Public Information Notice: IMF Concludes Article IV Consultation with Colombia

December 11, 1998

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On December 9, 1998 the Executive Board concluded the Article IV consultation with Colombia.1


In recent years, Colombia’s record of economic progress has given way to slow growth and widening macroeconomic imbalances, largely reflecting a deterioration in the public finances, which has placed a heavy burden on monetary policy and exerted upward pressure on the real exchange rate. To a large extent, the fiscal deterioration reflects the earlier introduction of large public spending programs and a constitutionally mandated revenue sharing arrangement.

Real GDP growth recovered to 3.1 percent in 1997, from 2.0 percent in 1996, spurred by falling interest rates and supported by higher coffee prices and strong growth in exports. The external current account deficit widened somewhat to 5.9 percent of GDP. The slowing of exchange rate depreciation through the first part of 1997 contributed to a drop in inflation, from 22 percent in 1996 to 18 percent in 1997. This marks the first time that the official inflation target has been met since targets were first announced in 1991.

In 1997, the central administration reduced its deficit, but the nonfinancial public sector (NFPS) deficit rose by 1.7 percentage points of GDP to 4.3 percent of GDP, to a large extent reflecting higher spending by the territorial governments.

Concerns about the widening economic imbalances, increased insurgent activity, and contagion from the international market turmoil have contributed to recurrent episodes of exchange market pressure since the third quarter of 1997. In response, the central bank has intervened to support the currency and tightened monetary policy; on September 2, 1998 the trading band for the peso was depreciated by 9 percent.

Real GDP growth has slowed markedly since the first quarter of 1998 in response to sharply rising interest rates and adverse external factors, and unemployment increased to over 15 percent in the second and third quarters. The impact of the El Niño weather disturbance on food prices contributed to an increase in the inflation rate during the first half of 1998, but it has since declined to near 16 percent in November. (The central bank’s target is 16 percent for the 12 months to December 1998.)

The higher interest rates, slower economic growth, and the debt-servicing difficulties of some territorial governments have contributed to a weakening of the financial system. Profitability has fallen sharply, and the share of nonperforming loans in total loans rose to 9.1 percent in September 1998 from 7.3 percent a year earlier.

The new government, which took office in August, has taken steps to reduce the NFPS deficit in 1998 and has announced a fiscal program that foresees the NFPS deficit being reduced from over 4 percent of GDP in 1998 to 2 percent in 1999. The measures to achieve this focus on reform of the value-added tax, improvements in tax administration and stronger tax enforcement, reduced revenue earmarking, expenditure cuts, and streamlining of the revenue-sharing system. In November the government adopted measures under an economic emergency to help deal with the problems faced by the most vulnerable financial institutions.

Executive Board Assessment

Against the backdrop of a deterioration in Colombia’s economic situation in recent years, Directors welcomed the policy priorities adopted by the new government and stressed the need for rapid action to address the imbalances in the economy and to achieve a sustainable external current account, reduce inflation, and foster stronger economic growth, as well as to tackle long-standing structural weaknesses. Directors welcomed the peace initiatives launched by President Pastrana, and noted that an early settlement of the conflict would pave the way for improvement in confidence and for economic advances on a broad front.

Directors welcomed the initial steps taken by the new government to reduce the fiscal deficit, and considered appropriate the fiscal targets announced for 1999 and beyond. They encouraged the authorities to pursue fiscal consolidation and to address structural weaknesses in the fiscal area, notably in the areas of pension reform, the size of the public sector, fiscal decentralization, and revenue earmarking. They also stressed the importance of strengthening tax administration and widening the value-added tax base. Several Directors cautioned against any premature reduction in the value-added tax rate until the fiscal objectives had been secured, given the uncertainties involved in achieving the revenue targets. Directors therefore urged the authorities to adopt contingency measures to deal with any fiscal slippages andencouraged the authorities to garner the necessary political consensus for the required fiscal actions.

Directors stressed the importance of addressing any weaknesses in the financial system, and urged the authorities to pursue with determination their efforts to strengthen the system. They expressed concern that the health of the financial sector might have deteriorated, especially against the current background of low growth and high interest rates. Directors urged the authorities to strengthen the supervision of financial institutions, as well as the regulatory framework governing their activities. Directors saw a strong financial system and fiscal consolidation as necessary to provide the authorities with sufficient scope for using monetary policy to achieve their inflation objectives while maintaining the exchange rate within its trading band.

