PROGRAM INFORMATION DOCUMENT (PID)
APPRAISAL STAGE
September 17, 2012
Report No.: AB7126
Operation Name
Region
Country
Sector
Operation ID
Lending Instrument
Borrower(s)
Implementing Agency
Date PID Prepared
Estimated Date of Appraisal
Estimated Date of Board
Approval
Corporate Review Decision
I.
Second Programmatic Fiscal Sustainability and Growth
Resilience Development Policy Loan
LATIN AMERICA AND CARIBBEAN
Colombia
General public administration sector (40%);Public
administration- Financial Sector (40%);Non-compulsory
health finance (20%)
P129465
Development Policy Lending
MINISTRY OF FINANCE AND PUBLIC CREDIT
MINISTRY OF FINANCE AND PUBLIC CREDIT
Public Credit and Treasury,
Ministry of Finance and Public Credit
Carrera 8A No. 6-64
Bogotá, Colombia
Tel: (57-1) 381-2156 Fax: (57-1) 350-7422
mfsuarez@minhacienda.gov.co
August 23, 2012
September 17, 2012
November 20, 2012
Following the corporate review, the decision was taken to
proceed with the preparation of the operation.
Country and Sector Background
The Government of Colombia has requested a Second Programmatic Fiscal Sustainability
and Growth Resilience Development Policy Loan for US$200 million. The First DPL for
US$300 million, approved by the Board in July 2011, supported several important legislative
reforms. Building on the progress achieved under DPL I, this Program Document proposes a
second DPL supporting the sustained implementation of the legislative agenda. The request
underscores the Government’s continued interest in engaging with the World Bank to support its
efforts in improving fiscal management.
The fiscal reform program supported by the loan series seeks to enhance fiscal
sustainability and strengthen growth resilience. The program includes a series of measures
that can be grouped along three main policy reform areas: (a) budget predictability and stability,
(b) social security liability management, and (c) disaster risk financing. Under the first area, the
implementation of a fiscal rule with a stabilization fund seeks to reduce and cap the structural
fiscal deficit in the medium-term and improve the fiscal management of commodity windfalls.
A series of tax reforms aim to strengthen the sufficiency and efficiency of the tax system. These
measures will improve budget predictability and stability, which are the cornerstone for sound
macroeconomic management of an economy which is increasingly relying on commodities. In
the second area covers important legal and regulatory changes to the health system to strengthen
fiscal sustainability and budget predictability. A final set of measures are expected to strengthen
the fiscal management of natural disaster risks, including the development of a national disaster
financing strategy and measures to enhance agricultural insurance coverage within a holistic
framework of agricultural risk management.
II.
Operation Objectives
The fiscal management program supported by this operation is expected to enhance fiscal
sustainability and strengthen economic growth resilience.
III.
Rationale for Bank Involvement
The Bank is committed to a long-term engagement in support of the Government’s fiscal
management program. The proposed operation is fully consistent with the Bank’s business
model in Colombia, which emphasizes a strategic and integrated client engagement in support of
selected development outcomes through three main lines of business, including financial,
knowledge and convening services. To complement and enhance its policy dialogue on the
fiscal reform agenda, the Bank, in 2011, designed a new Fiscal Policy Programmatic Knowledge
Service (PKS) for Colombia. Under this PKS, the Bank is providing a range of analytical and
convening services in support of the formulation the Government’s envisaged reforms on the tax
and pension systems. In sum, the proposed development policy loan fits into a broader strategic
engagement of the World Bank in support of improved fiscal and risk management in Colombia.
The Government of Colombia has made substantial progress in implementing its ambitious
fiscal reform program. During the first half of the Presidential term, Congress approved a
series of major fiscal reforms, including: a fiscal rule, a reform of the royalties system, a fiscal
sustainability constitutional change, tax reforms and a health law. The Government has
proceeded prudently with the sound implementation of these legislative reforms. Fiscal reforms,
combined with strong macroeconomic management and a solid economic performance,
prompted all three major rating agencies to upgrade Colombia’s foreign-currency bond credit
rating to investment grade in 2011. In August 2012, Standard and Poor’s became the first rating
agency to raise its outlook from ‘stable’ to ‘positive’ citing the effective implementation of fiscal
reforms.
Economic growth has been accompanied by poverty reduction. Between 2002 and 2011
headcount poverty fell from 49.4 to 34.1 percent, while the proportion of the population that
could not satisfy basic nutritional needs (the extreme poor) declined from 17.6 to 10.6 percent.
Although this is a positive development, Colombia’s progress in reducing poverty, given its
strong economic performance, falls below that of regional peers. Between 2005 and 2010,
poverty reduction in Colombia was exclusively the result of economic growth rather than
reductions in inequality. This experience contrasts with that of Latin America, where falling
inequality explains about 40 percent of poverty reduction.
