## Selected Economic and Financial Indicators

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### Background and policy context
- Policy frameworks:
  - Inflation-targeting regime and medium-term fiscal framework supported countercyclical measures during the 2008–09 global crisis.
- Monetary policy actions:
  - Central bank lowered the policy rate by 600 basis points (to 3.5 percent) over the course of 2009.
  - Policy rate kept at a historic low of 3 percent (from April 2010 to February 2011).
- Fiscal outcomes:
  - Combined public sector deficit widened to 2.7 percent of GDP in the crisis (compared with near balance in 2008).
  - In 2010 the combined public sector deficit rose to 3.2 percent of GDP, mainly due to lower oil-related revenues.
- IMF engagement:
  - On May 6, 2011, the Executive Board approved a two-year FCL arrangement for 500 percent of quota, treated as precautionary.

### Recent macroeconomic developments (2010–early 2011)
- Output and demand:
  - Real GDP growth in 2010: 4.3 percent.
  - Domestic demand increased by 6¾ percent in 2010.
  - Growth was broad-based except in agriculture, construction, and light manufactures linked to trade with Venezuela.
- Inflation and prices:
  - CPI inflation, eop 2010: 3.2 percent (within official target range).
  - Food inflation: 4.1 percent.
  - Regulated items (e.g., gasoline): 6.6 percent.
  - Core inflation anchored below the midpoint of the 2−4 percent target range.
- External sector and reserves:
  - External current account deficit 2010: 3.1 percent of GDP (increase of almost 1 percentage point of GDP).
  - Overall balance of payments surplus of more than US$3 billion in 2010 due to strong private capital inflows (mainly FDI in oil and energy) and other investment flows.
  - Gross reserves ended 2010 at over US$28 billion (just under 6 months of imports of goods and services).
- Fiscal specifics and contingent liabilities:
  - Central government outturn better than budgeted largely due to lower-than-expected capital expenditures that more than offset emergency flood-related expenditures of 0.2 percent of GDP.
  - Deficit of the Fuel Price Stabilization Fund (FEPC) increased to 0.15 percent of GDP (a contingent government liability).
- Tax reform:
  - Tax reform enacted using state of emergency powers broadened the tax base and increased the net wealth tax; combined yield estimated at an average of 0.4 percent of GDP per annum during 2011−14.
- Financial sector:
  - Financial soundness indicators remained strong in 2010: capital adequacy and profitability solid; NPLs broadly stable and at relatively low levels.
  - Banks’ liquidity tilted slightly toward foreign sources due to higher demand for foreign currency credit by corporates; most borrowing was fully hedged.
- Exchange rate and intervention:
  - Peso appreciated by 6.4 percent in nominal terms against the U.S. dollar during 2010.
  - In March 2010 the central bank adopted pre-announced daily purchases of US$20 million from the interbank market to ease appreciation pressures.
- Labor market:
  - Unemployment remained around 11 percent.
  - Labor informality estimated at about 60 percent.
  - High minimum wage and high rates of labor taxation identified as key factors behind unemployment and informality.

### Capital inflows and FX intervention (summary)
- Capital inflows:
  - Large capital inflows in the range of 5−7 percent of GDP, mainly FDI, since 2005.
  - Starting in 2009 the share of portfolio and other short-term capital inflows began to increase; share of net FDI in total inflows fell below 50 percent by mid-2010.
- FX intervention:
  - Colombia purchased just over US$3 billion in 2010 (about 11 percent of the end-2010 stock of gross international reserves) and US$2.5 billion in the first half of 2011 under a program of preannounced daily purchases.
  - Modality: spot-market purchases of US$20 million per day over a pre-announced horizon (extended to September 30, 2011); previous tools included auctions of options.
  - Comparison: intervention amounts much smaller than Brazil and Peru, more comparable to Chile and Mexico.
- Exchange rate performance:
  - Peso appreciation: 6.4 percent during 2010 and 6.6 percent so far during 2011 (as of the report).

### Outlook and medium-term projections (staff projections)
- Real GDP growth (percent): 2010: 4.3; 2011: 4.9; 2012: 4.5; 2013: 4.5; 2014: 4.5; 2015: 4.5; 2016: 4.5.
- Inflation, end of period (percent): 2010: 3.2; 2011: 3.1; 2012: 3.1; 2013: 3.0; 2014: 3.0; 2015: 3.0; 2016: 3.0.
- External current account balance (percent of GDP): 2010: -3.1; 2011: -2.6; 2012: -2.5; 2013: -2.1; 2014: -2.3; 2015: -2.2; 2016: -2.0.
- Central government overall balance (percent of GDP): 2010: -3.8; 2011: -3.8; 2012: -3.0; 2013: -2.6; 2014: -2.3; 2015: -2.3; 2016: -2.1.
- Nonfinancial public sector overall balance (percent of GDP): 2010: -3.3; 2011: -3.0; 2012: -1.5; 2013: -1.2; 2014: -1.0; 2015: -0.9; 2016: -0.9.
- Total public gross debt (excluding Ecopetrol) (percent of GDP): 2010: 35.2; 2011: 34.5; 2012: 33.2; 2013: 32.3; 2014: 31.6; 2015: 31.0; 2016: 30.2.
- Total public net debt (percent of GDP): 2010: 28.5; 2011: 29.2; 2012: 28.4; 2013: 27.5; 2014: 27.0; 2015: 26.6; 2016: 26.1.
- Outlook narrative:
  - Output gap expected to close in early 2012.
  - Real GDP growth in 2011 expected somewhat below 5 percent, with solid private consumption and investment.
  - Growth in 2012 and beyond projected to stabilize around the estimated potential rate of 4½ percent per year.

### Labor market issues and costs (Box summary)
- Labor market status:
  - Unemployment fell from 17 percent in 1999 to about 12 percent in 2010.
  - Labor informality estimated at 58 percent (Box) / about 60 percent (main text).
  - Minimum wage at end-2010: equivalent to 52 percent of GDP per capita (the second highest in the region).
- Non-wage labor costs (Earmarked Programs, percent of wage):
  - Pensions: 16.0
  - Contributory Health Regime: 12.5
  - Severance Fund: 8.3
  - Paid Vacation: 4.2
  - Mandatory Bonuses: 8.3
  - Severance payment for Unjust Dismissals 1/: 4.2
  - SENA (Training): 2.0
  - ICBF (Family and Child Welfare): 3.0
  - CCF (Family Compensation): 4.0
  - Total: 62.5
  - 1/ Varies according to the type of contract and time employed with a minimum value of around 4.23 percent in the case of defined contract (after labor reform of 2002).
- Main distortions and outcomes:
  - High non-wage costs and labor taxation—amounting to over 60 percent of profits—are cited as hindrances to formal job creation and competitiveness.
  - Staff recommends reforming labor taxes, ensuring minimum wage adjustments do not exceed target inflation, and designing revenue use to cover retraining and special funds.

### Macroprudential policy, financial stability, and credit developments
- Credit and asset indicators:
  - Credit to the private sector grew by 23 percent (y/y) in April 2011 (Box); stock of credit remains below 35 percent of GDP.
  - No clear evidence of asset market bubbles except fast growth in prices of high-end housing in Bogotá and Medellín.
- Macroprudential framework:
  - Broad set of tools, more extensive than regional peers, primarily using micro-prudential tools to control macroprudential risks.
  - Institutional setup: Financial stability committee includes the central bank, the Superintendencia Financiera (SF), the Ministry of Finance, and the Deposit Insurance Agency; a legal mandate for macroprudential policy has not been established.
- Selected tools (with introduction dates and details):
  - Loan-to-value ratio limits — 1999: set at 70 percent for mortgage borrowers.
  - Debt-to-income limits — 1999: monthly debt service limited to 30 percent of disposable income for mortgage borrowers.
  - Real credit growth caps — 1992: limited to 20 percent for banks; usage limited to 120 days per year.
  - Foreign-currency position limits in cash — 1999: limit is 50 percent of capital plus reserves and cannot be negative.
  - Foreign-currency position limits — 1999: long (short) limit is 20 percent (-5 percent) of capital plus reserves.
  - Dynamic Provisioning — 2007: introduced for commercial (2007) and consumption (2008) loans; application to mortgage and micro-credit pending.
  - Restriction on banks’ profit distribution — 2008: banks retained a portion of 2008 profits as additional capital buffer.
  - Limit on off-balance sheet positions — 2007: gross open positions in derivative products is 550 percent of capital plus reserves.
- Policy stance on inflows:
  - Pre-announced daily purchases helped contain appreciation pressures and portfolio inflows without creating balance sheet vulnerabilities.
  - Authorities would consider tightening macroprudential measures and reintroducing CFMs if inflows endangered financial stability.