Directors noted that Colombia’s main response to the turmoil in international financial markets over the past year had been an appropriate tightening of monetary policy. However, with weak fiscal support, the burden on monetary policy had been excessive, and interest rates had risen to historic levels. Directors recognized the importance of maintaining the credibility of the inflation target and according priority to the inflation objective, but agreed that in the circumstances of pressures on the exchange rate and—more generally—a weakening of the macroeconomic framework, the adjustment in September of the exchange rate band, together with the announcement of a strong fiscal package for 1999, had constituted an appropriate response.

Directors welcomed the attainment of the central bank’s inflation target in 1997 and the downward trend in inflation that had been established since mid-1998. They underscored the importance of attaining the inflation target on a consistent basis in order to break entrenched inflation expectations and lend credibility to the central bank’s disinflation policy. Directors encouraged the central bank to gear its monetary policy to achieving the inflation target established for 1999, and noted that the fiscal tightening in prospect would help in this regard. The incidence of indexation in the economy—particularly wage indexation—should be reduced to help mitigate the short-term employment cost of disinflation.

Directors noted the sharp increase in unemployment in the past few years, and urged the authorities to take steps to make the labor market more flexible. They noted that a reduction in payroll taxes and in the cost of dismissals would help reduce the informal sector of the economy, while helping to bolster public finances. Directors also encouraged the authorities to continue the privatization process while strengthening those enterprises that would remain in the public domain.

Directors welcomed the authorities’ decision to refrain from introducing exchange controls or raising external tariffs to help strengthen Colombia’s external position. They welcomed the recent easing of capital controls and the plan to reduce taxes on profit remittances, and encouraged the authorities to eliminate these restrictions in an orderly fashion. Directors also urged the authorities to accept the obligations of Article VIII, Sections 2, 3, and 4 of the Articles of Agreement.

Directors noted that, while Colombia’s debt burden remains manageable, medium-term external sustainability hinges on the competitiveness of non-oil exports in view of the possible tapering off of oil production early in the next decade. The recent exchange rate adjustment would help in this regard, and Directors underscored that, to be effective, this action must be supported by fiscal consolidation and appropriate monetary policy, as well as structural reforms designed to raise productivity.

Directors also noted that provision of data to the Fund was generally adequate and encouraged the authorities to pursue recent efforts to improve data, particularly in the public finance area.

Colombia: Selected Economic Indicators

   1994  1995  1996  1997  1998

  (Annual percentage change)
Domestic economy  
Real GDP 5.8 5.8 2.0 3.1 2.0
Unemployment rate 8.4 8.6 11.2 12.4 15.5
Consumer prices 22.6 19.5 21.6 17.7 16.0
Broad money 42.8 27.4 29.9 24.5 12.5
  (In millions of U.S. dollars)
External economy  
Current account balance -3,160 -4,365 -4,946 -5,632 -5,453
Exports, f.o.b. 8,749 10,222 10,651 11,681 11,463
Imports, f.o.b. 11,080 12,921 12,794 14,409 14,156
Capital account 3,288 4,683 6,528 5,636 3,943
Direct investment 1,500 1,943 3,208 4,902 1,967
Gross official reserves (in months of imports of goods and services) 5.8 5.2 5.7 5.2 4.4
  (In percent of GDP)
Financial variables  
Public sector savings1 2 8.3 9.3 8.8 7.5 6.4
Nonfinancial public sector balance1 0.0 -1.1 -2.6 -4.3 -4.3
Gross domestic investment 23.3 21.9 19.4 19.2 18.0
Gross national savings2 18.8 16.5 13.8 13.3 11.7
Current account (deficit -) -4.5 -5.4 -5.7 -5.9 -6.3
External debt3 31.3 31.1 33.8 33.1 36.8
Of which: Public sector3 20.5 18.8 18.4 15.7 18.6

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

1Excluding privatization proceeds.
2Includes the balance of the quasi-fiscal operations of Banco de la Republica.
3Includes short-term

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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