, large surplusesor where price fluctuations are very large). Its pricing policy has notbeen effective, it has imported too late and at too high prices. AlthoughIDEMA's reorganization and increased autonomy have had a noticeable impacton the institution's efficiency, IDEMA's policies must be coordinal:ed moreclosely with overall agricultural policy if improvements are to be achievedin the efficiency of the marketing system and to increase output.

Watershed Management

70. The country is also faced with considerable deterioration of itswatersheds. Moreover, water sources (hydropower, water supply and irrigation)are expected to play an increasing role in the country's development effortsover the medium and long term. However, the institutional capacity and themanagement of water sources requires strengthening and expanding.

F. The Social Sectors

71. Since the early 1960s, the authorities have directed a substantialpart of their expenditure toward the social sectors. The Government's commit-ment is evidenced by the fact that nearly two-fifths of public sector expendi--ture has supported programs which have succeeded in improving considerablythe welfare levels in many areas of the country. During the last decade,total expenditures in health and education increased by about 7% per year onaverage in real terms, of which current expenditure real growth was nearly 10%per year on average, reflecting the increased coverage of services and therecurrent costs necessary to service new investments. These developmentscontributed to a real improvement in welfare for the poor during the 1970s.

72. Further improvements in welfare can be envisaged for the 1980s.The major challenge facing the Government is how to improve the consumptioncapacity of the poor on a permanent basis. This requires a two-prongedapproach. On the one hand, increasing employment opportunities and laborproductivity to allow for increases in real income. On the other, increasingthe provision of social services in quantity and quality. In the case of theformer, data on income distribution in Colombia are fragmentary and can atbest only give an impression of the trends. They suggest that the distribu-tion may have worsened in the early 1970s and then improved during the rest

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of the decade. Moreover, when looking at the whole decade, the data implythat income distribution improved significantly for the very poorest while atthe same time the richest 5% did not suffer any loss in their share. Thissuggests that the Colombian authorities have been taking steps to improveincome distribution and that their experience is not significantly differentfrom that of other countries with similar intentions. As for social services,the on-going health and nutrition programs need to be continued and theircoverage extended to a larger proportion of the rural population. Publicservices in water supply and Sewerage facilities, electricity servicesto the poor and basic education also require considerable improvement.These objectives can be achieved through better integration of servicesand efforts to improve the efficiency of public agencies involved in theexecution of social programs, particulaJ1y with ,espect to current expenditureresources. Notwithstanding the above, and because of its stabilizationprogram, the Government has opted to finance from abroad only those projectswith a high import component and to finance from its own resources most of theexpenditures in the social sectors. The major problem facing the Governmentis not one of lack of resources, but of strengtheniing policy coordinationalong with using existing resources more effectivelv and of moderating,through improved management, the impact on recurrent costs which the invest-ment program generates.

73. One area of particular concern relates to the absorptive capacityof the social sectors. There have been growing indications that the executingagencies' ability to undertake additional programs is considerably constrained.For a number of reasons, including budgetary constraints, cost overruns,inadequate institutional arrangements, and complex administrative procedures,several of the on-going projects in these sectors have been delayed. Therefore,it appears unlikely that many new projects will be carried out, unless a rapidimprovement in management capability takes place. An alternative would be toundertake a smaller number of projects and gradually build up and strengthenthe management and execution capability of the agencies responsible for thesocial sectors. The latter is the most important priority in the socialsectors to enable them to achieve an expanded long term absorptive capacityand improve the quality of services.

Nutrition and Health

74. During the last two decades, significant progress has been madein the supply of various social services, including nutrition and health.From 1973 to 1980, the Government increased by over 50% its current expendi-tures in real terms (from Col$4.762 billion to Col$7.453 billion) to increasethe health care coverage and increase preventive health services. Investmentexpenditures increased by about 2% per year on average in real terms duringthe same period. However, despite these improvements, there are still serioushealth and nutritional problems outstanding, particularly among the ruralpopulation. The current level of infant mortality (65 per 1,000) is stillconsidered to be too high; and rural population access to potable water andsewerage facilities of around 13% and 7% respectively are a cause of consider-

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able concern. There are duplications of services in health delivery systemsand insufficient efforts have been made to change health care services from acurative to a preventive approach.

75. Major nutritional problems are evidenced by the fact that about80,000 children below five years of age die every year, with more than one-third of these deaths attributable directly or indirectly to malnutrition.In the early 1970s, the Government recognized the need to shift to apreventive health approach and reduce malnutrition and therefore institutedprograms to increase the nutrient intake and improve consumption habits.These programs emphasized the distribution of food, the development ofenriched processed foods and processing facilities, and the introductionof better eating habits for the population as part of the National Foodand Nutrition Plan (PAN). Its main objective was to improve the nutritionstandards of rural and urban poor for about 1.8 million people in 11 governmentdistricts, and to provide access to potable water supplies, home food produc-tion, health care systems, and food technology. Thus far, the program hasmade some progress. However, timely implementation has been delayed for avariety of reasons, including the slow-down of disbursement, particularly forthose components of the program which require considerable amounts of localfunding. A major challenge facing the Government is how to make this programwork effectively and to expand its benefits to the rest of the rural and urbanpoor in Colombia.

Water Supply

76. More than 70% of the urban population now has direct access towater facilities and more than 60% to sewerage facilities. The rural popula-tion has benefitted much less from the recent expansion of these services.In certain selected areas they have reached a much larger proportion ofthe population than in other areas. However, water supply sources have beenreduced considerably while water pollution has increased to dangerous levels.There is therefore a need for water purification which requires irnmediateattention. It also appears that projected water supply systems do not makeadequate provision for purification components and this may lead to additionalhealth problems.

77. To improve water and sewerage services particularly for the ruralpopulation, several measures need to be taken. These include increasingthe efficiency of a number of institutions involved in the sector. Whiletariff increases in real terms should be gradual so that poorer segments ofthe population can continue to receive water and sewerage services at afford-able costs, the Government-s objective should pursue an improvement in thefinances of water and sewerage institutions so as to enable them to finance anincreasing amount of their investment requirements from self-generated resour-ces. However, timely implementation of existing and new projects have beendelayed because of a number of outstanding problems in the sector. Oneproblem is the continuously weakening financial position of the waLter andsewerage agencies. INSFOPAL (for urban areas) and INAS (for rural. areas)

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which rely largely on budgetary allocations to finance their investmentprograms, have experienced considerable financial difficulties in recentyears. Moreover, the estimated costs of their projects have not taken intoaccount sufficient price escalations reflecting the inflationary trends.Consequently, investment targets have not been met, the agencies have had toexecute a reduced investment program in real terms and their finances haveremained weak. Furthermore, in addition to a limited capacity to executeprojects, constraints of a technical nature limit their preparation.

