Foreign Relations of the United States, 1964–1968, Volume XXXI, South and Central America; Mexico

325. Memorandum From William G. Bowdler of the National Security Council Staff to the President’s Special Assistant (Rostow)¹

Washington, April 19, 1968.

SUBJECT

• Colombia

You asked for a memorandum covering Colombia’s economic performance and the difficulties arising from current loan negotiations for 1968.

Colombia’s Economic Performance

With a $100 million program loan from us and sound exchange, fiscal and budgetary policies laid down by President Lleras, Colombia had a good year in 1967:

• —despite the sizeable drop in coffee revenues, 4.5% growth in GNP was achieved;
• —careful budget management and improved tax collections (up 20% over 1966) made possible a 42% increase in public investment, primarily in agriculture and education;
• —wise monetary measures held the cost of living increase to 8% compared with 13% in 1966;
• —minor exports were up 20% over 1966;
• —sound management of the exchange rate permitted a gradual depreciation of 16% without the usual strains;
• —commercial arrears were eliminated by July 1967, although substantial arrears in the capital market remain;
• —planning at the national level, especially in education and agriculture, greatly improved.

To the economic gains must be added Lleras’ success on the political-security front. He achieved a good working majority in both houses to achieve passage of reform measures. Guerrilla activity fell to a new low under a two-pronged offensive of increased military pressure and economic assistance to heretofore neglected rural areas.

The Loan Negotiations

The principal components of the aid package for 1968 are a $58 million program loan and a $15 million agricultural sector loan. PL 480 sales of $14.5 million are also involved.²

When Lleras was over the economic barrel last year, he agreed to specific performance targets in writing, although it grated on him. This year, with a clear record of significant accomplishments, he dug in his heels and asked that the assistance package for 1968 be given on faith that he will maintain sound economic policies.

When negotiations began last month, AID was edgy about certain backsliding indicators:

• —in January Lleras had stopped further adjustments in the certificate exchange rate;
• —a promised additional 20% liberalization of imports had not materialized;
• —the desired additionality had not been achieved and Treasury was pressing for sterner action.

This prompted AID to serve up the 1968 package with another set of conditions involving specific performance targets. Lleras balked. When he failed to liberalize imports 20% by March 31, as he had promised, AID withheld payments of the last $20 million tranche of the 1967 loan.

At the height of the impasse, Lleras broke off talks with World Bank representatives, the leaders of the negotiating group. And he let it be known to AID that he would not accept fixed targets on the key issues of devaluation, import liberalization and additionality.

Since then, both sides have maneuvered away from their rigid positions:

• —Lleras wrote Schweitzer³ that the dual exchange rates will be unified soon and, subsequently, the unified rate will be flexible “along the lines observed during 1967.” AID now finds this satisfactory;
• —The Colombians recently started strong efforts to safeguard the US share of the commercial market within its completely controlled import system;
• —AID is willing to drop prior commitments on import liberalization during 1968 in favor of performance review in October which could affect the amount of the second tranche. AID would link the level of coffee receipts, aid disbursements and import targets so that greater than expected coffee receipts or failure to increase imports could result in reduced loan disbursements. Lleras says this is agreeable;
• —AID will not insist on a 20% liberalization of imports before releasing the last tranche of the 1967 loan and will release the money as soon as the 1968 loan agreement is initialled. Lleras says once he has the money in hand, he will liberalize in the amount agreed.

So negotiations are back on the tracks and should be completed in the next two or three weeks.⁴

Lessons to be Learned

At the outset, AID was too demanding on specific written commitments. They should have known from last year’s experience that Lleras, with a good record behind him, would not agree to terms which rubbed him the wrong way in 1967. AID should have been willing to settle for more general assurances.

Lleras was too swift in taking umbrage—but this is his nature.

With more firm direction from the top, this kind of thing could be avoided, but you are familiar with that situation.

WGB

1. Source: Johnson Library, National Security File, Country File, Colombia, Vol. III, 10/66–12/68. Confidential.
2. President Johnson approved negotiation of the aid package to Colombia in late February. (Memorandum from Rostow to the President, February 24; ibid.)
3. Pierre-Paul Schweitzer, managing director of the International Monetary Fund.
4. The United States and Colombia signed two agreements, the $58 million program loan and the $15 million agricultural sector loan, on July 15. The PL–480 agreement was signed on May 31.