COLUMBIA: IMPLICATIONS OF THE FINANCIAL CRISIS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00589R000300350005-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 21
• Document Creation Date: December 22, 2016
• Document Release Date: December 20, 2010
• Sequence Number: 5
• Publication Date: August 1, 1985
• Content Type: REPORT

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Directorate of
Intelligence
of the Financial Crisis
Colombia: Implications
An Intelligence Assaameet
ALA 85-10087
August 1985
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Intelligence
Colombia: Implications
of the Financial Crisis
Office of African and Latin America Analysis. It was
coordinated with the Directorate of Operations. F-]
This paper was prepared by
on
Comments and queries are welcome and may be
directed to the Chief, South America Division, ALA,
Secret
ALA 85-10087
August 1985
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Colombia: Implication
of the Financial Crisis
Key Judgments President Betancur, with a year left in office, faces the same dilemma
Information available confronting almost all Latin American heads of state: how to resolve
as of 29 July 1985 external financial imbalances without jeopardizing political stability. Opin-
was used in this report.
ion polls show that the depressed state of the economy and continuing
guerrilla violence have destroyed his popular standing. The new lending
needed to begin an economic and political comeback, however, has
generally been tied to politically unpalatable adjustment policies under
IMF guidance. Betancur has attempted to soften domestic criticisms by
proposing a self-imposed, IMF-monitored stabilization strategy. The IMF
has given this approach its blessing, and bankers have tentatively offered
$1 billion in new loans based on its continuing implementation.F_~ 25X1
This strategy will not be cost free, however. The policy moves introduced
since the beginning of the year probably will cap GDP growth for 1985 at
less than 2 percent, in our judgment. In addition, the policy moves likely in
the coming months-more rapid devaluations, the removal of subsidies,
price increases on staples, and continued monetary creation to finance the
budget deficit-will probably push inflation in the short run above the 21-
percent ceiling set by the government. On the positive side, the immediate
pressure on foreign payments should ease with the new loan receipts and
currency devaluation. Even so, we project a payments gap of $1-1.5 billion
for this year that will probably have to be covered by drawdowns in
reserves and further gold sales.F__-]
The political costs of the program go beyond worker and consumer
grumbling about higher prices.
its plan for ending guerrilla violence-
which includes government jobs, small business credits, and land grants-
will cost $700 million. Because, in our judgment, the financial squeeze will
prevent the government from fulfilling these goals, the prospects are that
the shaky truce will completely collapse and many guerrillas will return to
armed violence. At the same time, the budgetary squeeze will further
undermine the counterinsurgency capabilities of the armed forces. We also
are concerned that this situation will provide new opportunities for
increased Cuban and Nicaraguan involvement with Colombian guerrillas.
iii Secret
ALA 85-10087
August 1985
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There is a slight chance that the up-front political and economic costs of
Betancur's stabilization strategy will appear with sufficient speed and
intensity to persuade the President to abandon the approach. In this case,
we believe he would opt for populist policies, such as increased government
spending, new subsidies, and eased access to credit. The short-term benefits
of economic stimulation and enhanced popular support for the President
would be quickly overshadowed by rising inflation, reduced access to bank
credit, and intensified foreign exchange shortages. While such a policy
path may garner local support in the short run, the results would only sow
the seeds for later discontent. F_~
From the perspective of US economic interests, exporters will continue to
suffer from Colombian import restrictions, and US investors will face
tougher exchange controls, in our view. US firms and businessmen, as well
as diplomatic officials, would be even more susceptible to terrorist attacks
if the country's economic and security situation deteriorates even further.
Bogota will require increased US assistance to sustain cooperation with
Washington in narcotics enforcement. Finally, we believe the financial
squeeze will encourage Bogota to campaign for a political solution to the
Latin American debt situation and to at least explore expanded commer-
cial relations with Soviet Bloc nations.F___1
The implications of Colombia's financial bind extend beyond the Betancur
era. As long as funding is constrained, for example, Bogota's ability to
develop its national resource base will be hampered. This is particularly
true in the expensive petroleum exploration field. In addition, we believe
continuing economic stagnation is likely to fuel further growth in illicit
narcotics trade, because of the increasing attractiveness of marijuana and
coca cultivation as compared to staple crops. This in turn has the risks of
undermining government authority and control and increasing popular
alienation from the political system-a development that would almost
certainly affect the full range of US-Colombian bilateral issues.=
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Contents
Key Judgments
Dashed Expectations
Pressures for Economic Adjustment
2
Colombia's Adjustment Strategy
5
Implications of the Adjustment Program
7
Dim Economic Prospects
7
Impact on the Insurgency
Implications for the United States
Over the Short Term
10
The Trade Front
10
Regional Foreign Policy Implications
11
Storm Clouds Beyond Betancur
12
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Secret
Colombia: Implications
of the Financial Crisis
President Belisario Betancur, who campaigned on a
platform to improve Colombian living standards by
reviving the economy and expanding social services,
began his four-year term in August 1982 with a solid
mandate. Soon after the election, Betancur an-
nounced that his second priority would be to end the
political violence that has plagued the country for
nearly 40 years by offering a broad amnesty to
members of the four most prominent guerrilla groups.