Education

78. Between 1963 and 1979, overall school enrollment increased atan average annual rate of 3.4%, 11.2% and 13.7% in primary, secondary andhigher education, respectively. Moreover, during 1970-80 current educationexpenditures increased sharply, by nearly 34% per year on average in nominalterms. At the same time, investment expenditures increased by 20% per annumon average. However, despite these developments, several deficiencies continueto exist in Colombia's educational system, which to a large extent have arisenbecause of the quality of the management of the system and the inefficient useof resources. The average years of schooling completed by the cohorts ofchildren entering primary school in the early 1970's was still less than three,while a minimum of four years is generally considered essential to assurepermanent functional literacy, a prerequisite for successful participation inrapid development. The overall capacity of the educational system to absorbthe relevant entry cohorts is substantial and growing (except at the tertiarylevel). However, the absorptive potential of the system masks an acute caseof low retention and high repetition. Fewer than one child in two in firstgrade is of the right or normal age. Over twenty percent of student placesin the first grade are occupied by repeaters. For the five primary gradestogether, the average annual repetition rate is about 15%. Less than athird of primary school entrants even complete the five-year cycle, inpart because only half of the country's primary schools offer the completecycle. The high wastage occasions unnecessarily elevated costs per studentcompleting a given cycle. To a considerable extent, these deficiencies arepresent at all levels of the system but relate mainly to inequalities whichexist particularly in primary schooling between urban and rural areas. Forexample, access to primary schools in rural areas is more limited than inurban areas; educational conditions (including capital costs per student) inrural areas are more adverse; teachers assigned to rural schools are usuallyless qualified than those assigned to urban schools; and overall, educationalattainment is considerably below the levels attained in urban areas. Two-thirds of Colombian primary schools, but only one-third of enrollment andteachers are in rural areas, the average enrollment per rural school is62 students, one-fourth the figure for urban primary schools. Each classroomis used by 37 pupils in rural schools but by 54 in urban schools, the cost ofeducational infrastructure is thus higher per student served in rural thanurban areas. Some of the problems in the education sector are of a broadernature and relate to the structure and organization of the system. The resultof some ol these deficiencies in the educational system during the last fewyears has been a less than satisfactory response of the sector to the overall

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changing needs of the economy. Therefore, appropriate changes in educationpolicy are necessary for the purpose of improving the quality of the system.Moreover, the degree of inefficiency is high in this sector. Decentralizationof educational management also remains an issue, particularly below the depart-mental level; the needs are for greater administrative agility and flexibilityat this level. The dearth of people with training and experience needed toadminister educational programs is a significant obstacle to decentralization.This makes improving the management and quality of educational services themost important issue requiring resolution in this sector.

Urban Development

79. About two-thirds of the Colombian population live in cities of2,500 inhabitants or more. On average, living conditions, including elec-tricity, water and sewerage facilities, are substantially better than in ruraLareas. However, unemployment and underemployment are increasingly becomingserious problems. Inadequate housing remains a disturbing aspect of urbangrowth, despite the availability of substantial amounts of resources. Govern-ment policies have emphasized raising productivity and incomes in rural areasto slow down urbanization. In addition, the Government has also initiatedprograms especially designed to assist the urban poor with an emphasis onincreasing incomes and productivity, involving the urban poor in managementand coordination activities, making available lines of credit fQr publicutilities, home improvements, community facilities and technical assistance.However, these programs face administrative and financial constraintswhich tend to delay project execution considerably. Administrative weak-nesses, including staff turnover in executing agencies, have caused longdelays in ongoing programs, leading to substantial cost increases andserious doubts on whether they can be completed in their present design.Management strengthening and consolidation of existing programs in urbandevelopment will require increasing attention to operate adequately andreach the urban poor effectively.

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III. PUBLIC SECTOR INVESTMENT PROGRAM

A. Public Sector Investment

80. As noted, during the latter part of the past decade, public sectorinvestment efforts were substantially curtailed because of the priority givento stabilization and the containment of inflationary pressures. The publicsector's gross fixed investment share of GDP remained below 6% during 1975-78,averaging 5.7% per year, compared to over 8% during 1970-75. The growth ofthe public capital stock was curtailed, the development of potential growthactivities was delayed, energy and other infrastructure constraints emergedrapidly and affected potential private sector investment expansion, part ofthe existing infrastructure deteriorated and the long-term growth potential ofthe economy was adversely affected. Notwithstanding these developments, thecountry made some progress in increasing the infrastructure in the socialsectors and substantial investments took place in agriculture, particularlyin coffee; private sector investment activity continued, and a series ofinnovative programs designed to meet the basic needs of the poor in the areasof housing, rural and urban development, health, nutrition and education wereintroduced.

81. With the publication of the PIN in 1980, the authorities opted topursue a more ambitious course covering the 1979-82 plan period by acceleratingthe execution of the ongoing investments and initiating a large number ofprojects, many of which are to be completed beyond 1982. With this information,in addition to the project list supplied by the Government to be presented tothe Colombia Consultative Group, the mission prepared public sector investmentprojections for the 1981-85 period. Disbursements under the public sectorinvestment program for 1981-85 are projected to amount to Col$1,712 billionover the five-year period -- an average of Col$342 billion or 9% of GDP peryear. The Central Government is expected to execute only 16% of the investmentprogram, with the rest of the public sector responsible for the remaining 84%.Approximately 94% of the investment program consists of fixed capital formation(8% of GDP per year on average), with the remaining 6% consisting of financialinvestments.

82. Half of the proposed investment program is expected to occur inenergy. However, significant increases in investment are also expected inthe productive sectors (agriculture, mining and industry) and in the socialsectors (nutrition and health, education and water and sewerage). Publicsector investment in energy will emphasize development of the country'svast hydropower resources, the exploration and development of petroleumand natural gas resources and the exploitation of large coal depositsprimarily for export. Transport sector investments emphasize road construc-zione rehabilitation and maintenance of highway and rnlLlway networks, expan--,ion of the feeder road construction program --ailway oonstruction and portimprovement. The primary objectives of public investment in agriculture arero rehabilitate and expand existing Irrigation infrastructure, increase thestorage and marketing capacity, expand Lood supplies, increase exports andimprove the welfare of small farmers.

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83. Achieving Colombia's longer term potential will not only requirecontinued good economic management, but also the rapid execution of a well-structured investment program and financing plan. However, the investmentprogram to be undertaken during 1981-85 raises several issues conctsrningwhether its level and composition are adequate and sufficient and whether itsfinancial viability can be assured.

Size of the Investment Program

84. The proposed increase in public investment for 1981-85 is highcompared to levels achieved over the recent past. Nevertheless, the countryhas gradually been able to increase its absorptive capacity over the years insome sectors, particularly electrical power. However, in others, particularlythe social sectors, this is clearly not the case. Moreover, substantialefforts will be required in mobilizing domestic financial resources andfurther developing human skills, apart from the physical resources required toexecute a program of the size proposed. Given the amount of slippages anddelays which for a variety of reasons normally occur during the execution ofan investment program, Colombia's 1981-85 public investment progralm will mostlikely have to be adjusted to lower and more manageable levels in linewith the country's absorptive capacity. Fixed capital formation expen-ditures are thus projected to increase gradually as a percent of GDP from 6%in 1980 to 10% in 1985. A significant part of the increase will correspond tothe El Cerrejon project, which will be executed as an enclave project andshould not be affected by problems of absorptive capacity.

Composition of the Investment Program

85. In terms of its composition, the program strongly reflects theGovernment's disposition to eliminate existing constraints to growth and thecorresponding private sector investment expansion, avoid a serious deteriora-tion of the country's energy balance by the mid-80s, reduce its dependence onimported oil and expand exports of energy. This approach is correct and seeksto expand the country's domestic energy production and promote the developmentof alternative energy sources. Thus, investments in energy constitute abouthalf of the 1981-85 investment program and reflect these objectives. 1/Investments in electrical power account for 32% of the total investmentprogram. An accelerated and rising program of investments to meet current andfuture demand emphasizes hydropower development. At least 10 medium- andlarge-sized hydropower projects are to be initiated. Preliminary informationindicates that there are extensive cost effective hydropower possibilities.Costs vary from US$700-1,200 per kW of installed capacity at 1980 prices(which are very low cost compared to most Latin American countries) for atotal of 15,600 MW. Since Colombia has some comparative advantage in cheaphydropower generation, it should seek to develop its full potential not only

1/ The relative emphasis given to energy projects in the section reflectsthe Government's priorities and the information provided to the mission.

