Embed Size (px)
Citation preview
Report No. 2235-CO FILE COPYEconomic Position and Prospects of Colombia
c- Ctm A5t(In Two Volumes)
Volume 1: Main Report pr ^,January17,1979 �rbRN TS l,A. & C.Latin America and Caribbean Regional Office iNFORMATION GEMS
FOR OFFICIAL USE ONLY
Document of the World Bank
This document has a restricted distribution and may be ljsed by recipientsonly in the performance of their officiai duties. Its contents may not otherwisebe disclosed without World F:ank authorization
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
CURRENCY EQUIVALENTS
Currency Unit: Peso
Exchange Rate Effective December 31, 1978
US$1.00 = Col$41.00Col$1.00 = US$0.0244
Average Exchange Rate (Buling)
1974 1975 1976 1977
US$1.00 = Col$26.08 Col$30.95 Col$35.05 Col$36.998Col$1.00 = US$0.0383 US$0.0323 US$0.0285 US$0.02703
FOR OFFICIAL USE ONLY
This report is based on the findings of an economic mission toColombia during April-May 1978, composed of Messrs. George R. Gebhart (Chiefof Mission), Wolfgang Schohl (General Economist), Pedro Rado (Fiscal Economist,IMF) and Benjamin Sands (Statistical Assistant).
This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
ECONOMIC MEMORANDUM ON COLOMBIA
TABLE OF CONTENTS
VOLUME I - THE MAIN REPORT
Page No.
MAP
COUNTRY DATA
SUMMARY AND CONCLUSIONS ............................ i - viii
I. BACKGROUND ............................................. 1
A. Post World War II Growth Patterns ............. 1B. The 1967-74 Period ............................ 2C. The 1974-75 Economic Reforms ................. 4D. The Benefits of Growth ........................ 5
II. RECENT ECONOMIC DEVELOPMENT: THE COFFEE BOOMAND STABILIZATION ................................ 7
A. Introduction ...... ........................ 7B. Growth and Employment: 1976-77 .............. . 8C. The Balance of Payments ..... .................. 10D. Public Finances ...... ......................... 17E. Financial Savings and Credit .................. 27F. Developments in 1978 ............ .. ............ 29
III. DEVELOPMENT STRATEGY AND SECTORAL GROWTH PROSPECTS . 31
A. Development Strategy .31B. Energy .... ....... ........... 36C. Manufacturing .38
IV. GROWTH PROSPECTS AND BALANCE OF PAYMENTS OUTLOOK ... 40
A. Growth Prospects .............. . .... 40B. Public Sector Investment and Its Financing 40C. Balance of Payments Outlook . 43D. External Capital Requirements, Debt Management
and Creditworthiness .46
VOLUME II - STATISTICAL APPENDIX
IBRD-3638R I78 744' 7° 0' OCTO0ER 1976
A r L A N r C/c SOUTH AM
Rioba t
ATLZI0 , ( / t g °
I D-1~~~~~~~~~0
sco A ' e MAGDALENA < COdO408 BX '
0 t~~~~~~~~~~~~~~~TA6B~J~4C1BC hiB BBB -C
< s , c o R D o 6 A ' e / /) i o; o T E \ V ~E N E Z U E L A14
A/ I AENEZUE
%, /. Co !fB 8'' \
t w . _ _ . f S ~~~~~~~A N T A N D ECRJ; J , A R A U C A \. "
tJ <'~~~C H O C O Wr v ., .oP AJ opcsNRE j BOYAr A i 5-' BB *. !'1O) R1SARALDAI / AA OCASANARE
,'o9I~~ CUNDINAMA*CA)
_ Peora ,O' f GOT#
e c ,, fev / M E T A< </.
r4~~~~~~~~~~~~~~~~~~~~~~~ I C A H UILA,_. D
'B a' J' 0
Vlo~rencls~1 o~~ -' -$\\B'
, NARI O - V A L L EES Z
- ~-~CALO U E ~ TOLIMA <. E T A
:- CCI P / YO
.HUILA- IA .
C A . C A+ ^2 A M AZOE S lO
N R I## N 10 V UP E/
__~~~~~~~~ ~~~~~ Aes e a P E R U A-- rB MB ' ' ,.x' Z 6
- t '> CA A M A Z N A
CO LOMBIA'7 E~s~0tM8t .Wv. ~4DOmeRer
- - - - ~~~~~~8MR*8~~~ ~~nI4~~~4I80M & Co~~~~~~rbud@ bormdaq~~~~~~~4
- - M~~~~~~~~~~~M~~~~~POWE~~~~~~~~~BIO8t.~~~~~~~~~~~~~8A / ~ ~ ~ ~ ~ 8
ir 71r'~~~~~~~~~~~
Page 1 of 2 pages
COUNTRY DATA - COLOfIA
AREA 2/ POPULATION DENSITY1,138.9 knr 25.0 million (mid-1977) 22, 0 per km/
Rate of Growth: 2.8% (from 1973 to 1977) 111.0 per k ma/of arable land
POPULATION CHARACTERISTICS (1973) HEALTH (1974)Crude Birth Rate (per 1,000) 33 Population per physician 2230Crude Death Rate (per 1,000) 8 Population per hospital bed 470Infant Mortality (per 1,000 live births) 70
INCOME DISTRIBUTION K1974 DISTRIBUTION OF LAND OWNERSHIP (1971)% of national income, nlug st quintile 54 % owned by top 10% of owners 80.0
lowest quintile 5 % owned by smallest 10% of owners 0.2
ACCESS TO PIPED 'WATER (1974) ACCESS TO ELECTRICITY% of population - urban 73 % of population - urban
- rural 29 - rural
NUTRITION (1972) EDUCATION (1974)Calorie intake as % of requirements 104 Adult literacy rate % 77.6Per capita protein intake (grams per day) 47 Primary school enrollment . 105.0
1/GNP PER CAPITA in 1977 US $710
GROSS NATIONAL PRODUCT IN 1976 ANNUAL RATE OF GROWTH C7.. constant prices)
US $ Min. . 1960-65 1965-70 1973-74 1974-75 1975-76
GNP at Market Pric*s 15,122 100.0 4.5 5.5 6.6 3.6 4.5Gross Domestic Investment 2,956 19.5 1.8 8.1 32.8 -17.4 20.5Grogs National Saving 3,070 20.3 2.1 10.8 18.5 -17.5 48.3Current Account Balance 237 1.6 * 'Exports of Goods, NFS 2 820 18.6 2.1 4.1 -6.1 13.0 34.3Imports of Goods, NFS 2,320 15.3 1.9 10.2 22.6 0.5 11.4
OUTPUT, LABOR FORCE ANDPRODUCTIVITY IN 197^
Value Added Labor Forcer V. A. Per WorkerIlJ$ Mln. % Min. % US $ %
Agriculture 2,812 29.4 2.1 30.9 1,339 81.3Industry 2,522 26.4 1.2 17.6 2,102 127.6Services 4,218 44.2 2.5 36.8 1,687 102.4Unallocated . 14.7
Total/Average 9,552 100.0 6.8 100.0 1,647 100.C
GOVERNMENT FINANCEGeneral Government Central Government
(cole Mln.) 7. of GDP (Co1s Mln.) % of GDP1977 1977 1975-77 1977 1972 _ of 5zGD
Current Receipts 93,974 12.8 13.1 77,874 10.6 10.7Current Expenditure 55,285 7.5 8.1 33,685 4.6 4.9Current Surplus 389689 5.3 5.1 44,189 6.0 5.8Capital Expenditures 8,706 1.2 1.5 5,806 0.8 0.9External Assistance (net) 1,000 0.1 0.4
1/ The Per Capita GNP estimate is calculated by the same conversion technique
as used in the World Atlas. All other conversions to dollars in this table areat the average exchange rate prevailing during the period covered.
2/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consistsmainly of unemployed workers seeking their first job.
not availablenot applicable
Page 2 of 2 pages
COUNTRY DATA - COLOMBIA
MONEY, CREDIT and PRICES 1972 1973 1974 1975 1976 1977(Million Col$ outstanding end period)
Money and Quasi Money 44,765 60,177 75,905 100,578 136,068 180,705Bank Credit to Public Sector 7,210 5,665 8,874 11,274 5,169 10,807Bank Credit to Private Sector 56,579 71,907 97,296 119,832 155,375 194,793
(Percentages or Index Numbers)
Money and Quasi Money as 7. of GDP 24.1 24.7 23.1 24.4 25.5 24.6Consumer Price Index (7154-6155 - 100) 573.1 699.0 875.1 1,082.1 1,298.0 1,749.7Annual percentage changes in: 13.8 22.0 25.2 23.7 20.0 34.8
Bank credit to Public Sector -4.8 -21.4 56.6 27.0 -54.2 109.1Bank credit to Private Sector 20.0 27.1 35.3 23.2 29.7 25.4
BALANCE OF PAYMENT' MERCHANDISE EXPORTS (AVERAGE 1975-77) -
1975 1976 1977 US $ Mln %(Millions US $)
Exports of Goods, NFS 2,100 2,820 2,748 Coffee 1,022.7 57.1Imports of Goods, NFS 2.082 2.320 3.427 Other Agriculture 311.9 17.4Resource Gap (deficit = -) 1S 500 679 Manufactured 355.5 19.8
Minerals 21.9 1.2Interest Payments (net) -120 -198 -130 All other commodities 80.4 4.5Workers' Remittances 35 41 44 Total 1,792.4 100,0Other Factor Payments (net) -156 -115 -114Net Transfers 47 9 15 EXTERNAL DEBT. DECEMBER 31. 1977Balance on Current Account -176 237 494
Direct Foreign Investment 43 12 42 US $ MlnNet MLT Borrowing 238 111 190
Disbursement (459) (328) (422) Public debt, incl. guaranteed, totalAimortization (221) (2175 (232) outstanding & Disbursed 2,622Subtotal 360 726
Capital Grants .. .. ., DEBT SERVICE RATIO for 1977 -
Other Capital (net) 1, 1 %Other items n.e.i 13 191 78
Increase in Reserves (+) 118 551 804 Amortization of Public Debt 5.1
Net Interest on Public Debt 3.9Gross Reserves (end year) 2/ 552.6 1,171.5 1,835.6 T 1Net Reserves (end year) 547.3 1,165.9 1,829.6 Total 9.0
RATE OF EXCHANGE IBRD/IDA LENDING, December 31, 1977 (Million US $):
December 31, 197t IBRD IDAUS $ 1.00 = 36.47 I I
Col$ 1.00 = US $0.02742 Outstanding & Disbursed 716.2 22.0
Decener 31 1977Undisbursed 487.9I
USDecember 31,17 Outstanding incl. Undisbursed 1,204.1 22.0
Col$ 1.00 = US $0.02624
1/ Data Refer to Export Registrations.21 Official Reserves.3/ Ratio of Debt Service to Exports of Goods and Nonfactor Services.
not availablenot applicable October 12, 1978
EPD/PRD
SUMMARY AND CONCLUSIONS
Background
1. During the past two decades, Colombia has made substantial progressin the transition from a predominantly rural and agricultural economy madeup of largely self-contained regions to a more integrated urban-industrialeconomy. The productive base of the economy has been widened appreciably, andthere has been substantial diversification of production in both the agricul-tural and industrial sectors. These improvements have been accompanied byrapid growth of nontraditional exports, also by the development of a modernsector relying to a considerable extent on imported inputs. Despite theseadvances, per capita income is still low (US$710 in 1977 1/) and the countryis to a considerable extent undeveloped with a limited modern sector super-imposed on a large, traditional and economically poor base. Moreover, thecountry is still heavily dependent on imports of intermediate and capitalgoods, and on export earnings from coffee. Although some success has beenachieved in recent years in diversifying export products and markets, eventsof the past two years indicate that fluctuations in world coffee prices stillhave a profound effect on the economy.
2. Following strong growth of output and employment in the immediatepost-World War II period, the consequence of rapid import substitution andrising coffee prices, the Colombian economy experienced an extended periodof erratic growth from 1950 to 1966. This was primarily the result of sharpfluctuations in coffee prices and a difficult social and political environment.With mounting balance of payments problems, fiscal difficulties and slowergrowth of employment, it became increasingly clear towards the end of thisperiod that opportunities for additional easy import substitution were ex-hausted and that the proliferation of direct administrative controls overresource allocation was hampering the operating efficiency of the economy.
3. A major reorientation of economic policy was introduced in 1967,designed to increase the availability of foreign exchange, raise domesticsavings and investment rates and improve resource allocation. The cornerstoneof this new strategy was the introduction of periodic adjustments in theexchange rate to provide incentives for expanding noncoffee exports. Majorfiscal, credit and trade policy changes were introduced to support the newexchange rate policy and public sector investment was expanded to provideneeded infrastructure. Led by rapid expansion of noncoffee exports, real GDProse by 6.6X per annum over the 1967-74 period. By 1974, noncoffee exportscomprised 54% of total merchandise exports, up from less than 40% in 1967.Exports of manufactured goods and noncoffee agricultural products respondedfavorably to the new export incentives, producing rapid growth of output inlabor-intensive sectors of the economy. As a consequence, unemployment de-clined and real per capita GDP rose by almost 4% per annum during the1967-74 period.
1/ World Bank Atlas Method.
- ii -
4. Despite improvements in economic efficiency, greater diversifica-tion of exports and strong economic growth, Colombia experienced increasingeconomic difficulties in the mid-1970s. Inflation accelerated, largely becauseof excessive monetary expansion caused by Central Bank financing of growingfiscal deficits and by rapid increases in private sector credit. In 1974,inflation was exacerbated by rising import prices, and the balance of paymentsweakened as a result of slower growth in the industrial countries, risingimport demand, and reduced capital inflows. Measures taken to stabilize theeconomy and a lower investment rate led to slower growth beginning about mid-1974.
5. In response to the country's growing economic problems, extensivefiscal, monetary and trade reforms were introduced beginning in late 1974.As a result of these reforms, the public finances improved sharply in 1975,financial savings expanded and were more evenly distributed among financialinstruments, and resource allocation was improved. Investment failed toincrease however, and while these measures were successful in stabilizing theeconomy, their immediate impact was to dampen economic growth. Consequently,the slowdown which began in 1974 continued through 1975.
Recent Economic Developments
6. During the last two years the Colombian economy has been stronglyaffected by the fourfold increase in the world price of coffee that occurredbetween late 1975 and mid-1977. As a consequence, Colombia's exportearnings from coffee rose from US$671 million in 1975 to nearly US$1.7 billionin 1977 and incomes throughout Colombia's rural areas increased substantially.Government efforts to sterilize the large inflow of foreign exchange reservesand to limit secondary expansion of the money supply were only partiallysuccessful in restraining the growth of aggregate demand. When the supply ofconsumer goods, especially of basic foodstuffs, failed to keep pace with thegrowth in demand, inflation accelerated rapidly; to 44% in the twelve monthsending June 1977 from 17% for the similar period ending June 1976. This un-precedented acceleration in inflation took place when public sector deficitswere low and foreign exchange earnings relatively high. This is differentfrom the usual case. The rise in coffee prices and the policy measures takento offset their inflationary consequences, therefore, had both favorable andunfavorable effects on the economy. Increased foreign exchange reserves,higher tax revenues and expanded employment and incomes in rural areas wereamong the beneficial effects, while much higher inflation, low availability ofinvestment credit, reduced incentives for non-coffee exports and negative realinterest rates leading to inefficiency in resource allocation were among theunfavorable effects.
7. The authorities responded rapidly to the acceleration of inflationby introducing a broad range of fiscal, monetary and trade policies designedto gain control over the explosive increase in prices. Beginning in late1976, reserve requirements were raised, rediscounting at the Central Bank wasreduced and public sector borrowing from the Central Bank was virtuallyeliminated. In early 1977 the authorities temporarily suspended periodicadjustments to the exchange rate, and exporters were required to accept 90-day
- iii -
US dollar-denominated certificates of exchange in lieu of cash payment fortheir exports. A larger proportion of coffee receipts was channeled to theCoffee Federation which agreed to invest these receipts in Central Bank bonds,the proceeds of which were frozen in a special account. Measures were takento liberalize imports, food imports by the state marketing agency, IDEMA, wereincreased sharply, and restrictive fiscal measures were introduced.
8. As a consequence of these measures, a favorable second semesterharvest and a slower rate of accumulation of foreign exchange reserves,inflation declined sharply beginning in July 1977. By the end of the year,the rate of inflation had fallen to 29% as compared to December of the pre-vious year. With inflation subsiding, periodic exchange rate adjustments werereintroduced. With few other exceptions, however, the stabilization policieswere continued in effect throughout the first part of 1978 and for the yearending in November, inflation had fallen to 17%.
9. Despite the domestic stabilization program, real GDP growth in-creased from 3.8% in 1975 to 4.4% and an estimated 5.9%, respectively, inthe subsequent two years. This growth was the direct result of the strongexpansion of domestic demand caused by the rise in incomes of coffee pro-ducers. Output of the industrial and service sectors responded strongly tothe rising demand, while agricultural output, adversely affected by droughtconditions in the interior of the country from early 1976 to mid-1977,showed only small increases in both years. Because strong growth occurredin relatively labor-intensive sectors of the economy, the urban unemploymentrate declined from an average 12% during the first half of the 1970s, toan estimated 8% by the end of 1977. Rural unemployment seems to have declinedalso during this period, although only fragmentary information is available.
10. Colombia experienced its largest overall balance of paymentssurplus of the post war period in 1977, eclipsing by a substantial marginthe previous peak reached in 1976. Export receipts rose by 23% in currentUS dollars and despite strong increases in imports, the current accountsurplus rose to US$494 million, equivalent to 2.5% of GDP. With net capitalinflows at about the same level as in 1976, net official reserves rose tothe equivalent of 11 months' merchandise imports by December 1977. Colombia'strade and exchange rate policies in 1976 and 1977 were largely a function ofthe need to reduce the rate of inflation. In an attempt to offset the disin-centive effects on noncoffee exports of a reduced rate of devaluation of thepeso, tax rebates were increased and export credit was expanded signficantly.Nevertheless, the combination of lower incentives for exports and risinginternal demand resulted in stagnation of noncoffee exports in nominal termsand a reduction in real terms. Consequently, the favorable trend of bothexport product and market diversification, which was characteristic of the1967-74 period, was reversed.
