There's no point in doing a compression test or leakdown, you already know you have an old engine. Replace it.
Rebuilding your 1.6 is an option but the 1.8 8v is such a better engine and so easy to swap. They would have done a lot less k's than your 1.6 and shouldn't need any work.
The 1.8 lets you fill the car with all your mates and go crusing without it feeling like it has an extra 200kg to lug around. Can't do that with a 1.6.
For now run a thicker oil to cut down the blue smoke. You might also try a different brand of petrol. Don't know why but my old MK1 GTI used to blow more smoke using one brand (can't remember which) than another.
Cheers
Paul
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