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Table 4 - COLOMBIA: SECTORAL COMPOSITION OF PUBLIC SECTOR INVESTMENT:AVERAGE 1976-80, PROJECTED 1981-85

(Percent)

1976-80 1981-85

I. Energy 23.7 50.0Electrical Power (12.5) (32.0)Coal (9.0)Petroleum and Natural Gas (11.2) (9.0)

II. Transportation 12.0 9.0

III. Telecommunications 2.8 4.0

IV. Agriculture and Rural Development 10.5 8.0

V. Industry and Mining 11.0 2.5

VI. Water Supply and Sewerage 5.4 4.0

VIT. Education 5.0 5.0

VIII. Nutrition and Health 5.0 5.0

IX. Urban and Regional Development 10.0 12.0

X. Other 14.6 0.5

TOTAL 100.0 100.0

Source: National Planning Department, Bank Staff estimates. These estimates arebased on the sectoral investment programs outlined in the PIN and the1981-84 Project List, with adjustmsents to account for known and pros-pective delays in project execution.

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to supply the domestic market but also to encourage energy intensive exportactivities. The program will require increased attention to transmission anddistribution investments in order that the power that will be generated willbe able to reach the ultimate consumer and encourage substitution of thermalby hydropower generation.

Petroleum Projects

86. Petroleum and natural gas projects account for 9% of the five-yearinvestment program and emphasize petroleum exploration, development, trans-portation and refining. In petroleum, an effective system by which goodprojects can be executed effectively needs to be developed. Several keyprojects in exploration and secondary recovery investments have belen delayedfor a number of years because of lack of resources to develop them. Moreover,the estimated costs for carrying out the proposed level of exploration invest-ments require substantial upward revisions which will produce a consequentdecrease in total development investments. For these reasons and in light ofECOPETROL's resource constraint, it would be preferable if ECOPETROL's shareof total exploration investments (which presupposes that private sectorcompanies would invest 40% of the total) were to be reduced to assure ECOPETROLa lower share and the private sector a concomitantly larger share of exploratorydrilling without affecting the total exploration effort. Colombia wouldbenefit from accelerating the development of existing and newly discoveredfields and increasing crude oil production from existing petroleum fieldsthrough secondary recovery when proven financially feasible. Many of Colombia'spetroleum fields are 30 to 40 years old, so that their production has exper-ienced a serious decline. Increased production through water injection andother means would be highly profitable. Moreover, to meet the increasingdemand for petroleum products and increase the productivity and efficiency ofits operations, ECOPETROL will have to upgrade its refinery operations andincrease the pipeline, petroleum port receiving and storage facilities network.

87. Since the PIN's approval, several large projects in the aboveareas are being considered by the Government. Large petroleum productionincreases are expected to take place in the Los Llanos area (mideasternpart of the country). A 15,000 b/d (barrel per day) output is presentlypossible and is projected to increase to 20,000 b/d in two to three years.The area has both heavy and light crude. Until recently ECOPETROL hadplans to build a refinery in this area to process the crude oil. Itsconstruction has been postponed because of high construction costs, insuf-ficient availability of proven reserves and insufficient interest on thepart of potential operators. ECOPETROL now plans to ship the crude oil tothe Barrancabermeja refinery and has proposed the construction of a 500 kmpipeline. The initial throughput of this pipeline would be 15,000 b/d withpossible expansion to 40,000 b/d. The existing Barrancabermeja refineryhas a current capacity of 140,000 b/d and operates at less than 70% capacity.The crude from Los Llanos would increase its rate of utilization. Moreover,the construction of the pipeline would provide oil companies with an incentiveto develop additional fields in the area and an opportunity to meet a larger

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part of the country's demand of the lighter products. Recent findings in thearea appear to support the project's justification even further. However,although the project appears highly attractive and may be highly profitable,its financial feasibility should be determined before proceeding with itsconstruction.

88. An imbalance between the domestic demand and supply of lightpetroleum products currently exists. Colombia imports crude, light andmiddle distillates and exports heavy fuel oil at international prices.To meet the growing demand for the lighter products, ECOPETROL is expandingits refining capacity at Cartagena -- including catalytic crackingfacilities to be completed by 1982 -- and assessing the possibility ofadding a hydrocracking facility to come on stream by 1985-86. Thehydrocracking plant would have a throughput capacity of 20,000 b/d of gasoil and consume 35 million cubic feet of natural gas. This plant wouldproduce gas and LPG (9%), gasoline (27X) and jet fuel (83%). Thisproject appears to be attractive because it produces a volumetricproducts gain of 20% and more desirable mixes of products. Nevertheless,its viability should be evaluated against other options, including: a)imports of reconstituted crude oil; b) imports of products; c) imports ofvacuum gas oil as feed stock; and d) shutting down the fluid catalyticcracking unit (FCC) in favor of the hydrocracking unit (due to inadequatesupply of vacuum gas oil). The option of importing reconstituted crudeoil would allow premixing of the semifinished products in such a waythat, once processed in the existing refinery (without hydrocracking), itwould meet the domestic petroleum products demand pattern. The option ofimporting vacuum gas oil would provide feedstock for the hydrocrackingunits without competing for the feedstock of the existing FCC unit. Thelast option assumes that vacuum gas oil cannot be imported at an economicprice and that the FCC would have to be shut down in order to providefeed stock for the hydrocracking unit. Preliminary information suppliedby ECOPETROL indicates that the construction of the hydrocracking facilityappears to be a viable option. The key parameters to determine itseconomic viability are the price of natural gas, the differential pricesbetween the products produced and the amount of investment required.

89. Colombia has three major petroleum receiving and exportingterminals, all in the Atlantic Coast. Santa Marta handles crude oil andvacuum gas oil imports which are transported by pipeline to the Barranca-bermeja refinery. Cartagena handles and processes crude oil imports fromVenezuela and also exports fuel oil from the Barrancabermeja refinerytransported to the port by pipeline. Cartagena's refining capacity willincrease to 70,000 b/d in 1982 from 47,000 b/d in 1980. The port facilitieswill be able to handle ships of up to 85,000 DWT (dead weight tons) from thecurrent 35,000 DWT. Cobenas handles and transports gasoline imports tothe Barrancabermeja refinery through a pipeline. A new crude oil pipelineis scheduled to be completed in 1981 which will connect the Cobenas receivingterminal with the Santa Marta-Barrancabermeja crude oil pipeline. To handlethe projected increase in oil imports, ECOPETROL has planned an additional

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expansion of the port, pipeline and tank facilities at Cobenas in order toaccommodate large crude oil tankers of 125,000 DWT. Although these invest-ments appear attTractive, they require an analysis of their financial viability.

