Public Information Notice: IMF Concludes 2002 Article IV Consultation with Colombia

January 23, 2003

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On January 15, 2003 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Colombia.1


The Colombian economy has staged a steady, albeit slow recovery since the 1998-99 crisis. Macroeconomic stabilization has been achieved, and robust fiscal and structural policies during most of the period since then have allowed the country to avoid some of the difficulties faced by other economies in the region. This is all the more remarkable since Colombia also has had to contend with a costly internal conflict that disrupts economic processes and distorts resource allocation.

However, the economic situation worsened in the first half of 2002. Peace negotiations with the guerillas broke down in February, after which violence escalated. Economic activity has remained sluggish, and the fiscal consolidation has gone off track. Exacerbated by increased contagion from other countries in the region, concerns about fiscal solvency led to increased pressure on the peso from mid-year and a loss of external market access.

After taking office in August 2002, a new administration took determined action to quicken a resolution of the internal conflict, reverse the fiscal deterioration, and safeguard macroeconomic stability, which had come under threat. At the same time, a two-year economic program has been designed, under which the government aims to achieve fiscal consolidation and effect critical structural reforms, so as to lay the basis for strong and sustained growth and a better distribution of income and social services.

Executive Board Assessment

Directors commended the new government's swift and comprehensive action to face a difficult domestic and external situation. A deterioration in the domestic security situation last year, together with the turbulence in international financial markets and a weakening of the public finances, had exerted pressure on the peso and had resulted in a temporary loss of market access. Directors strongly welcomed the new government's rapid and determined actions to reverse the fiscal slippages and safeguard macroeconomic stability, advance institutional and economic reforms, and accelerate resolution of the internal conflict. In particular, Directors were encouraged by the measures already taken, and the strong domestic ownership in support of further reforms, that will allow Colombia to lastingly improve its debt dynamics and prospects for growth and employment. They saw Colombia's recent return to the capital markets as a recognition of the improved economic policies and the reform momentum created by the government.

Directors supported the authorities' plan to reduce the fiscal deficit sharply in 2003-04 and welcomed their commitment to take the measures needed to ensure public debt sustainability. In particular, they welcomed the recent passage of tax reform that will help underpin the lower deficit, as well as the effort to mobilize broad public support for spending measures. While the program provides for fiscal consolidation to continue over the medium term, it will, nevertheless, remain important that the authorities stand ready to take additional measures, as needed, to address risks that could affect the public finances, including those from security-related spending. Directors welcomed the government's commitment and preparedness to take action in this regard. Looking ahead, they saw a need for further efforts to strengthen the tax base. This would include a reduction in the dispersion of VAT-rates, while, over the medium-term, efforts should aim at alleviating the need to resort to ad-hoc measures, such as the financial transaction tax.

Directors supported the authorities' decision to finance the fiscal program for 2003 entirely from the domestic market and from increased borrowing from multilateral lenders. They underscored the importance of advancing the structural reforms that will help secure this multilateral financing. Directors also noted the efforts underway to reduce the vulnerability of Colombia's debt structure. Going forward, it will remain important to continue to implement policies aimed at reducing the vulnerability of the public debt to shocks, which will require, in addition to fiscal consolidation, the pursuit of sound policies that help avoid volatility of exchange and interest rates. A few Directors encouraged the authorities to introduce collective action clauses in sovereign bond contracts.

Directors were encouraged by the authorities' commitment to wide-ranging structural reforms, which will be key to underpin the fiscal consolidation effort over the medium term. They welcomed the recent approval in congress of the reform of the general pension system, and looked forward to the next step, which will include reform of the special pension regimes. They also highlighted the importance of reforms to put the health system on a sound financial footing. Directors supported the high priority assigned by the new administration to modernizing and streamlining the state and introducing greater flexibility in public spending. They looked forward to sustained implementation of reform plans in these areas, building on the ongoing initiatives to close existing vacancies and reduce staffing through attrition, and the impending adoption of a Fiscal Responsibility and Transparency Law.

Turning to monetary policy, Directors commended the central bank for the high credibility that it has established after having presided over a period of significant disinflation. They noted that the continued skilful management of the inflation targeting framework in the period ahead will need to balance carefully the risk that the recent peso depreciation may fuel higher inflation against the still large unused capacity in the economy. In this regard, Directors recommended that the authorities should be ready to act promptly to signs that inflationary expectations could become embedded. Some Directors expressed concern that the central bank's policy rate is negative in real terms.

Directors welcomed the significant progress achieved in strengthening the banking system, including the recent legislation to further strengthen the safeguards, and the authorities' commitment to refrain from introducing new subsidy programs for distressed borrowers. They recommended continued vigilance in the period ahead, especially with respect to the mortgage institutions, and encouraged the authorities to strengthen the regulation of securities firms and brokerages. Directors commended the authorities for their exemplary and comprehensive efforts to combat money laundering and the financing of terrorism, and encouraged continued efforts against terrorist assets.

Directors emphasized that increased labor market flexibility will be key to address Colombia's high unemployment and support the government's social equity objectives. While welcoming the recent reform of the labor code, they encouraged the authorities to continue to work toward addressing remaining problems, in particular the backward indexation of the minimum wage and the high payroll charges, which tend to exclude workers from the formal sector.

Directors considered that Colombia's floating exchange rate regime was appropriate and had helped strengthen the country's ability to respond to shocks, and that Colombia's increasingly diversified exports are competitive at the current exchange rate. They commended the authorities for progress in liberalizing the trade regime and encouraged them to phase out remaining import restrictions. A number of Directors underscored the improved export prospects that Colombia would gain from faster trade liberalization by its trading partners.

Directors encouraged the authorities to accept the obligations of Article VIII of the Fund's Articles of Agreement as soon as possible, and eliminate the few remaining exchange restrictions.


Colombia: Selected Economic Indicators











(Annual percentage change, unless otherwise indicated)


National income and prices


Real GDP






Consumer prices (end of period)






Nominal exchange rate 1/ (depreciation -)






Real effective exchange rate 1/2/
(depreciation -)







Money and credit 3/


Broad money






Private sector credit






Real interest rate (90-day time deposits; percent/year)







(In percent of GDP, unless otherwise indicated)


External sector


Current account






External debt






Of which: public sector 1/






Gross official reserves (in months of imports


of goods and services)







Savings and investment


Gross domestic investment






Gross national savings







Public finances


Combined public sector balance 4/






Nonfinancial public sector balance 4/






Central government balance 4/






Public sector debt 5/







Sources: Colombian authorities; and IMF staff estimates and projections.


1/ End of period.


2/ Based on Information Notice System.


3/ All annual changes in foreign currency stocks valued at constant exchange rate.


4/ Excluding privatization proceeds.


5/ Coverage differs from data published by authorities by including debt of the financial public sector.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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