At the same time, he announced ambitious rural
25X1 development plans aimed at eliminating the socioeco-
nomic causes of South America's largest insurgency.
Few observers doubt that Betancur, a populist of
humble origin, is sincere in his goals. In our judgment,
however, he initially underestimated the magnitude of
each of these problems as well as the complexity of
pursuing all of them simultaneously during a world
economic slowdown. With one year left in office,
Betancur faces the politically difficult task of imple-
menting stabilization measures to ultimately strength-
en the economy and regain the cooperation of interna-
tional lenders without precipitating popular unrest.
His efforts, in our view, could have a critical impact
on the government's ability to encourage investment
needed to develop Colombia's natural resources, sus-
tain a truce with the guerrillas, strengthen the foun-
dations of democracy, and support policies important
to the United States, such as controlling narcotics.
Betancur has failed on both his campaign pledges.
the domestic economy is little better than it was
three years ago, and the external accounts are worse.
On the guerrilla front, sporadic violence continues
because the government has been unable to imple-
ment a lasting peace program centered on rural
development. Betancur's ability to take a firm correc-
tive hand is constrained by political reality-accord-
ing to the US Embassy, opinion polls showed last year
that Betancur had lost half of his 70-percent approval
rating, and, by April 1985, 62 percent of those
interviewed in a reputable poll disagreed with his
policies. A noted Colombian television news anchor-
man recently broadcast that the deterioration of
Betancur's popularity is unprecedented in modern
Colombian politics. F_~
Economic Malaise
At the time of his inauguration in 1982, Betancur had
counted on a strong influx of foreign credit to finance
economic growth and diversification, according to US
Embassy reporting. The availability of foreign financ-
ing at that time, however, was shrinking as the LDC
debt crisis that began in Mexico spread throughout
Latin America. At the same time, a depressed global
economy prevented any trade-led boom. As a result,
the populist-oriented Betancur turned to expansionary
fiscal and monetary policies to accommodate political
pressure groups and restore some growth momentum.
Indeed, the public deficit rose from $1.3 billion in
1982 to $1.9 billion last year, and measured 8 percent
of GDP. Over the same period, money supply expand-
ed by an average of 21 percent annually. The results,
as measured by standard statistics, are at best
lackluster:
? GDP growth seemed to spurt by 3 percent in 1984,
but that followed two years of annual growth of less
than 1 percent, and living standards were still below
the 1981 level.
? Inflation during the 1982-84 period was on the
order of 20 percent annually, high by Colombian
standards.
? Unemployment continued in the area of 10 to 15
percent, also high for Colombia.=
Far more worrisome from the international perspec-
tive was the steady addition of large current account
deficits, which came at the hand of the government's
own budget deficits, a slowdown in export earnings,
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Figure 2
Colombia: Selected Economic Indicators,
1978-85
Real Economic Growth
Percent change
Ii
Current Account Balance
Excluding Official Transfers
Billion US $
a
Total Debt
Billion US $
Consumer Price Inflation
Percent
01
Foreign Exchange Reserves
End of Year a
Billion US $
Debt Service Ratio
Percent
Unlike other major South American countries, Co-
lombia so far has managed to service its $12 billion
medium- and long-term foreign debt without resched-
uling. Although Colombia's external debt is smaller
in relation to the size of its economy than that of
many other developing countries-half the percent
share of Argentina and of Chile, for example-it has
been rising sharply, causing the ratio of debt service
to exports to more than double to 36 percent between
1978 and 1983. This partially reflects the growing
servicing cost of the $8 billion government debt in the
past six years. Bogota owes 40 percent of the public
debt to international agencies such as the World
Bank and the Inter-American Development Bank at
lower interest rates and longer repayment terms, but
it has increasingly depended on high-cost commercial
loans to finance new development projects since 1978.
Of the nearly $5 billion in public-sector commercial
loans, about 35 percent is owed to banks in the
United States, and the remainder predominantly to
banks in Japan and Western Europe. Although the
public sector is generally current in servicing its
obligations, the private sector is encountering diffi-
culty. The government estimates total private foreign
debt has increased to $4 billion, including some $1.2
billion in expensive short-term obligations. Most
private debt is owed to US banks.
and a high debt repayment burden. Indeed,
since Betancur took office, the current
Excludes gold.
Estimate.