Natural Gas Projects

90. The Atlantic coast of Colombia is endowed with significant gasresources. Most of the gas is found in the Guajira peninsula area. Thepotential economic and industrial growth of this region could be signifi-cantly enhanced as a result of the efficient utilization of these resources.Natural gas is a dominant fuel for the region's industrial activities.However, the Government has decided to replace the natural gas used inthermal power plants, cement factories and other applications with coalin order to make better use of the gas. The gas has a potential utiliza-tion of about 450 million cubic feet per day over a 20 year period. At thepresent time, exports are not being considered because of considerable marketuncertainties. A proposed fertilizer plant would consume about 50 millioncubic feet of natural gas per day. A UNDP-financed study is underway todetermine its feasibility. Proposed hydrocracking facilities at the Cartagenarefinery would utilize about 30 million cubic feet of natural gas per daymixed with feedstocks and could produce about 20% more of petroleum products.

91. The use of natural gas for the production of methanol appearsto be an interesting alternative. The preparation of a feasibility studyis also underway. The proposed project would produce methanol from naturalgas to be used in a mixture of gasoline (85%), methanol (12%) and Methylterbutyl ether (3%). It is proposed that this plant produce 2,000 tons ofmethanol per day. This level of production would replace about 14,000 b/d ofgasoline and would require about 60 million cubic feet per day of natural gasfeedstock.

92. Plans to transport surplus natural gas from the Guajiraand Cartagena fields through the proposed Gasoducto del Occidente pipelineto Medellin and Cali have been shelved because of the cost of the projectand market uncertainties. An alternative route has been proposed to supplysurplus gas from the northern region to both the Barrancabermeja refinery andthe Cocorna oil fields with a possible future extension to Medellin and Cali.It would replace 8,000 b/d of fuel oil in Barrancabermeja used as refineryfuel and for thermal power generation and also replace about 5,000 b/d ofcrude oil to be used in the Cocorna oil fields to produce steam for rein-jection purposes. About 60 million cubic feet of gas per day would beutilized in this project. However, these plans have also been temporarilyshelved because the fuel oil used in the Barrancabermeja Refinery could bereplaced by the natural gas from the nearby Provincia and Payoa gas fields.Further information is required to assess the potential development anduse of these gas fields.

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Coal Projects

93. Investments in coal account for 9% of the total investment programand emphasize the El Cerrejon project (northern and central blocks), coalengineering, and a mining development fund. Although most of the growth incoal production and demand for domestic consumption and exports will takeplace in the northern part of the country. Nevertheless, it is worth assess-ing the potential of the Antioquia and Valle coal deposits. There is animportant yet limited market in supplying coal for thermal generation andindustrial use. However, at present there is insufficient information on theamount of coal potential in these two areas, its quality or optimal use.Moreover, transport is a major constraint. A similar situation exists inother regions of Colombia. Coal production could be increased fairly rapidlyin the small and medium-sized mines if financing and technical assistance wereto be available to modernize mining operations given favorable geological,technical and labor conditions. The Government has created a mining fund tofinance such operations for all mining activities. This fund is to be comple-mented with an exploration fund to assess the potential of mining resourcesand undertake the corresponding feasibility studies to provide the Governmentwith better information to encourage production increases.

Transportation Projects

94. Investments in transportation account for 9% of the 1981-85 publicinvestment program. In the transport sector, major needs relate to themaintenance and rehabilitation of the existing infrastructure with the inten-tion of reducing transport costs. This aspect is of utmost importance, giventhat the benefits of new investments may not be fully realized unless operatingefficiency on all transport modes can be substantially improved. Colombia'sroad transport program should reflect an appropriate balance between maintenanceexpenditures (including equipment renewal), rehabilitation of trunk roads,paving of heavily travelled gravel roads, main construction (including alignmentupgrading) and secondary and feeder road construction, rehabilitation, andmaintenance. Therefore, some restructuring of the transport sector's 1981-85investment program may be desirable to increase economic efficiency and improvethe use of resources. Such restructuring should consider: (a) reducing thetotal level of investments through 1985 to about US$500 million per year at1980 prices; (b) reducing construction of new roads and reallocating funds toport and railway rehabilitation and to maintain and rehabilitate the trunk andfeeder road systems; (c) financing of five-year programs for both railways andports instead of shorter-time horizon programs; and (d) including the analysisof ports and railways investments as part of the same transport system.

Other Projects

95. Investments in telecommunications over the five-year projectionperiod account for 4% of the total investment program. The telecommunicationsinvestment program is well-balanced and includes integrating communications inthe country, expanding services and improving external communications.

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International communications investments are to be undertaken to rieplace partof the existing equipment and interconnect the existing facilities with asatellite. Upgrading of domestic communications is also planned through invest-ments to improve local lines, a long distance network, data transmission andrural services. Investments in agriculture and rural development account for8% of the five-year program. In agriculture, additional resources to increaseresearch and extension, credit availability and watershed management projectsare necessary. Investments in industry and mining account for 2.5J% of the1981-85 public investment program. In the industrial sector, the possibilityof increasing private sector participation in many of the proposed projectsshould be considered.

96. Investments in water supply and sewerage, education and nutritionand health account for 14% of the total investment program. Although thesocial sector's share of the program appears low, cost effectiveness andimprovements in the efficiency of resource use could offset the relativelylower levels over the medium term. Many of the problems prevalent in thesesectors do not originate from insufficient amount of investments, but fromthe low productivity of recurrent expenditures, a large part of which aregenerated as a result of past investments. In the health sector, for example,integration of services between the Ministry of Health and the Social Securityinstitutions and increased emphasis on preventive medicine could reducesubstantially the need for new investments. Investments in wa'ter supply andsewerage services, however, will be insufficient to accomplish Governmenttargets of rapid improvement in health indicators. Investments in educationrequire additional emphasis in the rural areas, particularly primary schoolsand in secondary schools to improve the quality of the stock of human capital.Investments in urban and regional development account for 12% of the five-yearpublic investment program and emphasize mass transit systems, whos.e alternativesshould be carefully evaluated. Preinvestment studies account for the remainderof the public sector investment program.

B. Financing of Public Sector Investment

97. To finance the 1981-85 public sector investment program as well asthe external debt amortization payments, a determined effort to mobilizepublic sector savings will be necessary. Public sector savings are expectedto reach Col$1,111 billion (US$14.5 billion) and average 6% of GDP during thefive year period. Capital revenues should finance Col$78 billion. Netdomestic borrowing by the public sector is expected to provide Col$89 billion.Since amortization payments would total Col$211 billion, Col$1,067 million indomestic resources would be left to finance the investment program. Inorder to finance fully the projected Col$1,712 billion (US$22 billion) inpublic sector capital expenditures during 1981-85, gross external inflows ofmedium and long-term capital to the public sector should amount to Col$644billion (US$8.2 billion) for an annual average requirement of Col$129 billion(US$1.6 billion). Of this amount, disbursements against loan commitmentsprior to 1981 is projected at Col$96 billion (US$1.4 billion). This leavesCol$548 billion (US$6.8 billion) to be sought. Of the new commitments,Col$177 billion (US$2.2 billion) is expected to come from multilateraland bilateral sources, with the remaining Col$371 billion (US$4.6 billion)from suppliers and financial credits.