### Fiscal framework, fiscal rule, and consolidation measures
- Fiscal rule (approved by Congress in June 2011):
  - Path to lower the structural deficit to 2.3 percent of GDP in 2014, and keep it below 1 percent of GDP from 2022 onwards.
  - Allows fiscal expansion when expected output growth rate is at least two percentage points lower than the long-term growth rate.
  - Creates a national sovereign wealth fund (SWF) to save windfall revenue from natural resources.
- Constitutional amendments (June) strengthened framework by:
  - Adding fiscal sustainability as a “constitutional criterion”.
  - Reforming the system of royalties and saving a portion in a sub-national savings and stabilization fund.
- Medium-term fiscal path and consolidation measures:
  - Authorities committed to significant consolidation over the next three years to lower the central government deficit below 2½ percent of GDP.
  - Expected consolidation mainly from expenditure restraint: control over goods and services, capping growth in transfers to regions (real terms cap at 3 percent over 2011−2016; thereafter set at rolling 4-year average growth of income), and lower interest payments from a single treasury account.
- Revenue stance and tax reform advice:
  - Staff: Colombia’s fiscal revenue-to-GDP ratio is low versus regional peers; sustained improvements in tax collections necessary to meet fiscal-rule targets given planned spending and contingent liabilities.
  - Staff encouraged revenue-raising reforms, simplifying the tax system to reduce distortions and combat informality.
  - Authorities: additional tax measures not needed to comply with fiscal rule; emphasized reducing tax distortions and consideration of FAD recommendations.
- Sovereign wealth fund (SWF) and royalty reform:
  - Staff supported the royalty reform and SWF plans but cautioned revenue projections underpinning fiscal targets leave little room for windfalls; accumulating resources in SWF in the next few years would require higher revenues and/or stricter expenditure restraint than assumed.

### Contingent liabilities and long-term fiscal risks
- Unfunded liabilities:
  - Unfunded liabilities from healthcare and pension systems estimated in the order of 200 percent of GDP (in present value terms).
- Staff concern over delays in strategy to address these contingent liabilities; authorities emphasized need for time to build social consensus.

### Exchange rate assessment, reserves, and external outlook
- Exchange rate assessments:
  - CGER-type assessments indicate the peso broadly in line with fundamentals as of end-April 2011.
  - Macroeconomic balance approach: real effective exchange rate about 10 percent above its medium-term equilibrium, mainly reflecting current account deficits somewhat larger than the current account norm.
  - Equilibrium real exchange rate approach: observed appreciation in line with equilibrium response to improved terms of trade.
- Reserves and adequacy:
  - New reserve metric in "Assessing Reserve Adequacy" for Colombia stands at 181 percent, compared with suggested adequacy range of 100-150 percent.
  - At current reserve levels the FCL added an important layer of protection; a tail event of a negative shock to commodity prices and curtailed access to capital markets, less severe than 2008−09, could generate a net external financing gap for Colombia of some US$5.5 billion.
- External current account:
  - Current account deficit 2010: 3.1 percent of GDP; projected to decline to 2 percent in 2016 due to higher production and exports of commodities, especially oil.

### Recovery, policy normalization, and risks (summary from assessment)
- Recovery and policy normalization:
  - Colombian economy proved resilient to the global financial crisis; solid recovery underway.
  - Output gap expected to close in a matter of months.
  - Normalization of macropolicies should become a priority with balance of risks tilted to the upside.
- Fiscal and monetary risks:
  - Fiscal stance envisaged for 2011 carries risk of yielding excessive stimulus in 2012; staff encourages maximum expenditure restraint feasible in remainder of year and saving any revenue overperformance.
  - Monetary tightening pace envisaged for 2011 strikes a balance between restraining credit growth and mitigating incentives for further capital inflows; markets expect policy rate to rise a few more basis points to neutral before end 2011.
  - Strategy of supplementing flexible exchange rate with pre-announced purchases has worked reasonably well but has limitations; staff supports considering strengthened macroprudential regulations and CFMs if inflows threaten stability.
- Staff recommendations on labor and competitiveness:
  - Build on recent labor market reform for first-time employees to lower costs of formal employment.
  - Reduce tax burden on labor earmarked for special funds and support those funds through general budget allocations.
  - Establish prudent limits to minimum wage increases.

### Key social and macro statistics (selected)
- Population (millions), 2009: 45.0
- GDP, 2010 per capita (US$): 4,943
- GDP, 2010 in billions of Col$: 546,951
- GDP, 2010 in billions of US$: 289.4
- Unemployment rate, March 2011 (percent): 10.8
- Life expectancy at birth (years), 2008: 73.0
- Gini index, 2009: 57.8
- Poverty rate ($2 a day (PPP)), 2009: 18.0
- Extreme poverty rate ($1 a day (PPP)), 2009: 8.0

### Selected balance-sheet, financial soundness, and fiscal indicators (selected time series)
- Exports (f.o.b.), annual (US$ millions): 2010: 40,777; 2011 (Proj): 54,861; 2012 (Proj): 57,870.
  - Petroleum products: 2010: 16,483; 2011: 25,679; 2012: 27,319.
  - Coffee: 2010: 1,884; 2011: 3,300; 2012: 3,457.
- Imports (f.o.b.), annual (US$ millions): 2010: 38,641; 2011 (Proj): 48,605; 2012 (Proj): 51,450.
- Trade balance (US$ millions): 2010: 2,136; 2011 (Proj): 6,256; 2012 (Proj): 6,421.
- Current account balance (US$ millions): 2010: -8,944; 2011 (Proj): -8,409; 2012 (Proj): -8,377.
- Gross official reserves (US$ millions): 2010: 28,078; 2011 (Proj): 31,803; 2012 (Proj): 33,751.
- Total public gross debt (percent of GDP): 2010: 36.4; 2011 (Proj): 35.9; 2012 (Proj): 34.7.
- Total public net debt (percent of GDP): 2010: 29.2; 2011 (Proj): 28.4; 2012 (Proj): 27.5.
- Financial soundness indicators (end-of-period):
  - Regulatory capital to risk-weighted assets: 2010: 17.3; April 2011: 17.9.
  - Nonperforming loans to gross loans (percent): 2010: 2.9; April 2011: 3.0.
  - ROAA (percent): 2010: 3.9; April 2011: 2.9.
  - Deposit to loan ratio (percent): 2010: 93.5; April 2011: 91.0.

### Debt sustainability and stress testing (summary)
- External debt (percent of GDP): 2010: 22.4; 2011 (Proj): 22.9; 2012 (Proj): 23.3.
- Gross external financing need (in billions of US$): 2010: 19.2; 2011 (Proj): 23.7; 2012 (Proj): 26.7.
- Debt-stabilizing primary balance example: indicated 0.3 (2016) in staff projections.
- Stress test scenarios include interest rate, growth, current account, combined, and 30% real depreciation shocks; public debt tests include contingent liability shock of 10 percent of GDP in one scenario.

### Fund relations, arrangements, and data transparency
- Membership: Joined December 27, 1945; Article VIII.
- Quota: 774.00 SDR Million — 100.00 Percent Quota.
- Latest FCLs:
  - FCL May 6, 2011 — May 5, 2013 — Amount Approved 3,970.00 — Amount Drawn 0.00.
  - Earlier FCLs listed with amounts approved and drawn as provided.
- Data adequacy:
  - Data provision adequate for surveillance; Colombia subscribes to the SDDS.
  - Rebasing to 2005 changed index formulae (Laspeyres fixed-base to Laspeyres chain index) with implications for comparability and non-additivity of components.
  - Areas for data improvements: timeliness and coverage of fiscal data, finances of local governments, monitoring of floating debts.

### Executive Board and staff recommendations (key policy advice)
- Macropolicy normalization:
  - Speedier exit from fiscal stimulus desirable given closing output gap; encourage saving revenue overperformance and restraining expenditure where feasible.
  - Gradual normalization of monetary stance supported; maintain inflation targeting and exchange rate flexibility with limited, transparent FX intervention.
- Fiscal policy and revenue:
  - Strengthen revenue collection and consider revenue-raising reforms to meet fiscal-rule targets and address contingent liabilities.
  - Support for fiscal rule and SWF, but staff cautioned accumulation in SWF will require higher revenues and/or stricter expenditure restraint.
- Financial sector and reserves:
  - Monitor credit and asset markets for overheating; expedite analysis of bank capital and liquidity under Basel III.
  - Consider larger reserve buffer to mitigate costs of unexpected financial or capital account shocks.
- Labor market and competitiveness:
  - Reduce labor taxation and non-wage costs; build on labor reform for first-time employees; set prudent limits to minimum wage increases to aid formalization and competitiveness.
- Capital flows and macroprudential measures:
  - Use macroprudential tools and consider CFMs as transitory responses if inflows threaten financial stability; remain vigilant of corporate and household balance sheets for currency mismatches.

*Source: IMF staff report excerpt (2011 Article IV Report — Selected Economic and Financial Indicators, _cr11224).*

### 1.  Selected Economic and Financial Indicators __________________________________________________ 32

### 1.  Selected Economic and Financial Indicators

### Background and policy context
- Colombia’s policy frameworks include an inflation-targeting regime and a medium-term fiscal framework that supported countercyclical measures during the 2008–09 global crisis.
- Policy rate actions:
  - The central bank lowered the policy rate by 600 basis points (to 3.5 percent) over the course of 2009.
  - The policy rate was kept at a historic low of 3 percent (from April 2010 to February 2011).
- Fiscal developments:
  - Combined public sector deficit widened to 2.7 percent of GDP in the crisis (compared with near balance in 2008).
  - In 2010 the combined public sector deficit rose to 3.2 percent of GDP, mainly on account of lower oil-related revenues.
- Access to IMF resources:
  - On May 6, 2011, the Executive Board approved a two-year FCL arrangement for 500 percent of quota, treated as precautionary.