11. Although public sector savings increased substantially in 1976 and1977 as a consequence of the Government's contractionary expenditure policyand increased coffee tax revenues, the capacity of internal taxes to supporthigher levels of public expenditure declined. Modifications of legislationsubsequent to the 1974 reforms reduced the scope and effectiveness of thereform and together with weak tax administration, retarded growth in tax
- iv -
collections. Thus, excluding revenues derived from coffee exports, Colombia'spublic finances deteriorated during this period. As a result of the Govern-ment's restrictive expenditure policy, public investment declined from 6.9% ofGDP in 1975 to an estimated 5.4% in 1977, thereby limiting progress on somesocially significant projects designed to provide increased public servicesto the poorer segments of the population. Public sector savings, however,financed an increasing proportion of public investment in 1976 and 1977, and,at the same time, the country reduced its debt obligations to the Central Bankand repaid in advance some of its more costly loans from external lenders.Future prospects for Colombia's public finances do not appear encouraging.Revenues from the coffee tax are expected to decline as world coffee pricesmove back to their real historic average and the decline in tax buoyancy whichoccurred over the past two years, especially with regard to the income andwealth taxes, may be hard to reverse in the short term. Moreover, thereappears to be only limited room for further reduction in public sector currentexpenditure and public sector investment should be expanded to provide neededsocial and economic infrastructure. Noncoffee tax revenues will probably haveto be the major source of financing for additional investment, and it isexpected that action will be taken to strengthen collections from this source.
12. Fixed investment by the decentralized agencies grew by 24% per annumin nominal terms in 1976 and 1977, representing only a modest increase in realterms. Lower operating surpluses and reduced transfers from the CentralGovernment held down investment by many of these agencies. With their com-binded operating surplus falling to 0.5% of GDP in 1977 from 1.8% in 1975,the deterioration in the finances of the decentralized agencies is a matterof concern since their future investments may have to be cut because of lackof sufficient internally generated savings.
13. Developments in the external sector have continued to exert a stronginfluence on the Colombian economy in 1978. Coffee prices, although graduallyweakening, have remained well above historical levels, and coffee exportvolumes have risen sharply. Thus, the trade account registered a sizeablesurplus during the first half of 1978, despite an apparent rapid increase inimports, and Colombia's balance of payments is expected to register its fourthconsecutive surplus in 1978. Noncoffee exports experienced only slow growthduring the first part of the year, however, probably in large part becauseof the disincentive of an overvalued exchange rate. Food production apparentlyreturned to normal in the first harvest of 1978 as well. Consequently, infla-tion has continued to decline and is not expected to exceed 18% for the year.Income and wealth tax collections in 1978 recovered somewhat from the depressedlevels of 1976 and 1977, and sales and customs taxes and receipts from thespecial exchange account have risen sharply in real terms. Current expendi-tures have also grown rapidly, and public sector savings is expected to beabout the same level as in 1977. A 33% increase in the price of gasoline inOctober 1978 should help improve the finances of Ecopetrol, the State OilCompany. High incomes from coffee, together with further recovery in bothprivate and public investment, should provide the stimulus for continuedstrong growth in real GDP in 1978. A rate of GDP growth somewhat above 6%seems likely.
-v -
Development Strategy
14. The development strategy embodied in the 1975-78 Development Planaimed at accelerating the rate of GDP growth and distributing the benefits ofsuch growth more equitably. This was to be accomplished through policiesdesigned to improve economic efficiency, stimulate public and private invest-ment and expand public services to the poorest half of the population.Substantial progress was made in carrying out this strategy during the pastthree years. However, the dislocations caused by the world recession of1974-75, and the subsequent coffee boom, required more concentration ofeconomic policy on short-term stabilization problems, and some of the longerterm objectives had to be stretched out.
15. The achievement of high economic growth rates in the future willprobably require greater reliance than in the past few years on the noncoffeeexport-led growth strategy followed during the 1967-74 period. This strategyemphasizes the provision of incentives to encourage noncoffee exports, amore active role for the public sector in providing needed infrastructure andsocial services, and increased efficiency and investment in the private sector.As coffee export receipts decline with falling coffee prices, this strategywould relieve the foreign exchange constraint and take up the slack in aggre-gate demand. While the success of this strategy depends in part on favorableeconomic developments in Colombia's major trading partners, domestic policiesmust assure adequate incentives, and the structural bottlenecks to growthwhich have multiplied in recent years must be removed. The most importantof these potential constraints to growth in Colombia is a lack of sufficientenergy, especially of petroleum based products. In the absence of morerapid development of additional energy resources, foreign exchange constraintsand shortages of energy could seriously limit growth by the mid-1980s, if notearlier. Therefore, high priority is expected to continue to be given toavoid any slowdown of growth of the energy sector. In addition, investmentsin transport infrastructure, particularly railroads and highways, shouldreceive priority to eliminate this increasingly serious constraint on growth.With respect to export incentives, the establishment and maintenance of aproper exchange rate will probably be crucial for more rapid growth of non-coffee exports and encouragement of efficient import substitution industries.Fiscal and credit incentives should be used, as necessary, to complementexchange rate incentives and to foster growth of exports of goods in whichColombia has a comparative advantage. In addition, high priority should begiven to the large resource-based projects which have the potential forsubstantially increasing Colombia's exports in the mid to late 1980s, e.g.nickel, coal and gas.
16. The revitalization of public sector investment appears also tobe important for accelerated economic growth in the future. The principaltask in this regard will be to increase public sector saving sufficiently tofinance the higher levels of investment without excessive recourse to CentralBank credit. This will require improvements in tax administrative andpossibly some expansion of the tax base, as well as continued adjustments inthe prices charged for services by the decentralized agencies. Holding downincreases in public sector current expenditures will also be required.
- vi -
17. Energy shortages could become a serious constraint on growth bythe mid-1980s unless efforts to develop alternative sources of energy arestepped up without delay. Although endowed with an abundance of primaryenergy resources, including hydro power, natural gas, coal and most probablyadditional petroleum, past development of Colombia's energy resources hasnot kept pace with energy use. As a consequence, the country became a netimporter of energy (petroleum) in 1976. Major policy changes were intro-duced in the energy sector beginning in mid-1975 as a result of the deter-iorating petroleum balance. Foreign firms were encouraged to enter intoassociation contracts with ECOPETROL (the State Oil Company) to explore foroil in new areas and price incentives were given for new oil and forincremental crude from old fields. A policy of gradual increases in pricesto consumers was adopted, with the self-financing of a substantial portionof the sector's investment requirements as its ultimate goal.
18. Colombia's strategy for dealing with the energy problem is toreduce the country's dependence on petroleum as the major energy source.Hydropower projects are to be executed as rapidly as possible and naturalgas and coal resources are to be developed to substitute for petroleumin generating electricity, and eventually to provide additional exports.These developments are not expected to be sufficient to prevent largeincreases in petroleum imports over the next several years, however, withthese imports projected at over US$600 million by 1982, and about US$900million by 1985. While the total investment requirements of further energydevelopment are still largely unknown, rough estimates indicate that theycould run as high as US$8.0 billion in 1976 prices over the next decade.
19. Increased investment and output in the directly productive sectorsof the economy, especially industry and agriculture, 1/ are crucial for theexport-led development strategy and for expanding employment opportunities.Therefore, measures to stimulate productively in both of these sectors wouldseem to merit high priority. Over the past decade industry has been one ofthe leading growth sectors in the Colombian economy, and at present consti-tutes about 20% of GDP, provides a similar proportion of total employmentand supplies 50% of the country's non-coffee exports. In response todevelopment policies favoring industrial exports, value added in the sectorgrew by over 8% annually in real terms during the 1967-74 period and the valueof manufactured exports increased by 48% annually in nominal terms. Recessionin the industrialized countries and domestic stabilization measures retardedthe sector's growth in 1975, however the growth in domestic demand in 1976 and1977 caused manufacturing value added to recover strongly.
20. A lack of sufficient long term investment resources has limitedexpansion of industrial capacity in recent years. Private sector industrialcredit has been curbed by the restrictive monetary policy pursued by theGovernment. In addition, retained earnings have been squeezed by a high taxburden and by high dividends required to maintain attractive returns onequity. Small- and medium-size firms have been especially hard hit by theshortage of long term funds for investment. Consequently, rollovers of short-
1/ A separate report on Colombia's agricultural sector is in preparation.
- vii -
term credit and high cost credit from the extra-bank market have become majorsources of investment financing for these firms. Lower inflation shouldfacilitate the development of Colombia's capital market and, together withthe lifting of controls over interest rates and credit, could be expected toincrease the availability of investment funds to the private sector.
Growth Prospects and External Capital Requirements
21. Colombia has demonstrated for over a decade that a coherent develop-ment strategy is possible and results in improved output and social welfare.Together with the country's strong resource base and its high level of inter-national reserves, this leads to optimism about the future. Colombia shouldbe able to achieve annual real GDP growth of between 6% and 7% during the1978-82 period. The maintenance of this level of growth will require strongexpansion of noncoffee exports and increases in savings and investment rates.The large unmet needs for infrastructure, social services and additionalsources of energy will mean rapid expansion of public sector investmentduring this period. By 1982, public investment is expected to reach 7% ofGDP, as compared with 5.4% in 1977. About two-thirds of this investment couldbe financed by public sector savings, if improvements are made in tax admin-istration and measures are taken to expand the tax base. Continued upwardadjustments in the prices charged for the goods and services provided by thepublic decentralized agencies would also be required. It is expected thatColombia will follow export promotion policies designed to provide adequateincentives for Colombian exports and to encourage both product and marketdiversification.
22. Greater efforts to increase efficiency and investment in the produc-tive sectors will be needed to complement incentives given to noncoffeeexports. Relaxing controls over interest rates and credit, together withmeasures to stimulate bond and equity issues by the private sector, wouldcontribute to an improved capital market, increased private savings and betterresource allocation. Ongoing and future infrastructure investments by thepublic sector should also facilitate improvements in economic efficiency.
23. Because of the expected continued decline in world coffee prices,accelerating oil imports and the high import content of future investment,the current account of the balance of payments is expected to be in deficitthroughout the early to mid-1980s, despite the strong growth which is assumedfor non-coffee exports. This deficit is projected to average US$466 millionannually during the 1978-82 period, or 1.4% of GDP. Colombia is expected,therefore, still to be a large net importer of capital for some time to come.Its future external resource requirements reflect the need to supplementdomestic savings and to provide increasing amounts of foreign exchange tofinance required imports of capital and intermediate goods. Gross externalcapital requirements are projected at US$4.5 billion between 1978 and 1982, oran annual average of about US$900 million. About half of Colombia's capitalinflow during this period is expected to be provided by official multilateraland bilateral sources, with commercial and financial credits foreseen asbecoming increasingly important.
- viii -
24. Colombia's public external debt repayable in foreign currencyamounted to US$3.6 billion at the end of 1977, of which US$2.6 billion wasdisbursed and outstanding. The capital inflows required during the 1978-82period would raise Colombia's total external debt (disbursed and outstanding)from US$3.1 billion in 1977 to US$5.5 billion in 1982. The public debt serviceratio, which fell during the past two years as export growth accelerated andwas 9.0 at the end of 1977, has increased slightly this year and is expectedto reach 12.3% in 1982. Balance of payments prospects beyond 1982 will dependheavily on the timely development of additional domestic energy sources and onprogress made in executing several large natural resource-based export-orientedprojects currently under preparation. Given the expected continuation ofsound economic and financial management and timely execution of the country'sdevelopment program, it should be possible to prevent the external sector fromagain becoming a constraint on economic growth and to maintain Colombia'screditworthiness for the required external borrowing.
CHAPTER I
BACKGROUND
A. Post World War II Growth Patterns
1. Duri..g the past two decades, Colombia has made substantial progressin the transition from a predominantly rural and agricultural economy madeup of largely self-contained regions, to a more integrated urban-industrialeconomy. The productive base of the economy has been widened appreciably, andthere has been substantial diversification of production in both the agricul-tural and industrial sectors. These improvements have been accompanied byrapid growth of nontraditional exports and by the development of a modernsector relying to a considerable extent on imported inputs. Despite theseadvances, per capita income is still low (US$710 in 1977 1/), and the countryis to a considerable extent undeveloped with a limited modern sector super-imposed on a large, traditional and economically poor base. Moreover, thecountry is still heavily dependent on imports of intermediate and capitalgoods, and on export earnings from coffee. Although some success has beenachieved in recent years in diversifying export products and markets, eventsof the past two years indicate that fluctuations in world coffee prices stillhave a profound effect on the economy.
2. Since the turn of the century, the Colombian economy has beenheavily dependent on export earnings from coffee. During the post WorldWar II period through 1967, proceeds from coffee exports averaged 70% of totalexports. World prices of coffee fluctuated widely during this period and as aconsequence Colombia's coffee earnings have been highly unstable. In thoseperiods in which world coffee prices have been high, there has generally beenan easing of the country's foreign exchange constraint and domestic consump-tion, investment and economic growth have accelerated, resulting in increasedemployment and significant improvements in levels of welfare of most Colombians.There were usually large accumulations of foreign exchange reserves, rapidexpansion of the monetary base, and an acceleration in the inflation rateduring these periods as well. When coffee prices were low, declining aggregatedemand and shortages of foreign exchange usually caused consumption, investmentand economic growth to fall. During these periods, the unemployment rate hasgenerally risen and levels of welfare have fallen.
3. In the late 1960s, the Government attempted to break this dependenceon a single commodity by introducing an export promotion program aimed atstimulating growth of noncoffee exp'orts. The basic components of this programincluded greatly expanded credit and fiscal incentives for noncoffee exportsand improvements in the efficiency of the institutions responsible for exportpromotion. At the same time, periodic adjustments to the exchange rate(crawling peg) were introduced as a further incentive. This effort wassuccessful in expanding noncoffee exports, and, as a consequence, the share of
1/ World Bank Atlas Method.
- 2 -
coffee in total exports declined from 62% in 1966 to 46% in 1974. During thisperiod, considerable diversification of export products and markets tookplace, and the Colombian economy became more resilient to external shocks,including fluctuations in world coffee prices. Nevertheless, the events ofthe past several years--abrupt changes in coffee prices, rapid accumulationof foreign exchange reserves, excessive monetary expansion and acceleratedinflation--indicate that the Colombian economy is still strongly affected byfluctuations in coffee prices and underscore the importance of longer termpolicies directed at reducing the effects of coffee price fluctuations on theeconomy.
4. Following steady growth of output and employment in the immediatepost World War II period, based on import substitution and rising coffeeprices, the Colombian economy from 1950 to 1966 experienced an extendedperiod of erratic growth of GDP, heightened economic instability and risingunemployment. This was in large part of the result of a binding foreignexchange constraint stemming from a secular decline of world coffee prices,exacerbated by trade and exchange rate policies which discouraged the growthof noncoffee exports. Government efforts to stabilize the economy andstimulate economic growth were frustrated by trade and credit policies whichencouraged excess demand for foreign exchange and increased the importintensity of consumption. Investment in fixed assets stagnated as well duringthis period, mainly as a result of shortages of imported capital goods.Consequently, real GDP growth averaged less than 5% per annum between 1950 and1966, and in several years barely exceeded the rate of population growth. Thelack of economic opportunities in the countryside, along with a difficultpolitical and social environment, contributed to a high rate of rural/urbanmigration and increased the social and economic problems of the cities. Thisplaced additional fiscal burdens on the Government, most of which were metthrough increased borrowing, in large part from the Central Bank. In spite ofgrowing economic difficulties, Colombia's development strategy continued toplace a high priority on import substitution. It became increasingly apparentduring this period, however, that the opportunities for easy import substitu-tion were becoming exhausted and that the proliferation of direct administra-tive controls over resource allocation was hampering the operating efficiencyof the economy. It was clear, also, that the country could not rely onthe coffee sector to provide the sustained increases in foreign exchangeearnings required for more rapid growth. It was not, therefore, until a newset of policies substantially altering the country's development strategy wereinstituted, that the basis for accelerated growth was reestablished.
B. The 1967-74 Period
5. Beginning in late 1966, Colombia introduced a new set of economicpolicies directed towards increasing the availability of foreign exchange,raising domestic savings and investment rates and improving resource allocation.The major purpose of the new strategy was to expand and diversify exports byproviding credit, fiscal and exchange rate incentives to noncoffee exporters.Modifications of credit policy focused on increasing the availability andlowering the cost of working capital and investment funds for potentialexport industries, and fiscal policy changes emphasized tax rebates (Certifi-cados de Abono Tributario--CATs) to exporters of most noncoffee items to
increase the return to exporting as compared to selling in the domesticmarket. Credit policy changes were directed towards eliminating the existingexcessive and cumbersome controls over interest rates and credit in order toincrease savings and improve the efficiency of resource allocation. Periodicexchange rate adjustments added a further dimension and widened flexibility tothe Government's export promotion efforts. In addition, significant improve-ments in public administration occurred during this period as several newinstitutions were established to support the export promotion anddiversification effort.
6. As a result of the new economic policies, real GDP increased byan average 6.6% per annum over the 1967-74 period, led by rapid expansionof noncoffee exports. By 1974, these exports comprised 54% of totalmerchandise exports, up from less than 40% in 1967, and only about 25% in1950. Manufactured goods accounted for nearly 50% of the increase innoncoffee exports, growing at 48% per annum in nominal terms between 1967and 1974. The strong growth in manufactured exports was heavily influencedalso by an increased technological sophistication of Colombian industry,acquired in large part through foreign investment. This is illustratedclearly by the increased technological complexity and diversity of thecountry's manufactured exports. In 1974, Colombia exported substantialamounts of chemicals, pharmaceuticals, metal-mechanic products, machineryand electrical equipment, paper based products and glass products, noneof which were exported in 1966. There were strong increases in cotton,sugar, beef and in many other agricultural exports as well. Total noncoffeeagricultural exports expanded by 18% per annum in nominal terms and accountedfor 26% of the increase in noncoffee merchandise exports during the 1967-74period. Expanded research and farm credit contributed strongly to theincreases in agricultural exports and output.
