IMF Executive Board Concludes Article IV Consultation with Colombia

Press Release No. 14/234
May 19, 2014

On May 19, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Colombia.

Colombia has maintained a robust economic performance in recent years. A strong policy framework—anchored by an inflation-targeting regime, a flexible exchange rate, a structural fiscal balance rule, and effective financial supervision and regulation—has allowed the authorities to respond adequately to shocks and pursue effective demand management. The authorities have continued to improve the policy framework in recent years, by including a fiscal sustainability principle in the constitution; introducing a structural fiscal balance rule; overhauling the oil and mining royalties system; and implementing a comprehensive tax reform that replaced payroll taxes with a corporate income tax. Amid increased volatility in financial markets, the Flexible Credit Line arrangement has also allowed Colombia to maintain orderly financial market conditions by providing a buffer against tail risks.

Real GDP growth rebounded strongly in the second half of 2013. After slowing down to 2.9 percent y/y in the second half of 2012 and the first half of 2013, growth accelerated to 5.2 percent y/y in the second half of 2013, driven by higher public investment and a solid expansion in private consumption. Overall, real GDP growth in 2013 as a whole averaged 4.3 percent, up from 4 percent in 2012. Employment also rose strongly, particularly in the formal sector of the economy, and unemployment declined to 9.7 percent in 2013, the lowest mark in the last decade. At the same time, inflation was subdued at 1.9 percent y/y at end-2013, slightly below the 2–4 percent target range.

Monetary and fiscal policies supported growth in 2013. The central bank held the policy interest rate constant at 3.25 percent between April 2013 and April 2014 in light of soft growth during the first half of the year and inflation at or below the lower bound of the target range throughout the year. The reallocation of central government spending to provide targeted stimulus (e.g., through mortgage interest subsidies) and the use of royalties for investment spending by sub-national governments also supported growth in 2013. In April 2014, the central bank increased the policy interest rate by 25 basis points to 3.5 percent. Going forward, the authorities have reaffirmed their commitment to adjust the policy rate as necessary as conditions warrant to keep inflation within the target range, to adhere to fiscal plans consistent with the medium-term fiscal framework, and to use the flexible exchange rate as a shock absorber.

The banking system remained stable. Financial soundness indicators remained strong, with low and well-provisioned non-performing loans, strong profitability, and adequate liquidity. New capital requirements became effective in August 2013, significantly enhancing the quality of banks’ capital. The financial system is expected to continue deepening, and the participation of nonresidents in both the local government debt market and the equity market is also projected to rise in the near term.

Growth is projected to remain robust in 2014 and beyond, although risks are tilted to the downside. With the output gap nearly closed as of end-2013, real GDP is projected to grow at around potential (about 4½ percent) in 2014 and beyond, with inflation remaining within the target range. However, Colombia remains vulnerable to external risks, including: a sharp decline in commodity prices, especially oil; deterioration in global financial conditions; and volatility from the normalization of monetary policy in the U.S., especially if not accompanied by a corresponding increase in U.S. growth.

Executive Board Assessment2

Executive Directors commended the continued strong performance of the Colombian economy, with faster economic growth, low inflation, robust job creation, particularly in the formal sector of the economy, and declining unemployment. Nonetheless, while economic prospects are favorable, risks remain tilted to the downside. The uncertain global outlook, including the increase in geopolitical and emerging market risks, could present challenges even for strong and well-managed economies like Colombia. Directors stressed the importance of continued prudent policies to safeguard macroeconomic and financial stability and sustained structural reforms to promote more inclusive growth.

Directors commended the authorities’ adherence to the fiscal rule and commitment to medium-term fiscal consolidation. They noted, however, that meeting the fiscal goals will require greater revenue mobilization, and called for decisive action to broaden the tax base, reduce informality, and strengthen tax administration. Adjustments on the expenditure side would also be needed to improve the efficiency of spending, including by reducing costs from healthcare provision. Directors considered the authorities’ plans for a comprehensive reform of the pension system to broaden coverage and increase the equity of the pension system as a step in the right direction.

Directors took note of the staff’s assessment that the external position of the Colombian economy is strong, with the current account balance and the real exchange rate broadly in line with fundamentals. They emphasized that continued efforts to enhance productivity is crucial to raise competitiveness. Directors noted that risks to external stability are mitigated by a stable source of financing of the current account deficit, an adequate level of international reserves, and the additional line of defense offered by the Flexible Credit Line arrangement. Directors welcomed the authorities’ recognition of the need to weigh the opportunity costs of further reserves accumulation vis-à-vis the benefits of ensuring sufficient buffers.

Directors noted that the financial system is sound and financial supervision broadly effective. Nonetheless, they saw room to enhance supervision of complex conglomerates and their exposure to concentration risk. They also highlighted that the expansion of the largest institutions across the region will require a deeper framework to monitor and stress-test cross-border risks.

Directors emphasized the need to foster more inclusive growth through structural reform. They encouraged the authorities to continue to reduce informality by further reducing non-wage costs and addressing labor market rigidities. They also recommended fostering financial inclusion by reducing the cost of access to finance and developing products tailored to low-income households. Directors noted that addressing infrastructure needs is critical to boosting competitiveness and growth and welcomed the authorities’ infrastructure program.

Colombia: Selected Economic Indicators
              Est Proj
  2007 2008 2009 2010 2011 2012 2013 2014
    (Annual percentage changes, unless otherwise indicated)

National Income and Prices


Real GDP

6.9 3.5 1.7 4.0 6.6 4.0 4.3 4.5

Consumer price index (period average)

5.5 7.0 4.2 2.3 3.4 3.2 2.0 1.9

Consumer price index (end of period)

5.7 7.7 2.0 3.2 3.7 2.4 1.9 2.7

GDP deflator

5.0 7.6 3.4 3.9 7.0 2.7 3.7 2.0

Terms of trade (deterioration -)

3.3 9.9 -10.4 9.4 12.8 3.1 -4.7 1.3

Real effective exchange rate (depreciation -)

7.5 -2.7 4.7 5.1 3.0 6.2 -7.5
    (In percent of GDP, unless otherwise indicated)

Public finances


Central government balance

-2.7 -2.3 -4.1 -3.9 -2.8 -2.3 -2.4 -2.3

Combined public sector balance

-0.7 -0.1 -2.7 -3.3 -2.0 0.2 -1.0 -0.8

Public debt 1/

32.3 31.9 35.2 37.0 35.7 32.0 35.2 34.7

External Sector


Current account (deficit -)

-2.9 -2.8 -2.2 -3.1 -2.9 -3.2 -3.3 -3.3

External debt

20.8 20.4 21.6 22.8 22.8 20.9 24.0 24.5

of which: Public sector

12.8 11.8 13.7 12.7 11.9 11.3 12.7 12.9

GIR in percent of short-term debt

198.7 207.3 239.9 198.4 154.1 229.2 164.3 167.0

Savings and Investment


Gross domestic investment

23.0 23.5 22.4 22.1 23.7 23.6 24.3 25.0

Gross national saving

20.1 20.7 20.3 19.0 20.8 20.4 21.0 21.7
    (12-month percentage changes, unless otherwise indicated)

Money and credit


Broad money (M2)

14.8 17.4 8.8 11.4 17.6 16.0 13.4 14.5

Credit to the private sector

25.6 14.1 0.9 16.8 23.0 16.3 12.1 12.6

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



9.0 10.1 4.1 3.5 5.1 5.2 4.1 ….

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

1/ Includes Ecopetrol and Banco de la Republica's outstanding external debt.

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.

2 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. An explanation of any qualifiers used in summings up can be found here:


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