Colombia and the IMF
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The International Monetary Fund (IMF) today approved a three-year credit for Colombia equivalent to SDR 1.957 billion (about US$2.7 billion) under the Extended Fund Facility(EFF)1 to support the government's economic reform program for 1999-2002.
In commenting on the Executive Board's discussion of the request by Colombia, Stanley Fischer, First Deputy Managing Director,made the following statement:
"In recent years Colombia's strong economic performance of past decades has given way to slow growth and widening economic imbalances. To a large extent, the deterioration has been the result of weak fiscal policies, adverse external shocks, and a difficult internal security situation. In discussing the proposed program, Directors commended the authorities for the recent corrective measures taken to begin restoring the country to a sound economic and financial footing and endorsed their medium term economic program. Directors emphasized that a substantial fiscal consolidation, an acceleration of the structural reform agenda with higher priority in restructuring the financial sector, and the pursuit of a flexible exchange rate policy, will be critical to restore economic growth, accelerate job creation, and alleviate poverty.
"The strengthening of the public finances is predicated on tight spending policies; strong tax enforcement; improved control of resources under the fiscal decentralization system; and economic recovery. Against the background of the programmed reduction in public spending in relation to GDP over the period through 2002. Directors welcomed the incorporation of new social safety net programs to help protect the gains in social spending that have been achieved in recent years.
"Directors considered that the authorities' decision to float the peso was appropriate. Under the floating exchange rate regime, central bank intervention in the exchange market will be limited to achieving their balance of payment objectives and maintaining orderly market conditions. With the shift to a floating exchange rate, it is expected that inflation targeting will increasingly provide the nominal anchor for the economy.
"The government's structural reform agenda includes measures to strengthen the finances of the territorial governments; streamline the revenue sharing system; reform the public pension systems; downsize the public sector, mainly through privatization; and reform the tax system. With regard to financial sector restructuring, the program incorporates measures to deal with the problems of the public banks through recapitalization and divestment, to recapitalize viable private banks, and to provide relief to the mortgage sector. The fiscal cost of these operations has been included in the program", Fischer said.
For several decades, Colombia achieved significant economic progress with steady and strong economic growth, and good balance in its external accounts. In recent years, this performance has given way to slow growth and widening economic imbalances. The deterioration has been largely the result of unsustainable fiscal policies, external shocks, and a difficult domestic security situation. Weak fiscal policies reflected mainly the introduction earlier in the 1990s of additional expenditure programs and a constitutionally mandated system of revenue transfers to the territorial governments. The recessionary trend intensified in late 1998, and real GDP is projected to fall by 3½% in 1999. The weak economic activity has helped reduce inflation rapidly and has sharply lowered the external current account deficit. The fiscal position however, deteriorated further in 1999; unemployment rose to record levels; and the financial system is under stress. The currency was allowed to float in September 1999.
The objectives of the government's medium-term program2 are focussed on restoring economic growth, reducing inflation further, and achieving a sustainable external position. To attain these objectives, the program calls for strong fiscal consolidation, financial sector restructuring, structural reforms, and a flexible exchange rate policy. Specifically, the program seeks to restore real GDP growth to 3% in 2000 and nearly 5% by 2002, with inflation declining from 10% to 6% respectively. The external current account deficit would increase somewhat in 2000 to 2.4% of GDP, but would stabilize subsequently at just above 3% of GDP, consistent with maintaining Colombia's external debt (public and private) at 43-44% of GDP. Under the floating exchange rate regime the central bank will intervene in the exchange market only to meet the targeted increase in net international reserves (NIR) and to maintain orderly market conditions.
The fiscal program for 2000 calls for a sharp reduction in the nonfinancial public sector (NFPS) deficit, to 3.6 percent of GDP from an estimated 6.3 percent in 1999. The improvement in the public finances is predicated on a tight wage policy; strong tax enforcement; improved control of resources under the fiscal decentralization system; and economic recovery. he structural reform agenda includes measures to strengthen the finances of the territorial governments; streamline the revenue sharing system; reform the pension systems; downsize the public sector, mainly through privatization; and tax measures.While seeking to reduce public sector spending in relation to the GDP, the government's plans call for the introduction of new social safety net programs to help ensure that the gains in social spending over the past several years will be preserved.
Colombia is an original member of the IMF; its quota3 is SDR 774 million (about US$1,063 million); and it has no outstanding use of IMF credit.
1The EFF is an IMF financing facility that supports medium-term programs that seek to overcome balance of payments difficulties stemming from macroeconomic imbalances and structural problems. The repayment terms are 10 years with a 4 ½-year grace period, and the interest rate, adjusted weekly, is currently about 4.30 a year.2Details of the program will be available on the IMF's website: http://www.imf.org.external/loi/mempub.asp
IMF EXTERNAL RELATIONS DEPARTMENT