IMF Executive Board Concludes 2019 Article IV Consultation with Colombia

IMF News, May 1, 2019

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2018 GDP growth strengthened to 2.7 percent, underpinned by private consumption and a modest recovery in investment.
Staff expects growth around 3.6 percent in 2019 and 2020 in response to policy accommodation, migrants from Venezuela, investment-friendly tax reform, infrastructure spending and improving corporate balance sheets.
Subdued corporate credit growth is expected to pick up with the investment recovery and as loan quality improves.
Heightened downside risks stem primarily from the external side, including weaker global growth, rising protectionism, and a possible tightening of global financial conditions.

Inflation eased to near 3 percent at the start of 2018 and has remained stable thereafter; inflation expectations remain anchored near the central bank’s inflation target.
Following rate cuts in the first half of 2018, monetary policy has been moderately accommodative to support the economic recovery.
Directors noted that the current monetary policy stance is appropriate, but should be tightened if credit and economic activity recover as projected.
Directors welcomed the central bank’s reserve accumulation program to maintain external buffers and emphasized that the flexible exchange rate should continue to be the first line of defense against external shocks, with adequate international reserves and the Flexible Credit Line as additional buffers.

The current account deficit widened to 3.8 percent of GDP in 2018 as non-oil exports remained sluggish while imports surged.
The current account continues to be comfortably financed through foreign direct investment, as well as robust portfolio flows from a more diversified set of foreign investors.
Directors highlighted external imbalances have widened and the economy remains vulnerable to external risks.

Fiscal policy was broadly neutral in 2018; the central government narrowed its headline deficit mainly through expenditure cuts to comply with the fiscal rule.
A Financing Law should raise tax revenues in 2019 but may curb them in 2020 in response to a lower tax burden on corporates that nonetheless should stimulate business investment.
Fiscal costs associated with migration flows from Venezuela are estimated to be around ½ percent of GDP in 2019.
Directors welcomed the authorities’ strong commitment to the fiscal rule and supported the use of flexibility within the rule to accommodate migration-related spending while preserving the integrity of the fiscal anchor and the medium term structural balance objective.
Directors called for structural fiscal reforms to safeguard social spending and public investment, and to boost revenue and enhance spending efficiency by:
- Broadening the tax base.
- Improving tax administration.
- Eliminating preferential regimes for businesses.
- Reforming the energy subsidy.
- Strengthening investment project selection and evaluation.

Directors commended continued advances in financial regulation and supervision, including steps to align regulation with Basel III standards over time and implementation of the Conglomerates Law that should further strengthen the financial system.
The banking system was described as sound.

The National Development Plan aims to boost inclusive growth and enhance external competitiveness; implementing the peace agreement should further strengthen regional development.
Directors emphasized further efforts are needed to:
- Improve the business environment.
- Reduce trade barriers.
- Address skills mismatches.
- Close infrastructure gaps.
- Strengthen governance and the rule of law.
- Reduce corruption.
- Advance a pension reform that improves coverage and progressivity.
Directors welcomed the National Development Plan’s focus on many of these issues and called for steadfast implementation.

Real GDP (annual percentage changes): 2017: 1.4; 2018: 2.7; 2019 (Proj): 3.6
Consumer price index (period average): 2017: 4.3; 2018: 3.2; 2019 (Proj): 3.4
Consumer price index (end of period): 2017: 4.1
GDP deflator: 2017: 5.1; 2018: 4.2
Terms of trade (deterioration -): 2017: 9.3; 2018: 10.3; 2019 (Proj): -4.1
Real effective exchange rate (depreciation -): 2017: 5.6; 2018: 0.8; 2019 (Proj): -4.4

Public finances (In percent of GDP):

External sector:

Savings and Investment:

Money and credit (12-month percentage changes, unless otherwise indicated):

Broad money (M2): 2017: 6.4; 2018: 6.9; 2019 (Proj): 10.2
Credit to the private sector: 2017: 12.8; 2018: 8.4; 2019 (Proj): 9.8
Interest rate (90-day time deposits; percent per year; nominal): 2017: 5.3; 2018: 4.5; 2019 (Proj): n.a.

IMF Executive Board assessment summarized following the conclusion of the Article IV consultation with Colombia on April 19, 2019.