### Recent macroeconomic developments (2010–early 2011)
- Output and demand:
  - Real GDP growth in 2010: 4.3 percent.
  - Domestic demand increased by 6¾ percent in 2010.
  - Sectoral note: growth was broad-based except in agriculture, construction, and light manufactures linked to trade with Venezuela.
- Inflation and prices:
  - CPI inflation rose to 3.2 percent by year end 2010 (within official target range).
  - Food inflation: 4.1 percent.
  - Regulated items (e.g., gasoline): 6.6 percent.
  - Core inflation anchored below the midpoint of the 2−4 percent target range.
- External sector and reserves:
  - External current account deficit increased by almost 1 percentage point of GDP to 3.1 percent of GDP in 2010.
  - Strong private capital inflows, mainly FDI in oil and energy, and other investment flows produced an overall balance of payments surplus of more than US$3 billion.
  - Gross reserves ended 2010 at over US$28 billion (just under 6 months of imports of goods and services).
- Fiscal specifics and contingent liabilities:
  - Central government outturn better than budgeted largely due to lower-than-expected capital expenditures that more than offset emergency flood-related expenditures of 0.2 percent of GDP.
  - The deficit of the Fuel Price Stabilization Fund (FEPC) increased to 0.15 percent of GDP (a contingent government liability).
- Tax reform:
  - A tax reform enacted using state of emergency powers broadened the tax base and increased the net wealth tax; the combined yield is estimated at an average of 0.4 percent of GDP per annum during 2011−14.
- Financial sector:
  - Financial soundness indicators remained strong in 2010: capital adequacy and profitability solid; NPLs broadly stable and at relatively low levels.
  - Banks’ liquidity tilted slightly toward foreign sources due to higher demand for foreign currency credit by corporates; most borrowing was fully hedged.
- Exchange rate and intervention:
  - The peso appreciated by 6.4 percent in nominal terms against the U.S. dollar during 2010.
  - In March 2010 the central bank adopted a program of pre-announced daily purchases of US$20 million from the interbank market to ease appreciation pressures.
- Labor market:
  - Unemployment remained around 11 percent.
  - Labor informality is estimated at about 60 percent.
  - High minimum wage and high rates of labor taxation are identified as key factors behind unemployment and informality.

### Capital inflows and FX intervention (Boxes summary)
- Capital inflows:
  - Colombia has received large capital inflows in the range of 5−7 percent of GDP, mainly FDI, since 2005.
  - Starting in 2009 the share of portfolio and other short-term capital inflows began to increase; the share of net FDI in total inflows fell below 50 percent by mid-2010.
- FX intervention:
  - Colombia purchased just over US$3 billion in 2010 (about 11 percent of the end-2010 stock of gross international reserves) and US$2.5 billion in the first half of 2011 under a program of preannounced daily purchases.
  - Cross-country comparison points:
    - Magnitude: Colombia’s intervention amounts were much smaller than those in Brazil and Peru and more comparable to Chile and Mexico.
    - Modality: Colombia used spot-market purchases of US$20 million per day over a pre-announced horizon (extended to September 30, 2011); previous tools included auctions of options.
    - Motivation: Colombia’s purchases aimed to slow the speed of appreciation (Chile cited reserve accumulation; Peru aimed at reducing excessive exchange rate volatility).
  - Exchange rate performance:
    - Peso appreciation: 6.4 percent during 2010 and 6.6 percent so far during 2011 (as of the report).

### Outlook and medium-term projections (staff table)
- Staff projections (Prel. Projections):
  - Real GDP growth (in percent): 2010: 4.3; 2011: 4.9; 2012: 4.5; 2013: 4.5; 2014: 4.5; 2015: 4.5; 2016: 4.5.
  - Inflation, end of period (in percent): 2010: 3.2; 2011: 3.1; 2012: 3.1; 2013: 3.0; 2014: 3.0; 2015: 3.0; 2016: 3.0.
  - External current account balance (in percent of GDP): 2010: -3.1; 2011: -2.6; 2012: -2.5; 2013: -2.1; 2014: -2.3; 2015: -2.2; 2016: -2.0.
  - Central government overall balance (in percent of GDP): 2010: -3.8; 2011: -3.8; 2012: -3.0; 2013: -2.6; 2014: -2.3; 2015: -2.3; 2016: -2.1.
  - Nonfinancial public sector overall balance (in percent of GDP): 2010: -3.3; 2011: -3.0; 2012: -1.5; 2013: -1.2; 2014: -1.0; 2015: -0.9; 2016: -0.9.
  - Total public gross debt (excluding Ecopetrol) (in percent of GDP): 2010: 35.2; 2011: 34.5; 2012: 33.2; 2013: 32.3; 2014: 31.6; 2015: 31.0; 2016: 30.2.
  - Total public net debt (in percent of GDP): 2010: 28.5; 2011: 29.2; 2012: 28.4; 2013: 27.5; 2014: 27.0; 2015: 26.6; 2016: 26.1.
- Outlook narrative:
  - The output gap is expected to close in early 2012.
  - Real GDP growth in 2011 is expected to be somewhat below 5 percent, with solid growth in private consumption and investment.
  - Growth in 2012 and beyond is projected to stabilize around the estimated potential rate of 4½ percent per year.

### Labor costs and social contributions (key statistics)
- Non-Wage Labor Costs in Colombia (Earmarked Programs, Percent of Wage):
  - Pensions: 16.0
  - Contributory Health Regime: 12.5
  - Severance Fund: 8.3
  - Paid Vacation: 4.2
  - Mandatory Bonuses: 8.3
  - Severance payment for Unjust Dismissals 1/: 4.2
  - SENA (Training): 2.0
  - ICBF (Family and Child Welfare): 3.0
  - CCF (Family Compensation): 4.0
  - Total: 62.5
  - 1/ Varies according to the type of contract and time employed with a minimum value of around 4.23 percent in the case of defined contract (after labor reform of 2002).

*Source: IMF staff report excerpt (2011 Article IV Report — Selected Economic and Financial Indicators).*

### Box 3. Labor Market Issues and Challenges

### Box 3. Labor Market Issues and Challenges

### Labor market status and key challenges
- Unemployment fell from 17 percent in 1999 to about 12 percent in 2010.
- Labor informality is estimated at 58 percent.
- Colombia’s labor market segmentation contributes to a poverty trap: informal laborers, who are predominantly poor, tend to be employed in lower-quality jobs and face barriers to access higher productivity formal-sector job opportunities.

### Main causes and labor market distortions
- Labor market regulations and laws have impeded job creation and created incentives toward greater informality.
- Colombia’s high non-wage costs rose sharply in the 1990’s, partly to help finance the health and pension systems mandated by the 1991 constitution.
- Minimum wage:
  - As of end-2010 the minimum wage was equivalent to 52 percent of GDP per capita (the second highest in the region).
- Non-wage costs in the formal sector include payroll tax contributions to fund health and pension schemes, taxes to fund training, set asides for severance payments, paid vacations, and mandatory bonuses.
- Colombia’s labor taxes and other mandatory contributions amount to over 60 percent of profits—the highest among large Latin American countries.
- Expansion of publicly provided health services in the early 1990’s has been linked by some studies to higher informality by enabling access to health services without participation in contributory regimes.
- Concern that health reforms under consideration to equalize benefits across subsidized and contributory schemes could create further informality pressures.

### Labor market outcomes and competitiveness links
- Despite past progress, overall unemployment and structural unemployment remain high by regional standards.
- Reducing distortions—such as high non-wage costs and rigidities that impair competitiveness—may help improve labor market outcomes.

### Policy discussions and near-term stance relevant to labor and macro risks
- Authorities envisaged continuing to raise the policy rate until it reaches a neutral level, with the market consensus estimate between 4.75 and 5.25 percent.
  - Since February (2011), the central bank had raised the policy rate five times; as of mid-June the rate stood at 4.25 percent.
- Authorities’ medium-term fiscal framework targets:
  - Central government deficit of 4.0 percent of GDP.
  - Combined public sector deficit of 3.4 percent of GDP.
- Government noted planned emergency relief and reconstruction outlays of about 0.5 percent of GDP; fiscal stance measures excluding these items did not suggest fiscal policy would be expansionary in 2011.
- Staff view:
  - Recommended a more ambitious fiscal target for 2011 to rebalance the policy mix and guard against possible overheating pressures.
  - Noted that fiscal policy lags could continue to support domestic demand into early 2012 and thus could put undue pressure on monetary policy if private demand growth or capital inflows intensify.
  - Emphasized that a tighter fiscal stance would need to be the main element of the policy response to a surge in inflows.

### Financial stability, capital inflows, and policy tools
- Recent inflows largely related to large FDI projects; pre-announced daily purchases of foreign exchange have helped contain appreciation pressures and portfolio inflows without creating balance sheet vulnerabilities.
- Authorities would consider:
  - Tightening macroprudential measures and
  - Reintroducing capital flow management (CFMs) tools used in previous episodes, if capital inflows endangered financial stability through excessive leveraging.
- Staff noted macroprudential coverage was broad and adequate; CFMs could be useful as part of a transitory response to an unexpected surge in inflows.
- Agreement to remain vigilant of credit market developments and monitor banks’ loan portfolios, liquidity, and asset markets, and to monitor corporate and household balance sheets for currency mismatches from capital inflows.

### Recent credit and asset indicators cited
- Credit to the private sector recovered strongly since mid-2010, growing by 23 percent (y/y) in April 2011.
- The stock of credit remains below 35 percent of GDP.
- No clear evidence of asset market bubbles other than fast growth in prices of high-end housing in Bogotá and Medellín.
- Indicators of household and corporate balance sheets do not reveal worrisome levels of indebtedness.

