Colombia's Peace Agreement Can Give Fillip to Inclusive Growth

IMF News, May 31, 2017

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The implementation of Colombia’s peace agreement, together with the government’s structural reform agenda, should help support more inclusive growth over the medium term, according to the IMF’s annual assessment of the Colombian economy.
The government steered inflation toward its target and restrained fiscal expenditure while protecting key social and infrastructure spending, ensuring an orderly, growth-friendly adjustment that helped bring down poverty and inequality further.
Rapidly declining inflation will create room for some lowering of interest rates during the year.
The approved tax reform will help generate revenues to lower the fiscal deficit while improving competitiveness.

For 2017, the IMF projects growth to gradually strengthen over the next five years as the economy steadily diversifies away from commodities.
Future growth of about 3.5 percent will be supported by:
- non-commodity exports,
- infrastructure spending,
- improved confidence stemming from the peace agreement.
The report expects peace to improve medium-term growth by up to 0.5 percent, and further over the longer term.

On average, income per person expanded by 50 percent during 2000–2015.
While the top 5 regions (departamentos) doubled their income per capita during that time, in the bottom 5 regions income per capita declined by about 13 percent.
National education attainment improved from 7 to 9 years (for people aged 15 or older), but large differences remain, with a 3-year gap between the top and bottom region (Bogota and Vichada, respectively).
Human capital differences are likely a contributing factor to regional income divergence.

The peace agreement with the Revolutionary Armed Forces (FARC) focuses on rural development and social inclusion, aiming to reduce gaps in education, health, infrastructure, and other public services among rural areas.
The agreement seeks to help people displaced by the conflict return to agricultural activity, including through land reform.
Specific elements include:
- financial incentives to replace illicit drugs with alternative crops and measures to reincorporate guerrilla members into society;
- tax incentives to firms that invest or relocate to regions affected by the conflict;
- special courts to handle conflict-related crimes and allows guerrilla members to compete for political positions;
- an extension of the victims’ reparations program that started in 2011.

The implementation of the agreement—to take place over 15 years—will give priority to regions with the largest institutional and social gaps.
Short-term priorities include municipalities with significant coca production, FARC presence, or lacking state presence.
Other priority groups include municipalities affected by the conflict and those with low income per capita, where private participation is expected to complement government programs, particularly in the south and west part of the country.

The peace agreement will cement security gains achieved over the last decade and continue to bring more investment to the country.
Focusing implementation on regions where income per capita is relatively lower and delivering basic public goods and services to remote, poor, and conflict-ridden regions—combined with Colombia’s improved security conditions—will make growth more inclusive over time.

IMF News — May 31, 2017