Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Colombia

May 9, 2005

Public Information Notices (PINs)) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2004 Article IV consultation with Colombia is also available.

On April 29, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Colombia.1


Since 1999 Colombia's economic policies have sought to strengthen the economy in the aftermath of the country's worst economic crisis in 30 years. The strategy focused on fiscal consolidation, lowering inflation, and strengthening the financial system. The government that took office in August 2002 improved the fiscal position through several revenue measures (a one-time wealth tax, an income tax surcharge, and a broadening of the VAT base) and expenditure restraint. Two pension reforms were also adopted, reducing the actuarial deficit of the pension system from 207 percent of GDP to 187 percent of GDP. Other reforms focused on restructuring and downsizing the nonfinancial public sector, improving financial supervision, and privatizing or liquidating the remaining public banks. Congress also approved in December 2002 a labor market reform to encourage employment in the formal sector. In addition, this administration established a policy known as democratic security to try to resolve the civil strife.

Initially the recovery proceeded slowly but in 2003-04 economic performance improved significantly:

· Real economic growth recovered to 4 percent a year in 2003-04. The national unemployment rate declined from 20 percent at end-2000 to 12 percent at end-2004, while the poverty rate declined from almost 60 percent in 1999 to 52 percent in 2003.

· The combined public sector deficit was reduced from 3.4 percent of GDP in 2000 to an unexpectedly low 1.3 percent of GDP in 2004, reflecting an unanticipated rise in the export price of oil to US$36 per barrel and an unusually large surplus of the autonomous local and regional governments. This outturn—together with the real appreciation of the peso during 2004—helped reduce public debt to 53 percent of GDP by end-2004. Also, public sector deposits reached 10.5 percent of GDP by end-2004.

· Inflation declined to 5.5 percent during 2004—the lowest level in decades—owing to the effective implementation of the inflation targeting framework.

· The external sector strengthened, led by sustained growth in exports and a recovery in capital inflows. During 2004, the peso appreciated by 11 percent in real effective terms, prompting the central bank to purchase US$2.9 billion (about one-third of the stock of base money) to limit the appreciation. By end-2004, net international reserves reached US$13.2 billion (123 percent of short-term external debt on a remaining maturity basis).

· The health of the financial system continued to improve. The solvency and profitability of the banking system have recovered, reflecting economic growth, a successful recapitalization scheme, and improved supervision. Nonperforming loans declined to 3.6 percent of total loans by late 2004 and were fully covered by provisions. The bank restructuring agency (FOGAFIN) continued to trim the government's participation in the banking system by selling several banks that were intervened in 1999. Progress continued in implementing risk-based financial supervision and actions to combat money laundering.

Executive Board Assessment

Executive Directors commended the authorities' pursuit of sound macroeconomic policies and structural reforms in recent years, which has contributed to a significant improvement in Colombia's macroeconomic performance and social indicators despite a difficult security environment. Economic growth has rebounded; inflation, unemployment, and the public debt have declined; the balance of payments position has improved, in part because of buoyant export growth; and confidence in the economy has strengthened, as reflected in increased capital inflows, the appreciation of the domestic currency, and a lowered country risk premium.

At the same time, Directors noted that unemployment, poverty, and the public debt remain high. In addition, while welcoming the reduction in the foreign currency component of the public debt through the issuance of peso-denominated bonds in international capital markets, Directors emphasized that external vulnerabilities still loom large due to rollover and foreign exchange risks. They therefore welcomed the authorities' intention to maintain the strategy of fiscal consolidation and steadfast pursuit of structural reform in the coming years, in order to strengthen the foundations for economic growth and to further reduce inflation and the ratio of public debt to GDP.

Directors agreed that the authorities' main challenge in implementing the economic strategy will be to maintain the pace of fiscal reforms. They considered the reforms currently before Congress—the revised budget code and the pension reform—to be important for containing expenditure growth and increasing the flexibility of expenditure management. However, they stressed that several other reforms will be needed over the medium term, on both revenue and expenditure.

On revenue, Directors welcomed the authorities' intention to continue to build support for a more efficient tax system while broadening the tax base and improving tax administration. They encouraged the authorities to slow the increases in revenue transfers from the central administration to subnational governments, and to strengthen fiscal coordination among the different levels of government. On expenditure, Directors called for a streamlining of current expenditure to make room for more productive capital expenditure. They welcomed efforts to increase the effectiveness of social spending through better targeting of subsidies to the poor. They also urged additional pension reform to limit the expected rapid rise in net pension costs, and gradual deregulation of the domestic prices of gasoline and diesel over the medium term. Directors encouraged further improvements in debt management, especially by increasing reliance on domestic currency borrowing, to reduce vulnerabilities.

Directors commended the prudent conduct of monetary policy. They noted that the inflation targeting framework has helped lower inflation expectations, and welcomed the authorities' commitment to reduce inflation to the range of 2-4 percent a year over the medium term. Directors considered that the flexible exchange rate regime has served Colombia well. It has helped maintain Colombia's external competitiveness, as evidenced by the broad-based growth of exports and the sustainable level of the external current account deficit. Most Directors urged the authorities to guard against excessive foreign exchange intervention aimed at curbing the appreciation of the currency, as this could create uncertainty regarding the objective of monetary policy, generate inflationary pressures, and raise quasi-fiscal costs through sterilization operations. They encouraged the authorities to phase out, as planned, the temporary capital controls instituted in December 2004. Directors welcomed the improved management of foreign exchange risk by the private sector, and encouraged the authorities to continue to facilitate the development of market-based hedging mechanisms.

Directors commended the government's financial restructuring operations, which have helped strengthen the financial system since 1999. They encouraged continued efforts to improve financial supervision, as recommended in the Financial System Stability Assessment Report. Key measures would include provision of sufficient autonomy to the Superintendency of Banks and adoption of risk-based regulations in line with the Basel II core principles. Directors encouraged the authorities to continue to reduce the role of the public sector in the banking system, and, in this regard, commended the decision to divest one large state-owned bank and to consider the divestment of another state-owned bank. They considered the new securities market law to be an important step toward deepening the domestic capital market, and urged the phase-out of the financial transactions tax and the bank stamp tax to promote financial intermediation.

Directors welcomed Colombia's acceptance of the obligations of Article VIII, Sections 2, 3, and 4. They urged the authorities to establish a timetable for removing two remaining exchange restrictions.


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