7. In response to the stimulus provided by increased exports, output inthe manufacturing and agricultural sectors rose by an average 8.3% and 4.6%per annum respectively, during the 1967-74 period. Output in the agriculturalsector rose significantly above its historical average growth of about 3%.In both sectors, the composition of output moved increasingly towards export-able goods. As a result of the improved economic climate, investment rosesharply, especially in the directly productive sectors. The average investmentcoefficient (gross fixed investment/GDP) increased to 19.1% during the 1967-74period, from 16.8% for the 1960-66 period. Investment became more efficientas well, with the average ICOR declining to 2.88 from 4.03 in the 1960-66period. The expansion of investment and output generated rapid growth inemployment opportunities, and, although rural/urban migration continued at arapid pace, the unemployment rate declined in each of the four major urbancenters. With the rate of population growth declining, real per capita GDProse by almost 4% annually from 1967 to 1974.
8. Despite the strong growth, increased export diversification, andimprovements in economic efficiency, Colombia experienced increasing economicproblems in the early-1970s. The most serious of these was a sharpacceleration of inflation--to 25% in 1974 from less than 7% in 1970. This wasin part the result of excessive monetary expansion resulting initially fromrapid accumulation of foreign exchange reserves supported by heavy external
-4-
borrowing, and later from Central Bank financing of growing public sectordeficits. Inflationary pressures were exacerbated in 1971 by shortages ofbasic foods caused by excessive rainfall in food producing areas of thecountry and, beginning in late 1973, by higher import prices associated withthe increase in world petroleum prices. Inelasticity of the tax system,rising tax rebates to exporters and inadequate price adjustments by thedecentralized agencies were the major causes of the public sector deficits.The higher inflation was accompanied by a decline in domestic savings andinvestment rates, and, in 1974, by weakening balance of payments and a slow-down in economic growth. Negative real returns on savings, as inflationaccelerated without comparable increases in interest rates, discouragedprivate savings, and weak growth in tax revenues reduced public sectorsavings. Although most of the shortfalls in public savings were covered byincreased external and internal borrowing, especially in 1972 and 1973, publicinvestment spending declined slightly in real terms between 1970 and 1973. In1974, slower economic growth in the industrialized countries reduced thedemand for Colombia's manufactured exports, and, combined with falling coffeeprices, resulted in lower growth of merchandise exports. At the same time, asharp rise in public sector investment and large inventory accumulationscaused imports to accelerate. As a consequence, the trade balance weakenedand the country's foreign exchange reserves fell by US$390 million, to about2.5 months' of merchandise imports by the end of the year.
C. The 1974-75 Economic Reforms
9. In response to the country's growing economic difficulties, exten-sive fiscal, monetary and trade reforms were introduced by the new Governmenttaking power in August 1974. The goals of these reforms were two-fold: (a) tostabilize the economy in the short run by lowering the rate of inflation,reversing the deterioration in the public finances and strengthening the balanceof payments; and (b) to establish a policy framework more conducive to increasedsaving and investment and economic growth. In order to strengthen the publicfinances, a series of measures was introduced aimed at increasing the elasticityand progressivity of the tax system. These measures were based on recommenda-tions of a group of international experts--the Musgrave Commission--which hadearlier undertaken a study of the tax system at the Government's request.Actions taken to reform the financial system were designed to increase privatesavings and ensure their more efficient use. This was to be accomplished byraising maximum allowable interest rates to levels more in line with inflation,and by eliminating distortions in the capital market. These distortions weremainly the result of differential tax treatment of financial instruments andforced investment requirements imposed on financial institutions. Tradepolicy reforms introduced in prior years, which lowered general tariff levelsand reduced cumbersome controls over trade, were reinforced. Taken together,these reforms represented a major reorientation of economic policy with theobjective of increasing the operating efficiency of the economy through greaterreliance on market forces.
10. As a result of these reforms, the public finances improved in 1975,private savings were increased and more evenly distributed among financialinstruments, and the efficiency of resource allocation was improved. Theprogressive lowering of tariffs and reduction in other nontariff barriers to
-5-
trade exposed domestic producers to increased competition from abroad, andprobably induced greater efficiency in local industry. Tax revenues rose by42% in 1975, and, as a share a GDP, increased to 9.4% from 8.3% in 1974.Consequently, public sector savings rose to 5.8% of GDP, from 4.1% theprevious year, covering 67% of total public sector financial requirements(excluding debF amortization) in 1975, in contrast to 47% on average over theprevious three years. More equal and stable returns on different financialinstruments appear to have stabilized financial flows among financialinstitutions, thereby providing a more secure base for the expansion ofcredit. This same factor probably helped to bring about a more efficient useof credit by the various sectors of the economy as well, because of the morebalanced availability of credit. Not all of the distortions in the capitalmarket were eliminated, however. Subsidized credit was still provided tocertain sectors of the economy, and returns on some savings instruments,although improved, remained negative in real terms.
11. The 1974 reforms initially had a contractionary impact on the economy.As a result of this impact and the effects of the deepening world recession,the economic slowdown which began in mid-1974 continued throughout most of1975, and real GDP rose by only 3.8% in real terms that year. The unemploy-ment rate, 1/ which had gradually declined during the 1967-73 period of higheconomic growth, rose in the subsequent two years, reaching a level of 12.5%in 1975, compared with 10% in 1973. Manufactured exports declined by 22% incurrent US dollars in 1975, contributing heavily to the limited growth (1.3%)of industrial output. On the other hand, good weather boosted agriculturaloutput by 6% that year and a strong increase in noncoffee agriculturalexports, combined with a reduction in imports, generated an overall balanceof payments surplus of US$118 million for the year.
D. The Benefits of Growth
12. The growth in employment and incomes that has occurred over the pasttwo decades, along with increased public investment in education, health,nutrition and other public services, has brought widespread benefits to theColombian people. As result of improvements in health and nutrition, thechild mortality rate (one to four years of age) fell from 16 (per thousand)in 1960 to about 9 in 1971, with the infant (less than one year old) mortalityrate declining from 100 to about 70 over the same period. Comparable figuresfor child and infant mortality in the US in 1971 were 0.8 and 22 respectively.Life expectancy increased from 55 years in 1960 to nearly 61 years in 1975.The rapid expansion of health services between 1960 and 1975 is evidenced bythe decline from 2,400 to 2,180 in the ratio of population per physician andfrom 3,540 to 1,920 in the population per nurse (broadly defined) ratio. Thepopulation per hospital bed ratio declined also during this period, from 580to 530. Water and seweage services have been provided to an increasing pro-portion of the population in recent years also, with heavy emphasis on theprovision of services to rural areas. Since 1970, the percent of the ruralpopulation with access to safe water rose from 28% to 33% and the percent
1/ Four largest cities.
- 6 -
with access to sewerage facilities rose from 8% to 13%. It is estimated that86% of the urban population had access to safe water in 1975 and 73% had accessto sewerage facilities.
13. Education services were expanded rapidly during the past severalyears. The primary school enrollment ratio rose from 77 in 1960 to 105 1/ in1975, while the secondary school enrollment ratio tripled, from 12 to 36,during the same period. The pupil-teacher ratio in the primary schoolsdeclined from 38 to 33 between 1960 and 1975, but increased from 11 to 19 atthe secondary school level, reflecting the emphasis on programs to expandprimary school enrollment during this period. The adult literacy rateincreased from 63% to 81% during the fifteen year span 1960-75, indicatinga significant improvement in the general education level of the population.
14. Colombia's population growth declined during the last two decades,from an annual average 3.2% in the 1950s to an estimated average 2.8% p.a.in the 1973-77 period. Most of this decline was the result of a rapid fallin the crude birth rate beginning in the mid-1960s. Average crude birth ratesiri excess of 45.0 per thousand inhabitants in the 1950-64 period gave way torates of 33.1 as measured by the 1973 census data and 31.1 as measured by the1976 National Fertility Survey. A number of factors have been associated withthe lower birth rates, including rising per capita income, rapid rural/urbanmigration, greater economic and educational opportunities for women, andincreased availability and use of family planning methods. Although stillhigh, rural/urban migration has declined somewhat since the early 1960s, andthe urban population growth rate has declined from 6.0% p.a. in the 1950s toabout 4.5% p.a. in the 1973-77 period. Progress made in eliminating thewidespread violence which had occurred in the countryside during the 1950scaused investment, output and employment in agriculture to expand therebyreducing the incentive for migrating to the cities. Also, a selected group ofmedium-size cities serving rapidly growing agricultural hinterlands haveexpanded employment in excess of their labor force growth rate, and attractedmigrants away from the three major urban centers. Approximately 64% of thecurrent population lives in urban centers and there are now 16 cities inColombia with population of over 100,000 persons. While Colombia's populationis not considered excessive relative to the country's resource base, economicgrowth will have to be accelerated in order to expand employment opportunitiesat a pace sufficient to keep up with rapid growth of the labor force.
15. There was some improvement in income distribution in Colombia between1950 and 1970. This appears to have occurred as a consequence of a number offactors, including: reduced population growth, migration of unemployed andunderemployed surplus labor from rural to urban areas, rapid growth of employ-ment in higher productivity jobs in industry and agriculture, and, since 1967,policy efforts to improve the welfare of the poor through employment genera-tion and through increased public investment in health, education, nutritionand urban development. On the other hand, a declining trend in average realwages and in the share of wages and salaries in national income would seem toindicate a worsening of income distribution between 1970 and 1975. In thefollowing two years, however, income distribution may have improved as a conse-quence of the rapid growth of rural incomes associated with the coffee boom.
1/ This ratio exceeds 100 because a number of students enrolled in primaryschool are below or above the official school age.
CHAPTER II
RECENT ECONOMIC DEVELOPMENT: THE COFFEE BOOM AND STABILIZATION
A. Introduction
16. During the last two years the Colombian economy has been stronglyaffected by developments in the external sector. As the result of a seriousfrost in Brazil's major coffee producing area in late 1975, coffee exportsfrom that country declined sharply, triggering a fourfold increase in theworld price of coffee by mid-1977. As a consequence, Colombia's export earningsfrom coffee rose from US$671 million in 1975, to nearly US$1.7 billion in 1977,and incomes throughout Colombia's rural areas increased substantially. Laggingsupply of consumer goods, especially of basic foodstuffs, the production ofwhich was adversely affected by drought conditions in most of the country'sinterior, failed to keep pace with rising demand, and inflation acceleratedfrom 26% in 1976 to 44% in the twelve months ending June 1977. The heavyimpact of declining agricultural production on inflation is clearly visiblein the price increases of basic food items. Food prices rose by 58% in the12 months ending June 1977, and accounted for most of the acceleration in thecost of living during this period. Since inflation in Colombia has generallybeen moderate relative to that experienced by other countries in the region,averaging less than 11% per annum between 1960 and 1970, and seldom exceedingan annual rate of 20%, the magnitude of the acceleration of inflation whichtook place from early 1976 to mid-1977 was unprecedented in the country'srecent history.
17. The authorities responded rapidly by introducing a broad rangeof measures designed to gain control over the explosive increase in prices.Monetary, fiscal, trade and exchange rate policies were increasingly orientedtoward counteracting inflation. Measures were taken to delay the impact ofinternational reserve accumulation on the monetary base, credit was restrictedthrough tighter monetary measures, a policy of fiscal retrenchment wasinstituted, and trade policy was modified to increase imports and curtailexports. Exchange rate adjustments were slowed, and finally temporarilysuspended, in order to discourage exports and increase import payments.Controls over imports were relaxed and food imports were accelerated. Theseactions were highly successful in reducing inflation during the secondhalf of 1977 and in early 1978; however they also had the effect of limitingeconomic growth and reversing some of the gains achieved through the tax andfinancial reforms of 1974. In particular, progress in noncoffee exportexpansion and diversification resulting from the export-led growth strategy ofthe 1967-74 period was temporarily interrupted because of the modifications inexport incentives designed to curb inflation. Moreover, the reductions inpublic sector investment spending slowed progress in carrying out some ofthe Government's high priority social development programs and economicinfrastructure projects.
18. The coffee boom of 1976 and 1977 had a number of favorable effectsas well. The balance of payments registered large surpluses in both yearsand in early 1978, the country's official international reserves rose tonearly one year's merchandise imports, providing a comfortable cushion of
-8-
reserves to support future import requirements. Large receipts from thecoffee export tax boosted public sector revenues, and the public financesshowed an overall surplus (excluding financial investments) for the first timein the post World War II period. Employment expanded more rapidly than thelabor force, reducing the unemployment rate, which, together with the growthof income in ruiral areas, may have led to some improvement in the distributionof income. These same factors may also have slowed the rate of rural/urbanmigration. On balance, the Colombian economy was able to adjust to thedestabilizing effects of the 1974-75 world recession and the subsequent sharpincrese in coffee prices, without serious adverse effects on its long-rungrowth prospects.
B. Growth and Employment: 1976-77
19. Despite attempts by the Government to curb growth of aggregatedemand, the Colombian economy recovered steadily during 1976 and 1977, withreal GDP growth rising from 3.8% in 1975 to 4.4% and 5.9% in 1976 and 1977respectively (see Table 1). The major contributor to growth in these yearswas a strong expansion of incomes and consumption resulting from the rise inworld coffee prices. Gross domestic income rose by about 8% per annum in realterms during the two years, largely as a result of the higher coffee prices.Under the stimulus of increased consumption spending and high capacity
utilization rates in the previous two years, gross investment in fixed assetsis estimated to have increased by about 11% in 1977, after having declined
slightly (0.7% per annum) in 1975 and 1976. The production of manufacturedgoods and commercial and service activities rose by an average 6.8% and 7.6%per annum, respectively, in 1976 and 1977, largely in response to the increaseddemand for consumer goods. While the demand for food increased strongly becauseof the higher incomes, a prolonged drought--beginning in mid-1976 and lastinguntil mid-1977--limited growth of agricultural output in both years, and realvalue added in the sector rose by only 1.5% in 1976 and by an estimated 3.2%in 1977. Shortages of domestic food crops caused IDEMA (the State AgriculturalMarketing Agency) to increase its imports of food to US$112 million in 1977,from only US$58 million in 1976. Coffee output remained constant in 1976,but rose by an estimated 6.7% in 1977, reflecting producers' response to therelatively high world coffee prices over the past few years and the cumulativeeffect of new technology in the industry. Mining sector output is estimatedto have fallen by about 4.5% per annum in 1976-77, largely as a result ofcontinued declines in petroleum production. Construction activity appears tohave increased moderately in 1977, reflecting the climb in investment activity,after having fallen sharply in 1975 (-4.3%) and 1976 (-9.0%).
20. The combination of strong growth in domestic demand for consumergoods, negative real interest rates and high levels of capacity utilizationarising from sluggish investment in the preceeding two years caused a sharprise in private investment demand in 1977. However, the Government's contrac-tionary monetary policies and an inflation-induced high liquidity preferenceon the part of savers resulted in relatively slow growth in the availabilityof long-term credit for investment purposes. This, together with a squeezeon retained earnings brought about by the lack of adjustment of the companyprofits tax for inflation, limited the growth of investment that year.These were the same factors that limited investment in the prior two years,
Table I - COLOMBIA: GROSS DOMESTIC PRODUCT AT FACTOR COST BY SECTOR IN 1970 PRICES, 1970-77
(In Million of 1970 Colombian Pesos)
Growth Rate (Average Annual)1970 1973 1974 1975 1976 1977 /5 1960-70 1970-74 1974-76 1977
Gross Domestic Product at f.c. 119,796.9 147,178.0 156,707.5 163.399.2 170,033.3 180,015.7 5.2 7.0 4.2 5.9
Agriculture /1 34,244.8 39,157.4 41,516.9 44,066.4 44,725.4 46,156.6 3.5 4.9 3.8 3.2
Mining 2,528.0 2,591.7 2,403.8 2,240.7 2,107.9 2,044.7 3.1 1.3 -6.4 -3.0
Manufacturing 20,976.7 27,828.2 29,657.2 30,030.7 32,037.7 34,280.3 6.0 9.0 3.9 8.3
Construction 6,530.0 7,839.2 8,142.4 7,795.9 7,091.8 7,262.0 7.7 5.7 -6.7 2.4
Electricity, Gas and Water 1,787.9 2,473.3 2,615.1 2,753.4 3,073.3 3,205.5 8.8 10.0 8.4 4.3
Transportation and Communication 8,881.1 11,367.5 12,946.5 14,025.3 15,058.8 15,992.4 6.4 9.9 7.8 6.2
Trade /2 20,760.2 26,227.4 28,231.8 29,487.8 31,452.0 34,408.5 6.3 8.0 5.5 9.4
Public Administration andDefense /3 8,283.5 10,529.7 10,775.1 11,189.1 11,385.4 11,692.8 5.5 6.8 2.8 2.7
Other Branches /4 15,804.7 19,163.6 20,418.7 21,749.9 23,101.0 24,972.9 5.5 6.6 6.4 8.1
/1 Includes fishing and hunting and forestry./2 Composed of conmerce and banking, finance and insurance.7 Equals Government services./4 Composed of house rentals and personal services.75 Preliminary estimate.
- 10 -
although investment demand was probably not as buoyant in those years. Small-and medium-scale firms were most seriously affected by the lack of investmentfunds, and, as a result, an increasing concentration of credit and investmentin the larger firms occurred during this period. Foreign investment, mostlyin exploration for oil and other natural resources, rose from US$12 millionin 1976 to an estimated US$42 million in 1977, but still constituted a smallportion (1.5%) of Colombia's total investment. Public sector investment,which was curbed by the Government's contractionary fiscal policies, did notincrease in real terms during the 1976-77 period. By restricting capitaltransfers to the decentralized agencies, which carry out over three-quartersof all public sector investment, the Central Government was able to limitgrowth in their investments to about 5% in real terms.
21. As a result of rapid growth in the labor intensive manufacturingand service sectors of the economy, open unemployment in urban areas ofColombia declined to an estimated 8% in December 1977, as against 9.2% inDecember 1976 and 10.5% in October 1975. 1/ Moreover, labor shortages werereported in several rural areas of the country in 1977, and there is alsoevidence that rural wages increased significantly in real terms over the pastcouple of years. Both of these developments appear consistent with the declinein the rural/urban migration rate and with the slight drop in the participationrate in urban areas that have apparently occurred in recent years.