### Macroprudential framework and tools (Colombia)
- Colombia employs a broad set of macroprudential tools, more extensive than regional peers; for the most part authorities have used micro-prudential tools to control macroprudential risks.
- Institutional setup:
  - Financial stability committee includes the central bank, the Superintendencia Financiera (SF), the Ministry of Finance, and the Deposit Insurance Agency.
  - A legal mandate for macroprudential policy has not been established.
- Selected macroprudential tools in Colombia with introduction dates and details:
  - Loan-to-value ratio limits — 1999: Applies to mortgage borrowers; set at 70 percent.
  - Debt-to-income limits — 1999: Applies to mortgage borrowers; monthly debt service limited to 30 percent of disposable income.
  - Real credit growth caps — 1992: Applies to banks; limited to 20 percent; usage limited to 120 days per year.
  - Foreign-currency position limits in cash — 1999: Limit is 50 percent of capital plus reserves and cannot be negative.
  - Foreign-currency position limits — 1999: Long (short) limit is 20 percent (-5 percent) of capital plus reserves.
  - Dynamic Provisioning — 2007: Introduced for commercial (2007) and consumption (2008) loans; application to mortgage and micro-credit loans is pending.
  - Restriction on banks’ profit distribution — 2008: Banks agreed with the SF to retain a portion of 2008 profits as an additional capital buffer (amounts determined for each institution based on systemic importance).
  - Limit on off-balance sheet positions — 2007: Gross open positions in derivative products is 550 percent of capital plus reserves.

*Source: _cr11224 - Box 3. Labor Market Issues and Challenges*

### 21.      Discussions focused on the key

### _cr11224 - 21.      Discussions focused on the key

### Fiscal framework and fiscal rule
- Centerpiece: fiscal rule for the central government approved by Congress in June 2011.
- Main features of the rule:
  - Set a path for fiscal consolidation that lowers the structural deficit to 2.3 percent of GDP in 2014, and keeps it below 1 percent of GDP from 2022 onwards.
  - Allow fiscal expansion when the expected output growth rate is at least two percentage points lower than the long-term growth rate.
  - Create a national sovereign wealth fund (SWF) to save windfall revenue from natural resources.
- Constitutional amendments (June) strengthened the framework by:
  - Adding fiscal sustainability as a “constitutional criterion” to limit the impact of fiscally costly rulings of the constitutional court.
  - Reforming the system of royalties to achieve a more equitable distribution and to save a portion of royalties in a sub-national savings and stabilization fund.

### Medium-term fiscal path and consolidation measures
- Authorities committed to significant fiscal consolidation over the next three years to lower the central government deficit below 2½ percent of GDP.
- Expected sources of consolidation (bulk from expenditure restraint):
  - Control over goods and services expenditures.
  - Adoption of a rule to keep the growth in transfers to regions below the projected medium-term rate of growth of real GDP.
    - The rule caps the growth of transfers in real terms at 3 percent over 2011−2016; thereafter, it will be set at the rolling 4-year average growth of income.
  - Lower interest payments stemming from implementation of a single treasury account (reducing reliance on costly short-term debt).

### Revenue stance and tax reform advice
- Staff observations and recommendations:
  - Colombia’s fiscal revenue-to-GDP ratio is low compared with regional peers.
  - Sustained improvements in tax collections will be necessary to meet fiscal-rule targets, especially given planned increases in infrastructure spending, compensation for victims of the internal conflict, and contingent liabilities from the healthcare system and the fuel stabilization fund.
  - Staff encouraged revenue-raising reforms and recommended simplifying the tax system to reduce distortions and combat informality.
- Authorities’ view:
  - Additional tax measures were not needed to comply with the fiscal rule, which would be met through expenditure restraint.
  - Authorities emphasized reducing distortions in the tax system to support formal-sector activity and noted consideration of recent FAD recommendations on tax policy and administration.

### Supporting legislation, oversight, and budgetary reforms
- Staff urged rapid enactment of supporting legislation for the fiscal rule and alignment with international best practice.
- Recommended oversight committees for computing the fiscal rule (structural fiscal balance, potential output) be independent of political process and highly transparent.
- Staff stressed reforms to public financial management and the budgetary process to make the rule operational, including integrating a medium-term expenditure framework into the budget.
- Authorities stated supporting legislation would be ready in time for the 2012 budget and highlighted inclusion of congressional representatives on oversight committees for consensus building.

### Sovereign wealth fund (SWF) and royalty reform
- Staff supported the royalty reform passed in Congress and plans to establish a national SWF to save windfall fiscal revenues.
- Staff caution: revenue projections underlying the fiscal targets do not leave much room for windfalls; accumulating resources in the SWF in the next few years would require higher revenues and/or stricter expenditure restraint than assumed in the government’s consolidation path.
- Authorities considered more ambitious consolidation politically infeasible and noted concerns about delaying infrastructure investments.

### Contingent liabilities and long-term fiscal risks
- Staff concern over delays in strategy to address contingent liabilities of healthcare and pension systems.
- Unfunded liabilities from these systems are estimated to be in the order of 200 percent of GDP (in present value terms).
- Authorities acknowledged concern but emphasized the need for time to build social consensus and prepare reforms.

### Monetary policy, exchange rate, and reserves
- Inflation targeting:
  - Inflation-targeting framework considered appropriate; official target range to be maintained at 2−4 percent over the medium term.
  - Staff welcomed the increase of “usury” caps on interest rates to improve monetary policy transmission to lending rates.
- Exchange rate and reserves:
  - Authorities committed to exchange rate flexibility and saw scope for further buildup of reserves to strengthen the external position.
  - Staff noted no intrinsic inconsistency between flexible exchange rates and a reserves target; key reserve coverage metrics for Colombia fall below the median for other emerging markets.
  - The new reserve metric in "Assessing Reserve Adequacy" for Colombia stands at 181 percent, compared with a suggested adequacy range of 100-150 percent.
  - At current reserve levels the FCL added an important layer of protection. A tail event of a negative shock to commodity prices and curtailed access to capital markets, less severe than 2008−09, could generate a net external financing gap for Colombia of some US$5.5 billion.

### Exchange rate assessment and external outlook
- CGER-type assessments indicate the peso is broadly in line with fundamentals as of end-April 2011.
  - Macroeconomic balance approach: real effective exchange rate about 10 percent above its medium-term equilibrium, mainly reflecting current account deficits somewhat larger than the current account norm.
  - Equilibrium real exchange rate approach: observed appreciation in line with equilibrium response to improved terms of trade.
  - External stability approach: peso broadly in line with fundamentals.
- Current account dynamics:
  - Current account deficit was 3.1 percent of GDP in 2010 and is projected to decline to 2 percent in 2016 due to higher production and exports of commodities, especially oil.
  - A strengthening oil balance surplus is consistent with continued appreciation of the equilibrium real exchange rate.
  - Nontraditional exports are not expected to be adversely affected by peso appreciation over the medium term.

### Exchange restrictions and liberalization timetable
- No changes in exchange restrictions since the last Article IV consultation.
- Multiple currency practice and exchange restriction arising from a tax on outward remittances of nonresident profits earned before 2007 approved until December 31, 2011; the measure will be fully phased out on January 1, 2012.
- Staff encouraged authorities to set a timetable for removal of the exchange restriction arising from the special regime for the hydrocarbon sector; authorities will reassess this restriction.

### Financial sector oversight and regulation
- Financial sector supervision described as solid; strengthened by the Financial Superintendency Roadmap (period 2011−14).
  - Roadmap actions: strengthen coordination for information exchange, bank resolution, design of financial and macroprudential regulation, upgrade supervisory process, improve consolidated supervision and cross-border collaboration.
  - Roadmap proposes enhancing independence and legal protection of financial regulators, requiring legislative approval.
  - FSAP update planned for early 2013.
- Basel III implementation:
  - Assessment of financial soundness and Basel III terms is at an early stage.
  - Authorities noted strong solvency and good capital quality; beginning to assess capital and liquidity under Basel III.
  - Staff urged rapid analysis to expedite adoption; authorities expressed concern full adoption could affect financial deepening.
- AML/CFT:
  - Colombia is a member of GAFISUD and characterized as having strict AML/CFT practices.
  - Superintendency implements a risk-based approach and supports cooperatives to enhance compliance; a Circular aims to increase cooperatives’ compliance with AML/CFT customer due diligence.

### Labor market performance and reforms
- Labor market improving but challenges remain.
- Government target: reduce unemployment to 8.5 percent by 2014.
- Legislation (December 2010) established a temporary payroll tax break for small and medium-term enterprises to promote formalization and encourage youth employment.
- Staff recommendations:
  - Sweeping reform of labor tax legislation as part of broader tax reform.
  - Adopt mechanisms to ensure minimum wage adjustments do not exceed target inflation.
  - Design additional revenue from tax reform to cover special funds and retraining programs currently funded by specific labor taxes.
  - Staff highlighted high minimum wage and burdensome taxes/charges on firms as main hindrances to formal employment.
- Authorities’ view:
  - Reducing labor taxes seen as beneficial, but larger competitiveness gains expected from improvements in infrastructure, agriculture development policies, free trade agreements, and simplifying tax burdens for firms.

*Italic: Source — _cr11224 - 21.      Discussions focused on the key (excerpt from 2011 Article IV Report — Colombia).*

### 37.      The Colombian economy proved

### _cr11224 - 37.      The Colombian economy proved

### Recovery, output gap, and macropolicy normalization
- The Colombian economy proved resilient to the global financial crisis and a solid recovery is underway.
- The recovery was appropriately supported by expansionary monetary and fiscal policies.
- The output gap is expected to close in a matter of months.
- With the balance of risks tilted to the upside, the normalization of macropolicies has to become a priority.