Projection - Assumes Bogota maintains its stabilization program.
account deficit has averaged some $2.5 billion annual-
ly. In the absence of adequate bank credits, Colombia
has had to finance nearly half of the deficit by
drawing down foreign exchange reserves from about
$5 billion at yearend 1981 to just over $1 billion at
yearend 1984.F__1
international creditors
had advised Colombia to seek an IMF-supported
agreement as early as last year, on the grounds that
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Table 1
Colombia: Balance of Payments, 1980-85
2,000
752
946
1,260
337
513
411
400
Short-term capital and
errors and omissions
270
182
428
-629
-668
-500
893
2,083
1,894
1,735
-940
-1,960
-537
-564
a Estimate.
b Projection-assumes Bogota maintains its stabilization program.
c In April, after Bogota presented to Colombia's international
creditors the self-imposed austerity program that called for no
import growth in 1985, it had to commit itself to ease import
restrictions as one of the conditions to receive a $300 million loan
cofinanced by the World Bank. This accounts for the small import
growth we project for 1985.
d Includes change in foreign exchange reserves, excluding gold
holdings, as reported in the IMF's International Financial
Statistics.
failure to do so would curb access to external credit,
deplete foreign exchange reserves, and lead to a severe
economic decline. We believe that Betancur demurred
because of the high political cost he perceived and
pressures from such political groups as labor and
business. In addition, we know largely from US
Embassy reporting that Betancur faced conflicting
advice and demands from his own advisers. For
example, Finance Minister Junguito favored tighter
monetary control, substantial reductions in the fiscal
deficit, and a large devaluation; he publicly backed an
IMF-supported program last year,
On the other hand,
more liberal members of the economic team, such as
Minister of Labor and Social Security Salazar and
Economic Development Minister Castro, who are also
members of the opposition Liberal Party, contended
that an IMF-supported program would have unac-
ceptable social costs.
Pressures for economic adjustments that would bring
unsustainable current account deficits under control
reached a head earlier this year when bankers flatly
refused to lend any more without an IMF stabiliza-
tion program in place. Bogota had requested a short-
term bridge loan to avert a standstill on debt repay-
ments plus $1.5 billion in new development loans,
according to US Embassy and press reports. Bankers,
however,
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Bogota last negotiated for an IMF loan in 1967, but
rejected the Fund's proposals because they called for
a large devaluation at a time when the memory of the
inflationary burst after the November 1962 devalua-
tion was fresh. Even so, Colombia successfully re-
solved balance-of-payments difficulties with its own
set of economic measures. With this experience in
mind and concerned about his declining popularity,
President Betancur continues to reject a formal
agreement with the IMF
He has privately accused t e
tion Business Latin America.
Fund of colonialism and manipulation in the interest
of the industrialized world, according to the publica-
he President
ident Betancur has publicly placed his prestige be-
hind obtaining a financing arrangement with interna-
tional creditors without a formal Fund standby. We
believes the adoption of IMF austerity would prevent
social reforms integral to seeking peace with the
country's insurgents. Government officials have told
creditors that Colombia does not need IMF balance-
of-payments support, but, instead, commercial credits
and project financing. The US Embassy reports Pres-
25X1 believe that backing away from this position would be
politically difficult.
Panamanian affiliate of the largest bank.
balked because of their concern about dwindling
foreign exchange reserves, the health of Colombia's
banking system-the two largest private banks were
battling liquidity problems-and Bogota's unwilling-
ness to honor $150 million in illegal loans made by the
In an apparent effort to regain lender confidence,
Betancur began implementing elements of a self-
imposed stabilization program. In the first three
months of 1985, he increased gasoline prices, bus
fares, and value-added taxes, cut government spend-
ing, limited wage increases, and lifted some import
Table 2
Colombia: Original Economic Goals
of Self-Imposed Austerity Program
Public-sector deficit
(percent of GDP)
4.9
3.8
Foreign debt (US $ billion)
13.9
14.5
Debt service
(percent of current revenues)
39.5
39.3
Change in foreign exchange
reserves (US $ million)
-75
+310
Export growth (percent)
10
14
Import growth (percent)
0
10
Source: Republic of Colombia Financing Plan, 1985-86, reported
by the US Embassy.
these ad hoc measures, and in April,
the Bank Advisory Commit-
tee agreed in principle to Bogota's proposal for IMF
monitoring of a comprehensive Colombian-designed
economic adjustment program as a condition for new
bank loans. For Betancur, the ability to substitute for
a formal IMF stabilization program enables him to
avoid opposition criticism of going "hat in hand" to
the Fund. While Betancur's self-imposed IMF-moni-
tored program is economically similar to a formal
IMF standby accord, a
"Colombian program" is more appealing to the coun-
try's political elites, opinion makers, and business
leaders, making it easier to sell at home.'
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Under the terms of Colombia's 'IMF-monitored agree-
ment with the Fund, Bogota's goal is to hold inflation
below 21 percent for 1985, limit the drop in Central
Bank foreign exchange and gold reserves to $75
million (compared to $524 million in 1984), reduce the
public-sector deficit to 5 percent of GDP, and aggres-
sively devalue the currency,
To meet these targets, the govern-
ment will need by the end of 1985 to take additional
policy moves such as eliminating some consumer
subsidies, increasing gasoline prices, stepping up the
rate of currency devaluation, raising taxes, cutting
public spending by postponing some public works and
limiting public-sector wage increases, and liberalizing
import restrictions. F__1
25X1 Thus far, Betancur has implemented stabilization
measures on a piecemeal basis. US Embassy and press
reports show that in the last few months progress
toward economic adjustment has slowed, although he
continues to resist labor pressures for wage increases
and has lifted some additional import restrictions. The
IMF-monitored program, however, will require the
Colombian Government to become more consistent in
implementing adjustments and to send both the IMF
and the World Bank detailed quarterly progress re-
ports. Fund and World Bank representatives also will
visit Colombia every six months to monitor economic
performance. If Colombia substantially fails to meet
the performance criteria, as we believe they probably
will, and the IMF refuses to grant waivers,
Bogota is re-
the Fund.
