IMF Executive Board Concludes 2006 Article IV Consultation with Colombia

Public Information Notice (PIN) No. 06/130
November 7, 2006

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.

On October 30, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Colombia.1


In early November 2006, Colombia exited from a period for Fund support that began in 1999. Since then, numerous reforms were adopted that have reduced public debt, brought inflation to the lowest level in decades, and restored the health of the financial system after the 1999 crisis. As a result of these efforts and aided by a favorable global economy, real GDP rose by 5 percent a year in 2004-05, after having stagnated in 1999-2002.

The economy continues to perform well in 2006. Real GDP is expected to rise by 5.2 percent, led by strong growth in private demand and continued robust export growth. Urban unemployment fell to 13.1 percent in July, compared with 14.8 percent a year earlier. The Banco de la República intends to keep inflation within a range of 4-5 percent by end-2006, as targeted. The economy has recovered swiftly from the effects of turbulence in international financial markets earlier this year, indicating that vulnerabilities have been reduced.

The authorities expect the combined public sector deficit to reach 1.5 percent  of GDP in 2006, as targeted, which would reduce public debt to around 45 percent of GDP and allow deposits held by the public sector to reach 13 percent of GDP.

The government has imparted new momentum to key structural reforms. In July it submitted to congress a comprehensive tax reform and, in September, a constitutional amendment to modify the system of intergovernmental transfers. The authorities are also seeking congressional approval of a plan to enhance the commercial orientation of Ecopetrol. In the coming months, they intend to present to congress several financial sector reforms and a free trade agreement with the United States.

Since April 2006, the Banco de la República (BR) has been tightening monetary policy. The Banco de la Republica raised its policy interest rate by a total of 125 basis points in April-September, to 7.25 percent, and is prepared to adjust monetary policy as needed to ensure inflation remains under control.

The external current account deficit is expected to remain at 1.6 percent of GDP in 2006, fully financed by net capital inflows, led by strong net foreign direct investment. By end-2006, net international reserves are expected to reach about US$15 billion (150 percent of short-term debt on a remaining maturity basis).

Financial indicators remain sound. Through end-June, bank liquidity and loan portfolio quality were adequate, and bank solvency exceeded the minimum regulatory requirement of 9 percent.

Over the next four years, the government's macroeconomic policies aim at continuity. The authorities' medium term goals are as envisaged in the program. Fiscal policy is being framed with the goal of reducing public debt to 40 percent of GDP by 2010. Monetary policy will be aimed at lowering inflation to 2-4 percent a year over the medium term. The authorities have proposed structural reforms in the areas of taxes, intergovernmental transfers, and the commercial orientation of public enterprises, and in the coming months will present legislation to broaden domestic financial deepening and establish free trade with the United States.

Executive Board Assessment

Executive Directors congratulated Colombia for the successful completion of the Fund-supported program and exiting from the use of Fund resources. Directors commended the authorities' policy strategy of fiscal reform and consolidation, low inflation with exchange rate flexibility, and strengthening of the financial system, which has enabled the economy to enter a virtuous cycle of strong investment-led growth and a sustainable external current account position. They noted that the recovery from the international financial market turbulence earlier this year underscores the economy's increased resilience in the face of shocks.

Directors welcomed the tightening of monetary policy since April 2006 to help address the risk of overheating. At the same time, Directors underscored the benefits of limiting the combined public sector deficit in 2006 to below the budgeted level to contain the growth in demand and ease the burden on monetary policy.

Directors welcomed the authorities' intention to keep public debt on a sustained downward path to strengthen the economy and build resilience. A number of Directors agreed that the authorities' medium-term fiscal consolidation program provides sufficient protection against exogenous shocks, while providing fiscal space to meet important infrastructure and social investment needs. However, many Directors considered that a larger primary surplus that would bring public debt decisively below 40 percent of GDP would provide a greater protection from shocks. These Directors cautioned that the authorities' plan to lower the primary surplus in 2007 and beyond may add too much stimulus when the private sector is likely to provide a strong impetus for growth.

Directors welcomed the renewed momentum for structural reforms. They remarked that the reform of intergovernmental transfers was crucial to preserve the credibility of fiscal policy, while the tax reform would help make the economy more competitive by simplifying Colombia's complex and distortionary tax code. Directors called on the authorities to phase out the financial transactions tax and eliminate the parafiscal taxes, which encourage informality in the financial and the labor markets. They noted that an unfinished task was to reduce the widespread revenue earmarking to allow for greater expenditure flexibility. Directors also welcomed the decision to increase the commercial orientation of Ecopetrol and supported the authorities' plan to deregulate the domestic prices of gasoline and diesel by mid-2008.

Directors considered that the flexible exchange rate regime has served Colombia well. They judged external competitiveness to be adequate, in view of the broad-based growth in exports and the sustainable level of the external current account deficit. In this context, many Directors considered that less reliance on foreign exchange market intervention would provide a clearer signal about the stance of monetary policy, while a number of other Directors agreed with the general foreign exchange policy stance of the authorities. Directors agreed that the development of market-based hedging mechanisms would reduce the need for foreign exchange intervention during periods of high volatility.

Directors welcomed the continuing efforts to strengthen financial supervision. They agreed with the authorities that the transition to risk-based supervision in line with Basel II should proceed with due caution to ensure that banks and the financial superintendency are well prepared to implement this complex system. Directors urged the authorities to submit to congress the proposed legislation to strengthen the independence of the financial superintendency. They welcomed the recent privatization of Granbanco and the authorities' plans to issue regulations to strengthen the governance of Banco Agrario, the only remaining public sector bank.

Directors commended Colombia for accepting the obligations under Article VIII, Sections 2, 3, and 4, and welcomed the authorities' intention to remove one of the remaining exchange restrictions that is subject to Fund approval.

Colombia: Selected Economic Indicators

  2002 2003 2004 2005 2006

(Annual percentage change, unless otherwise indicated)

National income and prices


Real GDP

1.9 3.9 4.8 5.2 5.2

Consumer prices (end-of-period)

7.0 6.5 5.5 4.9 4.5

Nominal exchange rate (depreciation+, end-of-period)

20.0 -3.1 -16.3 -4.6 ...

Real effective exchange rate (depreciation-)

-17.4 -5.2 11.4 10.9 ...

Money and credit


Broad money

2.9 9.6 16.6 18.6 18.4

Credit to the private sector

4.0 9.2 12.0 15.7 23.6

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

0.7 1.4 2.2 ... ...
(In percent of GDP, unless otherwise indicated)

External sector


Current account (deficit-)

-1.7 -1.2 -1.0 -1.6 -1.6

External debt

52.6 46.2 36.8 30.8 30.2

Of which: public sector

32.1 29.8 24.0 19.4 19.8

Net official reserves (in months of imports of goods and services)

7.6 6.4 6.4 6.1 5.4

Savings and investment


Gross domestic investment 1/

15.3 17.2 18.3 19.3 19.5

Gross national savings

13.6 16.0 17.3 17.7 17.9

Public finances


Combined public sector balance 2/

-3.6 -2.7 -1.3 0.0 -1.5

Nonfinancial public sector balance 2/

-4.2 -3.2 -1.5 0.0 -1.6

Central administration balance 2/

-6.4 -4.5 -5.4 -4.8 -4.9

Public sector debt 3/

57.0 53.3 49.5 45.8 44.5

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

1/ Data on fixed capital formation were revised starting in 2003.

2/ In 2007 corresponds to authorities' projections.

3/ Program definition. Assumes no purchases under the current SBA. Includes valuation changes.

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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