Colombia’s macroeconomic policy framework is deemed adequate. Medium-term fiscal
policy remains prudent, in part as a result of policy reforms supported by this operation, with
proposed fiscal adjustments already well underway. Monetary and exchange rate policies are
also supportive of macroeconomic and financial stability. Despite solid fundamentals,
Colombia’s near-term macroeconomic outlook could be adversely affected if commodity prices
fall, external financing conditions deteriorate or the global recovery falters.
IMF relations: A two-year Flexible Credit Line (FCL) arrangement for 500 percent of quota
(US$6.2 billion) with the International Monetary Fund (IMF) was approved by the Board in May
2011, and, reviewed in April 2012. The Bank’s country team has been collaborating very closely
with the IMF.1 This cooperation includes the review of macroeconomic developments, including
fiscal projections and analysis of debt sustainability. The proposed DPL program is consistent
with IMF policy advice. In fact, the IMF Fiscal Affairs Department advised the Government of
Colombia in the process of designing and implementing the fiscal rule. The two institutions have
also been collaborating closely in other areas, including revenue administration improvement and
public financial management (including debt management). The IMF and the Bank have also
been advising the Government on tax policy reform and customs administration.
IV.
Tentative financing
Source:
Borrower
International Bank for Reconstruction and Development
Borrower/Recipient
Total
V.
($m.)
0
200
0
200
Institutional and Implementation Arrangements
The Ministry of Finance and Public Credit (MHCP) and the National Planning
Department (DNP) are responsible for coordinating actions among the concerned agencies.
The Department for Public Credit within the MHCP will collect the necessary data to assess the
implementation progress for which the MHCP is responsible and report it to the Bank.
Similarly, the Sub-directorate of Public Credit within the DNP will collect the information
necessary related to the implementation progress for which the Ministry of Health and the
Ministry of Agriculture and Rural Development are responsible and report it to the Bank.
Bank staff will monitor actions and review progress of the implementation of the proposed
operation, as well as the subsequent actions of the Government’s program, through: (1)
periodic monitoring, (2) the Implementation and Status Reports (ISRs), (3) preparation for the
second operation, (4) the Implementation and Completion Report (ICR) at the end of the second
operation.
1
Colombia is on the standard 12-month Article IV consultation cycle.
The Bank, through the Strengthening Public Information, Monitoring and Evaluation for
Results Management Project has been helping the Government to increase the use of
information for policy design and accountability in a cost-effective way. The project supports
the SINERGIA program, which includes: (a) a system of monitoring indicators (SISMEG)
throughout the public sector and linked to the national budget, (b) a system of evaluation of
public policies (SISDEVAL), and, (c) a network of evaluation agencies throughout Colombia
(RED de Evaluacion), which includes support to sub-national governments and, therefore, would
be particularly atuned to the Government's priority for decentralization. The Bank will continue
to provide technical support to the National Planning Department in consolidating results-based
public management and rigorous evaluation of public programs and policies.
VI.
Risks and Risk Mitigation
The DPL operation is subject to risks related to a deteriorating external economic
environment and reform program implementation. Despite solid fundamentals, Colombia’s
near-term macroeconomic outlook could be adversely affected in the event of external shocks.
This risk is mitigated by a high policy response capacity. There are also risks of policy slippages
related to the implementation of the fiscal management program. By way of mitigation, this
DPL was designed to exclusively support administrative measures that do not depend on
legislative processes. The overall risk classification is thus considered low.
Despite high exposure to external shocks, Colombia exhibits low vulnerability because of a
high policy response capacity. Colombia is exposed to three different types of external shocks,
including: a slowdown in economic activity in the US, a decline in oil prices, and global
financial market turmoil. Mitigation: The country’s macro resilience is based on solid initial
conditions and policy buffers to respond. Economic growth is solid and the absence of
significant domestic or external imbalances help shore up stability. Substantial foreign direct
investment inflows, ample accumulation of foreign reserves, and a Flexible Credit Line with the
IMF protect the external position. Colombia also enjoys a flexible change rate and has room for
monetary and fiscal policy easing.
The emphasis on administrative (as opposed to legislative) measures in DPL II reduces the
program risk of policy slippages. The reforms supported in the first DPL relied heavily on
legislative measures taking advantage of the high level of political capital in the first year of the
Administration. DPL II prior actions, by contrast, are exclusively focused on administrative
measures over which the Executive has full control. This effectively reduces the program risk
associated with the legislative process. The latter may nonetheless affect the outcomes of the
supported program, for instance, if tax reforms necessary to meet fiscal rule targets are not
approved by Congress. Beyond the DPL Program, the Administration’s broader fiscal reform
agenda, including the envisaged tax and pension reforms, would continue to be subject to the
Executive’s ability to pass legislative reforms successfully in Congress.
VII.
Poverty and Social Impacts and Environment Aspects
The Government actions, supported in this DPL, are expected to have a positive poverty
and social impact. There are reasons to expect a positive or neutral impact of each of the
supported reforms, as explained below.
The fiscal rule contributes to improved fiscal performance and macroeconomic stability,
which are important foundations for sustained economic growth and poverty reduction.