22. These changes in the rural/urban demand and supply of labor seemto have caused a relative improvement in rural wages in Colombia since 1975.While average real wages in urban areas declined by an estimated 13% duringthe 1976-77 period of high inflation, real wages in rural areas are estimatedto have risen by about the same percentage. The lack of adjustment in publicsector wages, with government encouragement for similar wage restraint by theprivate sector, probably explains the decline in urban real wages. There issome evidence that increases in fringe benefits offset some of the losses inreal base wages in urban areas, but, despite this, the real value of totalremuneration of urban workers has apparently declined. Minimum wages havebeen maintained in real terms since 1974 through periodic adjustments,however these apply to a small proportion of the labor force and are largelyineffective in practice. The higher rural incomes and increased employmentopportunities arising from the coffee boom no doubt contributed stronglyto the increase in real wages in rural areas.
C. The Balance of Payments
23. As a consequence of exceptionally high world coffee prices during1977, Colombia experienced its largest overall balance of payments surplus inthe post World War II period; eclipsing by a substantial margin the previouspeak reached in 1976 (see Table 2). The increase in coffee receipts produceda positive resource balance equivalent to 3.4% of GDP and raised the currentaccount surplus to US$494 million, or 2.5% of GDP, in 1977, from US$237 mil-lion, or 1.6% of GDP in 1976. Drawdowns on foreign loans in 1977 particularlyby the public decentralized agencies, sustained the net inflow of capital at
1/ In the seven largest cities; country-wide employment data are available
only in census years.
Table 2 - COLOMBIA: BALANCE OF PAYMENTS, 1970-77
(In Millions of US$)
1970 1971 1972 1973 1974 1975 1976 /1 1977 /2
Current Account
Exports of Goods and NFS 1,000 974 1,207 1,548 1,858 2,100 2,820 3,427
(of which Coffee) (464) (399) (469) (597) (684) (671) (1,170) (1,685)
Imports of Goods and NFS 1,149 1,285 1,236 1,424 2,072 2,080 2,320 2,748
(of which Petroleum) (84) (131)
Resource Balance -149 -311 -29 124 -214 18 500 679
Factor Service Income (net) -180 -176 -197 -215 -192 -241 -272 -200
Transfers (net) 27 34 35 35 55 47 9 15
Current Account Balance -302 -453 -191 -56 -351 -176 237 494
Capital Account
Direct Foreign Investment (net) 39 40 17 23 36 43 12 42
Private Long-Term Loans 61 66 _55 2 -8 -11 22 -4
Disbursements (128) (145) (139) (60) (50) (76) (87) (55)
Amortizations (67) (79) (84) (58) (58) (87) (65) (59)
Public Medium- and Long-Term Loans 161 130 255 285 158 249 89 194
Disbursements (236) (222) (351) (417) (364) (383) (241) 367
Amortizations (75) (92) (96) (132) (206) (134) (152) 173
Other, Short Term and Errors
and Omissions 35 135 28 -41 -224 13 191 78
Net Change in Reserves 6 82 -164 -213 389 -118 -551 -804
(- = increase)
/1 Revised.
/2 Preliminary.
Source: Banco de la Republica and mission estimates.
- 12 -
about the 1976 levels of US$300 million. Net international reserves of thebanking system rose by an estimated US$804 million for the year, of whichUS$664 million accrued to the Central Bank. Net official reserves reached theunprecedented level of US$1,830 million at year end, equivalent to 11 monthsof merchandise imports.
24. Colombia's total receipts from merchandise exports rose on averageby 28.5% per annum in 1976 and 1977, almost entirely as a consequence of highercoffee prices. Coffee export values rose by 44% in 1977, after having risen byno less than 74% in 1976, while noncoffee export values increased on averageby only 4.2% per annum in the two year period. By 1977, coffee's share intotal goods exports had increased to 60%, from only 40% in 1975. Colombiancoffee fetched an average price of US$2.42/lb in 1977, more than double theaverage 1976 price received and nearly four times the average 1975 price. 1/Coffee export volume, on the other hand, declined by 23% in 1976 and by 15% in1977. The causes of the decline in coffee export volumes during the past twoyears are not entirely clear. The following combination of factors appear tohave been involved. Production declined by 3% in the 1975-76 coffee year(October 1975 to September 1976) and stocks were relatively low, which couldpartially account for the lower exports in 1976 and early 1977. However,production increased by 15% in the following coffee year, and, even allowingfor some rebuilding of stocks, a higher level of exports should have beenfeasible. Also, contraband exports probably increased during this period, asis usual in time of rising coffee prices, diverting some coffee from officiallyregistered marketing channels. Port congestion, caused by large-scale foodimports, may have prevented an acceleration in coffee shipments in 1977, andwith coffee prices on a downward trend beginning in April 1977, importers mayhave held back purchases in anticipation of continued declines in prices.
25. The production of coffee in Colombia has shown an upward trendin the past couple of years, after remaining rather stable at 7-8 million60 kilos bags during the past decade. The major cause of the increaseproduction was the introduction of new technology which substantially raisedthe yield per hectare, without any loss in the quality of the coffee producedor commensurate increase in the cost of production. Largely as a result ofthis new technology, production for the 1977-78 coffee year rose to a record10.6 million bags. Further gains are projected in subsequent years, as the newtechnology is extended to additional coffee areas, with production expected tolevel off at 12-13 million bags in the early 1980s. An increase in productionof this magnitude, given recent trends in world production and consumption,has important implications for current coffee marketing policy and for therole of coffee in the Colombian agricultural sector. Careful considerationneeds to be given to these questions in the context of future economic planning.With domestic consumption at about 1.5 million bags and exports projected at9.0 million bags in 1978, stocks could exceed 6 million bags by year end.This would appear to be well above the level required to guarantee efficientmarketing of coffee.
1/ Average monthly New York price quotations for Colombian coffee soared toUS$3.28/lb by April 1977, following sizeable increases in 1976; declininggradually thereafter to US$2.00/lb by December 1977 and to US$1.91/lbin June 1978. The average annual New York price quotation in 1975 wasUS$0.82/lb.
- 13 -
26. Colombia's coffee export policy was modified in mid-1978. Coffeeexports were accelerated, despite declining prices, in an effort to reduce thelarge stocks accumulated as a result of high production and low sales inprevious months. One advantage of this shift in policy is that any futureinternational coffee agreement will probably base country export quotas onrecent export performance, so that raising exports now would likely guaranteea higher quota for Colombia in any future agreement. With coffee outputexpected to increase rapidly in both Colombia and Brazil, internationalagreements will probably be required to sustain remunerative prices in thefuture. It should be noted, also, that Brazil's coffee output is apparentlybecoming less susceptible to frosts, since a larger proportion of its coffeeis being grown in frost-free areas. Thus, the favorable effect on worldcoffee prices of periodic frosts in Brazil may dimi-tish in the future.
27. In contrast to the large increase in the value of coffee exports,Colombia's noncoffee exports stagnated during the past two years. Therewere sev-ratl reasons for this. Exports of certain food items previoutslyexported in large amounts were prohibited because of supply shortages on thedomestic market, and relatively attractive domestic prices caused the diver-sion of many items from exports to the domestic market. Exports in generalwere hampered by the lowering of export incentives by virtue of slower pesodevaluation and increased protectionist measures in some of Colombia's majortrading partners adversely affected selected export lines, such as textiles.En addition, an apparent sharp increase in smuggling to neighboring countriesof a broad range of Colombian manufacturing and agricultural goods may havediverted a significant amount of exports from the "registered" market.Continued slack demand in some of Colombia's major export markets probablyhindered the growth of exports during this period also.
28. Noncoffee agricultural exports fell sharply in 1976-77, by 6.5%per annum in nominal terms. Decreases were most pronounced for sugar,and cattle and beef exports, while flowers, cotton, bananas and shrimp andshellfish registered significant increases (See Table 3.8, StatisticalAppendix). Sugar exports declined from US$96 million in 1975 to practicallynothing in 1977, when production shortages caused exports to be prohibited.Cattle and beef exports appear to have fallen because of the rebuilding cifherds that had been depleted by heavy sales in previous years. Cotton exports,on the other hand, increased by nearly 17% per annum in current US dollars asa result cf both higher international prices and increased output, and flowerexports rose by 38% due to strong increases in demand.
29. Manufactured exports rose by 12% per annum in nominal terms between1975 and 1977, a very modest increase compared with the large increases(36% per annum) registered in the late 1960s and early 1970s. The diversionof many manufactured goods, which otherwise would have been exported, tomore profitable local markets and a high incidence of unregistered salesin neighboring countries were important causes of the slow growth inmanufactured exports. Also of importance, however, was the reduction inexport incentives during this period. It is estimated that the real effectiveexchange rate, taking account of price and exchange rate movements and
- 14 -
weighted by the non coffee export trade shares of Colombia's major tradingpartners, fell by more than 11% in 1977 and by an estimated 16% since 1975(see Table 3). Although fiscal and credit incentives were increased in thelast two years, they did not rise sufficiently to offset the disincentiveeffects of the lower rate of peso devaluation. The loss of Colombia's sharein the total noncoffee imports of the OECD countries is illustrative of theadverse effects of the decline in export incentives. Since 1975, Colombia'sexports to these countries rose at about one-fourth the rate of the areas'total imports. Moreover, largely as a result of the relatively strong pesodevaluation vis-a-vis some of the European currencies which appreciated withrespect to the US dollar during this period (the peso is tied to the USdollar), the direction of Colombia's export trade changed in favor of thesecountries. An increasing proportion of Colombia's exports are going to theAndean Group countries as well, as a consequence of the reduction in tradebarriers among those countries. Exports of leather and hides, mechanical andelectrical equipment and metallic products increased most rapidly (33%, 29%and 27%, respectively) during this period, while exports of chemicals andpharmaceutical products declined in nominal terms. Exports of all othermanufactured goods either stagnated or grew only modestly in nominal terms.Because world markets for manufactured goods are becoming increasingly competi-tive, it may take Colombian producers some time to regain lost markets onceincentives are right for export expansion.
30. Merchandise imports rose by 23% in current US dollars in 1977,twice as fast as in 1976, reflecting the steep increase in domestic demand,lower production of petroleum and some domestic agricultural goods, and fewerimport restrictions. Registrations of nondurable consumer imports, for themost part foodstuffs to compensate for the poor harvests, increased by anestimated 23%. Fuel imports rose rapidly (56%), reflecting the country'sgrowing dependence on foreign energy sources as a result of declining domesticoil output. Overall, registrations of intermediate goods imports rose by18%. Imports of consumer durables, which were probably most affected by thedecelerating pace of peso devaluation and the expectation of its futureacceleration, increased by an estimated 81% in 1977, while capital goodsimports rose by 22% in current US dollars. The structure of imports since1975, therefore, has shifted towards a greater share of consumer goods intotal imports, mostly at the expense of nonpetroleum intermediate goods.Nevertheless, imports still constitute a relatively small proportion ofColombia's total demand for consumption goods, while a large proportion ofits use of intermediate and capital goods has to be imported. The directionof imports has changed moderately since 1974, with an increasing proportioncoming from the Andean Group countries, Central America and the Caribbean,and a lesser share from Europe. Colombia's other major suppliers managed tomaintain their relative shares during this period.
31. Colombia's trade and exchange rate policies in 1976 and 1977 werelargely a function of the need to reduce the rate of inflation. In orderto slow the rate of international reserve accumulation, the Government loweredthe rate of peso devaluation, reduced import tariffs and nontariff barriersto imports and raised advance import deposit requirements. Beginning inearly 1977, exporters of coffee and most other major export products wererequired to accept dollar-denominated 90-day certificates of exchange in lieu
Table 3: COLOMBIA - Index of Trade Weighted Real Exchange Rate for Non-Coffee
Exports, Selected Countries, 1970-77, June 1978 1/
(1970 - 100)
1970 1971 1972 1973 1974 1975 1976 1977 1978
USA 100.00 100.6 97.3 93.4 90.6 86.8 82.6 73.4 54.7
Venezuela 100.00 101.6 98.6 91.0 87.0 87.1 84.8 78.8 58.6
Ecuador 100.00 88.4 88.2 85.1 85.2 86.2 86.8 82.2 64.9
Peru 100.00 104.0 103.3 95.9 91.6 94.1 81.1 44.3 50.4 un
Germany 100.00 106.5 110.8 119.6 114.2 104.9 108.9 95.1 74.1
Netherlands 100.00 106.2 113.0 118.4 108.7 108.9 100.2 95.8 74.6
United Kingdom 100.00 107.7 107.9 96.4 92.6 95.6 82.3 79.5 63.1
Weighted Average 100.00 103.8 101.5 99.1 95.1 93.0 88.4 77.9 61.1
Source: Bank Staff Estimates
1/ These indicies include an adjustment for certificados de Abono Tributaria (CATS). The countries included inthis index accounted for approximately 64% of the country's total exports in 1975.
16 -
of cash payment as a means of delaying the impact of the increased foreignexchange inflows on aggregate demand. These certificates, discountableimmediately at the Central Bank at a 15% discount (later reduced to 10% andsubsequently to 7%), had to be held to maturity to receive their full facevalue. Since they were protected against peso devaluation, transferable andusable in paying for imports, a secondary market developed for them. A largesupply of these certificates entered the market in 1977 as a result of theexpanding coffee receipts, causing their price to fall. Consequently, theybecame an attractive depository for short-term savings. The fact that theywere effectively tax free enhanced their attractiveness. The use of thesecertificates reduced the immediate impact of the accelerating export receiptson the domestic money supply and meant an effective revaluation of theexchange rate for the export categories involved. Their use also reducedmoderately the foreign exchange cost to some importers. Steps were also takento channel an increasing proportion of coffee receipts to the CoffeeFederation and away from the private coffee grower where they would mostlikely be translated into increased aggregate demand. To accomplish this, theretention quota 1/ was raised in 1976 from 30% to 80%, where it was maintainedthroughout 1977. In addition, there were only minor upward adjustments in theprice paid to coffee growers by the Federation in 1977, after a doubling ofthe price in 1976. As a result of these measures, the authorities were ableto limit the increase in private sector coffee incomes, reducing the privatecoffee farmer's participation in Colombia's overall coffee receipts to around48% in 1977, from 60% in 1975. The Government's share of the increased coffeereceipts remained constant at about 11%. A large part of the increased shareaccruing to the Coffee Federation was then frozen in a special account at theCentral Bank.
32. In an effort to protect nontraditional exports from the loss inincentives, tax rebates in the form of tax credit certificates (CATs) wereincreased slightly in 1977 and export promotion efforts through low interestexport credit, which had been expanded sharply in 1976, were increased againin 1977. Nonetheless, the use of exchange rate policy as one of the tools ofdomestic stabilization, although perhaps effective in this instance, may havebeen costly in terms of its disincentive effects on noncoffee exports. Inthe 1967-74 period, rapid devaluation of the peso--averaging 10% per annum--was largely responsible for the rapid gains in noncoffee exports, and itseems reasonable to suggest that the lower rate of devaluation from mid-1976through 1977--6% per annum on average--had the opposite effect. If wholesaleprice increases for Colombia's industrial exports, after devaluation against
1/ The retention quota refers to the fixed amount of coffee (or, in part,its equivalent in cash at the discretion of the producer) which has tobe delivered to the Coffee Federation for each 100 bags exported. Forexample, if 100 bags are exported, the coffee producer has to surrenderan additional 80 bags to the Coffee Federation. Thus, the retentionquota is a form of tax, the proceeds of which accrue to the Federation.These proceeds are subsequently returned in part to the coffee growingareas in the form of investments in land improvements, social projects,etc.
- 17 -
the US dollar, are compared against wholesale price increases in the UnitedStates, a clear reduction in incentives for noncoffee exports is evident,especially in 1976 and 1977. Prices of industrial exports from Colombia,after devaluation, have increased by about 25% faster than wholesale prices inthe US. Similarly, the prices of consumer goods imported into Colombia, evenafter adding import duties, have risen a good deal less than Colombian whole-sale prices. Calculations which consider the recent implicit devaluationof the Colombian peso against major European currencies weighted by tradeshares, still show a notable loss of incentives (see Table 3). Clearly, otherfactors also played an important role in the sluggish growth of noncoffeeexports during this period, but the effects of slower peso devaluation wereprobably equally important and the reestablishment and maintenance of appro-priate exchange rates would seem critical for the future growth of exports.
33. Despite efforts to delay export receipts and advance import pay-ments there was a surplus in Colombia's trade balance of US$749 million in1977, following a US$608 million surplus in 1976. Both nonfactor and factorservices were in deficit and the current account closed with an estimatedsurplus of US$494 million in 1977, more than twice as much as in 1976, and2.5% of estimated GDP. In an attempt to counter the inflow of foreign exchangethrough the trade account in 1976 and 1977, the Colombian authorities intro-duced a variety of measures to reduce net capital inflows. These includedaccelerating repayments on external loans of the public sector and requiringdomestic rather than foreign borrowing by private firms. Both export financingfrom foreign sources and the use of foreign loans for investment and workingcapital requirements were limited by government decree. As a result of thesemeasures, disbursements of long-term loans to the private sector declined fromUS$87 million in 1976 to US$55 million in 1977, and net disbursements wereslightly negative for the year. In contrast, disbursements on public sectorloans rose by 50% in 1977, although from a relatively low 1976 base, despitedeliberate restraint on public sector investment as part of the Government'sstabilization program. Most of this increase in disbursements was by thedecentralized agencies, especially ECOPETROL, which borrowed heavily tofinance crude oil imports and its expanding exploration program. Additionaldomestic financing was provided for the acquisition by Colombians of foreign-owned shares of domestic enterprises, and new foreign investment, except incertain priority sectors (e.g. petroleum) was discouraged. Nevertheless,private net direct investment is estimated to have increased to US$42 millionin 1977, from US$12 million in 1976. The strong current surplus and theinflow through the capital balance brought official net international reservesto a level of US$1,830 million by the end of December 1977, the highest levelin the post World War II period. As a consequence of the large net foreignliability position of the commercial banks, the net international reservesof the total banking system amounted to US$1,349 million at the end ofDecember 1977.
