IMF Executive Board Concludes 2008 Article IV Consultation with Colombia

Public Information Notice (PIN) No. 09/08
January 26, 2009

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 2008 Article IV Consultation with Colombia is also available.

On January 14, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Colombia.1


Colombia's economy has performed well in recent years. Economic growth in 2006-07 exceeded the regional average by a substantial margin. However, GDP growth slowed to about 4 percent (year-over-year) in January-September 2008, reflecting less buoyant domestic demand conditions and weaker global economic growth.

Colombian financial markets have been affected by the recent global turbulence, although debt and interbank markets have continued to function normally. Since mid-September 2008, spreads on credit default swaps (CDS) spreads and equity prices have generally moved in line with the rest of the region, although the Emerging Markets Bond Index (EMBI) and corporate bond spreads have risen more. External trade credit lines to domestic banks have been affected only modestly, although interest rates have risen.

The authorities have acted swiftly to bolster confidence and ensure that the private sector retains access to credit. They have secured financing from multilateral institutions and private capital markets for 2009, which will inter alia permit Colombia to meet its public sector external financing requirements. The monitoring of liquidity has intensified, with frequent contacts with the banking sector to keep abreast of the latest developments. As a preventive measure, the Banco de la República (BdR) has also reduced reserve requirements and injected liquidity through open market operations.

As in other countries in the region, inflation has increased, driven mainly by higher food and fuel prices, although overheating pressures have also played a role. Nontraded goods inflation-a good indicator of underlying demand pressures-rose in the first half of the year. Inflation expectations remain outside the BdR's medium-term inflation target (2-4 percent).

The peso appreciated by about 15 percent in real effective terms between end-2007 and mid-June, but since then it has weakened, reflecting the decline of commodity prices and turbulence in international financial markets. Citing prudential considerations, the BdR stepped up its foreign exchange (FX) intervention in June, replacing the US$150 million monthly options-based auctions introduced in March with daily US$20 million purchases in the spot market. Against the backdrop of a weakening peso, the BdR suspended its daily purchases of foreign currency in early October. It also reinstated the automatic FX intervention rule, which had been suspended in June. Capital controls, which had been tightened at mid-year, were also eliminated in October.

Monetary policy was tightened in recent years to lower inflation and bring the growth of domestic demand to more sustainable levels. The BdR raised its policy interest rate by 400 basis points (to 10 percent) between April 2006 and July 2008 to rein in the growth of credit and domestic demand. Against this background, credit growth (year-over-year) slowed from about 35 percent in early 2007 to about 20 percent by September 2008. The policy rate was, however, lowered by 50 basis points in December 2008 against the backdrop of weakening global and domestic growth.

Fiscal policy has been expansionary, but public debt has continued to decline. Despite the mid-year decision to cut government outlays relative to the original budget, the fiscal stance in 2008 has remained expansionary. Nevertheless, strong economic growth over the past few years has led to a marked reduction of public debt ratios, which are now close to the average for emerging market economies at investment grade.

Financial soundness indicators remain solid. Although nonperforming loan ratios (NPLs) have risen-especially for consumer credit-banks are well provisioned and profitable, and expected default probabilities remain low. There is no evidence of extraordinary reductions of activity by subsidiaries of foreign banks. External credit lines account for a small share of banking system liabilities, and reliance on wholesale (nondeposit) financing is also moderate.

Executive Board Assessment

Executive Directors commended the Colombian authorities for implementing sound macroeconomic policies and wide-ranging structural reforms, which had contributed to rapid growth and reduced vulnerabilities. Directors considered that, with improved economic fundamentals and a healthy banking system, Colombia is well-placed to confront the challenges posed by the ongoing global downturn. They emphasized nonetheless the need for continued flexible and timely policy responses.