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Table 5 -COLOMBIA: PUBLIC SECTOR INVESTMENT PROGRAM AND ITS FINANCING, 1980-85

(Millions of Colombian Pesos)

Preliminary Projected

1980 1981 1982 1983 1984 1985

Resource Requirements 116,660 170,606 255,410 351,988 487,642 657,602

A) Gross Fixed Investment 91,833 138,373 215,442 296 40 404,044 548,206

1. Central Government 22,129 28,574 39,790 51,739 65,982 81,412(National Government) 9,577 11,779 14,724 18,404 22,453 26,944(National Highway Fund) 10,242 14,031 21,748 29,360 38,755 48,831

(CAVECINALES) 1,591 1,909 2,291 2,749 3,299 3,960(Social Security) 719 855 1,027 1,226 1,475 1,677

2. National Decentralized Agencies and 43,512 72,635 121,292 173,638 248,411 353,426Nonfinanicial Public Enterprises

3. Departments 9,932 16,351 26,679 ',116 44,67 60,290

4. municipalities 16,260 20,813 37,681 35,985 44,981 53,078

B) Financial Investment _3,054 15,012 19,714 20,902 24,87A 28,968

C) Amortization 11,773 17,221 20,254 34,608 58,724 80,428

Financing 116,660 170i06 255,410 351,988 487,642 657,602

A) Public Sector Savings 99,727 123,212 166,140 214,12 4 266,983 340,8561. Central Governnicnt 103,015 126,6]6 161,454 199,006 242,016 296,803

(National Government) 101,041 122,041 152,904 187,372 226,950 277,460(National llighway Fund) 9,544 11,662 14,718 17,882 21,477 25,815(CAVECINALES) -178 -213 -256 -307 -369 -442(Social Security) -7,392 -6,874 -5,912 -5,941 -6,042 -6,030

2. Decentralized Agenices and Non-financial Public Enterprises 8,426 10,953 13,911 18,084 24,052 32,230

3. Departments -16,365 -19,752 -15,591 -10,223 -8,850 -3,651

4. Municipalities 4,651 5,395 6,366 7,257 9,765 15,474

B) Capital Revenuies 8,226 10,356 12,728 15,273 18,328 21,756

C) Loan Disbursements 8iP0 37,038 76,542 122,591 202,331 294,990External 48,698 55,119 78,526 120,137 171,040 219,5]4Internal -39,991 -18,081 -1,984 2,454 31,291 75,476

Note: Inflation has been projected to be 27% in 1981, 25% in 1982, 23% in 1983, 22% in 1984 and 20% in

1985.

Source: Comptroller General 's Office, Mlinistry of Finance, Planning Department and mission's estimatesfor 1980 and missionts projections for 1981-85.

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98. The Central Government will continue to be the main source ofsavings contributing 92% of total public sector savings during 1981-85, withthe National Gov;ernment savings corresponding to 94% of it. The detailedNational Government projections are given in Tables 5.14 and 5.15 of theStatistical Appendix. It is also assumed that prices of oil derivatives willcontinue to be increased in line with Government policy to reach internationallevels. The contributions to social security are projected to grow above therate of projected inflation (see note on Table 5) as increasing support willbe required to bolster their finances. Transfers to national agencies andenterprises, departments and municipalities would increase by about 25% annu-ally. This assumes that they will adopt the necessary measures to reduce gra--dually the growth of such transfers and, therefore, the decentralized agenciesand non-financial public enterprises, departments and municipalities are as-sumed to increase their financial self-sufficiency during 1981-85. Theirsavings as a percentage of total public sector savings are projected to in-crease from a negative 3% in 1980 to a positive 13% in 1985. These increasedsavings would be utilized to augment the proportion of investment financedwith internally generated funds. Current expenditures of the National Govern--ment would have to be restricted to grow with inflation and efforts would haveto be undertaken to increase the productivity of existing resources. Neverthe-less, a decrease in current transfers to the rest of the public sector wouldbe necessary to increase the availability of resources required to financethe investment program.

99. Traditional sources of public sector investment financing inColombia have consisted of central government savings, savings from the restof the public sector and external borrowing. Domestic borrowing has alwaysbeen used sparingly because the absence of a well-developed medium and long-term capital market has limited financing from that source. The developmentof such a market is of crucial importance to finance both public and privatesector investments. Thus, the financing of the public sector capital expen-diture program during the five-year period will require an improvement inthe savings generating potential of the public sector with particular emphasison strengthening the finances of the national nonfinancial public enterprises,departments and municipalities through increases in taxes, public servicetariffs and increased restraint of current expenditure growth so as to reducegradually the current and capital transfers from the National Government.Moreover, the finances of the social security institutions require increasingscrutiny; there is a need for a better use of resources and possibly increasesin contributions. In addition, National Government finances will requirestrengthening. Unless revenues and savings performance are strengthened, thefinancial viability of the projected level of capital expenditures will not beassured. The alternative is to execute a reduced program from that projectedin Table 5. By exercising such an option, the growth and employment potentialof the economy and the balance of payments prospects in the late 1980s couldbe affected adversely. Nevertheless, some of the effects on the above couldbe offset depending on the size and composition of possible investment cuts,and on sufficient encouragement to increase private sector investmLent.

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100. The finances of the National Government will require improving thebuoyancy of the tax system through new revenue generating measures. Theexpected weakening of the special exchange account caused by falling coffeeprices and foreign exchange reserves, combined with continuing tax evasion,will affect the growth of tax revenues. One possibility that should be consi-dered to improve this situation is to broaden the base of the sales tax andconvert it into a general value added tax at all levels of economic activity.In addition to its revenue generating potential, the value added tax wouldreduce the level of evasion of the income tax through improved controls onsales and purchases of business enterprises. Moreover, to increase the buoyancyof the income tax, tax administration would have to he improved to simplify taxcollecting procedures, in addition to a revision of the fiscal code to closeexisting loopholes in the administration of the tax law.

101. The electrical power sector will increasingly require continuousreal tariff increases during 1981-85 to finance the projected level of ex-penditures. The same will be necessary of the other utilities: water andtelephone. However, a significant amount of resources required by them willhave to come from domestic capital markets. Unless sufficient progress isachieved in developing adequate medium and long-term financial instruments toprovide the resources required, tariffs will have to be increased even furtherto provide these utilities a higher rate of return on their revalued assets.

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IV. ECONOMIC PROSPECTS

A. Output and Expenditure

102. Given the country's strong resource base and given sound economicmanagement, Colombia's growth prospects for this decade are very good andsignificant advances in economic welfare can be anticipated. The economy isprojected to grow by an average 5.8% per annum in real terms or about a 2.3%average GNP per capita increase, over the 1981-85 period. The achievement ofthis growth will depend upon the success the authorities have in containinginflation and eliminating constraints to the growth effort and will requireincreased coordination of the Government's economic policies. As a complementto these policies, output oriented policies will be necessary to raise thelevel of investment and improve economic efficiency. In particular, energypolicies, together with agriculture and industrial policies, must be singledout as being crucial. The problem of energy imbalances needs to be directlyaddressed by measures favoring energy conservation and encouraging the develop-ment of Colombia's abundant energy resources, particularly hydroelectricity,coal and natural gas. This, along with the country's success in expandingagricultural and industrial production and diversifying exports away fromcoffee, will be instrumental in avoiding foreign exchange constraint in thelater years, expanding employment creation, and making attainable a growth rateof over 6% per annum in real terms over 1985-90.

103. In order to achieve the projected GDP growth rates, total investmentwill have to increase to an average 24% of GDP during 1981-85 from an averageof 21% in 1976-80. Gross fixed investment, which grew by about 7% in realterms during the 1976-80 period, is projected to expand by about 9% in realterms over the next several years, a pace substantially in excess of real GDPgrowth. Public sector investment is expected to increase as a proportion oftotal investment in view of sizeable investments to be undertaken. Therelatively high level of investment will require that the share of consumptiondecrease from 77% of GDP in 1980 to 74% in 1985, although consumption willstill grow at about 4% per year. Gross national saving would have to averageabout 22% of GDP during 1981-85 in order to avoid too high an increase inforeign indebtedness. This is about the same level of savings achieved inrecent years, but significantly higher than that registered in the early1970s, and will have to be maintained in the face of declining terms oftrade.