### Fiscal policy stance and risks
- The fiscal policy stance envisaged for 2011 carries the risk of yielding excessive stimulus in 2012.
- Staff recognizes that budget rigidities and infrastructure needs, in part related to flooding damage, limit the scope to tighten the fiscal stance in the second half of the year.
- Domestic demand momentum in a context of limited slack in the economy is a serious concern.
- The authorities are encouraged to exercise the maximum expenditure restraint feasible in the remainder of the year.
- The authorities’ intention to save any revenue overperformance is welcome, but may not be sufficient to slow down demand in time.
- Staff underscores that a tightening of the fiscal stance would have to be part of the policy response to a possible surge in capital inflows.

### Monetary policy, inflation, and capital flow considerations
- The pace of monetary tightening envisaged for 2011 strikes the right balance between restraining credit growth and mitigating incentives for further capital inflows.
- Inflation expectations remain within the official target range.
- Markets expect that the policy rate will rise a few more basis points to its neutral level before end 2011.
- Staff welcomes the authorities’ unwavering commitment to attaining the inflation target and preserving financial stability.
- There is a risk that a sudden acceleration of domestic demand places an additional burden on monetary policy in the coming months.
- The strategy of supplementing the flexible exchange rate with an intervention program of pre-announced purchases has worked reasonably well, but has limitations.
- Staff welcomes the authorities’ plans to consider other policies (including strengthened macroprudential regulations and capital flow management policies) if capital inflows are seen as likely to endanger financial stability.

### Reserves and external buffers
- Colombia’s reserve position appears adequate, but it could be somewhat larger.
- Staff welcomes that the recent buildup in reserves has been carried out in a transparent fashion without compromising exchange rate flexibility and monetary policy objectives.
- Indicators of reserve adequacy suggest that Colombia’s current level is comfortable, but a larger reserve buffer could help mitigate costs of unexpected financial or capital account shocks.

### Fiscal framework and revenue reform recommendations
- Recent reforms strengthen Colombia’s fiscal framework: the fiscal rule for the central government, the incorporation of fiscal sustainability as a constitutional criterion, and the reform of the royalties system.
- Staff’s recommended next step: a revenue reform focused on broadening the tax base, including by eliminating exemptions and lowering the number of rates of the VAT.
- Expected benefits of revenue reform:
  - Encourage formalization in the economy.
  - Allow for more ambitious medium-term fiscal targets.
  - Allow a faster build up of resources in the new national sovereign wealth fund.
- Staff encourages the authorities to start developing a strategy to address contingent liabilities stemming from Colombia’s pension and healthcare systems.

### Financial sector oversight and supervision
- Colombia’s financial sector oversight is solid.
- Plans to strengthen cross-border and consolidated supervision are welcome.
- Staff recommends adopting a more ambitious timetable for completing the analysis of the composition of bank capital and liquidity under Basel III.
- Close monitoring of foreign borrowing activities by banks and corporates is necessary.

### Labor market, minimum wage, and competitiveness
- Steep taxation of labor and a relatively high minimum wage are significant hindrances to Colombia’s competitiveness.
- Staff urges that the authorities build on the recent labor market reform for first-time employees to lower the costs of formal employment and help to begin reducing the high rate of informality.
- Staff supports the authorities’ plans to expand business opportunities as a cornerstone of efforts to reduce informality.
- Staff recommends:
  - Reducing the tax burden on labor earmarked for special funds and supporting those funds through general budget allocations.
  - Establishing prudent limits to minimum wage increases.

### Exchange restrictions
- There have been no changes in Colombia’s exchange restrictions since the last Article IV consultation.
- Staff does not recommend approval of the retention of the restriction arising from the special regime for the hydrocarbon sector, since there is no timetable for its removal.

*International Monetary Fund — 2011 Article IV Report: Colombia (excerpt).*

### 46.      It is recommended that the next

### _cr11224 - 46.      It is recommended that the next

### Recommendation
- It is recommended that the next Article IV consultation be held on the 12-month cycle.

### Social and Demographic Indicators
- Population (millions), 2009: 45.0
- GDP, 2010 per capita (US$): 4,943
- GDP, 2010 in billions of Col$: 546,951
- GDP, 2010 in billions of US$: 289.4
- Unemployment rate, March 2011 (percent): 10.8
- Life expectancy at birth (years), 2008: 73.0
- Under 5 mortality rate (per 1,000 live births), 2008: 20.6
- Physicians (per 100,000 people), 2008: 143.0
- Adult illiteracy rate (ages 15 and older), 2007: 6.9
- Gross primary school enrollment rate, 2008: 119.9
- Sustainable access to safe water, 2006 (percent of population): 93.0
- Gini index, 2009: 57.8
- Poverty rate ($2 a day (PPP)), 2009: 18.0
- Extreme poverty rate ($1 a day (PPP)), 2009: 8.0

### Real Economy and Prices (selected annual rates)
- Real GDP growth: 2007: 6.9; 2008: 3.5; 2009: 1.5; 2010: 4.3; 2011 (Proj): 4.9; 2012 (Proj): 4.5
- GDP deflator: 2007: 5.0; 2008: 7.8; 2009: 4.2; 2010: 3.1; 2011 (Proj): 5.7; 2012 (Proj): 2.9
- Consumer prices (average): 2007: 5.5; 2008: 7.0; 2009: 4.2; 2010: 3.2; 2011 (Proj): 3.3; 2012 (Proj): 2.9
- Consumer prices (end of period): 2007: 5.7; 2008: 7.7; 2009: 2.0; 2010: 3.2; 2011 (Proj): 3.1; 2012 (Proj): 3.1

### External Sector: Trade, Reserves, and Current Account
- Exports (f.o.b.), annual (US$ millions): 2007: 30,577; 2008: 38,534; 2009: 34,026; 2010: 40,777; 2011 (Proj): 54,861; 2012 (Proj): 57,870
  - Of which: Petroleum products: 2007: 7,318; 2008: 12,204; 2009: 10,254; 2010: 16,483; 2011: 25,679; 2012: 27,319
  - Of which: Coffee: 2007: 1,714; 2008: 1,883; 2009: 1,543; 2010: 1,884; 2011: 3,300; 2012: 3,457
- Imports (f.o.b.), annual (US$ millions): 2007: 31,161; 2008: 37,563; 2009: 31,479; 2010: 38,641; 2011 (Proj): 48,605; 2012 (Proj): 51,450
- Trade balance (US$ millions): 2007: -584; 2008: 971; 2009: 2,546; 2010: 2,136; 2011 (Proj): 6,256; 2012 (Proj): 6,421
- Current account balance (US$ millions): 2007: -6,018; 2008: -6,923; 2009: -5,141; 2010: -8,944; 2011 (Proj): -8,409; 2012 (Proj): -8,377
- Gross official reserves (US$ millions): 2007: 20,607; 2008: 23,672; 2009: 24,992; 2010: 28,078; 2011 (Proj): 31,803; 2012 (Proj): 33,751
- Gross international reserves (in US$ billion), projections: 2007: 20.6; 2008: 23.7; 2009: 25.0; 2010: 28.1; 2011 (Proj): 31.8; 2012 (Proj): 33.8
- Gross international reserves (in months of imports of goods and services): 2007: 5.5; 2008: 7.4; 2009: 6.4; 2010: 5.8; 2011 (Proj): 6.2; 2012 (Proj): 6.2
- Oil Price (Colombian mix): 2007: 66.2; 2008: 90.2; 2009: 56.6; 2010: 73.1; 2011 (Proj): 98.4; 2012 (Proj): 97.4
- Share of ST debt at remaining maturity + CA deficit: 2007: 119; 2008: 143; 2009: 130; 2010: 119; 2011 (Proj): 119; 2012 (Proj): 129

### Balance of Payments and Financial Flows (selected)
- Financial account balance (US$ millions): 2007: 10,347; 2008: 9,492; 2009: 6,254; 2010: 11,879; 2011 (Proj): 12,134; 2012 (Proj): 10,325
- Direct investment in Colombia (US$ millions): 2007: 9,049; 2008: 10,596; 2009: 7,137; 2010: 6,760; 2011 (Proj): 7,778; 2012 (Proj): 8,224
- Gross inward direct investment (memorandum): 2011 (Proj): 22,060; 2012 (Proj): 23,587

### Fiscal Operations: Central Government (percent of GDP and COP billions)
- Total revenue (percent of GDP): 2006: 14.7; 2007: 15.0; 2008: 15.6; 2009: 15.2; 2010: 13.7; 2011 (Proj): 14.4; 2012 (Proj): 15.2
- Tax revenue (percent of GDP): 2006: 13.4; 2007: 13.4; 2008: 13.4; 2009: 12.8; 2010: 12.2; 2011 (Proj): 12.7; 2012 (Proj): 13.4
- Total expenditure and net lending (percent of GDP): 2006: 18.1; 2007: 17.7; 2008: 17.9; 2009: 19.2; 2010: 17.5; 2011 (Proj): 18.2; 2012 (Proj): 18.2
- Overall balance (percent of GDP): 2006: -3.4; 2007: -2.7; 2008: -2.3; 2009: -4.1; 2010: -3.8; 2011 (Proj): -3.8; 2012 (Proj): -3.0
- Primary balance (percent of GDP): 2006: 0.2; 2007: 1.0; 2008: 0.9; 2009: -1.1; 2010: -1.1; 2011 (Proj): -0.9; 2012 (Proj): -0.3
- Nominal GDP (in COP billions) series: 2006: 383,898; 2007: 431,072; 2008: 481,037; 2009: 508,532; 2010: 546,951; 2011 (Proj): 606,418; 2012 (Proj): 652,062