quired to negotiate a formal standby agreement with
We judge the original economic goals of the self-
imposed austerity program as unrealistic. For exam-
ple, inflation remains unabat-
ed above the 21-percent limit-running at a 25-
25X1 percent annual rate in June. Foreign exchange
reserves continue to fall-dropping $350 million dur-
ing the first six months of 1985. Economic growth
remains sluggish because of falling wages, rising
25X1 unemployment, high interest rates, and lack of fresh
capital as investors adopt a wait-and-see attitude
pending next year's presidential elections.)
Beyond the incentive to avoid the political damage of
negotiating a formal IMF accord during an election
year, Betancur's self-imposed austerity, if attained,
will garner a sizable chunk of new money tied to the
agreement.
commercial banks have tentatively agreed to
provide a $1 billion loan over two years. Under the
special IMF monitoring arrangement, $700 million of
this would be for public-sector debt amortization,
which will be applied primarily to the debts at the
state oil and coal enterprises, $200 million would be
for new development projects, and $100 million would
be lent to refinance Colombia's largest private bank.
funds will
be disbursed quarterly beginning later this year after
the IMF issues its first report on economic perfor-
mance. In addition, the World Bank will cofinance
with international bankers a $300 million loan for
Bogota to finance imports needed to produce nontra-
ditional export goods,
Half of the World Bank loan will be disbursed
by the end of the year, with the remainder to be
disbursed in 1986.
This is not to say that the issue of new funding is
necessarily cut and dry. The Bank Advisory Commit-
tee has indicated its preliminary financial support,
In
practice, however, some US regional banks have been
opposed to similar pledges in new loan syndications
for Chile and Ecuador. West European members of
the Advisory Committee contend that private debt
arrearages need to be brought current before syndica-
tion of the new money package. The Japanese, who,
want a higher
interest rate, are also reluctant to participate because
of the Japanese Ministry of Finance's new require-
ment to set aside reserves against this type of loan. In
mid-July, only half
of the $1 billion had been subscribed by bankers.
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Internal Vulnerabilities
Economists working with the Bank Advisory Commit-
tee for Colombia believe the country's adjustment
program is modest enough in its objectives to have a
good chance of success. We believe, nevertheless, that
Colombian economic and political realities could easi-
ly derail the program. From an economic perspective,
even if all the scheduled external funding is lined up,
the program seems vulnerable on several counts:
? Although the government directly sets wages for
about half the public sector, it only issues guidelines
for state corporations and the private sector. Failure
to comply with these guidelines and hold down wage
increases would impede reduction of the fiscal
deficit.
? The private banking sector is in poor financial
shape, according to the US Embassy. Any austerity-
induced bank failures-like those that recently oc-
curred in Argentina and Ecuador-would necessi-
tate central bank financial support that in turn
would undermine monetary targets.
? Capital flight could resurge if the government-
guerrilla truce breaks down completely, forcing a
larger-than-expected drawdown of foreign exchange
reserves.
billion budget for 1985, awaiting President Betan-
cur's signature since May, will jeopardize attempts
? Continued delay in approving the government's $1.2
to hold down growth of the money supply.
? The term sheet for the new foreign loan package
must be approved by the Colombian Congress, but,
presidential cam-
paign rhetoric is creating an unfavorable atmo-
sphere for legislative approval and could delay the
25X1 first disbursement of new money until next year.
In our judgment, Colombia's political environment
also threatens the adjustment program. Betancur is
counting on his ability to continue selling the program
as Bogota's own decision to impose needed austerity
and to rally support from the two major political
parties and from business groups,
He is a veteran of the elite-
controlled, bipartisan political system and hopes to
capitalize on the tradition since the 1950s of muting
ideological and policy disputes for the sake of the
national interest.
The task will not be easy. Betancur's adjustment
measures have been under steady fire from key
constituents since he first began to implement them in
January, according to the US Embassy. Retailers, for
example, charge that the new value-added tax sched-
ule is inflationary and that the government is using
business as a scapegoat. Transport owners marched in
mid-May in Bogota protesting against speculation in
the price of scarce spare parts. Industry leaders are
publicly warning that another round of austerity is
bound to increase social tension.)
In addition to problems from business and industry
elites, we judge that Betancur will have substantial
difficulty getting labor to accede to his programs.
Trade union representatives are cautioning that the
adjustments are merely disguised IMF recipes and
make labor peace unlikely, according to press reports.
Embassy and press reports also indicate that orga-
nized labor, frustrated by the erosion of living stan-
dards, is increasingly challenging government policies:
? Public-sector workers in January demonstrated
against the administration's 10-percent limit on
minimum wage increases, resulting in several vio-
lent incidents in Monteria and Medellin.