D. Public Finances
1. Total Public Sector
34. Although public sector savings fell only slightly in 1976 and 1977 fromthe high ratio to GDP achieved in 1975, the year following a major tax reform,
Table 4: COLOMBIA: TAX REVENUES, 1974-77
(In Mfillions of Colombian Pesos)
% of GDPGrowth Rate Average
1974 1975 1976 1 9 7 7.L 1975/74 1975-77 1972-74 1975 1976-77
Taxes on Income and Property 11,259 17,885 21,050 24,534 58.9 17.1 3.8 4.3 3.6Of which:
Income and Net Wealth Taxes 10,725 17,633 20,912 24,403 64.4 17.6 3.6 4.3 3.6Other 534 252 138 131 -52.8 -27.9 0.2 - -
Taxes on Foreign Trade 8,692 9,291 12,862 18,563 6.9 41.3 2.5 2.3 2.5Of which:
Customs /2 4,846 5,308 7,362 9,763 9.5 35.6 1.5 1.3 1.4Special Exchange Account - 3,040 3,640 5,500 8,800 19.7 55.5 0.8 0.9 1.13% Import Surcharge /3 806 343 - - -57.5 - 0.2 0.1 -
Taxes on Domestic Consumption andTransactions 7,340 11,608 15,019 20,170 58.1 31.8 2.2 2.8 2.8Of Which:
Sales Tax 3,944 7,757 9,501 12,828 96.7 28.6 1.1 1.9 1.8Gasoline Tax 1,546 1,726 3,208 4,464 11,6 60.8 0.6 0.4 0.6Stamp Tax 1,791 1,658 1,748 2,176 -7.4 14.6 0.6 0.4 0.3Other 59 467 562 702 - 22.6 - 0.1 0.1
Total Tax Revenue 27,291 38,784 48,931 63,267 42.1 27.7 8.5 9.4 8.9
Internal Tax Revenue (ExcludingSpecial Exchange Account) 24,251 35,144 43,431 54,467 44.9 24.5 7.8 8.5 7.7Minus Tax Credit Certificates -2,284 -1,780 -1,190 -1,095 -32.1 -21.6 -0.6 -0.4 -0.2
Net Internal Tax Revenue 21,967 33,364 42 72 51.9 26.5 7,2 8.1 7,5
/1 Preliminary./2 Mainly coffee export tax and earnings on foreign exchange holdings./3 Receipts from this surcharge, earmarked for PROEXPO, were excluded from the Central Government Revenue accounts after 1975.
- 19 -
the ability of the internal tax structure 1/ to provide revenues to supportan increasing real level of public sector spending declined. The high levelsof public saving in 1976 and 1977 were made possible by strong growth inreceipts from the coffee tax and by restraint on expenditures. Thus, exclud-ing revenues derived from coffee exports, Colombia's public finances 2/ deter-iorated during this period. Revenues from internal taxes, which increased by45% in 1975 following the tax reform, rose on average by only 24.5% per annumin 1976 and 1977 (see Table 4), while nominal GDP increased by 33.3% per annum.The slow growth in revenues was almost entirely the result of sluggish growthin receipts from the income and wealth taxes, which together have accountedregularly for 40% of total tax receipts. The combined finances of the decen-tralized agencies worsened also during 1976 and 1977, although many of theseagencies individually experienced improvements in their finances as a resultof sizeable real increases in current revenues associated with higher chargesfor the goods and services they provide. Their combined current accountsavings declined primarily because of the increased expenditures on petroleumimports. At the same time, their investments increased only slightly in realterms as a consequence of the Government's efforts to hold down public sectorspending.
35. Among the major objectives of the 1974 tax reform 3/ were those ofincreasing the progressivity and elasticity of the tax system and reducingthe amount of tax evasion. Several measures were taken to accomplish theseobjectives, including an increase in the progressivity of personal income taxrates, the elimination of many of the deductions and exemptions favoring highincome taxpayers, greater taxation of "luxury" consumption, inclusion in thesales tax base of services consumed largely by upper income families, theintroduction of a capital gains tax and, to reduce tax evasion, the introduc-tion of a presumptive income tax based on net wealth. As a result of thesereforms, income and wealth tax collections increased sharply in 1975, rising
1/ The internal tax structure is defined here as including all tax revenuesminus receipts from the special exchange account. This account includesprimarily coffee tax revenues, which represent windfall gains from highcoffee prices, and earnings on the country's foreign exchange reserves.
2/ The Colombian public sector is defined in this report as comprising (a) theCentral Government, (b) decentralized agencies, and (c) the local govern-ments. The Central Government includes operations of the National Govern-ment, two major social security institutions, and the National HighwayFund. Decentralized agencies comprise a number of public enterpriseswhich operate in the energy, transport, communications, and housingsectors. Local government operations are carried out by 22 departmentsand 1,000 municipalities.
3/ For a full description of the 1974 tax reform, see Economic Position andProspects of Colombia, May 20, 1975, Vol. III, "The Colombian Tax Reformof 1974"; World Bank.
- 20 -
by 64.4% and reaching 4.3% of GDP compared with an average 3.6% of GDP for theprior three years. In 1976 and 1977, however, the responsiveness of incomeand wealth tax collections to GDP increases declined, with collections fromthese taxes rising on average by only 17.6% per annum and falling steadily to3.3% of GDP in 1977 (less than the ratio prevailing prior to the tax reform).This decline in responsiveness of the income and wealth taxes to GDP growthwas the result of: (a) subsequent measures which reduced the effectiveness ofthe reforms, (b) a substantial increase in tax evasion, and (c) deficienciesin the tax reform itself.
36. The bases of the net wealth and presumptive income taxes werenarrowed subsequent to the 1974 reforms by excluding from the definition ofwealth such important assets as coffee plantations, breeding cattle, forestlands, editorial enterprises, assets related to activities subject to pricecontrol (transport services, medicines, rents, and many agricultural activi-ties), assets of incipient industries, and assets of activities operatingunder "specially adverse conditions" (basically the textile sector). Inaddition, partnerships were exempted from liability under the presumptiveincome tax, and a large number of items have been excluded from the sales taxbase. A sharp increase in tax evasion has apparently occurred since 1975,probably as a result of the increased tax obligations caused by the 1974 reform.This is suggested by the decline from 79% to 66% in the proportion of requiredtax returns actually filed in 1975 and 1977, respectively. Discrepanciesbetween data on income declared in various income categories (wages andsalaries, rent, dividends, profits) and national accounts statistics on incomeorigin also suggest high levels of tax evasion, especially on income fromsources other than wages and salaries. Deficiencies in tax administrationand in applying legal sanctions have permitted tax evasion to increase.Inadequate administration of the capital gains tax, for instance, has allowedtaxpayers to evade the presumptive income tax by low wealth declarations, withthe implied increase in tax liability under capital gains not picked up becauseof lax administration.
37. Deficiencies in the tax reform itself have led to lower tax buoyancy.Perhaps most important in this regard is the lack of mechanisms to adjust thevarious taxes for inflation. Individual taxpayers forced into higher taxbrackets by inflation have not received compensating adjustments in deductionsand exemptions. Likewise, business firms have not been permitted adjustmentsin asset values, depreciation charges, etc. The capital gains and presumptiveincome taxes are similarly affected by inflation. The lack of adjustment forinflation has undoubtedly been an important cause of the increased tax evasionover the past couple of years. Finally, the Government did not provideadequately for the increased administrative demands flowing from the reformand several existing (legal) tax loopholes remained available after the reform.
- 21 -
Table 5: COLOMBIA - CONSOLIDATED PUBLIC FINANCES, 1973-77
(Percent of GDP)
1973 1974 1975 1976 1977 1/
Current Revenues 18.2 19.9 20.9 22.3 21.2Current Expenditures 15.8 15.4 13.7 16.5 15.4Current Account Saving 2.4 4.5 7.3 5.8 5.8Total Gross Investment 6.9 7.9 8.7 7.7 6.4of which Gross Fixed Investment 6.2 7.1 6.9 6.5 5.4
Capital Revenue 0.5 0.8 0.8 0.5 0.2Overall Surplus (Deficit) (3.9) (2.6) (0.6) (1.5) (0.4)Overall Surplus (Deficit)Excluding FinancialInvestment (3.3) (1.8) (1.2) (0.2) (0.6)
1/ Estimated.
Source: National Comptroller's Office, Banco de la Republica, andBank estimates.
38. Notwithstanding the deterioration in the revenue productivity ofthe basic tax structure and in the finances of the decentralized agencies,total public sector savings increased sharply during the 1975-77 period,averaging 6.3% of GDP compared with an average of only 3.5% in the 1973-74period (see Table 5). This favorable result was made possible by strongincreases in receipts from the coffee tax and from earnings on foreign exchangereserves and, more importantly, by restraint on current expenditures by theCentral Government. Public sector savings increased by an average of 19.1%per annum in 1976 and 1977, starting from the high base established in 1975.Current expenditures of the total public sector rose by 38% per annum duringthis period, while current revenues, starting from a much larger base, rose by34%. On average, public sector savings financed 66% of total resource require-ments (gross investment plus debt amortization) of the public sector in 1976and 1977, compared with 92% in 1975 and an average of only 35% in the 1972-74period. Expenditure on fixed investment by the public sector was also affectedby the tight fiscal restraint prevailing in 1976 and 1977, and grew in nominalterms by only 18% per annum on average (see Table 6). In both years, butespecially in 1977, total public sector investment declined in real terms,and as a proportion of GDP, fell from an average of 7% in 1974-75, to anaverage of 5.9% for 1976 and 1977. Capital revenues declined by nearly 50%,to Col$1.6 billion between 1975 and 1977, and financial investments--mostlyby the social security institutions--increased moderately reaching Col$7.2billion in 1977. These developments led to a reduction in the overall
- 22 -
Table 6 - COLOMEBIA: PUBLIC SECTOR RESOURCES FOR INVESTMENT, 1972-77
(In millions of Colombian pesos)
Actual Preliminary1972 1973 1974 1975 1976 1977
I. SOURCES
A. Current Account Surplus 1/ 7.203 5,897 14.862 29,933 30,875 42,4941. Central Government 8,504 10,638 15.939 24 751 32,126 44,189
National Government 7,982 9.847 13,635 21.828 29,412 40,450National Highway Fund 100 69 1,286 1,732 2,740 4,000Social Security 422 722 1,018 1,191 - 26 - 261
2. Decentralized Agencies 1,009 - 88 3,794 7,373 4,123 3,805(a) National Decentralized
Agencies - 125 - 1,515 2,496 5,505 1,341 539
ECOPETROL 1,375 1,406 3,734 6,153 1,836 772IDEMA - 474 - 1,436 - 2,115 - 1,801 - 320 53TELECOM 461 470 708 1,091 1,290 1,000Others - 1,487 - 1,955 169 62 - 1,465 - 1,286
(b) Municipal DecentralizedAgencies 1,134 1,427 1,298 1,868 2,782 3,266
EAAB 278 304 240 335 251 603EEEB 316 440 348 755 920 1,064EPM 375 488 563 563 1,511 1,499Others 165 195 147 215 100 100
3. _epartments - 168 - 964 - 1.087 559 1,990 4,600
4. Municipalities - 2,142 3689 - 3,784 - 5 ,750 - 7,364 -10,300
B. Capital Acunt Revenues 766 1,1 2,578 3,305 2,458 1,550
C. Borrowio_ (Disbursements) .13'182 16.159 15,384 12 262 17,820 15,6101. External 6,912 7,892 8,362 7,205 5,500 7,6002. Domestic 6,270 8,267 7,022 5,057 12,320 8,01'0
TOTAL 21,151 23,234 32,824 45,500 51,153 59,654
1.USES
A. Investment Expenditures 14,379 16,714 26,011 35,786 41,093 46,8541. Gross Fixed Investment 1 15,147 23,435 28,375 34,663 39,704
a. Central Government 3,283 3,284 4,175 4,651 5,481 5,806National Government 1,030 997 1,512 1,743 1,559 1,912National Highway Fund 2,146 2,382 2,439 2,725 3,692 3,600Social Security 107 105 224 183 230 294
b. Decentralized Agencies 8,013 9,674 16,846 20,051 25,941 30,997(I) National Decentralized
Agencies 6 357 7,724 14,537 16,954 20,570 24,924ECOPETROL 1,558 1,601 5,334 7,753 5,039 6,003INSCREDIAL 854 1,002 1,398 1,701 2,076 3,210ICCE 435 678 814 235 627 742CvC 604 1,041 949 487 708 820ISA 487 1,044 1,150 1,265 1,575 1,989Others 2,419 2,358 4,892 5,513 10,545 12,160
(II) Municipal DecentralizedAgencies 1_656 1,950 2,309 3,097 5,371 6,073
EAAB 579 594 483 1,201 2,000 2,300EPM 460 500 1,090 1,307 1,871 1,829Others 617 856 736 589 1,500 1,944
c. Departments 1, 1,650 1,921 3,438 2,986 2,700
d. Municipalities 229 539 493 235 255 200
2. Financial Investment 1,412 1,567 2,576 7,411 6,430 7,150ICSS 741 985 1,024 1,396 1,603 1,750others 671 582 1,551 6,015 4,R27 5,400
B. Amortization Payments 5,84 6,009 7,015 11,239 10,060 12, 8001. External 1,970 2,498 2,872 3,315 3,900 6,6002. Domestic 4,014 3,511 4,143 7,924 6,160 6,200
C. Cash Balances 2/ 788 511 - 202 1,525 = --
TOTAL ~ 21151 23,234 32,824 45,500 51,153 59,654
1/ Before transfers.2/ Balancing item.
Source: Informe Financiero of the Controller General's Office: Financial Reports of Public Enterprises;Planning Department; Banco de la Repi,blica; and Mission estimates.
- 23 -
public sector deficit from 2.6% of GDP in 1974, to 1.5% in 1976 and to 0.4% in1977. Excluding financial investments, the public sector registered anoverall surplus of Col$4.3 billion in 1977, or 0.6% of GDP. The increasedpublic sector savings was reflected in a sharp decline in net domesticborrowing which fell to Col$1.8 billion in 1977, as compared to Col$6.2 bil-lion in 1976. As a consequence of the large budget surplus and the highlevel of foreign exchange reserves, the National Government paid in advancepart of its more costly external debt.
39. Public sector fixed investment, as mentioned earlier, was restrainedin 1976 and 1977 as part of the economic stabilization program. The decen-tralized agencies, which carry out over 75% of public sector investment, in-creased their investment slightly in real terms, largely as a result ofincreased capital spending by the power companies and INSCREDIAL (the housingauthority). ECOPETROL's investment, while not increasing significantly, wasmaintained at the high levels achieved since 1974. The rest of the decen-tralized agencies as a group, the Central Government, and the departmentsand municipalities reduced their investment in real terms. The sectoralcomposition of public investment has shifted somewhat since 1975, as isillustrated in Table 7. Investments in the power and industrial sectors(including petroleum) have increased in relative importance over the pastcouple of years, while those in agriculture have declined. The shift in thecomposition of public investment since 1975 mirrors the growing concern inColombia over the country's mounting energy problem. Investment in educationand water supply and sewerage have increased somewhat, also, relative to totalpublic sector investment, but those in some of the other social sectors,particularly health and nutrition and urban development, have declined. Therewere strong increases in current expenditures in all of the social sectorsduring this period, and overall their share in total public sector expendi-tures is estimated to have increased to around 38% in 1977, from 33% in 1974,reflecting the Government's policy of providing greater services to a broadersegment of Colombian society.
2. National Government
40. National Government operations, which account for 38% of totalpublic sector expenditures, began improving in 1975 when the overall deficitwas virtually eliminated as a result of a sharp increase in revenues followingthe 1974 tax reform (Table 5.3, Statistical Appendix). In 1976 and 1977,growth of National Government revenues (28.7%) continued to be faster thanthat of total expenditures (22.7%) and a sizeable overall surplus emerged; in1977 this surplus reached Col$5.6 billion, equivalent to 0.7% of GDP. Thelarge surpluses in 1976 and 1977 were achieved despite poor growth by themajor noncoffee revenue sources, being largely the result of (a) extraordinaryrevenues obtained through the special exchange account (primarily receiptsfrom the coffee tax); (b) a decrease in export subsidies granted throughtax certificates (CATs); and (c) a reduction in expenditure growth. Thecombined effect of the first two elements resulted in an increase in 1977 ofCol$5.8 billion in receipts compared to the 1975 level, and accounted fornearly one-quarter of the increase in current revenues during this period.The contractionary expenditure policy contributed to the increase in theoverall surplus by reducing total expenditures as a proportion of GDP from9.3% in 1975, to 7.9% in 1977.
Table 7 : COLOMBIA: SECTORAL DISTRIBUTION OF PUBLIC GROSS FIXED INVESTMENT, 1975-78
(In Millions of Col$)
Actual Actual Estimated Projected1975 % 1976 % 1977 % 1978 %
Agriculture 3,538 12.5 3,750 10.8 4,300 10.8 5,600 11.1
Industry /1 3,648 12.9 6,838 19.7 8,303 20.9 11,500 22 .8
Nutrition and Health 2,330 8.2 2,700 7.8 2,200 5.5 2,700 5.4
Water Supply and Sewerage 1,061 3.7 2,000 5.8 2,200 5.6 2,500 5.0
Power 2,392 8.4 3,162 9.2 3,797 9.6 5,300 10.5
Telecommunications 864 3.0 1,050 3.0 1,090 2.7 1,300 2.6
Transportation 3,895 13.7 4,070 11.7 4,600 11.6 5,600 11.1
Education 1,568 5.5 1,930 5.6 2,350 5.9 2,700 5.4
Tourism 198 0.7 350 1.0 480 1.2 500 1.0
Urban Development 3,459 12.3 3,700 10.7 4,350 10.9 5,400 10.7
Central Services 325 1.1 500 1.4 600 1.5 800 1.6
Other /2 5,097 18.0 4,613 13.3 5,434 13.7 6,513 12.9
Total 28,375 100.0 34,663 100.0 39,704 100.0 50,413 100.0
/1 Includes manufacturing, mining, and petroleum.
/2 Includes public buildings, urban works and roads, development studies, purchase of food by IDEMA.