### Combined Public Sector (selected)
- Combined public sector total revenue (percent of GDP): 2006: 27.3; 2007: 27.2; 2008: 26.3; 2009: 26.5; 2010: 24.4; 2011 (Proj): 25.3; 2012 (Proj): 25.9
- Combined public sector total expenditure and net lending (percent of GDP): 2006: 28.1; 2007: 28.2; 2008: 26.3; 2009: 29.1; 2010: 27.5; 2011 (Proj): 28.3; 2012 (Proj): 27.4
- Combined public sector balance (percent of GDP): 2006: -0.7; 2007: -0.7; 2008: -0.1; 2009: -2.7; 2010: -3.2; 2011 (Proj): -2.9; 2012 (Proj): -1.5
- Total public debt (percent of GDP): 2006: 36.8; 2007: 32.7; 2008: 30.8; 2009: 36.3; 2010: 36.4; 2011 (Proj): 35.9; 2012 (Proj): 34.7
- Total public gross debt (in COP billions, memorandum): 2011 (Proj): 217,814

### Monetary and Financial System Indicators
- Broad money (y-o-y percent change): 2007: 17.4; 2008: 18.5; 2009: 8.1; 2010: 11.5; 2011 (Apr): 17.6; 2011 (Proj): 13.3
- Credit to the private sector (y-o-y percent change): 2007: 25.6; 2008: 14.0; 2009: 0.9; 2010: 16.8; 2011 (Apr): 20.9; 2011 (Proj): 13.5
- Monetary base (COP billions): 2007: 32,415; 2008: 36,195; 2009: 39,547; 2010: 44,878; April 2011: 40,409
- Central bank gross official reserve assets (in billions of US$): 2007: 15.7; 2008: 21.0; 2009: 23.9; 2010: 25.3; April 2011: 28.5; April 2011 (other line): 31.0
- Central bank inflation target: range examples shown: 4.0-5.0; 2.0-4.0
- CPI inflation, eop: 2007: 4.5; 2008: 5.7; 2009: 7.7; 2010: 2.0; 2011 (Proj): 3.2; 2012 (Proj): 3.1

### Financial Soundness Indicators (end-of-period)
- Regulatory capital to risk-weighted assets: 2006: 15.4; 2007: 16.0; 2008: 15.4; 2009: 17.2; 2010: 17.3; April 2011: 17.9
- Nonperforming loans to gross loans (percent): 2006: 2.7; 2007: 3.2; 2008: 3.9; 2009: 4.0; 2010: 2.9; April 2011: 3.0
- ROAA (percent): 2006: 4.0; 2007: 4.0; 2008: 3.6; 2009: 3.5; 2010: 3.9; April 2011: 2.9
- ROAE (percent): 2006: 29.9; 2007: 30.8; 2008: 28.1; 2009: 26.2; 2010: 27.2; April 2011: 20.5
- Deposit to loan ratio (percent): 2006: 101.4; 2007: 94.7; 2008: 94.9; 2009: 98.8; 2010: 93.5; April 2011: 91.0

### Medium-Term Outlook (2007–2016 projections, selected)
- Real GDP growth (annual): Baseline: 2011: 4.9; 2012–2016: 4.5 each year
- Consumer prices (end of period, percent): 2011 (Proj): 3.2; 2012–2016 (Proj): 3.1, 3.0, 3.0, 3.0, 3.0
- Gross national savings (percent of GDP): 2007: 20.5; 2008: 20.5; 2009: 20.5; 2010: 19.4; 2011 (Proj): 20.3; 2012 (Proj): 20.6
- Gross domestic investment (percent of GDP): 2007: 23.4; 2008: 23.4; 2009: 22.7; 2010: 22.5; 2011 (Proj): 22.9; 2012 (Proj): 23.0
- External current account balance (percent of GDP): 2007: -2.9; 2008: -2.9; 2009: -2.2; 2010: -3.1; 2011 (Proj): -2.6; 2012 (Proj): -2.5

### Debt Sustainability: External and Public Sector (selected)
- External debt (percent of GDP): 2007: 21.2; 2008: 19.7; 2009: 22.9; 2010: 22.4; 2011 (Proj): 22.9; 2012 (Proj): 23.3
- External debt-to-exports ratio (percent): 2007: 130.2; 2008: 108.7; 2009: 140.5; 2010: 143.3; 2011 (Proj): 122.0; 2012 (Proj): 124.7
- Gross external financing need (in billions of US$): 2007: 16.3; 2008: 17.3; 2009: 16.6; 2010: 19.2; 2011 (Proj): 23.7; 2012 (Proj): 26.7
- Total public gross debt (percent of GDP): 2006: 36.8; 2007: 32.7; 2008: 30.8; 2009: 36.3; 2010: 36.4; 2011 (Proj): 35.9; 2012 (Proj): 34.7
- Total public net debt (percent of GDP): 2007: 21.0; 2008: 27.4; 2009: 28.5; 2010: 29.2; 2011 (Proj): 28.4; 2012 (Proj): 27.5
- Debt-stabilizing primary balance (percent of GDP) under baseline public debt: 2006–2016 series shows baseline public sector debt around 36.8 (2006) declining to 31.2 (2016); debt-stabilizing primary balance indicated: 0.3 (2016)

### Stress Test Scenarios (summarized from bound tests)
- External debt bound tests include shocks: interest rate shock, growth shock, current account shock, combined shock, 30% real depreciation.
- Public debt bound tests include shocks: interest rate shock, growth shock, primary balance shock (no policy change scenario), combined shock, 30% real depreciation and 10 percent of GDP contingent liabilities shock.
- Baseline and historical scenarios, and scenario with key variables at historical averages, are presented for both external and public debt analyses.

*Sources: Colombian authorities; UNDP Human Development Report; World Development Indicators; Banco de la República; Superintendencia Financiera; Ministry of Finance; Creditedge (Moody's-KMV); and Fund staff estimates and projections.*

### ANNEX I. COLOMBIA: FUND RELATIONS _______________________________________________ 2

### ANNEX I. COLOMBIA: FUND RELATIONS _______________________________________________ 2

### Membership Status
- Joined: December 27, 1945; Article VIII.

### General Resources Account
- Quota: 774.00 SDR Million — 100.00 Percent Quota
- Fund holdings of currency: 565.30 SDR Million — 73.04 Percent Quota
- Reserve position: 208.70 SDR Million — 26.96 Percent Quota

### SDR Department
- Net cumulative allocation: 738.32 SDR Million — 100.00 Percent Allocation
- Holdings: 742.43 SDR Million — 100.56 Percent Allocation

### Outstanding Purchases and Loans
- None.

### Latest Financial Arrangements (in millions of SDR)
- FCL May 6, 2011 — May 5, 2013 — Amount Approved 3,970.00 — Amount Drawn 0.00
- FCL May 7, 2010 — May 5, 2011 — Amount Approved 2,322.00 — Amount Drawn 0.00
- FCL May 11, 2009 — May 6, 2010 — Amount Approved 6,966.00 — Amount Drawn 0.00
- Stand-by May 2, 2005 — Nov 2, 2006 — Amount Approved 405.00 — Amount Drawn 0.00
- Stand-by Jan 15, 2003 — May 2, 2005 — Amount Approved 1,548.00 — Amount Drawn 0.00

### Projected Payments to Fund (in SDR Million)
- Forthcoming (Principal / Charges/interest / Total):
  - 2011: Principal 0.01 — Charges/interest 0.01 — Total 0.01
  - 2012: Principal 0.01 — Charges/interest 0.01 — Total 0.01
  - 2013: Principal 0.01 — Charges/interest 0.01 — Total 0.01
  - 2014: Principal 0.01 — Charges/interest 0.01 — Total 0.01
  - 2015: (no line items beyond 2014 shown)

### Implementation of HIPC Initiative
- Not applicable.

### Implementation of Multilateral Debt Relief Initiative (MDRI)
- Not applicable.

*ANNEX I. COLOMBIA: FUND RELATIONS (As of May 31, 2011)*

### ANNEX IV. COLOMBIA: STATISTICAL ISSUES

### ANNEX IV. COLOMBIA: STATISTICAL ISSUES (as of June 15, 2011)

### I. Assessment of Data Adequacy for Surveillance — Real sector
- Data provision is adequate for surveillance.
- The National Department of Statistics (DANE) compiles the national accounts; Banco de la República (BdR) compiles the financial accounts.
- Estimates of GDP by the production and the expenditure approaches both use 2005 as their base year.
- GDP compilation conforms to the methodological recommendations of the System of National Accounts 1993 (1993 SNA).
- Rebasing to 2005:
  - Changed index formulae: historically a Laspeyres fixed-base index; with the 2005 base year it is a Laspeyres chain index.
  - Implications: the 2000 and 2005 are not comparable and the chain index is associated with non-additivity of the components.
  - Rebasing resulted in a revision of nominal GDP reflecting improvements in source data.