Directors considered that the authorities' fiscal policy appropriately allows for some relaxation in the budget deficit in the near term, while keeping public debt ratios on a declining path. They underscored the importance of adhering to the fiscal targets incorporated in the medium-term fiscal plan, to reassure markets of the authorities' commitment to reduce fiscal vulnerabilities further. At the same time, financing conditions would continue to be a key consideration in determining the scope for additional fiscal easing if economic growth turns out to be weaker than presently envisaged. Directors suggested that consideration be given to the adoption of a fiscal rule over the medium term to strengthen the policy framework. They also encouraged the authorities to further improve the efficiency of the tax system and reduce budget rigidities.

Directors agreed that the monetary policy stance should aim at steering the economy toward a soft landing. They welcomed the efforts to reduce inflation to its medium-term target. The recent reduction of interest rates was deemed appropriate in view of the weakening economy. Going forward, Directors stressed that continued close monitoring of forward-looking indicators of economic activity and inflation expectations will be necessary to guide the course of monetary policy.

Directors considered that Colombia's flexible exchange rate regime has helped maintain external stability in the face of a rapidly changing external environment. Greater stability in exchange rate intervention practices would also strengthen the policy framework. In this regard, Directors welcomed the wider band for the automatic intervention rule, under which exchange rate intervention would take place less frequently. Directors welcomed the authorities' elimination in October 2008 of the capital controls imposed in mid-2007. Noting the difference in views between the staff and the authorities on the effectiveness and impact of capital controls in the short run, some Directors considered that capital controls should remain in the authorities' toolkit in case the need should arise in the future. A few Directors encouraged the authorities to remove the exchange restriction arising from the special regime for the hydrocarbons sector.

Directors noted that the financial sector has significant buffers and that, based on stress-testing undertaken by the authorities, it is expected to remain solvent under a number of extreme scenarios. They suggested extending stress-testing to a broader range of macroeconomic and global financial scenarios, and agreed that credit risk should be closely monitored given the rising nonperforming loan ratios. Directors welcomed recent efforts to strengthen the crisis prevention framework, improvements in financial sector monitoring and financial safety nets, and measures to help prevent liquidity problems. They saw scope for further strengthening the bank resolution process and the deposit insurance system, with technical assistance from the Fund. Greater clarity is also needed with respect to the circumstances under which emergency liquidity support would be provided.

Directors encouraged the authorities to move forward with their structural reform agenda. They welcomed progress in improving the regulatory framework for derivatives, and the proposed development of a multi-tier pension system. A strengthening of creditor rights and greater independence for financial sector supervisors remain important priorities.

Colombia: Selected Economic Indicators







2004 2005 2006 2007 2008

(Percentage changes, unless otherwise indicated)

National income and prices


Real GDP

4.7 5.7 6.8 7.7 3.5

Consumer prices (end of period) 1/

5.5 4.9 4.5 5.7 7.7

Nominal exchange rate (depreciation+, end-of-period) 1/

-14.0 -4.4 -2.0 -10.0 11.6

Real effective exchange rate (depreciation +)

-13.4 -11.6 1.9 -8.2 ...

Money and credit


Broad money

19.2 17.6 18.0 17.4 35.9

Credit to the private sector

29.8 11.3 38.5 23.5 17.5

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

2.3 1.4 2.3 3.5 ...
(In percent of GDP, unless otherwise indicated)

External sector


Current account (deficit -)

-0.8 -1.3 -1.8 -2.8 -3.6

External debt

31.5 26.2 23.4 20.9 22.7

Of which: public sector

20.6 16.4 15.3 13.5 14.6

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

6.4 5.8 4.9 5.4 6.1

Savings and investment


Gross domestic investment

20.1 21.6 24.3 24.9 24.3

Gross national savings

19.3 20.3 22.5 22.0 21.2

Public finances


Combined public sector balance

-1.1 0.0 -0.7 -0.6 -0.8

Nonfinancial public sector balance

-1.3 0.0 -1.0 -0.8 -0.9

Central government balance

-4.7 -4.1 -3.4 -2.7 -2.6

Public debt 2/

42.4 38.8 35.9 32.8 31.7

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

1/ Actual figure for 2008.

2/ Includes bonds issued to recapitalize financial institutions.

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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