104. The leading growth sectors of the economy over the medium term areexpected to be mining, services and power. Mining in particular is expected tobecome a leading growth sector as a consequence of expanded nickel and coalproduction and some increases in petroleum production. Construction activityshould pick up as a result of the large investments projected in infrastructureand a renewed private construction effort. By the late 1980s, however, miningis expected to increase its importance as a leading growth sector of theeconomy as a consequence of rapidly expanding coal production. Petroleum andnatural gas production is expected to increase sharply in the latter part ofthe decade as major projects come on stream. Growth of the services and tradesectors of the economy, including financing and banking, will likely match theaverage growth rate of GDP during the 1981-85 period, while the public sectoris expected to significantly increase its share of GDP.

Table 6 - COLOMBIA: NATIONAL ACCOUNTS 1979 AND 1980 AND PROJECTIONS 1981-85

(Millions of 1970 Colombian Pesos) 1/

Preliminary Projected1979 1980 1981 1982 1983 1984 1985

ross Domestic Product 220,006 228,805 239,186 252,341 266,977 282,728 299,692erms of Trade Adjustment -5,892 -5,524 -8,430 -9,120 -9,820 -9,911 -10,042ross Domestic Income 214,114 223,281 230,756 243,221 257,157 272,817 289,650

mports 33,261 39,880 27,433 29,349 30,773 31,976 32,765xports 33,919 35,716 39,853 31,815 33,295 34,851 35,962xports (Import Capacity) 28,027 30,192 21,423 22,694 23,475 24,940 25,920esource Gap 5,234 9,688 6,010 6,655 7,298 7,036 6,845 1

onsumption 177,123 184,850 182,703 190,224 199,469 209,744 221,091nvestment 42,226 48,119 54,063 59,652 64,986 70,109 75,405esource Availabilities 219,349 232,969 236,766 249,876 264,455 279,853 296,496

ross Domestic Savings 36,992 38,431 48,053 52,997 57,688 63,073 68,560actor Service Income -1,679 -1,297 1,624 645 -4 -680 -1,161et Current Transfers 29 168 172 181 188 195 164ross National Savings 35,342 37,302 49,849 53,823 57,872 62,588 67,563

/ The external accounts in this table are converted to pesos at the 1970 exchange rate.

ource: Banco de la Republica and Bank Staff estimates and projections.

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105. On the basis of expanded credit and increased investment,particularly in irrigation and marketing facilities, agricultural sectorgrowth is projected to average about 4% p.a. during the projection period,which, although below the projected rate of GDP growth, is still hligh byColombian standards. This expansion should, however, assure increased domes-tic food supplies, and provide for increasing exports in many crops. Coffeeproduction is not likely to maintain the high growth rates of the past fewyears, primarily because of lower international prices and quota limitationsset by the international Coffee Agreement.

B. Balance of Payments

106. The country-s success in exploiting additional energy resources,the developments in world coffee output and price prospects, and the rateof growth of Colombia's major trading partners will be the major factorsinfluencing the country's balance of payments during this decade. Lowgrowth of the world economy (particularly Venezuela), falling productivityin the manufacturing sector and an appreciated exchange rate (if not adjust-ed to recuperate the losses during 1976-79) are expected to affect the demandfor Colombia's exports, especially of manufactured goods. With the relativemarket share in coffee controlled under the International Coffee Agreementand price uncertainties remaining despite a 1981 frost in Brazil, Colombia'scomparative advantage and export potential lies in rapidly developing itsenergy exports, particularly coal, and in expanding its agricultural andagroindustrial export capacity. Pricing policies could dampen the growth ofthe large amount of petroleum imports by increasing conservation. Moreover,recent petroleum discoveries appear to indicate the existence of sufficientoil reserves which could make Colombia self-sufficient in oil towards the endof the decade. The current high level of foreign exchange reserve's provides acushion to support rising impprts until the mid-1980s. Nevertheless, seriousbalance of payments constraints on growth may be likely by then if the develop-ment of the coal, petroleum, and hydropower resources is delayed.

107. Successful balance of payments management over 1981-85 will requirethe achievement of several objectives in addition to the rapid development ofthe country's energy resources. These include: (1) acceleration of importliberalization policies designed to increase economy efficiency sco as toimprove Colombia's industrys ability to compete in external markets. Thesepolicies should emphasize gradual dismantling of import restrictions and ad-ministrative controls combined with progressive reductions of impcirt tariffs;(2) timely adjustments of the exchange rate geared to balance of payments andemployment objectives rather than to price stabilization; (3) policies toincrease direct foreign investment, particularly in export activities withthe purpose of introducing modern production technologies; (4) fiscal andother incentives to attain higher levels of labor productivity and replacetechnologically obsolete capital equipment; and (5) elimination of external

Table 7 - COLOMBIA: SUMMARY BALANCEG OF PAYMENTS: 1978 ACTUAL, 1979 AND 1980 PRELIMINARY1980-85, 1990 PROJECTIONS

(In Millions of US Dollars)

Actual Preliminary Projected1978 1979 1980 1981 1982 1983 1984 1985 1990

Exports of Goods and Nonfactor Services 4,005 4,741 5,327 4,932 5,660 6,367 7,323 8,193 15,854

Irports of Goods and Nonfactor Services 3,390 4,136 5,376 6,361 7,369 8,401 9,446 10,415 14,630

Resource Balance 615 605 -49 -1,429 -1,709 -2,034 -2,123 -2,222 1,224

Net Factor Services -258 -199 -172 331 143 -1 -175 -319 -812Profits and Interest (-302) (-252) (-269) (190) (-8) (-185) (-382) (-534) (-995)

Workers Remittances (44) (53) (97) (141) (151) (184) (207) (215) (183)

Current Transfers 29 4 26 35 40 45 50 45 6

Current Account Balance 386 410 -195 -1,063 -1,526 -1,990 -2,248 -2,496 418

Net Direct Foreign Investment 67 124 234 150 175 300 450 600 450

Net Plublic Medium & Long-Term Disbursements 79 542 781 691 912 1,164 1,335 1,463 -500

Gross Disbursements (325) (954) (1,030) (1,005) (1,229) (1,635) (2,033) (2,309) (1,502)

ArnorLization (-246) (-412) (-249) (-314) (-317) (-471) (-698) (-846) (-2,002) Ln

other Mediuc & Long-Term Disbursements -32 103 57 22 39 76 113 133 -97

Gross Disbursements (66) (180) (114) (22) (39) (76) (17) (145) (25) I

AJZortization (-98) (-77) (-57) ( - ) ( - ) ( - ) (-4) (-12) (-122)

SDR Allocation - 24 24 - - - - - -

Other Capital 110 34 240 - - - - - -

Capit2 IAccount Balance 224 827 1,336 863 1,126 1,540 1,898 2,196 -147

Overall Palance -610 -1,237 -1.141 200 400 450 350 300 -271

Change in Net Reserves (-increase) -610 -1,237 -1,141 200 400 450 350 300 -271

Memorandum Itemns

'c: Cernrral Bank Reserves 2,482 4,106 5,416 5,216 4,816 4,366 4,016 3,716 4,878

Not Roserves of Banking System (End of 2,462 3,699 4,840 4,640 4,240 3,790 3,440 3,140 4,302

?eriod)

Reserves in Terms of Months of Imports of Goods 9.6 9.8 8.0 6.3 5.0 4.0 3.3 3.2and Services

Public Debt Service Ratio 12.8 9.4 11.3 11.2 13.3 15.8 17.1 18.3

External Public Debt Outstanding and Disbursed 3,406 4,062 4,753 5,665 6,828 8,163 9,627 12,174

Source: Banco de la Republica, Bank Staff estimates and projections.