Moreover, the fiscal rule strengthens the capacity of the Government to pursue counter-cyclical
fiscal policy, including the implementation of social programs that can protect the poor and
vulnerable in times of growth decelerations. The proposed stabilization fund is expected to
smooth the fiscal impact of the commodity cycle, which potentially reduces the need for
government to reduce public spending (including social and poverty programs) in times of low
commodity revenues. The fiscal adjustment implemented thus far has taken place primarily
through enhanced tax revenues, and there is no evidence to suggest that further adjustment will
take place through a reduction in pro-poor spending. On the contrary, the Government has
proceeded to expand the main conditional cash transfer program (Familias en Acción) and has
initiated the construction of low-cost housing for the extreme poor. Existing social safety nets
are affordable and fiscally sustainable.
The 2010 tax reform is estimated to have had a small positive impact on low income
households. The reform tends to affect mainly high-income individuals and private sector firms.
The elimination of the capital investment tax credit of firms, the reduction of the energy
surcharge of firms and the closing of financial transaction loopholes are not expected to have any
direct impact the poor. The gradual elimination of the financial transaction tax will have a
positive impact on the low income households who use the banking system. The increased base
and higher rate of the wealth tax will not directly negatively affect the poor. On the contrary,
proceeds from this tax were used to finance humanitarian efforts in the wake of the 2010-11 La
Niña.
The update of the Mandatory Benefit Package brings important benefits for the poor,
vulnerable groups and women.2 The Colombian Benefit Package is not a ‘basic package’, but
rather a very comprehensive one and the recent update expanded the coverage of health goods
and services. The burden of disease of the poor necessitates health promotion, prevention and
health care interventions that were already included in the previous Package and the update
contains improvements to primary health care. For instance, new medicines and other goods
needed to deal with acute and transmittable diseases as well as with chronic conditions (i.e.
diabetes and hypertension), that disproportionally affect the poor, were improved. Moreover, the
introduction of a set of mental health care services facilitates the treatment of vulnerable groups
such as internally displaced population and victims of domestic violence. The expansion of new
pharmaceutical alternatives needed for health care of individuals living with HIV/AIDS will
improve the quality of life of patients. Finally, the introduction of procedures to improve the
diagnosis and treatment of gynecological and obstetric conditions represent important
improvements in the quality of health of women.
2
This paragraph summarizes the findings of an analysis of the social impact of the update of the Mandatory Benefit
Package developed in the context of loan preparation.
Being financially prepared for natural hazards reduces the need for governments to divert
fiscal resources away from long-term development goals when a disaster strikes. Ex ante
disaster risk financing instruments facilitate an appropriate fiscal response to a natural hazard
event thereby reducing the magnitude and duration of adverse impacts on the affected
population, which typically include the poorest and most vulnerable segments. Such instruments
also gradually transfer the risk from the public to the private sector thereby reducing the fiscal
contingency of the state. Increased insurance coverage, whether of public buildings or private
agricultural land, reduce the fiscal burden of the government in responding to natural disasters
and allows the government to focus limited resources on the most vulnerable populations. This,
in turn, reduces the need for the Government to reduce public spending on long-term
development (including social spending), to respond to a crisis.
Colombia’s existing social safety net is well equipped to handle natural disasters. The core
social protection program, Familias en Acción, has clear operational rules for disasters and has
demonstrated its ability to serve poor disaster victims in several recent disaster episodes.
Similarly, the Unidos program played an important role during the 2010-11 La Niña, as social
workers under this program contributed substantially to developing a census of affected families
that was later used to target government interventions. Finally, the temporary unemployment
program (Programa de Empleo de Emergencia) is designed to be triggered during crisis and it
was also activated during the recent La Niña.
Support to agricultural risks management will have positive effects on the rural
population, particularly small farmers. By making fiscal outlays for the management of
agriculture risks more predictable, facilitating agro-meteorological information for forecasting,
and developing the agriculture insurance market, it is expected that small farmers will gain
access to more readily accessible support to prevent and respond to production losses due to
natural disasters. The smoothing of agriculture incomes, in particular for the rural poor, can have
significant positive social and economic implications for investment and consumption.
The proposed operation is not likely to have any significant effects on the environment.
Following OP 8.60, the operation was reviewed for any potential effects relating to the
environment, forest, and natural resources. As this operation focuses on implementing a fiscal
management program it is not expected to have any impact on the environment.
VIII. Contact point
World Bank
Contact: Lars Christian Moller
Title: Senior Economist
Tel: 5280+254 / 57-1-326-3600
Email: lmoller@worldbank.org
Location: Bogota, Colombia (IBRD)
Borrower
Contact:
Title:
Tel:
Email:
María Fernanda Suárez Londoño
Director General of Public Credit and National Treasury
(57-1) 381 2156
mfsuarez@minhacienda.gov.co
IX.
For more information contact:
The InfoShop
The World Bank
1818 H Street, NW
Washington, D.C. 20433
Telephone: (202) 458-4500
Fax: (202) 522-1500
Web: http://www.worldbank.org/infoshop