### I. Assessment of Data Adequacy for Surveillance — Government finance statistics
- The Ministry of Finance and Public Credit (MFPC) compiles public revenue, expenditure, and financing data.
- Improvements made, but needs remain:
  - Improve timeliness and coverage of fiscal data.
  - Develop timely and reliable data on the finances of local governments.
  - Improve monitoring of floating debts.
- Data cover the nonfinancial public sector (NFPS); coverage of “above-the-line” operations of units outside the national administration is not exhaustive due to capacity constraints.
- The General Accounting Office (GAO) developed a single accounting database for the public sector.
  - GAO accounting classification is bridged to the GFSM 2001 framework to compile GFS on accrual and cash bases.

### I. Assessment of Data Adequacy for Surveillance — Financial sector statistics
- The BdR compiles financial sector data; the Superintendency of Banks and the Superintendency of Securities compile data in their respective areas.
- Fund technical assistance emphasized interagency cooperation and procedures to ensure data consistency.

### I. Assessment of Data Adequacy for Surveillance — Balance of payments and external debt
- BdR is responsible for balance of payments (BoP) statistics.
- Quarterly BoP data produced since 1994; BdR adopted BPM5 in 1998.
- BoP statistics extended to cover transactions in the free trade zones.
- Improved surveys, particularly in services, enhanced coverage and consistency.
- Financial account data are based on actual disbursement rather than registers.
- 2005 data ROSC recommendations:
  - BdR, in consultation with DANE, should develop methodology to include unrecorded trade timely.
  - BdR should reclassify some FDI equity transactions to portfolio equity and adjust related investment income series accordingly.
  - Continue efforts to identify government bonds issued abroad and purchased by residents and those purchased by residents on the secondary market.
- BdR also compiles and disseminates:
  - International Investment Position statistics
  - External Debt statistics
  - Data Template on International Reserves and Foreign Currency Liquidity

### II. Data Standards and Quality
- Colombia subscribes to the Special Data Dissemination Standard (SDDS).
- Metadata are posted on the Fund’s Dissemination Standards Bulletin Board (DSBB).
- A data ROSC was published in October 2006.

### III. Reporting to STA (optional)
- Colombia reports annual GFS to STA for general government and its subsectors on accrual and cash bases for publication in the Government Finance Statistics Yearbook (GFS Yearbook).
  - Data for consolidated general government are only available from 2008 onward because of shortcomings in the consolidation process of past data.
- Currently, no high frequency data are reported for publication in IFS.
- Authorities use standardized report forms for reporting monetary data to STA:
  - central bank (Form 1SR)
  - other depository corporations (Form 2SR)
  - other financial corporations (Form 4SR)

### Colombia: Table of Common Indicators Required for Surveillance (As of June 15, 2011) — selected items and data quality assessments
- Exchange Rates
  - Date of latest observation: May 2011
  - Date received: Jun. 1, 2011
  - Frequency of Data: D
  - Frequency of Reporting: W
  - Frequency of Publication: D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities
  - Date of latest observation: Apr. 2011
  - Date received: May 23 2011
  - Frequency of Data/Reporting/Publication: M / M / M
- Reserve/Base Money
  - Date of latest observation: Apr. 2011
  - Date received: May 17, 2011
  - Frequency of Data: D
  - Frequency of Reporting: W
  - Frequency of Publication: W
  - Data Quality — Methodological soundness: LO, O, LO, LO
  - Data Quality — Accuracy and reliability: O, O, O, O, O
- Broad Money
  - Date of latest observation: Mar. 2011
  - Date received: May 17, 2011
  - Frequency of Data/Reporting/Publication: D / W / W
- Central Bank Balance Sheet
  - Date of latest observation: Apr. 2011
  - Date received: May 17, 2011
  - Frequency: M / M / M
- Consolidated Balance Sheet of the Banking System
  - Date of latest observation: Mar. 2011
  - Date received: May 17, 2011
  - Frequency: M / M / M
- Interest Rates
  - Date of latest observation: May 2011
  - Date received: Jun. 7, 2011
  - Frequency: D / W / D
- Consumer Price Index
  - Date of latest observation: Apr. 2011
  - Date received: May 17, 2011
  - Frequency: M / M / M
- Revenue, Expenditure, Balance and Financing Composition — General Government (GG)
  - Date of latest observation: Q2 2009
  - Date received: Feb. 2010
  - Frequency: Q / Q / Q
  - Data Quality — Methodological soundness: O, O, LO, O
  - Data Quality — Accuracy and reliability: LO, O, O, O, NO
- Revenue, Expenditure, Balance and Composition of Financing — Central Government
  - Date of latest observation: 2009
  - Date received: Apr. 2011
  - Frequency: M / M / M
- Stocks of Central Government and Central Government-Guaranteed Debt
  - Date of latest observation: Q3 2009
  - Date received: Jan. 2010
  - Frequency: Q / Q / Q
- External Current Account Balance
  - Date of latest observation: Q4 2010
  - Date received: Apr. 14, 2011
  - Frequency: Q / Q / Q
  - Data Quality — Methodological soundness: O, LO, LO, LO
  - Data Quality — Accuracy and reliability: O, O, O, O, LO
- Exports and Imports of Goods and Services
  - Date of latest observation: Q4 2010
  - Date received: Apr. 14, 2011
  - Frequency: Q / Q / Q
- GDP/GNP
  - Date of latest observation: Q4 2010
  - Date received: Apr. 20, 2011
  - Frequency: Q / Q / Q
  - Data Quality — Methodological soundness: O, LO, O, O LO
  - Data Quality — Accuracy and reliability: LO, O, LO, LO, NO
- Gross External Debt
  - Date of latest observation: Sep. 2009
  - Date received: Jan. 2010
  - Frequency: M / M / M
- International Investment Position
  - Date of latest observation: Q4 2011
  - Date received: Apr. 14, 2011
  - Frequency: Q / Q / Q

### Public Information Notice (PIN) No. 11/96 — Background and Staff Findings (July 22, 2011)
- On July 20, 2011, the IMF Executive Board concluded the 2011 Article IV consultation with Colombia.
- Background and recent performance:
  - After a short-lived contraction, economic activity began to recover in the second half of 2009; real growth for the year was 1.5 percent.
  - In 2010, real GDP grew by 4.3 percent.
  - Inflation in 2010 was near the mid-point of the official target range of 2−4 percent.
  - Commercial and consumer credit began to rebound strongly around mid-2010.
  - External current account deficit widened to 3.1 percent of GDP in 2010, reflecting a sharp pick up in imports.
- Policy responses during the crisis:
  - Central bank lowered policy rate by 650 basis points to a historic low of 3 percent between early 2009 and early 2011.
  - Expansionary fiscal policy: combined public sector deficit widened to around 3 percent of GDP in 2009 and 2010 (compared with near balance in 2008).
  - Financial system remained resilient: capital adequacy and profitability remained strong and non-performing loans increased only slightly.
- Capital inflows and FX intervention:
  - In 2010, renewed appreciation pressures on the peso amid strong inflows.
  - Central bank purchased just over US$3 billion through pre-announced intervention program of purchasing at least US$20 million per day (most recently extended until September 30, 2011).
  - Peso appreciated by just 1 percent against the U.S. dollar through the remainder of the year since the program was initiated.
- 2011 outlook (staff projections and commentary):
  - Real GDP growth in 2011 projected at about 5 percent, led by domestic demand and favorable terms of trade.
  - Inflation expected to remain within central bank target range; output gap projected to close in early 2012.
  - Inflation expectations well anchored.
  - Central bank started normalizing monetary conditions: policy rate increased by 125 basis points so far during 2011.
  - External current account deficit expected to narrow to 2.6 percent of GDP due to higher oil and commodity prices.
  - Strong private capital inflows (mainly FDI) expected to result in an overall balance of payments surplus and continued appreciation pressures.
- Fiscal policy and reforms:
  - Government strategy includes a structural fiscal rule for the central government, constitutional amendments establishing fiscal sustainability as a constitutional criterion and a more equitable distribution of royalties, and creation of a national sovereign wealth fund.

### Executive Board Assessment — Key messages
- Directors commended sound macroeconomic policies and strong institutional frameworks.
- Recovery is well entrenched; outlook positive.
- Main challenges: normalize macropolicy mix to avoid overheating, strengthen revenue collection, reduce unemployment and labor market informality.
- Fiscal policy:
  - Directors generally agreed a speedier exit from fiscal stimulus desirable given closing output gap.
  - Encouraged authorities to save any overperformance in government revenues this year and restrain expenditure where feasible.
  - Welcomed legislative reforms including adoption of a fiscal rule for the central government and creation of a sovereign wealth fund.
  - Stressed importance of addressing large contingent liabilities in pension and healthcare systems.
- Monetary and exchange rate stance:
  - Inflation targeting has served Colombia well; supported gradual normalization of monetary stance.
  - Exchange rate flexibility, with limited FX intervention, should remain primary tool to absorb capital inflows.
  - Additional tools (macroprudential regulation, capital flow management policies) can be used if inflows threaten financial stability.
  - Most Directors supported policy intention to further improve reserve coverage.
- Financial sector:
  - Financial system is sound; credit and asset markets should be closely monitored for overheating risks.
  - Welcomed improvements in financial supervision and encouraged completion of analysis of bank capital and liquidity under Basel III.
- Labor market:
  - Urged authorities to build on recent reforms to lower unemployment and informality.
  - Recommended broadening cuts in labor taxation and addressing the binding minimum wage.