? Some 35 labor leaders were arrested in four cities-
Rionegro, Barrancabermeja, Bucaramanga, and Bo-
gota-in February because of protests against wage
restraint.
? Transport owners demonstrated in May for a freeze
on gasoline prices.
? In May, after President Betancur turned down labor
demands for salary raises and for the rejection of
IMF-supported austerity measures, the pro-Soviet
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Confederacion Sindical de Trabajadores de Colom-
bia (CSTC) publicly called for a June nationwide
general strike, supported by most guerrilla groups.
Betancur's political opponents also have caused him
problems over economic questions, but have not been
able to exploit the issue as much as they would like.
Some leaders in the Liberal Party, the New Liberal
Party, and the opposition left-particularly those
serving in the Congress-have vehemently criticized
the administration, according to the US Embassy.
This has occurred despite the fact that Liberals are
serving in the Betancur Cabinet. The Embassy notes
that the opposition presidential candidates have been
more restrained in their criticism, however, notwith-
standing their desire to distance themselves from the
government's economic policies. The principal reason,
in our view, has been the President's threat to retali-
ate through his control of patronage to the other
parties. Consequently, when Communists and other
leftist forces in labor scheduled a national strike last
June to press the administration on economic issues,
the Liberal presidential candidate opposed the strike.
Looking a bit further down the road, Betancur's
populist inclinations may also hinder economic adjust-
ments. The US Embassy reports that in a recent
speech he announced that in the last year of his
administration he would emphasize:
? Creating new jobs.
? Holding down price increases on basic products.
? Reorienting public investments to community ser-
vices, health, housing, and education.
We believe that Betancur's continued hope that he
can have it both ways-austerity and increased wel-
fare-portends difficulties in keeping the deal with
the IMF and the commercial banks on track. At a
bare minimum, it sends a signal to labor and business
groups that sustained political pressure could pay
economic dividends.)
Implications of the Adjustment Program
We judge that because of sheer financial necessity
Betancur will try to continue self-imposed stabiliza-
tion for at least the next 12 months. Even so, we do
not believe that the implementation of self-imposed
stabilization policies will produce major economic
improvements, and they are very likely to result in
political strains for him and any successor govern-
ment. F_~
Dim Economic Prospects
To meet external financial targets, even self-imposed
stabilization will have to slow economic growth in
most key domestic sectors for a time. According to
US Embassy and press estimates, agriculture and
commerce will remain slack for at least the rest of this
year and probably into 1986 as well. Judging from the
policy changes already introduced-higher taxes, low-
er government spending, and reduced public invest-
ment-it is hard to see economic growth above 1.5
percent for 1985, a conclusion shared by a number of
other observers. The growth slowdown will also be fed
by the indirect effect of current austerity policies. For
example, the real decline in government spending will
depress construction activity and employment. Higher
unemployment probably will squeeze consumer de-
mand, in turn slowing industrial production.) 25X1
Under the Colombian plan, we believe inflation will
rise above the 18-percent rate posted at the end of last
year. Considering more rapid devaluations, the re-
moval of subsidies and consequent price increases on
staples, and continued monetary creation to finance
the budget deficit, Bogota would be extremely lucky
to keep inflation below its 21-percent target ceiling.
We, like others, believe that, if anything, inflation will
break this level and could easily hit 25 percent.
Regardless of the exact inflation rate, as economic
austerity begins to bite, we foresee:
? Middle-class groups staging cost-of-living protests.
? Influential agricultural interests pressing for higher
support prices.
? Labor striking for wage hikes and more public
spending to ease unemployment.
? The military demanding additional funds to help
them make up for the loss in real purchasing power.
? Businessmen insisting on restraints on labor costs
and the return to growth-oriented policies.F__1 25X1
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Table 3
Colombia: Comparative Economic Performance
Projections for 1985
Econometrics
Econometric
Forecasting
Associates
Resources
Inc.
International
GDP growth (percent)
3.1
1.8
1.9
0.5
0.5
Inflation (percent)
26
23
24
28
25-30
Current account balance
(US $ billion)
-1.4
-1.5
-1.7
-1.5
-1.5-3.0
a A private Colombian economic research foundation that compiles
projections of the country's private sector and academic
community.
