IMF Executive Board Concludes 2010 Article IV Consultation with ColombiaPublic Information Notice (PIN) No. 10/45
March 31, 2010
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 March 31, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Colombia.1
With strong policy and institutional frameworks, the global crisis did not have too severe effects on Colombia’s economy. The economy had begun to slow down in early 2008 as policies had been tightened to address overheating, but the global crisis caused private investment to collapse in the last quarter of 2008. Domestic demand began recovering in the second half of 2009, led by public investment and consumption. For the year as a whole, real gross domestic product (GDP) growth was 0.4 percent. With near zero food price inflation and a negative output gap, end-year inflation fell to 2 percent from 7.7 percent at end-2008. The exchange rate served as the main shock absorber, and net international reserves (excluding the special drawing rights (SDR) allocation) remained broadly constant at the end-2008 level of US$24 billion. The financial system did not experience major strains from the global crisis as capital adequacy remained strong and non-performing loans increased only slightly, backed by high provisions. The corporate sector’s strong balance sheets and the moderate levels of household debt also helped avoid financial distress.
The authorities were able to adopt countercyclical monetary and fiscal policy measures. Monetary policy responded swiftly, with a 650 basis point reduction in the policy rate (to 3½ percent). Fiscal policy also contributed to support demand, imparting a fiscal impulse of about 1 percent of GDP in 2009 as measured by the change in the combined public sector overall structural balance. With uninterrupted access to capital markets, the government was able to preemptively increase its foreign borrowing (about 2 percent of GDP). Furthermore, several measures were taken to strengthen financial sector resilience, including an agreement between banks and the superintendent to retain a portion of 2008 profits.
The outlook for 2010 is generally positive. Real GDP growth in 2010 is projected at about 2¼ percent, reflecting the upturn in the world economy and the impact of the expansionary policies of 2009 (though dampened by lower exports to Venezuela). Inflation is likely to remain within the central bank target range of 2−4 percent, as the effects of El Niño on food inflation are expected to be short lived and likely to be offset by the output gap and peso appreciation. The external current account deficit is expected to widen in 2010 to 3.1 percent of GDP on account of lower exports to Venezuela and a pickup in oil investment-related imports. The bulk of this deficit would be financed by foreign direct investment, with other private flows also expected to recover.
Executive Board Assessment
Executive Directors commended the Colombian authorities for maintaining strong policy and institutional frameworks during the global crisis. This, together with an early request for a flexible credit line from the Fund, contributed to preserving external confidence and limiting the impact of the crisis. Directors considered that, with improved economic fundamentals and a healthy banking system, Colombia is well-placed to confront the challenges posed by the still uncertain global outlook.
Directors considered that monetary and fiscal policies should remain broadly supportive until there is clear evidence of sustained recovery. Consequently, close monitoring of forward looking indicators of activity and inflation will be essential to guide the size and timing of the withdrawal of support. Directors emphasized that the Colombian authorities should prevent anticipated increases in food prices from affecting long-term inflation expectations.
Directors noted that the deterioration of the fiscal position was mainly driven by weak domestic demand conditions. In the medium term, as economic activity recovers, oil-related revenues increase, and government spending is kept in check, the fiscal deficit is expected to fall and public debt to resume a downward trend. Directors welcomed the authorities’ intention to establish a fiscal rule, which would provide stronger assurances that the recent increase in public debt will be undone. A number of Directors encouraged the authorities to broaden the coverage of the fiscal rule. Directors welcomed the authorities’ commitment to contain health costs, and their intention to take compensatory measures if fiscal risks materialize. They also encouraged the authorities to further develop a strategy to minimize medium-term fiscal risks, including those resulting from investment tax incentives and special tax regimes, and pension spending.
Directors agreed that the flexible exchange rate policy has helped protect the external position in the face of adverse shocks. Some Directors considered that other temporary instruments could complement the flexible exchange rate regime and rule-based intervention in the foreign exchange market as a policy response if the risk of a surge in capital inflows were to materialize. Some Directors saw merit in further strengthening reserve coverage, while others stressed that the authorities pay close attention to the costs and externalities of reserve accumulation. Directors encouraged the authorities to remove the exchange restriction arising from the special regime for the hydrocarbons sector.
Directors noted the soundness of the financial system, and welcomed improvements in financial regulation and reforms to develop capital markets. The new liquidity management system, the broader coverage of deposit insurance, and the enhanced tools to facilitate bank resolution, further strengthen crisis preparedness. Directors commended the authorities for improvements in the over-the-counter market infrastructure, new regulations on collective investment vehicles, and the broader investment strategy options for pension funds, which will contribute to financial deepening.