### Colombia: Selected Economic Indicators (Prel. 2006–2010) — key figures
- Real GDP (annual percent change)
  - 2006: 6.7
  - 2007: 6.9
  - 2008: 3.5
  - 2009: 1.5
  - 2010: 4.3
- Consumer prices (average)
  - 2006: 4.3
  - 2007: 5.5
  - 2008: 7.0
  - 2009: 4.2
  - 2010: 2.3
- Consumer prices (end-of-period)
  - 2006: 4.5
  - 2007: 5.7
  - 2008: 7.7
  - 2009: 2.0
  - 2010: 3.2
- Real effective exchange rate (depreciation -)
  - 2006: -1.0
  - 2007: 7.7
  - 2008: 0.4
  - 2009: 5.2
  - 2010: 5.5
- Broad money (annual percent change)
  - 2006: 18.0
  - 2007: 17.4
  - 2008: 18.5
  - 2009: 8.1
  - 2010: 11.5
- Credit to the private sector (annual percent change)
  - 2006: 35.6
  - 2007: 25.6
  - 2008: 14.0
  - 2009: 0.9
  - 2010: 16.8
- Interest rate (90-day time deposits; percent per year) — Nominal
  - 2006: 6.8
  - 2007: 9.0
  - 2008: 10.1
  - 2009: 4.1
  - 2010: 3.5
- Interest rate (90-day time deposits; percent per year) — Real
  - 2006: 2.3
  - 2007: 3.3
  - 2008: 2.4
  - 2009: 2.1
  - 2010: 0.3
- Current account (deficit-), percent of GDP
  - 2006: -1.9
  - 2007: -2.9
  - 2008: -2.9
  - 2009: -2.2
  - 2010: -3.1
- External debt, percent of GDP
  - 2006: 25.0
  - 2007: 21.2
  - 2008: 19.7
  - 2009: 22.9
  - 2010: 22.4
  - Of which: Public sector
    - 2006: 16.4
    - 2007: 13.7
    - 2008: 12.5
    - 2009: 15.9
    - 2010: 13.6
- GIR in percent of short-term debt
  - 2006: 147.6
  - 2007: 198.7
  - 2008: 207.3
  - 2009: 244.4
  - 2010: 183.7
- Gross domestic investment, percent of GDP
  - 2006: 22.4
  - 2007: 23.0
  - 2008: 23.4
  - 2009: 22.7
  - 2010: 22.5
- Gross national savings, percent of GDP
  - 2006: 20.5
  - 2007: 20.2
  - 2008: 20.5
  - 2009: 20.5
  - 2010: 19.4
- Combined public sector balance, percent of GDP
  - 2006: -0.7
  - 2007: -0.7
  - 2008: -0.1
  - 2009: -2.7
  - 2010: -3.2
- Central government balance, percent of GDP
  - 2006: -3.4
  - 2007: -2.7
  - 2008: -2.3
  - 2009: -4.1
  - 2010: -3.8
- Public debt (includes Ecopetrol and Banco de la República's outstanding external debt)
  - 2006: 36.8
  - 2007: 32.7
  - 2008: 30.8
  - 2009: 36.3
  - 2010: 36.4

### Statement by María Angélica Arbeláez, Alternate Executive Director for Colombia (July 20, 2011) — authorities' views and policy intent
- Economic outlook and performance:
  - First quarter 2011 real GDP: 5.1 percent year-on-year.
  - Government and BdR raised 2011 forecast from 4.5 percent to between 5 and 6 percent.
  - Expect current negative output gap to close before year-end 2011.
  - No clear signs of overheating: no price bubbles observed in asset markets; credit growth manageable.
  - Inflation expected low: 3.1 percent in December year-on-year according to central bank projections.
  - Fiscal deficit close to 3 percent of GDP; public gross debt around 36 percent of GDP.
  - Current account deficit anticipated to narrow to 2.6 percent of GDP, financed mostly by FDI inflows.
  - International reserves level remains adequate.
  - Credit rating on sovereign debt raised to investment grade.
  - Flexible Credit Line (FCL) has provided protection against tail risks.
  - Medium-term objective: raise potential growth rate, which today is around 4.5 percent.
- Fiscal policy framework and reforms:
  - Historical and recent institutional framework:
    - Laws in 1997 and 2000 to regulate regions’ indebtedness and enforce fiscal discipline and transparency.
    - Fiscal Responsibility and Transparency Law (2003) includes a Medium-Term Fiscal Framework and Medium-Term Expenditure Plan with specific ceilings.
  - Recent reforms approved by Congress:
    - The Fiscal Rule: limits the structural deficit of the Central Government; creates mechanisms to increase savings from hydrocarbon export related revenues; develops rules to manage countercyclical fiscal policies.
    - The Fiscal Sustainability Legislative Act: incorporates fiscal sustainability as a general principle in the Constitution.
    - The Royalties Reform: mandates saving 30 percent of hydrocarbon royalties; directs fairer distribution among regions and seeks to enhance spending efficiency of royalties.
  - Authorities committed to passing supporting legislation before 2012 and to ensure the Fiscal Rule is technically robust, transparent, and independent.
  - Fiscal Rule target: gradually reduce the Central Government’s deficit until reaching below 1 percent of GDP from 2022 onwards—met through significant spending cuts independent of new tax reforms.
- Revenue and tax policy:
  - 2010 tax reform eliminated some exemptions, broadened the tax base, and gradually dismantled distortionary taxes such as the financial transactions tax.
  - Authorities see further room to improve tax structure through measures that stimulate private activity and reduce informality.
  - Possible measures: broadening the tax base, reducing tariffs (income tariff of 33 percent described as extremely high compared to peers), eliminating some VAT rebates.
  - Ministry of Finance valued recent Fund TA mission on tax reform and is designing a tax package for future presentation to Congress.
- Short-term fiscal impacts of flooding:
  - Severe flooding cost around 0.5 percent of GDP in 2011; total reconstruction costs estimated between 2 and 3 percent of GDP.
  - Authorities increased taxes and reduced spending to ensure an unchanged fiscal stance.
  - Budget for 2011 approved before 2010 tax reform was not modified to reflect expected additional revenues.
  - Revenues from reform higher than expected and spending lower than envisaged likely to result in a lower deficit by around 0.4 percent of GDP than projected by authorities (3.4 percent of GDP for the combined public sector).
  - Authorities perceive fiscal policy would not be pro-cyclical given planned further reductions for 2012.
- Monetary policy and capital inflows:
  - Inflation targeting regime reduced inflation and anchored expectations.
  - BdR began tightening in 2011: raised benchmark interest rate by 25 basis points every month since February 2011.
  - Objectives: keep inflation low/stable and smooth the business cycle; move toward neutral monetary stance cautiously.
  - Exchange rate flexibility seen as primary shock absorber for capital inflows.
  - Central bank’s pre-announced daily purchases of foreign exchange (US$20 million per day) used mainly to build international reserves; purchases have totaled just over US$3 billion in 2010.
  - Authorities find transparent, small, predictable interventions more effective than large-scale unpredictable accumulation.
  - Future policy responses to inflows will depend on inflow nature and whether impacts are mainly on exchange rate or financial system stability.
- Unemployment and informality:
  - High structural unemployment is a major challenge.
  - Improvements in 2011: unemployment rate in May 2011 was 11.1 percent compared to 12 percent in May 2010.
  - Rural unemployment declined strongly (example: from 8.6 percent to [text ends in source]).

*Source: _cr11224 - ANNEX IV. COLOMBIA: STATISTICAL ISSUES (as of June 15, 2011) and accompanying IMF Public Information Notice and statements.*

### 7.5 percent. In addition, the quality of labor has enhanced, as salaried employment has grown

### _cr11224 - 7.5 percent. In addition, the quality of labor has enhanced, as salaried employment has grown

### Labor market developments
- Growth and labor composition:
  - "7.5 percent."
  - "The quality of labor has enhanced, as salaried employment has grown while non-salaried has declined."
- Unemployment challenge:
  - Strategy to tackle unemployment—and bringing it down to one digit—gives weight to the promotion of larger-scale economic activity focused on labor intensive sectors such as road infrastructure and agriculture.
- Labor costs:
  - "The authorities recognize that labor costs are high in Colombia, but several studies show that their reduction may have a limited impact on employment creation, aside from being politically difficult."

### Policies to reduce labor costs and promote formalization
- Legislative action:
  - "The Formalization and First Employment Law was recently enacted, which dictates the reduction of labor taxes with the view to promote formalization of small businesses and to stimulate employment for youth, where unemployment is concentrated."
- Reported early impact:
  - "Although the law is still new, its impact has been remarkable: it is estimated that around 400,000 small and medium businesses were formalized."

### Poverty reduction, measurement, and targets
- Government programs:
  - "Successive Colombian governments have been doing strong efforts to reduce poverty and have put in place several programs, including subsidies and targeted assistance schemes."
- Income-based poverty trend (World Bank standard index):
  - Poverty defined as the percentage of the population living with less than "USD 2.5".
  - "Poverty has declined from around 20 percent in 2000 to 16.4 percent in 2009 (close to Latin American average)"
  - Government goal: "to reach 9.0 percent in 2014."
- Measurement caveats and comparability:
  - "Other calculations of poverty using different methodologies show different figures."
  - In staff Box 3, country poverty indices are defined domestically and "are not comparable."
  - "The poverty line defined as the value of the basic market basket in Colombia (as well as in Mexico) almost double the value used in other Latin American countries; therefore the rate of poverty appears to be much higher."
- Policy emphasis:
  - "The government acknowledges that poverty is still high and all efforts are focused on attaining a more balanced and pro-poor growth."

*IMF staff report excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11224.pdf_