Source: Comptroller's General Report, Planning Department, and mission estimates.
- 25 -
a. National Government Revenue
41. Following the 1974 tax reform, current revenue of the NationalGovernment rose by 45% in 1975 (Table 5.4, Statistical Appendix). Mostof the increase in revenue originated from the income and wealth and salestaxes, the receipts from which grew by 64% and 97%, respectively. Receiptsfrom most other taxes did not fare as well: gasoline excises, which wereaffected by the lack of adjustment in gasoline prices, and customs duties,reflecting lower imports, incresaed only moderately. Stamp duties and nontaxrevenues declined below the previous year's level. Revenues also received aboost in 1975 from a reduction in export tax subsidies, as tax payments withtax credit certificates declined by 20%, to Col$1.8 billion. The high rateof growth of current revenue was not sustained in 1976 and 1977, however,declining to 27% and 30% respectively. Only moderate increses in receiptsfrom the income and wealth taxes (17.6% per annum) and slower growth in salestax proceeds (28.6% per annum) tended to hold down growth in current revenuesin those years. These were partially offset by strong growth in proceeds fromthe special exchange account (55% per annum) and by higher collections fromgasoline excises (61% per annum) resulting from increases in retail gasolineprices. Domestic revenues 1/ declined as a percentage of GDP from 8.4%in 1975 to 7.4% in 1977. Initially the tax reform of 1974 resulted in anincrease in the average buoyancy (with respect to GDP) of domestic revenues,with the bouyancy rising to 1.77 in 1975, from an average of 0.82 duringthe 1972-74 period. However, in the subsequent two years, the averagebuoyancy fell to only 0.74, primarily as a result of slow growth in collectionsfrom the income and wealth taxes. The buoyancy of the sales tax, Colombia'ssecond most important tax in terms of revenue produced, declined in 1976,after having increased strongly in both 1974 and 1975, but showed someimprovement in 1977, rising to slightly above pre-1974 levels.
42. The slow growth in receipts from the income and wealth taxes duringthe last two years is a matter of serious concern. While these taxes havedeclined in importance in the country's overall tax structure in recent years,they still account for about 40% of total current revenue and together providetwice the revenue of the next most important single tax. Between 1975 and1977, the ratio of income and wealth taxes to GDP declined from 4.3% to 3.3%,a level lower than that obtained before the 1974 tax reform. The slow growthin receipts from these taxes in recent years can largely be explained by weak-nesses in tax administration and by deficiencies in the system for collectingthese taxes. These deficiencies relate to the method of payment, whichinvolves long lags, and to the lack of provision for asset revaluation and foradjustment of nominal values for inflation--particularly as regards to exemp-tions, deductions and the definition of tax brackets. Data showing a declinein the incidence of tax filing and an increase in the proportion of taxreturns disputed by the taxpayer, are evidence that the high inflation ratesof the last two years, without appropriate adjustments in the tax system,probably resulted in an increase in tax evasion. Nontax receipts, comprisedmainly of administrative fees and fines, declined in nominal terms in 1975 and1976, and although they increased moderately in 1977 (to Col$1.2 billion),they were still below the 1975 nominal level.
1/ Domestic revenues in this report are defined as total revenues (includingnon tax revenues) exclusive of revenues from the special exchange account.
- 26 -
b. National Government Expenditures
43. National Government expenditures for consumption and investment didnot keep pace with GDP growth and their share declined from 9.7% in 1972-74,to 8.4% in 1976, and to 7.9% in 1977. While current expenditures fell onlymarginally, relative to GDP, from 5.9% in 1972-74, to about 5.6% in 1977, thecapital expenditures GDP share (including capital transfers) declined markedlyfrom 3.8% in 1972-74 to 2.3% in 1977. Expenditures on wages and salaries,inclusive of social security contributions, grew substantially more slowlythan other current expenditures and their share declined from 53% in 1974 toonly 39% in 1977. This reflects the limited wage adjustments which took placeduring this period and the policy of decentralizing the provision of educationand health services to the local governments. The decentralization process,which started in 1975, has resulted in rapid increases in the transfer offunds to departments and municipalities. These transfers nearly doubled from1975 to 1977, reaching Col$12 billion in the later year - equivalent to 30% ofNational Government total current expenditures. Other current transfers,particularly to decentralized agencies and the private sector, have alsoincreased as a percentage of total current expenditure since 1975. Thesetransfers have been directed to compensate for operating losses of some publicenterprises and to subsidize private activities, particularly the privatelyoperated public transport system.
44. Direct investment expenditures have accounted for a decreasingproportion of total National Government capital expenditures in recent years.Most capital expenditures have taken the form of transfers to decentralizedagencies and to a lesser extent to local governments. Reflecting the re-strictive expenditure policy of the past two years, direct capital expendi-tures have grown in nominal terms at a 5% average annual rate, and, as aresult, their share on total capital expenditures declined from 13% in 1975,to 11% in 1977. Capital transfers have also grown relatively slowly, at 14% ayear from 1975 through 1977, with transfers to local governments having beenfrozen at a level of about Col$1.0 billion since 1975.
3. The Decentralized Agencies
45. The decentralized agencies play an important role within the totalpublic sector. Most of these agencies depend administratively on NationalGovernment ministries, although a number of them operate at the local govern-ment level. While the operating receipts of these agencies increased onaverage by 47% per annum in 1976 and 1977, to 40% of total public sectorrevenues, their operating expenditures grew still more rapidly (66% perannum) and their combined operating surplus declined to 0.5% of GDP in 1977from 0.8% in 1976, and 1.1% in 1975. As a result, their operating surplusfinanced only 14% of their combined investment during these two years,compared with 30% for the two-year period 1974-75. The favorable growth inrevenues of these agencies reflects the sizeable increase in prices chargedfor the services they provide. The 2% per month increases in water andsewerage rates in recent months, the 37% average increases in electricity
- 27 -
rates in 1977 by some electric companies--with similar increases programmedfor 1978--and the advances made in railroad and bus charges, stand out in thisrespect. Overall, the increases in rates charged for services providedrepresent a substantial achievement for these agencies. The exceptionalgrowth in current expenditures by the decentralized agencies, on the otherhand, was largely caused by increased imports of food by IDEMA and petroleumby ECOPETROL.
46. Expenditures on fixed capital formation by the decentralizedagencies grew in nominal terms by 24% per annum in 1976 and 1977, reachingalmost Col$31 billion in 1977. This represents an increase of about 5% perannum in real terms. The two single largest investing agencies in 1977 werethe State petroleum company (ECOPETROL), which invested Col$6.0 billion, andthe housing institute (INSCREDIAL), which invested Col$3.2 billion. Otheragencies with large investment programs were the municipal enterprises ofBogota and Medellin which had combined outlays of Col$5.3 billion, theelectricity concern Interconnection Electrica, Col$2.0 billion, and themunicipal water and sewerage concern of Bogota, Col$2.0 billion.
E. Financial Savings and Credit
47. As a consequence of the strong increase in domestic income, savingsflowing into the financial system in Colombia 1/ increased by 40% and 38%,respectively, in nominal terms in 1976 and 1977, despite the increasingly negativereal return on savings paid by financial institutions. These savings reacheda peak 12-month rate of increase of 50% in June 1977. Because of uncertaintiesregarding future inflation rates and the lack of differentiation in interestrates by maturity, a high proportion of financial savings occurring during the1976-77 period was placed in short-term time deposits or other short-term
savings instruments. Prior to 1977, certificates of deposit of savings andloan corporations carrying monetary correction (UPACs) were highly favored bysavers. When the 90-day dollar-denominated exchange certificates entered themarket in early 1977, they immediately became preferred savings instrumentsbecause of their high return, protection against devaluation and de facto taxfree status. They attracted large amounts of savings away from otherinstruments, and probably from the extra-bank market as well, because of theseadvantages.
48. Despite high inflation rates and excess demand for credit, interestrates on both saving and lending were left virtually unchanged during thepast two years (with the exception of rate reductions in certain directedcredit lines, e.g., Agricultural Development Fund). As real interest ratesbecame increasingly negative in late 1976 and in 1977, saver's preference forholding liquid assets increased, limiting further the availability of long-terminvestment funds. This, together with the general tightening of credit,forced investors either to roll over their short-term borrowings or to enterthe high cost extra-bank market to cover their investment financing needs.Moreover, with excess demand for credit at the negative real interest rates,the function of allocating credit was transferred from the market place to thefinancial institutions, and to the Government through the system of directedcredit. In addition, the extra-bank market increased in importance. Theproblem of negative real interest rates was apparently considered by
1/ Including quasi-money and other instruments of financial saving.
- 28 -
the authorities to be the result of transitory phenomena, i.e., the highinflation resulting from temporarily high world coffee prices and drought-realted supply shortages. Therefore, they chose to allocate credit directlyduring this period, rather than to allow interest rates to rise and possiblychoke off investment demand. While the supposition regarding the transitorynature of the problem proved correct, the costs of this policy included, interalia, greater concentration of credit among borrowers, discrimination againstsmaller borrowers, incentives for increased capital intensity, probablediversion of borrowed funds to non-investment uses, and erosion of the realvalue of the special development funds, e.g., Agricultural Development Fund(FFAP), Private Investment Fund, etc.
49. The Government introduced a broad range of monetary measures in 1976and 1977 to deal with the accelerating inflation. In 1976, the Governmentfocused on reducing rediscounting by the commercial and specialized banks,on raising reserve requirements to limit secondary expansion of the moneysupply and on reducing public sector borrowing from the Central Bank.Stronger measures were needed in 1977, however. In order to further curb theexpansion of credit, reserve requirements of commercial and specialized bankswere raised again in January 1977, and, in addition, a 100% marginal reserverequirement was placed on increases in commercial bank deposits above theDecember 31, 1976 level. As noted earlier, coffee exporters, and exportersof certain other goods, were required to accept certificates of exchange inlieu of cash payment for exports as a means of delaying the monetization offoreign exchange receipts, and the Coffee Federation agreed to invest alarge portion of its share of the coffee proceeds in US dollar-denominatedCentral Bank bonds, the proceeds of which were frozen in a special accountin the Banco de la Republica. These measures were supplemented duringthese two years by the trade and exchange rate actions mentioned earlierwhich were motivated also by the need to reduce monetary growth.
50. As a consequence of Government measures to limit credit expansionduring 1976 and 1977, net financial system credit - including the specializedbanks - increased by only 22% per annum, with credit to the private sector, 93%of the total, expanding by 23% per annum. This represented no significant realincrease in credit to the private sector. Moreover, part of this credit expansionrepresented the conversion of external credits held by IDEMA and the ElectricityDevelopment Fund to domestic sources, which did not signify a net increase incredit. The extent to which other foreign credits were "substituted for"by domestic credit is unknown, however, it was likely significant - especiallyin export and import credits - since domestic real interest rates were highlynegative and the Government was discouraging foreign borrowing for monetary *
policy reasons. Long-term credit declined from 33% of total banking systemcredit in 1974 to 21% in 1977, with a corresponding increase in short-termcredit to 62%-ft6m 51% of the total. Medium-term credit continued at about16% of total credit.
51. As a result of these actions, a lower rate of international reserveaccumulation, and an increase in food supplies on local markets owing to afavorable second semester harvest and increased food imports, inflation declinedsharply beginning in July 1977. There was virtually no change in the consumer
- 29 -
price index between June and December 1977, and for the full year the infla-tion rate was 29%. The favorable effect of increased food supplies on pricescan be seen in the behavior of the foodstuffs component of the consumerprice index. During the second half of 1977, food prices fell by 4.3%,while the prices of housing, clothing and miscellaneous goods--the othercomponents of the index--rose by 7.9%, 9.2% and 8.7%, respectively. Monetaryexpansion slowed during the second half of 1977 as well, reflecting the tightmonetary controls. For the calendar year the increase in the money supply(MI) was 31%, compared with an increase of 44% for the year ending June 1977.
F. Developments in 1978
52. Developments in the external sector have continued to exert a stronginfluence on the Colombian economy in 1978. Coffee prices, although graduallyweakening, have remained well above historical levels, 1/ and coffee exportvolumes have risen sharply. Consequently, receipts from coffee exports havebeen sustained at high levels, and despite an apparent rapid increase inimports, the trade account has registered a sizeable surplus. Colombia con-tinued to accumulate foreign exchange reserves during 1978, although at areduced rate compared with 1977. At the same time, food production apparentlyreturned to normal levels in the first harvest of 1978, as favorable weatherconditions prevailed in the major agricultural areas of the country. Thestabilization policies were continued in force with only minor exceptions,despite the slower rate of international reserve accumulation and the increasedfood supplies. As a consequence, inflation fell to 11.5% for the 12 monthsending in July 1978, before rising again to reach 17% for the 12 months endingin November. Inflation is not expected to exceed 18% for the full calendaryear.
53. Public sector current revenues increased sharply in 1978, primarilyas a result of strong increases in indirect taxes, especially sales taxesand customs duties, and in receipts from the special exchange account. Theincrease in the latter was primarily the result of increased earnings onforeign exchange reserves. Receipts from the coffee tax rose only moderatelyas lower average coffee prices nearly offset higher export volumes. Althoughdirect tax receipts increased more rapidly in 1978, the buoyancy of thesetaxes to GDP seems to have remained below one. An adjustment to the wage andsalary levels of civil servants in May 1978, retroactive to January 1978,contributed to an estimated 40% rise in current expenditures. Public invest-ment expenditures rose sharply also, as the public sector accelerated itsspending on energy sector projects and on projects designed to expand theavailability of economic and social services in rural and urban low incomeareas. Public investment expenditures are expected to continue to riserapidly over the next several years in response to the need to acceleratedevelopment of energy resources and to improve economic and social infra-structure. In contrast, prospects for public acceptance of further tax
1/ New York spot quotations on Colombian coffee had declined to US$1.80/lbby August 1978, from US$2.11/lb in December 1977.
- 30 -
increases appear modest. At the same time, it is likely that receipts fromthe coffee export tax will decline as a result of recent trends toward lowerinternational coffee prices. Unless tax administration improvements areforthcoming and new revenue sources found, the public finances coulddeteriorate substantially over the medium term and become a significantconstraint on accelerated growth and economic stability.
54. Colombia's balance of payments is likely to register its fourthconsecutive surplus in 1978, largely as a result of continued strength inthe trade account, i.e., primarily in coffee exports. The trade surplus isexpected to decline in 1978, however, and with rapidly rising factor andnonfactor service payments, the current account surplus will be considerablyreduced from the record 1977 level. The outlook for noncoffee exports in 1978is less favorable. Data on exchange surrender of noncoffee exports coveringthe period January through October indicate less than 10% growth in thenominal value of these exports compared with the similar period of 1977.Probably the main reason for the lack of growth of these exports has been thedisincentive provided by the overvaluation of the Colombian currency broughtabout by an extended period of relatively high domestic price rises, with onlymoderate adjustments in the exchange rate. By June 1978, the real effectiveexchange rate index (1970=100) had fallen to 61.1, compared with 77.9 onaverage for 1977. The policy of slow movement of the exchange rate wasmodified in August 1978 and, as a consequence, registrations of non-coffeeexports, an indicator of future trends in these exports, began to accelerate.Because of the lag between export registrations and the actual export of goodsit is unlikely that this will significantly affect receipts from these exportsin 1978, however, it does presage more rapid growth for 1979.
55. The high incomes from coffee, together with further recovery inboth private and public investment, should provide the stimulus for continuedstrong growth in real GDP in 1978. A rate of growth somewhat above 6% islikely. The agricultural sector should register strong growth as a resultof the favorable weather conditions this year, and the light manufacturing,construction commercial and personal service sectors of the economy willprobably grow rapidly because of strong growth in domestic demand. As aconsequence, it is expected that the high employment rates of 1977 will besustained.
- 31 -
CHAPTER III
DEVELOPMENT STRATEGY AND SECTORAL GROWTH PROSPECTS
A. Development Strategy
56. The development strategy embodied in the 1975-78 Development Planaimed at accelerating the rate of growth of GDP and at distributing the benefitsof such growth more equitably. This was to be achieved by increasing theallocative efficiency of the economy through greater reliance on market forces,by providing incentives for increasing private sector investment, by expandingeconomic and social infrastructure, and by improving public services providedto the poorest half of the population. Substantial progress has been made incarrying out this strategy during the past three years. Although sidetrackedby subsequent events, the fiscal, monetary and trade reforms of 1974 set thestage for increases in economic efficiency and private investment. Publicsector investment has focused increasingly on projects designed to alleviaterural and urban poverty and on expanding and improving infrastructure. Compre-hensive integrated rural development and nutrition projects aimed at increasingincomes and welfare of the lowest income groups have been introduced. Urbandevelopment projects designed to provide improved services and employmentopportunities to residents of slum areas in Colombia's major cities have beeninitiated to alleviate urban poverty. These programs have been complemented bypolicies to encourage the development of small- and medium-scale enterprisesand to decentralize industry away from the three largest cities. The latterpolicy, together with credit programs to increase output and employment inagriculture, has been designed to alleviate rural poverty and stem rural/urbanmigration, thereby reducing social and economic pressures on the cities.Public sector infrastructure investments have concentrated on improvements andextensions to the country's highway and communication systems. Specialpriority has been given to the development of domestic energy sources toreduce the country's growing dependence on imported oil.
57. These advances occurred despite the fact that the economic dis-locations caused by the world recession of 1974-75 and the subsequent highcoffee prices gave rise to a greater concentration of economic policy onshort-term management problems, to the detriment of measures to further thecountry's long-term development effort. More specifically, these dislocationslimited investment, especially public investment, and required temporarysuspension of some of the measures designed to free the price system andstimulate growth of noncoffee exports. Also, the recovery of GDP growththat occurred in 1976 and 1977, was based largely on greater utilization ofinstalled capacity in response to rising consumer demand, and not on increasesin productive capacity as a result of greater investment. The developmentchallenge now facing Colombia is to restore economic growth to levels consis-tent with high rates of employment and to re-establish those policies andprograms designed to spread the benefits of growth more equitably.