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commercial borrowing by the public sector to finance the overall NationalGovernment deficit which in turn should be eliminated by increasing publicsector savings. Although the Government has already begun to take some of theactions required to achieve these objectives, timely efforts will continue tobe necessary to develop the export sector's potential and maintain a strongbalance of payments position.

108. The urgent need to relieve the pressure on aggregate demand arisingfrom the recent growth of foreign exchange and the necessity to increaseimports to develop the country's resource potential and restore higher economicgrowth requires a turnaround in the balance of payments from a small currentaccount deficit of US$195 million in 1980 (0.5% of GDP) to a projectedcurrent account deficit of US$1,063 million in 1981 (2.8% of GDP) by openingup imports other than oil. Over the entire 1981-85 period, the currentaccount deficits are projected to average US$1,865 million. Based on expectedavailability and use of external financing, net international reserves of thebanking system are projected to fall from their present level of a year'simports to about three months of imports in 1985 and remain at that level (anadequate level for Colombia); net official reserves are projected to fall toabout 3.9 months of imports during the same period. Imports of goods andnonfactor services are projected to rise to 17% of GDP for the 1981-85 period,from 16% in 1980. Beginning in 1986, the current account balan'ce shouldimprove as a result of increased export proceeds (coal) and a levelling off ofimports, the current account deficit reversing from 3% of GDP in 1986, to asurplus of 0.4% in 1990.

109. Merchandise imports are projected to grow on average by about 13%per year in current US dollars (5% in real terms) during the 1981-85 period.Substantial amounts of capital goods imports will be required for the increasedinvestment effort, particularly to develop the country's coal depcsits, expandthe electrical power potential, increase petroleum investments, an.d improvetransportation services. Increasing imports of raw materials and intermediategoods will also be required to expand industrial output. Consumer goodsimports have been projected to continue to be restrained to preven.t too rapida decline in the level of net foreign exchange reserves. Notwithstanding theabove, Colombia's balance of payments will be increasingly influenced andaffected by development in world petroleum prices during the next 10 years.Import payments for crude petroleum and petroleum derivatives are expected togrow rapidly during the next several years as a result of rising world pricesand domestic demand. By 1981, these imports are projected to reac.h aboutUS$970 million and by 1985 about US$1,780 million, 21% of merchandise exports,compared with only US$194 million or 7% of merchandise exports in 1977.Petroleum imports are projected to grow rapidly until 1985, when i.t is projectedthat oil flowing from new discoveries, in addition to that produced fromsecondary recovery operations should come into full production andl substitutea large part of the imported oil bill. Colombia's terms of trade are expectedto be affected by the above development until 1986. By 1987, they shouldimprove with increased oil production, coal exports and gradually increasingcoffee prices.

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110. Merchandise exports are projected to grow at 14% per year on averagein current US dollars during the 1981-85 period. However, Colombia'a merchan-dise export growth will continue to be influenced by the size of coffee-sshare of merchandise exports and therefore by developments in the world coffeemarket, at least until 1985. According to World Bank projections, coffeeexport prices which declined in nominal terms in 1981 are expected to remainat about the same level in 1982, and then rise moderately in current and realterms toward the end of the decade. A slow growth of export volumes isprojected while inventory accumulation takes place. Nevertheless, theseprojections do not take into account the possible effects on world coffeeprices resulting from the recent frost in Brazil, which at this point in time,still remain to be determined.

111. Non-coffee merchandise exports have been projected to grow by about16% per year in current US dollars and by 7% in real terms during the 1981-85period. This projection assumes that existing incentives provided for exportpromotion will be maintained and that the exchange rate will be adjusted tomaintain the competitiveness of Colombia's products in external markets. Morerapid growth of non-coffee exports over the medium term is possible with morerapid adjustments of the exchange rate. Over the longer term, progress onimport liberalization, increasing investments to modernize and increasecapacity in export-oriented activities and rapid development of the country'smineral resources, particularly coal, is expected to expand the country'sexport potential.

112. Prospects for expanding the major non-coffee agricultural exportreceipts appear promising. The price and world demand outlook is favorablefor most products. Major non-coffee agricultural exports are projected toincrease by about 13% per annum in current dollars during the 1981-85 period,of which about 4% would be the result of volume increases. For the rest ofthe decade, the projections follow a slightly lower trend. To expand theexport volume potential above the projected level, a number of conditionswould have to be present. Cotton exports, in particular, will require favor-able weather conditions, increases in acreage planted and major investments inirrigation. Rice yields have been rising rapidly over the past decade as aresult of the introduction of improved varieties; thus, export volumes havebeen projected to reach 195,000 tons by 1985, up from 90,000 tons in 1980.However, if the irrigated area were to be significantly increased, an addi-tional 50,000 hectares could be brought into cultivation to produce highyielding flooded rice. Sugar export volumes have been projected to increaseby about 3% per annum; by 1985, volumes are expected to reach about 340,000tons. Volume increases beyond this level will require bringing new lands intocultivation. Flower and tobacco export prospects art; good but will dependon the country's ability to continue penetrating world markets. Prospects forbananas are relatively less attractive from a point of view of projected worldprices. However, increased productivity could increase Colombia's exportoutput. Prospects for increasing beef and cattle exports are fair in theabsence of the Venezuela market opening up again or substantial progress beingachieved in eradicating foot and mouth disease. Shrimp and shell fish resourceshave been fairly well depleted and despite favorable world demand and prices,volume increases are not expected.

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113. Major manufactured exports have been projected to achieve an averageannual growth ra.te of about 9% in nominal terms (3.6% in real terms) duringthe 1981-85 period. Beyond 1985, however, manufactured export values areprojected to reach an average growth of 8% p.a. (4.8% in real terms). Thesegrowth rates have been projected under the assumption that the growth oftrade with the Andean Group countries, particularly Venezuela, will not expandas rapidly as during the late 1970s. Exports of timber and wood products,metallic products, mechanical and electrical equipment, leather and hides andpaper, cartons and books have good expansion possibilities (11% or more isthe projected annual growth rate in current dollars for each of these productsduring 1981-85). To expand the export volume potential of the major manufac-tured products above the projected level, an increase in productivity inthe manufacturing sector has to take place. Along with the measures to tacklethe structural problem of low productivity, policies to improve Colombia'scompetitiveness in manufactured exports in order to regain and expand worldmarkets will be needed.