On the external side, we expect another large pay-
ments deficit in 1985 despite adjustments. Given first
quarter 1985 trade results and some preliminary
trading partner data, we estimate that Colombian
exports could be up 10 percent this year, a $270
million gain in sales. We also judge that imports will
rise slightly as the government relaxes controls to
meet commitments to the World Bank. In our opinion,
Colombia will post a $1.2 billion trade deficit in 1985,
roughly in line with private forecasts, which put the
deficit in the range of $500 million to $1.5 billion. The
service deficit, in our opinion, will grow mainly be-
cause of higher interest payments obligations to ser-
vice the growing stock of debt. F_~
The inability to eliminate the current account deficit
as we and others project makes continuing foreign
exchange difficulties almost inevitable.
we estimate Colombia will receive
capital inflows of no more than $2 billion in 1985, but
probably will require something on the order of $3
billion to cover the projected current account deficit
while another $500 million in capital leaves the
country. With $500 million in scheduled disburse-
ments from the current loan, and $430 million from
World Bank and Inter-American Development Bank
project financing loans, the Colombians still face a
projected payments shortfall of about $1-1.5 billion
even if they can attract $400 million in direct invest-
ment as they did in 1984. Thus, we believe that in
1985 Bogota will probably need to continue to heavily
draw down reserves-despite its pledge to the con-
trary-and sell gold to avoid declaring a standstill on
foreign payments. F_
We believe political opponents, motivated by self-
interest, will probably exploit economic difficulties.
President Betancur is losing any remaining influence
over the country's restive labor unions, and growing
economic problems could cast a pall over his Conser-
vative Party ambitions to retain the presidency in the
1986 elections. The new political party Union Patrio-
tica-launched by the guerrilla group Revolutionary
Armed Forces of Colombia-will increase pressures
for Betancur to deliver the economic promises made
to the guerrillas as part of his plan to end political
violence in the country.F__-]
Impact on the Insurgency 2
In our judgment, Betancur's program to stabilize the
external accounts could undermine the government's
commitment to make peace with the guerrillas and
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eventually could help swell insurgent ranks. In its
nationwide truce with the leading guerrilla groups last
August, the government promised not only to reinte-
grate the guerrillas into the political system, but to
put them on the government payroll for a year at
minimum wage, to grant them credits to establish
small businesses, and in some cases to give them land.
Bogota
agricultural credits.
estimates it will need $700 million for this rural
pacification, which also includes subsidizing new
schools, roads, and health facilities, and providing
We doubt the government will be able to come even
close to these goals. These offers, coming at a time
when tougher economic policies are beginning to bite,
have provoked complaints from the three major labor
unions and from agricultural workers, according to
US Embassy and press reports, and generated stiff
resistance in Congress, where opposition legislators
see an opportunity to criticize the administration and
strengthen their position in the elections next year.
The danger is that a failure by Bogota to live up to its
commitment at this point could make it much more
difficult in future negotiations to convince the insur-
gents that the government can deliver on its promises.
Moreover, as economic conditions deteriorate, the
insurgents may be able to attract increasing numbers
of unemployed and alienated Colombians. Any major
resurgence of rural and urban violence, in our view,
would only further discourage foreign investment and,
in turn, intensify the country's foreign exchange bind.
From the military's standpoint, economic austerity
will hit hard. As it is, the military's capability to
contain the strengthened insurgency is being under-
mined by a 35-percent cut in the 1985 defense budget.
The US defense attache reports that additional bud-
get cuts will limit acquisitions and the ability to
recruit. Such cuts, according to defense attache re-
ports, are reducing the level of Army operations
throughout the country, and, we believe, will lead to
even more public criticism of the administration's
policies.F_-]
If Betancur's economic program undercuts military
capabilities while simultaneously increasing the draw-25X1
ing power of the militant insurgents, new opportuni-
ties for increased Cuban, Soviet, and Nicaraguan
meddling will be created, in our view.
provided extensive support to Colombian guerrillas in - - -
the past and still maintains close ties to the insurgent
groups. members of the 25X1
various Colombian guerrilla groups recently have
been receiving training in Cuba and Nicaragua. Al-
though Castro values his good relationship with Be-
tancur, he would be tempted, in our view, to step up
support for a more active guerrilla movement.
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Dangers Before Betancur Leaves Office
If President Betancur concludes that his self-imposed
stabilization measures may contribute to serious
political unrest, we believe he could resort to populist
policies in his remaining months in office. Initially,
we believe he would announce large-scale increases in
government spending, new subsidies, and eased access
to credit for farmers and other groups. Such actions
would probably enable him to finish his term on a
high note, but create serious problems for his succes-
sor. In addition, precedent suggests that foreign bank-
ers would probably cease new lending, which would
quickly translate into severe cash strains on Colom-
bia. Instead of drawing down reserves, we believe
25X1 Betancur would declare a moratorium on payments
to creditors and receive public support for the action.
and demands for large wage increases would eventu-
ally follow. We also would expect a paralyzing
nationwide strike.)
The halt to debt servicing, in our judgment, would
cut Colombia's access to foreign credit, direct invest-
ment, and development assistance. Once foreign ex-
change reserves dwindled, Bogota would be forced to
use export earnings and gold sales to pay for essential
imports on a cash-and-carry basis. There is also
some danger that Betancur might be tempted to
accept some help from narcotics traffickers, who in
mid-1984 offered to repatriate and inject $3 billion a
year into Colombia's economy in exchange for am-
nesty, according to US Embassy and press reports.
With external constraints eased, we believe economic
growth would increase. Stimulative fiscal policies,
wage increases, and the ability to increase imports
using frozen debt servicing funds would bolster the
consumer demand needed to revive the economy.
