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Box 4a INSTITUTIONAL CREDIT IN BRAZIL, COLOM1IA, AND MEXICO In Brazil, subnattonal borrowing Is llnked to tax revenues, which allows the wealthler jurisdictions to achieve considerably higher levels of borrowing. The domestic Indebtedness of States and Municipalitles Is ruled by Federal Senate Resolution 62 of October, 1975, which states that:

- (i) Total debt outstanding cannot exceed 70% of the revehues of the previous fiscal year (adjusted for 'nflation).

(11) Incremental debt contracted In any year cannot exceed 255 of total revenues.

(111) Debt service (interest and amortization) cannot exceed 15% of the revenue In the previous fiscal year.

However, a subsequent Resolution No. 93 freed many credit operations (Urban Development, Social Development and the National Housing Bank Loans) from the preset limits upon approval by SEPLAN, the National Monetary Council and the Federal Senate.

The growth of Indebtedness allowed by these exceptions (extra-limit credit reaching about 61% of the total debt of subnatlonal Institutions In 1983) was not spread evenly either In terms of type of debt or of category of jurisdictlons. In general the smaller municipalities were less favored by the criteria used for extra-limit credit approval and were less accustomed to borrowing. The use of the statutory Indicators of debt capacity would show that the legal limits have not been reached In the majority of cases.

Nevertheless, a more rigorous analysis could show a different picture as small municipalities tend to stretch their spending beyond their available resources by turning to direct suppliers credit, by postponing due payments, by drawing advances on next year's receivables, by not collecting contributions from public employes. Although such short-term devices are also used by the larger municipallties and by the states themselves (which makes the actual records of their financial position less than transparent) It would seem po sible In many Instances to finance urban Improvement programs through credit, especially If the planned Investments are likely to Increase local revenues, so as to meet future demands of debt amortization .L According to the Central Bank statistics, In 1983 the external debt of States and Municipality of Brazil accounted for 33% of their total obligations and the Internal debt for 70%. Between 1980 and 1984 subnational debt grew only 3% per year (.3% In per capita terms) at a slower pace than subnatIonal revenues.

In Calombia, because of the generally low level of the municipal budgets, only the largest centers are able to allocate a substantial proportion of their resources to capital Investment. According to Bank staff estimates, many of the Intermediate-size municipalities have virtually exhausted their existing borrowing capacity. Widespread concern over the status of local finances and the underdevelopment of local ecorcmles prompted the National Congress to pass new laws (no. 14 of 1983 and No. 12 of 1986) Increasing substantially the fiscal autonomy and revenue generating capabilities of the municipal governments. The debt servicing potential of smaller communities has been Increased by earmarking an additional share of the value added tax allowance for decentralized Investment but this requires an expanded role of public agencies both to assist these local units In the mob0lization and management of resources and In actual lending to themŽb a/ See IBRD report No. 6585a-BR: Brazil: Urban Development In the Northeast Region, May 1986.

b/ See lt;D report No. 6631-CO: Colombia: A Review of Recent Flscal Decentralization Measures; January 1987.