- 32 -
58. The achievement of high economic growth rates in the future willprobably require greater reliance than over the last several years on thenoncoffee export-led growth strategy followed during the 1967-74 period.This strategy emphasizes the provision of incentives to encourage exports,especially of manufactured and noncoffee agricultural products, and a moreactive participation of the public sector in providing the needed infra-structure and social services. It also entails the provision of adequateincentives for private investment in order to encourage increases in effi-ciency and output in the productive sectors of the economy. This strategywould relieve the foreign exchange constraint which could develop as coffeeexport receipts decline and take up the slack in aggregate demand resultingfrom the drop in coffee incomes, thereby providing the required ingredients
for economic growth. Improvements in the welfare of the lowest income groupswould result from increased employment opportunities and expansion of govern-ment programs to upgrade public services. While the success of this strategydepends on favorable developments in Colombia's major trading partners,internal policies must assure the provision of proper incentives, and thestructural bottlenecks to development which have multiplied in recent yearsmust be removed.
59. The most important of the potential constraints to future growth inColombia is a lack of sufficient energy. Energy imports (petroleum) areexpected to increase rapidly during the next several years, even assuming thecountry's energy development programs are accelerated, and by the early 1980sare expected to absorb at least 15% of the country's total export proceeds.In the absence of rapid development of additional energy resources, theforeign exchange constraint and the lack of sufficient energy resources couldseverely limit economic growth by the mid-1980s. While Colombia has anabundance of undeveloped primary energy resources, present ongoing and proposedprograms in the energy sector appear just sufficient to deal with the mountingenergy problem, and any slippage or unforeseen delays in these programs couldhave serious consequences for economic growth. Since the country's energydevelopment strategy involves several unknowns, e.g. the availability ofadditional petroleum reserves, the marketability of coal, the costs of variousenergy alternatives, etc., such delays and slippages could very well occur.It would seem important, therefore, that the highest priority be assigned tothe energy program and that efforts to develop alternative sources of energybe stepped up without delay.
60. Next to energy development, the promotion of noncoffee exports wouldappear to be most important for Colombia's future economic growth prospects.Probably of greatest significance in explaining the country's success withexport expansion in the 1967-74 period was the incentive provided by theperiodic adjustments to the exchange rate. Moreover, when these incentiveswere decreased after 1975, noncoffee exports stagnated. With domestic priceincreases expected to exceed those of Colombia's major trading partners,at least for the next few years, the reestablishment and maintenance of aproper exchange rate would appear crucial for the success of an export-ledgrowth strategy and encouragement of efficient import substitution industries.Also, with the accumulation of foreign exchange reserves having slowed and
- 33 -
inflation having subsided, there would appear to be scope for more rapidadjustment in the exchange rate, without sacrificing progress in reducing therate of inflation.
61. The incentives provided through fiscal and credit measures andthrough other export promotion efforts are also important to future highrates of growth of noncoffee exports. However, since the fiscal incentives(CATs) impinge on successful development of the public finances and the creditincentives interfere with the efficient allocation of resources, these incen-tives may be considered less desirable than that provided through exchangerate movements. They should probably be used, as they have been in thepast, only to complement exchange rate incentives and to foster growth ofexports of goods in which Colombia has a comparative advantage.
62. In addition to the exchange rate, credit, and tax incentives, exportpromotion efforts may need to be expanded to encourage the diversificationof both export products and markets. Substantial advances were made byColombian exporters in Andean Regional and Western European markets in thepast several years, and the future potential in those markets appears good. Inaddition,the Caribbean market would seem to be a potentially favorable outletfor some of Colombia's agricultural products, as would markets in some of theCentrally Planned countries of Eastern Europe. The search for new markets isparticularly important at this time because of the growing protectionisttendencies in some of Colombia's major trading partner countries.
63. Investments in infrastructure, especially railroads, highways andports are urgently needed and should receive high priority. Inadequatetransport services, particularly by rail and highway, are a constraint toeconomic growth and the service is deteriorating. The railroads are indisrepair, with derailments and delays frequent. Much of the rolling stockis out of commission because of lack of maintenance and spare parts. Asa consequence, the railroads are operating far below capacity and rail trans-port costs to the user are high. In addition, service needs to be extendedinto new areas, particularly into the Cerrejon coal mining area to provide themeans for transporting the coal to port. The decision on this line will haveto await the feasibility study establishing the exact location and extent ofthe coal deposits at Cerrejon and the appropriate port for shipping. Colombia'shighways are also in poor condition. Maintenance has been generally inadequate,primarily because of a chronic lack of funds for this purpose. Improvementsto the highways connecting Bogota, Medellin and Cali are needed and an expandedprogram of feeder roads connecting isolated rural areas with the centralhighway network would seem to merit high priority. The ports also need to beexpanded to handle the increased traffic projected for the next decade,although the constraints do not appear to be as serious as in the case of therailroads and highways. Transport sector planning, incorporating trends ineconomic growth, geographical dispersion of economic activity, product mix,export diversification, etc., would seem to be a prerequisite for optimumdevelopment of the country's transport system.
64. The revitalization of public sector investment appears also tobe important to attaining accelerated economic growth in the future. Inaddition to the large investment needs in developing energy resources, a
- 34 -
significant part of which will have to be provided by the public sector, thereare sizeable investments in infrastructure (highways, railroads, ports, waterand sewerage, communications, etc.) which will be required to eliminatebottlenecks to growth in the productive sectors of the economy. In addition,high priority should probably be given to the large resource-based projectswhich have the potential for substantially increasing Colombia's exportsin the mid to late 1980's, e.g., coal and gas projects. Further publicinvestment in the social sectors (education, health and nutrition, urbandevelopment), although apparently somewhat limited currently by institutionalcapacity constraints, may be required to maintain the flow of social servicesto the lower income segments of the population.
65. The principal task facing the new administration in this regard isto increase public sector savings sufficiently to finance the substantiallyhigher levels of public investment expected in the future, without excessiverecourse to Central Bank credit. This would require improvements in taxadministration and possibly some expansion of the tax base if the elasticityof the income and wealth tax cannot be increased. Measures to adjust the taxsystem for inflation, including revaluation of assets for purposes of thewealth tax, and reduction in the lag in income tax payments, would mostlikely have a strong effect on total tax collections. In addition, the baseof the sales tax could be widened either by extending the coverage of thecurrent sales tax to the retail level or by adding a general retail sales tax.The latter has the advantage of being somewhat easier to administer. Continuedadjustments in the prices of goods and services provided by the decentralizedagencies to bring these prices to levels sufficient to cover costs as wellas part of the investments of these agencies, would also appear importantfor maintaining strong public finances. While substantial progress has beenmade during the last two years in raising the prices of some of the moreimportant of these services and products (e.g. gasoline and other petroleumproducts, water and sewerage, transportation and electricity), many of theseitems are still sold at prices below cost and the responsible agencies requirelarge financial transfers from the Central Government. In some cases, thesubsidies being provided on these goods accrue as much or more to thewealthier segments of Colombian society. Since the decentralized agencieswill likely be carrying out 80% or more of the large public sector investmentprogram over the next several years, strengthening the revenue base of theseagencies is critical.
66. Equally important is maintaining control over current expenditures.In this regard, Colombia's record is outstanding. During the recent 1976-77period of high inflation, current expenditures of the public sector increasedby only 2% in real terms, excluding the sharp rise in expenditure on petroleumand food imports. Holding down future increases in current expenditures maybe more difficult, however. The larger public sector investment programenvisaged for the next several years will probably require substantial addi-tions to payrolls and other current expenditures, and public employees willundoubtedly demand higher wages, since their real wage has declined substan-tially in recent years. Because of the wage increase granted this past May,current expenditures of the National Government have risen rapidly already in
- 35 -
1978. While some increase in current expenditures may be unavoidable, everyeffort shbuld be made to limit real growth in these expenditures during thenext several years. Also, since any measures taken to strengthen the publicfinances will probably take time to implement, it may be desirable to move
quickly in adopting such measures so as to ensure a strong financial base tosupport the country's long-term investment program.
67. The increasing complexity of government programs, especially with theemphasis on social sector projects in recent years (e.g., integrated rural de-velopment, comprehensive health and nutrition projects, urban developments, etc.)has required much greater concentration of institutional inputs per unit ofinvestment. For this reason there are limits to the number of new projectsmanageable at any one time by the public sector. While this is less of aproblem in the productive sectors and for economic infrastructure projects,the magnitude of the public investment required and the lack of technicalskills in many important fields (especially energy) will most likely putserious strains on the absorptive capacity of many public sector institutions.Measures to deal with this problem, including upgrading of staff and insti-tutional reorganization where necessary, should be planned and carried outin advance of the investment increases to avoid delays arising because ofadministrative problems.
68. Rapid increases in productive capacity and in productivity in thedirectly productive sectors of the economy will be required during the nextseveral years in order to sustain high GDP growth rates without recurrence ofexcessive inflation. Future productivity gains in the agricultural sector 1/are particularly important because of the powerful influence of rising foodprices on the cost of living. The key to increasing both productive capacityand productivity lies in providing the proper incentives for investment andfor increasing the allocative efficiency of the economy. Public policy oninterest rates, credit and pricing are of great importance in this regard.With the decline in inflation since mid-1977, real interest rates in Colombiahave become positive and household savings are expected to increase in thefuture. This should result in a greater supply of investment resources, agrowing proportion of which may be available in the form of long-term credit.Since private investment demand is also expected to be high, the benefits tothe economy of flexible interest rates in allocating these savings to the mostproductive uses would appear to be considerable.
69. In addition, this would seem to be an appropriate time to begindismantling the existing cumbersome controls over interest rates and creditand the forced investment requirements on financial institutions. The declinein monetary expansion arising from reserve accumulation should permit non-inflationary real increases in credit to the private sector, and there shouldbe scope for less restrictive monetary policies to allow this expansion totake place. Since investment operates with a lag with respect to changes inthe availability and cost of credit, modification in monetary policy wouldneed to be timed to prevent a decline in economic activity from occuring oncethe coffee boom-induced growth in internal demand slacks off. Price policy is
1/ A separate report on Colombia's agricultural sector is in preparation.
- 36 -
especially significant with respect to the agricultural sector, since amajority of the price controls in effect cover basic food items. In general,price policy, as well as policies related to interest rates and credit, couldprobably be most effective by ensuring maximum reliance on market forces,rather than by attempts to channel investment through direct controls.
70. The acquisition of foreign investment is another effective meansof increasing productivity, especially in the industrial sector. Foreigninvestment bringing new technology and international marketing expertise madean important contribution to the rapid growth of industry and manufacturedexports in the 1967-74 period and could play a similar role in the future.Although there are certain restrictions on foreign investment, including theprohibition of such investment in the three largest cities (Bogota, Medellinand Cali) as a means of decentralizing industry and the limitation on profitremittances under the Andean Pact agreement, the Government is desirous ofattracting foreign investment in a broad range of industrial activities. Theadvantages of a highly skilled labor force, a competitive exchange ratepolicy, proximity to growing South American markets and a stable democracyshould make Colombia an attractive location for foreign industry.
B. Energy
71. Energy shortages could become a serious constraint on growth bythe 1980s unless efforts to develop alternative sources of energy areaccelerated. Although endowed with an abundance of primary energy resources,including hydro power, natural gas, coal and most probably additional petro-leum, Colombia became a net importer of energy in 1976. In that year,imports of crude oil - the country's dominant energy source - exceeded exportsof petroleum-based products for the first time since oil was first producedcommercially in the country in the early 1920s. The deficit widened furtherin 1977, with crude petroleum imports reaching an estimated US$131 million,and will continue to increase rapidly over the next several years. Even withaccelerated development of additional energy resources, including expecteddiscoveries of new petroleum reserves, petroleum imports may be expectedto average about 25 million bbls/year during the next decade at an averageannual cost of US$470 million in current prices. Any significant delaysin developing additional energy supplies, however, could have seriousadverse effects, beginning in the early 1980s, on economic growth, employ-ment and on the economic well-being of all Colombians.
72. Colombia's present energy problem can be traced back to the 1960swhen insufficient exploration and development of primary energy resourceslaid the basis for the current shortages. The abundance of low cost energyfrom petroleum discouraged the development of alternative energy sourcesand institutional changes within the petroleum sector discouraged explorationfor additional oil reserves. As a result, the discovery of new crude oilreserves lagged behind the rate of production required to meet growingdomestic and export demand. Production peaked at 80 million bbls in 1970, andbegan to decline thereafter at an average annual rate of 7% per annum. Hydropower generation of electricity increased at a rapid rate, about 9.5% perannum, during the 1960s, but accounted for only about 10% of total energyoutput by 1970.
- 37 -
73. The deterioration in the energy balance accelerated markedly in
the early 1970s. Continued rapid economic growth and sharp declines inreal petroleum prices caused energy consumption to expand sharply. Furtherincreases in hydro power generation covered part of these additional needs,however the imbalance in the demand and supply of petroleum continued torise rapidly between 1970 and 1974. When crude oil prices paid to foreignproducers in Colombia failed to follow international price increases inlate 1973, investments in exploration and development virtually stopped.
74. Major policy changes were introduced in the energy sector beginningin mid-1975 in response to the growing energy problem. Foreign firms wereencouraged to enter into association contracts with ECOPETROL to explore foroil in new concession areas. These contracts contain substantial incentivesfor the foreign enterprises and several such contracts have been awarded.Under these contracts, the foreign firm is to be paid the internationalprice for its share of the crude oil extracted from newly discovered fields.In addition, price increases have been granted for incremental crude from oldfields, and, similar price incentives have been enacted for natural gasproduction. In line with the higher prices paid to producers and in recog-nition of the substantial financial requirements of future energy sectorinvestments, a policy of gradual increases in energy prices to consumerswas adopted. with the goal of self-financing of a substantial proportionof the required investments. Between mid-1975 and late 1977, transportfuel prices were raised by 120%, household fuels by 75%, and natural gasprices by 92%. During this same period, general consumer prices rose by 71%.Gasoline prices were raised another 20% in early 1978 in further pursuitof the goal to increase these prices to international levels by the early1980s. Electricity tariffs have also been increased substantially overthe past two years.
75. Colombia's strategy for dealing with the energy problem involvesseveral components. The policy changes mentioned earlier are expected toencourage energy conservation, stimulate exploration for and developmentof oil and other primary energy resources and to finance a large part ofthe investments required. Hydro power projects are being advanced as rapidlyas possible and are expected to cover an increasing proportion of Colombia'senergy needs over the next decade. Large natural gas and coal depositsdiscovered recently along the northern coast of the country are to bedeveloped, in part to substitute for petroleum in generating electricityand in other uses, and to provide additional exports to offset the costof petroleum imports. Some foreign firms have already expressed interestin establishing a liquid natural gas (LNG) plant in the northern coastalarea, and plans are well advanced for another foreign firm to exploit thecountry's vast coal deposits in the Guajira region. Over the medium-termperiod, coal and natural gas are to be substituted for petroleum ingenerating electricity for several major industries -- steel-making,textiles, sugar refining, cement, chemicals, and others. Also, additionalhydro power capacity is expected to come on line during this period. Never-theless, some minor power shortages are probable in the early 1980s, andshould another drought occur reducing reservoir levels as happened in early1977, these shortages could become serious.
- 38 -
76. The future investment requirements for developing additional energyresources have not been accurately determined as yet. Issues such as thecost of effectiveness of various alternatives, plus issues related to theexport of natural gas and coal and to energy pricing and tariff rates, need tobe given further study. The pricing question is of special importance sinceenergy is still heavily subsidized in Colombia. Although considerable progresshas been made in raising power tariffs over the past several months, powertariff adjustments have generally lagged behind cost increases in recent yearsand electricity prices are low. In any event, preliminary estimates indicatethat the required investments in energy could run as high as US$8 billion incurrent prices in the next decade. Even under optimistic assumptions regardingforeign private investment, suppliers credits and domestic resource mobiliza-tion in the sector, external loans of about US$4.0 billion would probably berequired during this period.
C. Manufacturing
77. Manufacturing was one of the leading growth sectors in the Colombianeconomy during the past decade. In response to development policies favoringindustrial exports during the 1967-74 period, value added in the sectorgrew by over 8% annually in real terms, and the value of manufactured exportsincreased by 50% annually. The world recession and domestic stabilizationmeasures retarded the sector's growth in 1975, however the coffee boominduced growth in aggregate demand in 1976 and 1977 caused manufacturingvalue added to recover strongly. At present, manufacturing constitutes about20% of GDP and supplies 35% of the country's noncoffee exports. Exports ofmanufactures have increased only moderately, however, during the last twoyears as a result of reduced incentives for exporters. Since manufacturingis expected to be a leading growth sector in the future, policy measures toencourage industrial expansion should be of high priority.
78. Probably the major problem facing Colombia's manufacturing sectorduring the past few years has been the lack of sufficient investment resourceswith which to expand productive capacity. Traditionally, industrial investorsin Colombia have relied heavily on retained earnings for financing theirinvestments, however, profits have been increasingly squeezed in recent yearsby a tax system which does not permit adjustments for inflationary increasesin asset values, depreciation charges, etc. Also, industrial enterprises havefelt obliged to pay out increasing proportions of their earnings in order tomaintain dividends in real terms. Consequently, retained earnings have fallenand industrial firms have increasingly had to enter the financial marketseeking investment funds. At the same time, however, the availability ofcredit, especially long-term credit, to the private sector from the financialmarket has become increasingly limited. As a result, the major source of long-term credit for industrial financing in the past few years has been the loansprovided by external lenders through the development finance corporations.Also, rollover of short-term credit and high cost borrowing from the extra-bank market have become important, although maybe not very desirable, means ofinvestment financing in Colombia as well. Now that inflation has subsided,the lifting of controls over interest rates should serve to increase the flow
- 39 -
of funds available for private investment and improve the allocation of thesefunds among competing uses. Eventually, continued economic stability andconfidence should result in an extension of the maturity structure of bothsaving and lending. There appears to be scope for strengthening othersources of industrial financing, also, by increasing the transfer of savingsfrom the household sector - or from the productive sectors with lower
financing needs - to industry via the sale of long-term bonds and shares.This could probably be achieved by strengthening the capital market andby increasing the relative profitability of equity investments and long-termdebt instruments. Current tax and other practices, which render bond andequity investments relatively unattractive, should be reviewed with a viewto removing these obstacles to investment.