Price controls on staple items would be necessary to
contain inflation, and tough foreign exchange con-
trols would be required to prevent capital flight. We
would expect this boom to be short lived, however, for
rapid monetary expansion and tight price controls
would erode business profitability and increase incen-
tives for smuggling. As more goods went into the
black market, we would expect product shortages to
cause officially recorded inflation to spiral. Wide-
spread economic distortions, rising unemployment,
Implications for the United States Over the Short
Term
The Trade Front
Aside from the obvious issue of $12 billion in debt
repayment to international creditors, Colombia's eco-
nomic difficulties will have numerous direct and
indirect implications for US interests. From a trade
standpoint, for example, Bogota's economic problems
will affect both export and import flows. As far as US
sales to Colombia are concerned, the IMF's Direction
Whatever initial support Betancur's populist policies
were able to muster would quickly dissipate. Social
unrest would drive conservative sectors of the mili-
tary, the business community, and the President's
own party to press for change and even move to
impose a state of siege as it did in May 1984, in our
view. To preserve Colombia's traditional power-
sharing political system and ensure against radical
shifts in political or economic policy, a Conservative-
Liberal coalition of elites could attempt to strip
Betancur of real power for the remaining months of
his term.
of Trade statistics already shows that exports declined
about 8 percent to $1.4 billion in 1984-the lowest
level since 1978. US sales to Colombia are likely to
remain depressed as Bogota tries to conserve foreign
exchange and devaluations make imports more expen-
sive. On the other side, the Betancur government
probably will increasingly criticize US countervailing
duty actions because of the need to boost its own
exports.
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President considers US sugar and coffee quotas espe-
cially onerous, and he objects to US tariffs on cut
flowers, leather goods, and textiles. F_~
While trade tensions with the United States are likely
to rise, there is also a new area of potential trade
concern that is beginning to emerge. Growing com-
mercial relations with the Soviet Bloc, partly a result
of Colombia's financial problems, may, in our judg-
ment, lead to warming political ties. According to US
Embassy and press reports, Bogota recently signed a
six-year bilateral trade protocol in the $25-30 million
range with the Soviet Union. Press reports also indi-
cate that the Colombian Government authorized Flo-
ta Grancolombiana-the Colombian-Ecuadorean na-
tional shipping line-to establish regular general
cargo service with the USSR for two years.
To facilitate trade
further, Bogota is reported to be
discussing the granting of landing rights for Soviet
Aeroflot and Cuban Aerocaribbean cargo flights.
Although Betancur has restrained his personal prefer-
ence to renew diplomatic relations with Cuba because
of strong armed forces and political opposition, -
he is considering
allowing Havana to open a commercial office in
Colombia as a first step toward normalizing ties.
Investment Issues
Colombian economic problems will also have spillover
effects on the investment side. President Betancur
recently signed an Overseas Private Investment Cor-
poration (OPIC) bilateral agreement to attract new
American investment. Nonetheless, we believe the $4
billion US foreign investment stake in Colombia will
remain vulnerable to tightening restrictions on divi-
dend remittances and principal repatriation until pay-
ments stringencies ease. For example, the US Embas-
sy reports that Bogota has proposed a new tax on
foreign profits that would reduce remittances for all
foreign companies.)
US Embassy reported that in May guerrillas attacked
an Occidental Petroleum oil drilling operation in the
north and inflicted damages estimated by the compa-
ny at $2 million. In addition to sporadic sabotage, we
believe insurgent groups may increase kidnapings of
US citizens. guerril-
las in this area had also developed a new tactic of
extorting money from foreign investors by staging
demonstrations, protests, and strikes for social ser-
vices.
Regional Foreign Policy Implications
Colombian economic problems will also have a num-
ber of implications for regional policy relations. De-
spite President Betancur's commitment to support
stability in the Caribbean Basin, economic stringen-
cies probably will limit Bogota's role in the Caribbean
Basin Initiative. For example, foreign financing diffi-
culties probably will undermine plans to sponsor a
coal facility similar to the Mexican-Venezuelan oil
assistance to Caribbean Basin countries. Betancur,
however, will continue, in our view, to favor a regional
settlement in Central America through the auspices
of the Contadora Group, of which Colombia is a
member. F_~
We expect that, as long as Betancur feels a financial
pinch, he will continue campaigning for a regional
political solution to Latin America's debt problems.