114. Developments of the country's hydrocarbon and mineral resourcesfor export and import substitution are projected to affect significantlythe trade balance in the mid to late 1980s. Of particular importance are theCerro Matoso nickel and the El Cerrejon coal projects and the petroleumsecondary recovery, exploration investments and refining expansions whichwill increase the availability of fuel oil exports. Nickel exports areexpected to start with about 21 million lbs. in 1982 and rise rapidly to about:50 million lbs. in 1985 and remain at about the same level until 1990. Cokingcoal exports have been projected to increase from 360,000 tons in 1981, to485,000 tons in 1985 and 1,500,000 tons in 1990. Thermal coal exports fromthe Northern and Central blocks of El Cerrejon have been projected to startwith 8 million tons in 1986 and rapidly rise to 23.5 million tons in 1990.However, coal exports from these and other projects have a potential to reach30 million tons per year by the early 1990s if sufficient marketing contractsand additional infrastructure investments were to be in line. Notwithstandingthese developments, if these projects were to be delayed in coming on streambeyond 1986 and at the same time the increased petroleum production projectedfails to materialize on time, the balance of payments prospects could beaffected seriously. Fuel oil export volumes derived as residuals from refiningcrude oil are projected to rise from 6.5 million barrels in 1981 to 18.4million barrels in 1985 and 19.8 million barrels in 1990. Energy exportearnings are thus projected to amount to 16% of the value of current merchandiseimports by 1986; and reach about 33% by 1990, highlighting the importance ofexecuting the above projects on time.

C. External Capital Requirements

115. Gross external capital requirements are projected to total US$10.3billion over the 1981-85 period for an average of US$2.1 billion per year.Net foreign investment is expected to increase rapidly during the'nextseveral years, primarily in the petroleum and mining sectors, averagingabout US$355 million per year during 1981-85. These inflows should provide

Table 8 - COLOMBIA: ACTUAL AND PROJECTED CAPITAL REQUIREMENTS AND FINANCING, 1978-90

(In Millions of US Dollars)

Actual Preliminary --Projected1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Exports of Goods & Non 4,005 4,741 5,327 4,932 5,660 6,367 7,323 8,193 9,635 10,818 12,390 14,106 15,859factor Services

Imports of Goods & Non 3,390 4,136 5,376 6,361 ?,369 8,401 9,446 10,415 11,065 11,470 12,439 13,584 14,630

factor Services

Resource Balance 615 605 -49 -1,429 -1,709 -2,034 -2,123 -2,222 -1,430 -652 -49 522 1,224

Interest on Public Debt 1/ -113 -231 -291 -348 -403 -474 -566 -670 -785 -893 -958 -995 -1,003

Other Factor Service Income -116 36 145 714 586 518 441 396 314 208 169 187 197

& Transfers

Current Account 386 410 -195 -1,063 -1,526 -1,990 -2,248 -2,496 -1,901 -1,337 -838 -286 418

Amortization (Total) -344 -489 -306 -314 -317 -471 -702 -858 -1,081 -1,391 -1,684 -1,956 -2,124 p.

Reserve Accumulation -610 -1,237 -1,141 200 400 450 350 300 -198 -136 -261 -296 -271

Capital Requirements 568 1,316 1,642 1,177 1 443 2,011 2,600 3.054 2180L 2 864 2 783 2 538 1,977

Financing (Gross) 568 1,316 1,642 1,177 1,443 2,600 3,054 3,180 2,864 ,783 2,538 1,977

Foreign Investment 67 124 234 150 175 300 450 600 600 500 450 450 450

Loans 391 1,134 1,144 1,027 1,268 1,711 2,150 2,454 2,580 2,364 2,333 2,088 1,527

To Public Sector (325) (954) (1,030) (1,005) (1,229) (1,635) (2,033) (2,309) (2,429) (2,243) (2,221) (2,003) (1,502)

To Private Sector (66) (180) (114) (22) (39) (76) (117) (145) (151) (121) (112) (85) (25)

Capital n.e.i. 110 58 264 - - - - - - - - -

Debt Service Ratio (Public) 8.6 12.8 9.4 11.3 11.2 13.3 15.8 17.1 17.9 19.6 19.8 19.4 18.3

1/ Includes public and publicly-guaranteed debt.

Source: Banco de la Republica, Bank Staff estimates and projections.

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about 16% of gross external financing during the projection period. About33% of US$10,285 million of gross external financing is expected to come frommultilateral and bilateral agencies, and the remaining 51% is expected toaccount for 5% of total external borrowing during the projection period,averaging about US$80 million per annum following the Government policy offinancing the private sector mostly in the domestic capital markets whilepublic and publicly guaranteed debt is expected to account for the remaining95%.

116. Of total gross external disbursements during 1981-85, about US$1.4billion, or 17%, would come from loans committed prior to 1981 while for theremaining US$7.2 billion, additional commitments will have to be sought. Ofnew commitments, about US$2.2 billion (31%) is expected to come from multila-teral and bilateral sources, the remainder from supplier's and financialcredits.

D. Debt Management and Creditworthiness

117. Colombia's public and publicly-guaranteed external debt, repayablein foreign currency, was estimated at about US$6.4 billion at the end of1980, of which about US$4.1 billion was disbursed and outstanding. Publicdebt outstanding and disbursed is projected to rise to about 16% of GDP by1985 and fall to 11% by 1990, from 12% at the end of 1980.

118. The public debt service ratio is projected to increase to about 17%in 1985 from 9% in 1980, as a result of the rapid increase in public debtforeseen for the future and of modest export growth. Projections past 1985show the public debt service ratio peaking in 1988 at about 19.8% as thecountry pays off the heavy borrowing incurred over the previous decade.The debt service ratio of total public and private debt would then startdeclining and would be about 19% in 1990 as compared to an estimated 10% in1980. The ratio of total debt service to GDP should remain low, rising fromabout 2% to a projected 3% in 1985 and about the same in 1990.

119. Although the projected debt and debt service ratios would be rela-tively high compared to past levels, they would decrease substantially inthe early 1990s when rapidly increasing exports from new energy and miningprojects should improve substantially the balance of payments. By then, amajor part of the investment infrastructure required should be completed andnew commitments for public sector investment projects should decrease sub-stantially. The success of the high investment strategy planned by theGovernment would therefore depend heavily on the timely development ofdomestic energy sources and on progress in executing the export orientedmining projects contained in the public sector investment program. Given thecontinuation of sound economic and financial management, Colombia is expectedto maintain its creditworthiness through and beyond the 1981-90 period.

Table 9 - COLOMBIA: COMITMENTS AND DISBURSEMENTS OF MEDIUM AND LONG-TERM CREDITS, 1979-90

(In Millions of US Dollars)

Preliminary Projected Total1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1981-1990

ommitments I 1,509 1 1,265 1,761 2,300 2,648 2,772 2,367 2,353 2,165 1,649 20,449

Multilateral and Bilateral 584 731 784 682 784 886 917 952 815 855 901 952 8,528

Supplies and Financial Credits 925 529 385 583 977 1,414 1,731 1,820 1,552 1,498 1,264 697 11,921

isbursements 1,1 3 4 1144 1,027 L 268 1,711 2,150 2,454 2 ,580 2,364 2,333 2,088 1 19,502

xisting Loans 1j,3 1,144 451 .85 302 190 93 52 26 10 2 - 1,511

Multilateral and Bilateral 253 383 373 329 260 157 90 52 26 10 2 - 1,299

Supplies and Financing Credits 881 761 78 56 42 33 3 - - - 212

ew Loans - - 576 883 1,409 1,960 2,361 2,528 2,338 2,323 2,086 1,527 17,991

Multilateral and Bilateral - - 184 335 463 575 666 741 816 855 854 864 6,353

Suppliers and Financial Credits - - 392 548 946 1,385 1,695 1,787 1,522 1,468 1,232 663 11,638

ource: Banco de la Republica, Bank Staff Estimates and Projections.