79. Small- and medium-sized firms have been especially hard hit by thetightness of investment funds, and the amount of credit (and technicalassistance) available to these firms should be expanded in order to preventthe further concentration of credit among large firms that appears to haveoccurred in recent years. Small- and medium-scale enterprises could partici-pate more fully in filling domestic demand for such goods as processed food,clothing, etc. which would otherwise need to be imported. If the properincentives are provided, the manufacturing sector, which accounted forone-fifth of GDP in 1976, should increase its participation in economicgrowth in the future and contribute to further diversification of productionand exports, and to increased employment.
- 40 -
CHAPTER IV
GROWTH PROSPECTS AND BALANCE OF PAYMENTS OUTLOOK
A. Growth Prospects
80. Colombia has demonstrated for over a decade that a coherent develop-ment strategy is possible and results in improved output and social welfare.Together with the country's strong resource base and its high level of inter-national reserves, this leads to optimism about the future. The economyshould be able to sustain growth rates of 6% to 7% during the next severalyears, barring any major economic reversal in the developed world (see projec-tions in Table 7). Strong increases in noncoffee exports and in both privateand public investment, should provide the impetus to growth as the economyreturns to the favorable pattern of development of the 1967-74 period.Achieving these growth rates may require an increase in investment to about23% of GDP on average during the next five years, compared with an average of18% in recent years. Gross national savings would have to average about 21%of GDP annually to avoid too large an increase in the country's externalindebtedness. Assuming that the public finances are strengthened throughadditional fiscal measures, public investment could average about 7% of GDPannually during this period. The maintenance of higher growth over the nextseveral years is expected to make it possible to sustain high employmentlevels and to achieve increases in per capita incomes of about 3% or 4% perannum.
81. Manufacturing is expected to be the leading growth sector of theeconomy in the future with output increases expected to average 7-8% annually.Agricultural output should also grow more rapidly, averaging about 5% perannum, assuming adequate incentives are provided to farmers to encouragetheir use of more modern technology. Once the large coal, nickel and naturalgas projects come on stream in the mid-1980s, mining output should expandrapidly. Also, the declining trend in petroleum production should be reversedby the mid-1980s if the present acceleration in exploration activity issuccessful in identifying new sources of crude petroleum. Although coffeeprices are expected to decline in coming months, the large cushion of inter-national reserves built up over the past two years and the growth in exportsshould ensure against any serious shortage of foreign exchange in the mediumterm.
B. Public Sector Investment and Its _iancing
82. Public sector investment is expected to increase rapidly over thenext several years, to 7% of GDP by 1982 as compared with 5.4% of GDP in 1977(see projections in Tables 8 and 9). Total resource requirements of thepublic sector--fixed and financial investment plus debt amortization--areexpected to reach about 9% of GDP. The major emphasis in public sector fixedinvestment is expected to be on energy sector projects, with nearly 65% of allprojects for which Colombia is seeking external financing over the next two
Table R - COLOMBIA: NATIONAL ACCOUNTS 1976, 1977 AND PROJECTIONS 1978-85
(In Billions of 1970 Colombian Pesos)
Rate of Rate of
Growth Growth1976 1977 1978 1979 1980 1982 1985 1977-82 1977-85
Gross Domestic Product 183,023.0 193,797.8 206,346.4 220,182.8 235,550.1 269,670.0 330,614.7 6.8 6.9Terms of Trade Adjustment 5,286.8 8,483.8 4,628.1 1,532.3 377.2 -555,8 641.5 - -Gross Domestic Income 188,309.8 202,281.6 210,974.5 221,715.1 235,927.3 269,114.2 331,256.3 5.9 6.4
Imports 23,813.4 24,011.0 26,416.6 29,092.1 31,679.9 36,648.6 44,782.7 8.8 8.1Exports -21,846.1 -21,456.9 24,554.1 25,836.7 -28,467.9 -33,694.3 -40,227.0 9.4 8.2Exports (Import Capacity) -27,132.9 -29,940.7 29,182.2 27,369.0 -28,845.1 -33,138,5 -40,868.5 2.1 4.0Resource Gap -3,949.5 -5,929.7 2,765.6 1,723.1 2,834.8 3,510.1 3,914.2 - -
Consumption 148,855.2 156,941.4 164,069.0 174,884.4 185,352.9 209,174.2 255,241.6 5.9 6.3Investment 35,505.2 38,410.5 44,139.8 48,553.8 53,409.1 63,450.1 79,928.9 10.0 9.2Resource Availabilities 184,360.4 196,351.9 208,208.9 223,438.2 238,762.0 272,624.3 335,170.5 6,8 6.9
Gross Domestic Savings 39,454.6 45,340.2 46,905.5 46,830.7 50,574.4 59,940.0 76,014.7 5.7 6.7 .Factor Service Income /1 -1,506.5 -1,654.9 -1,443.3 -1,298.2 1,417.2 -1,965.6 -3,175.7 3.5 8.5Net Current Transfers 71 117.1 124.1 127.6 131.8 136.7 147.3 164.6 3.5 3.6Gross National Savings 38,065.2 43,809.4 45,589.8 45,644.3 49,239.9 58,121.7 73,003.6 5.8 6.6
/1 Converted from US$ to Col$ at constant 1970 exchange rate.
Source: Banco de la Republica and mission estimates.
L'ablo g - COLO0,IA: PUBLIC SECTOR INVESTIENT PROCRAM AND ITS FINANCING, 197582
(In Millions of Colombian Pesos)
Actual Estimated Prolected1975 1976 1977 1978 1979 1980 1981 1982
Resource Requirements 45.500 51,153 59.654 69,213 86,239 106,422 133.044 166.043
A. Cross Fixed Investment 28,375 34,663 39,704 50,413 67,181 84.925 108.4Q3 139.023
1. Central Government 4,651 5,481 5,806 7,413 9.581, 11,925 14,603 17,623(National Government) (1,743) (1,559) (1,912) (2,713) (3,881) (5,045) (6,003) (6,723)(hational Higlhw.ay Fund) (2,725) (3,692) (3,600) (4.300) (5,200) (6,300) (7,900) (9,900)(Social Security) (183) (230) (294) (400) (500) (580) (700) (1,000)
2. Decentralized Agencies 20,051 25,941 30,997 39,000 52,400 67,000 86,000 111,800
I s. vepartments 3,438 Z,9o Z,NUU 3,5UU 4,400 5,000 6 500 7,900 .
4. Municipalities 235 255 200 500 800 1.000 1.300 1.700
B. Financial Investment 5L886 / 6 .430 7. 150 8,000 9,000 10,000 11.500 12,000
C. Amortization 11.239 10,060 12.800 10.800 10.058 11,497 13.141 15,020
Financing 45,500 51,153 59,654 69.213 86,239 106,422 133.044 166,043
A. Public Sector Savings 23.836 3Q.75 42,494 53,461 63,746 79,143 95,356 117,275
1. Central Government 21,654 32,126 44,189 56,361 64,286 77,443 92 056 110,775(National Government) (18,731) 29.412 (40,450) 51,631 58,586 70.343 83.256 98.775(National llighway Fund) (1,732) (2,740) (4,000) (4,800) (5,700) (6,800) (8,000) (10,600)(Social Security) (1,191) (-26) (-261) (-70) - (300) (800) (1,400)
2. Decentralized Agencies 7,373 4,123 3,605 4,100 6,460 8,700 10,300 13,500
3. Departments 559 1,990 4,600 3,000 3,000 3,000 3,000 3,000
4. Municipalities -5,750 -7,364 -10,100 -10,000 -10,000 -10,000 -10,000 -10,000
B. Capital Revenue 3,305 2,458 1,5S0 4,000 4.800 5,600 7,200 8,700
C. Loan Disbursements 18,359 17,820 15 610 11,742 17,693 21,679 30,488 40,068
External 7,205 5,5C0 7,600 8,452 11,795 15,102 21,941 28,648
Internal 11,154 12,320 8,010 3,300 5,898 6,577 8,541 11,420
/I Iiecludes balarcing t'. of Col$1,525.
- 43 -
years falling within the energy sector. Other major investment programsinvolving external financing are planned for the mining, communication, andtransportation sectors and for urban and regional development. These priori-ties reflect increased concern over the country's rapidly emerging energydeficit and the need to provide economic infrastructure to facilitate futuregrowth. At the same time, however, the authorities are expected to continueto pursue the goal of providing increased services to the rural and urban poorthrough projects in agriculture, nutrition and health, and urban and regionaldevelopment.
83. Over the five year period, 1978-1982, 67% of total public sectorresource requirements could be met with public sector savings. This wouldrequire continued restraint on current expenditures, adoption of full costpricing for goods and services by the decentralized agencies and the intro-duction of measures to improve tax administration and raise additional revenue.This percentage is down from the abnormally high 71% financed in this manner in1977, but above the 1974-1976 average of 62%. External borrowing is expectedto cover 19% of public sector resource requirements during this period,compared with 13% in 1977 and 8% on average for the 1974-76 period. Domesticborrowing is expected to finance only about 8% of these requirements comparedwith 23% on average for the 1974-76 period and 13% in 1977. This level ofdomestic financing of the public sector deficit represents only 0.7% of GDPand should be manageable without recourse to credit from the Central Bank.
C. Balance of Payments Outlook
84. The increased investment associated with higher growth rates andrising incomes is expected to cause imports to grow rapidly. At the sametime, the growth of export receipts may slow, despite expected recovery ofnoncoffee exports, because of declining coffee export values. As a consequence,the current account of the balance of payment is projected to revert to a size-able deficit in 1979, which would grow to about US$850 million by 1982. Publicsector borrowing, particularly in the early 1980s, will provide most of theexternal capital inflows needed to finance the deficit on current account.Private foreign investment, mostly in the energy sector, is expected to increasestrongly also, reaching US$130 million per annum by 1982 (see projections inTable 10).
85. Exports should make a strong contribution to growth of the Colombianeconomy during the next five years, despite expected declines in coffeeearnings resulting from lower world coffee prices. 1/ The nature of theimpact on the economy of the export growth will change, however, with exportdemand flowing to the industrial and noncoffee agricultural sectors ratherthan to coffee producers. Coffee earnings are expected to decline graduallythrough 1981, rising moderately thereafter to regain 1977 absolute levelsin the mid-1980s. Colombia's coffee export volume, after rising sharply in1978 (to over 9 million 60 kilo bags compared with only 5.3 million in 1977according to official estimates) is projected to increase slowly over thenext several years in response to excess supplies on world markets and slowergrowth of production domestically. Future coffee markets will most likelybe shared among producers through an international coffee agreement.
1/ These projections assume, of course, that there is no major frost inBrazil.
Table 10 - COLOMBIA: BALANCE OF PAYMENTS 1976, 1977 AND PROJECTIONS 1978-85
(In Millions of US$)Actual Preliminary Estimated Projected
1976 1977 1978 1979 1980 1002 19R5
Current Account
Exports of Goods and Non-factor Services 2,819.9 3,426.9 3,579.6 3,592.0 4,033.1 5,217.0 7,667.7
Imports of Goods and Non-factor Services 2 319.9 2,748.2 3,240.3 3,818.1 4,429.5 5,769.6 8,402.1
Resource Balance 500.0 678.7 339.3 -226.1 -396.4 -552.6 -734.4
Net Factor Service Income -272.0 -200.0 -186.6 -178.7 -206.8 -322.3 -620.3
Net Transfers 9.0 15.0 16.5 18.2 20.0 24.2 32.2
Current Balance 237.0 493.7 169.2 -386.6 -583.2 U59.8 -1,322.5
Capital Account
Direct Foreign Investment (net) 12.0 42.0 52.5 65.6 82.0 128.2 193,9
Public Medium- and Long-term Loans (net) 121.0 193.9 192.9 220.8 349.2 856.9 1,285.1
Disbursements 272.0 367.3 431.2 506.1 671.4 1,239.4 1,720.8
Amortizations -151.0 -173.4 -238.3 -285.3 -322.1 -403.5 -435.7
Other Medium- and Long-term Loans (net) 22.1 -4.0 -27.7 -23.5 -11.6 64.4 91.2
Disbursements 87.1 55.0 63,3 72.8 83.7 110.7 154.1
Amortizations -65.0 -59.0 -91.0 -96.3 -95.3 -46.3 -62.8
Capital n.e.i. -39.0 78.0 -56.1 - - - -
Short-term/Errors and Omissions 220.0 - 209.0 - - - -
Change in Reserves (- = increase) -573.0 _803.6 - 539.8 123.8 163,6 -177.7 -247.7
Source: Banco de la Repuiblica and Bank staff estimates.
- 45 -
86. Noncoffee agricultural exports are expected to grow only moderatelyin the first two years of the 1978-82 period, largely because of weak inter-national prices and slow recovery of production of some of Colombia's majorexport crops (e.g. sugar). By the early 1980s, however, these exports shouldexpand strongly if efforts to improve agricultural productivity are increasedand if international markets remain free of import restrictions. The prospectsfor many noncoffee agricultural exports, e.g., livestock products, rice,bananas, flowers, etc., are especially good since world market prospects forthese crops are favorable and production should grow rapidly in Colombia tosupply these exports. An important condition for this growth to occur is theprovision of adequate production credit and market information to allowColombian farmers to take full advantage of available opportunities.
87. Manufactured exports are expected to resume the strong growthachieved in the 1967-74 period, increasing by about 10-15% in real terms onaverage during the 1978-82 period. This presupposes continuation of favorableexport promotion policies by the Colombian Government, including the reestab-lishment and maintenance of incentives through adjustments in the exchangerate. It also presupposes no significant relaxation of other export incen-tives granted through tax rebates or through credit, except to the extentthese are offset by more rapid peso devaluation. In addition, this projectionassumes no significant increase in trade restrictions by those countrieswhich are major recipients of Colombian exports. The development of thecountry's coal and gas resources for export should begin to influence thetrade balance favorably in the early to mid-1980s, when petroleum, coal andnatural gas projects are expected to begin producing. Coal could begin to bea significant export item by 1985, and substitute for petroleum in severaldomestic uses even earlier. Natural gas should be substituting for petroleumin domestic use also during the next several years and natural gas exports(LNG) could begin by the mid-1980s if the Government proceeds as planned withits investments in this area.
88. On the basis of the foregoing assumptions, exports of goods andnonfactor services should rise by about 9% per annum in real terms duringthe 1978-82 period. Since the decline in coffee prices is expected to offsetthe price increases on other exports, the current value of exports is expectedto increase on average only little more than in constant terms.
89. Imports are expected to rise rapidly in real terms over the period1978-82, although at a rate less than in the last two years. The accelerationof economic growth to rates of the early seventies will require relativelyhigh rates of growth of intermediate and capital good imports, and petroleumimports are expected to expand rapidly. On the other hand, the recent
acceleration in consumer goods imports should be reduced to more normallevels in the future. Food imports are expected to decline now that domesticproduction has recovered, and imports of consumer durables are likely tobe discouraged through faster rates of devaluation. Overall, imports ofgoods and nonfactor services should increase on average by about 8% per annumin real terms during the 1978-82 period. Import values, however, shouldrise by about 15% per annum, reflecting an average annual growth in import
- 46 -
prices of 6.5%, equivalent to the projected increase in the index of pricesof manufactured exports from industrialized countries. Given these trendsin the terms of trade and in export and import volumes, the resourcebalance is expected to detriorate sharply. Interest and foreign investmentincome payments are projected to increase rapidly in the years ahead, andthe deficit on current account is expected to average US$466 million duringthe 1978-82 period. After 1985 the deterioration in the resource balanceshould be reversed as a result of increased exports of coal, natural gas,nickel, etc., reduced imports of petroleum owing to increased domestic produc-tion, and a lower import coefficient resulting from less capital intensiveinvestments.
D. External Capital Requirements, Debt Management and Creditworthiness
90. Colombia is expected to continue to be a net capital importer forsome time to come. Future external capital requirements of the Colombianeconomy largely reflect the need to supplement gross domestic savings and toprovide increasing amounts of foreign exchange to finance required importsof capital and intermediate goods. Gross external capital requirements areprojected to total about US$4.5 billion in current prices during the 1978-82period, or an average of about US$900 million annually. During the 1973-77period, gross exteral capital inflows averaged US$510 million per annum.
91. Largely as a result of big joint venture projects in the miningsector, direct foreign investment should provide about 10% of total grosscapital requirements between 1978 and 1982, averaging about US$86 million peryear, compared to an average of only US$33 million in the period 1974-77.Approximately 49% of total external capital requirements, or US$441 millionannually, is expected to come from multilateral agencies and foreign govern-ments. The remaining 41% could be financed through foreign banks or viasuppliers' credits, and could amount to an average annual inflow of aboutUS$370 million.
92. Approximately 82% of total gross external borrowing would be bythe public sector or publicly guaranteed. Of the total gross borrowing bythe public sector, almost 45% would be required for the amortization of debt,whereas the remaining 55% would be used to finance the public sector invest-ment program and to channel resources through financial institutions toprovide credits for priority sectors of the economy. The public sectorwould receive about one-fifth, or US$125 million per annum of its 1978-82average annual disbursements from old commitments, whereas for the remainderof about US$600 million per annum, new commitments would have to be sought.Of these new commitments, 50% are expected to come from multilateral and 4
bilateral sources, and the remainder from suppliers' and financial creditsthrough banks and other sources.
93. Colombia's public external debt repayable in foreign currencyamounted to US$3.6 billion at the end of 1977, of which US$2.6 billion wasdisbursed and outstanding. The public debt service ratio fell during thepast two years as export growth accelerated. However, this ratio isexpected to increase during the next several years as a consequence ofslower growth of exports and rapid growth in the debt outstanding. Still,the debt service ratio should reach only 12.3% in 1982, compared with 9.9%
- 47 -
in 1977. Balance of payments prospects beyond 1982 will depend heavily onthe timely development of domestic energy sources and on progress made inexecuting several natural resource-based export oriented projects currentlyunder preparation. Given the expected continuation of sound economic andfinancial management and timely execution of the country's energy program, itshould be possible to prevent the external sector from again becoming aconstraint on economic growth and to maintain Colombia's creditworthiness forthe required external borrowing.