According to a US Information Agency poll last year,
a substantial number of educated Colombians cited
high US interest rates as a principal cause of Colom-
bia's debt difficulties, and about half of them viewed a
We also believe there is increased potential for terror-
ist violence against US investors that will only intensi-
fy if general conditions deteriorate in Colombia. The
tion of debt on longer terms, with payments limited to
a fixed percentage of export earnings. Recently, Be-
tancur has been seized with the proposal to sponsor a
"Marshall Plan" for Latin American economic recon-
struction, an initiative we expect him to tout in the
future. The US Embassy reports Betancur worked
hard to exert regional leadership in late July at
Peruvian President Garcia's inauguration, trying to
rally official support proposing that each industrial
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Economic Impact of Narcotics and Other
Contraband on the Colombian Economy
Evidence of financial flows associated with drug
production, as reported by the US Embassy, does not
support the widely held belief that "black money"
has been a source of stability for the Colombian
economy. The US Embassy reports that earnings
from illegal cocaine and marijuana exports have
declined sharply since 1982, measured as a percent of
GDP. At the same time, other exports have not risen
to compensate for falling drug earnings. Thus, drug
income has not offset this economic cycle for Colom-
bia, but moved in the same direction as the economy
as a whole and impeded government efforts to deal
with its financial difficulties. F__1
25X1 On balance, the annual value of Colombian exports of
narcotics fluctuated between $500 million and $3
billion over the past five years,
in the early 1980s in the face of rising world demand,
they dropped an estimated 50 percent to less than $1
billion in 1984 as the price of both marijuana and
cocaine fell steadily, according to press and US
Embassy reports. By way of comparison, total record-
ed exports declined 25 percent to $3 billion since
1980. Drugs thus constituted about one-third of total
exports in 1984, but not all of these revenues returned
to Colombia. Although illicit drugs do not account
for all the contraband exports, drug earnings, howev-
er estimated, remain Colombia's second most impor-
tant source of foreign exchange. The US Embassy
reports that illicit trade-mainly smuggled consumer
goods financed by drug exports probably amounts
to $400-500 million a year, about 10 percent of
recorded, or legal, imports.F_~
Although drug earnings were strong
nation transfer to developing countries 1 percent of its
GNP annually to relieve financial constraints. More-
over, he contends that international aid organizations
should take a more aggressive lending role. F_~
Storm Clouds Beyond Betancur
The implications of Colombia's financial crisis go
beyond the remaining year of Betancur's term. With-
out sustained economic stabilization, we believe Co-
lombia will face a financial crunch in 1986 and 1987.
Political unwillingness to carry through stabilization
will probably result in continuing payment constraints
and an exhaustion of the thin reserves cushion. We
judge that continued failure to reduce the budget
deficit and restrain monetary expansion would ulti-
mately drive inflation into the three-digit level, in-
creasing deep-set financial distortions and eroding
bankers' confidence. With access to foreign credit cut,
Bogota would have little choice but to resort to more
protectionist trade and investment policies to shore up
external accounts. Such policies would end Colom-
bia's ability to attract foreign capital and technical
expertise.
From an economic perspective, in our view, Colom-
bia's external financial crisis and the need to make
economic policy adjustments to correct it will have set
back its economic development program for several
years. To develop its resource base-coal, nickel,
natural gas, and petroleum deposits-Bogota esti-
mates it will require about $3 billion in foreign credit
through 1987. Development lending probably will be
limited, however, for the next several years, because
of foreign creditors' continued reluctance to increase
their exposure in Colombia, or indeed anywhere in
Latin America. Thus, we judge that Bogota will be
unable to develop oil, coal, and nickel exports at a
pace that would resolve external financial burdens
before 1990 or enhance domestic recovery.
In particular, Bogota's efforts to become a significant
net oil exporter will be set back. Although Colombia
has the geologic potential to export $1-2 billion worth
of oil annually this decade,
it needs $700-800 million in investment capital
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struction probably will cease.
to fund infrastructure and oilfield development. Such
lending will be critically dependent on Bogota's com-
pliance with the IMF-monitored adjustment program;
even then, if the
government fails to protect workers building pipelines
to remote fields from terrorist attacks, further con-
25X1 We believe that another adverse consequence of eco-
nomic stagnation over the next several years will be
growth in the narcotics trade. We judge that during
the rest of the Betancur administration Colombia will
choose to continue close cooperation with the United
States in fighting drug traffic. We also believe that
mounting popular concern over the traffickers' terror-
ist tactics-demonstrated in the latest publicized
INVANER-Gallup opinion poll-will probably
strengthen any successor government's resolve in this
regard. Bogota's financial squeeze, however, will in-
creasingly inhibit Colombia's ability to interdict traf-
fickers. At the same time, the economic incentives to
enter the lucrative drug production and distribution
markets will be on the rise because of deteriorating
conditions in the legal economy. Marijuana and coca
will probably become an even more important source
of income for peasants, who will continue to reduce
the cultivation of staple crops. Increased "black-
market" flows will probably complicate government
efforts to collect taxes and control the amount of
money circulating in the economy. We believe large-
scale clandestine flows of drug money to offshore
banks also will continue to restrain capital formation
and add to Colombia's payments vulnerabilities.
From a political perspective, we expect prolonged
economic hardship in Colombia-especially if marked
by sharp changes in taxes, subsidies, and official
prices-could run the risk of increasing middle-class
alienation, fuel more crime and violence in the urban
and rural areas, and strengthen the appeal of leftist,
populist, and anti-US groups among the lower classes.
Such growing public disillusionment would have the
potential to not only undermine government author-
ity, but also weaken the country's traditional two-
party system and politics of consensus. If this were to
occur, Colombia could find itself in uncharted waters,
a development that would almost certainly alter the
nature of US-Colombian bilateral relations for years.
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