Colombia: Staff Concluding Statement of the 2022 Article IV Mission
IMF News, February 15, 2022
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- Published: February 15, 2022
Overview and near-term outlook
- Colombia rebounded strongly in 2021, driven by private consumption; the economy is expected to expand by 4½ percent in 2022 with above-trend growth led by household consumption.
- Recovery characteristics:
- Among the fastest recoveries in the region.
- Job recovery has lagged the activity rebound.
- A consumption-led recovery widened the external deficit.
- Higher food and commodity prices and supply bottlenecks have pushed inflation up.
- Vaccination and pandemic context:
- Vaccination progress has reached 64 percent of population.
- New variants and potential renewed containment measures remain downside risks.
- Inflation reached almost 7 percent in January.
Risks to the outlook
- Pandemic-related uncertainty and supply chain disruptions.
- Vulnerability to a sharp rise in global risk premia given higher external financing needs from a wider current account deficit.
- Political uncertainty around upcoming elections.
- Slower implementation risks for the infrastructure agenda and the peace accord.
Public finances — recent developments and policy direction
- Fiscal trajectory and recent performance:
- Government financial plan for 2022 foresees a lower fiscal deficit of -6.2 percent of GDP (versus -7 percent of GDP in the medium-term fiscal framework).
- A narrower-than-anticipated fiscal deficit in 2021 and effective unwinding of pandemic support measures put public debt on a downward trajectory in 2021 — three years earlier than previously expected.
- Policy guidance:
- Added fiscal revenue from higher-than-expected GDP and tax collections should be saved.
- Consider further targeting and phasing out of exceptional pandemic measures (including public loan guarantees).
- Strong, independent oversight by the new Autonomous Fiscal Rule Committee (CARF) is important to guide deficit reduction goals and meet targets, including in 2022.
- Revenue and spending reform priorities:
- Further raising revenues durably by an additional 1 – 1 ½ percent of GDP over the medium term would be desirable.
- Revenue mobilization should reduce tax distortions and loopholes, increase progressivity, improve fairness, and protect poorer households with compensating measures where needed.
- Complementary spending-efficiency measures: better utilize the social benefit system (SISBEN IV), build a new social registry to better identify recipients, implement energy subsidy reforms, and improve public procurement.
- Noted reforms and institutions:
- Social Investment Law (SIL) is a step toward a structural balance rule with a new debt anchor.
- DIAN modernization expected to contribute to revenue gains.
Monetary policy and external buffers
- Monetary policy stance:
- Accelerated monetary tightening by the central bank is appropriate to control rising consumer prices and prevent second-round effects from supply-side factors.
- Added steps to raise interest rates in the first half of the year are recommended to tighten monetary and financial conditions and guide inflation lower.
- Clear communication of monetary policy decisions and balance of risks is important to guide market expectations.
- External buffers:
- International reserve accumulation over time should continue to maintain reserve adequacy and insure against external liquidity risks.
- The IMF’s Flexible Credit Line (FCL) provides additional external buffers and enhances market confidence.
Financial sector resilience and supervision
- System health:
- Banks withstood the pandemic well; the financial system remains sound.
- Loan forbearance measures (including the Programa de Acompañamiento a Deudores (PAD)) have been phased out.
- Banks exhibit strong capital and liquidity buffers; operational profitability has recovered.
- Basel III implementation continues on track and banks have further strengthened capital adequacy.
- Supervisory and regulatory enhancements:
- The IMF’s FSAP finds considerable strengthening of the regulatory and supervisory system since 2012.
- Further improvements possible in data availability, institutional arrangements for bank resolution, and macroprudential frameworks.
- With an upswing in credit, continued close monitoring of riskier loans is important to ensure household and corporate leverage do not become excessive.
Structural reforms for inclusive, job-rich growth
- Labor market and social protection:
- Lowering barriers to firm and labor formalization would help reduce structural unemployment and enhance productivity.
- The Social Protection Floor (SPF) grants access to social security benefits for nearly 10 million workers earning less than minimum wage.
- The Temporary Protection Status (TPS) program for Venezuela migrants should strengthen integration and raise Colombia’s economic potential.
- Retain cash transfers for families but move to more targeted delivery to sustain support for the most vulnerable.
- Green recovery and climate policy:
- Pursuing a green recovery is a key pillar of the Compromiso por Colombia plan and the Carbon Neutrality and Climate Resilience Law.
- The launch of sovereign green bonds and new environmental taxes can support investment in climate-related areas.
Key policy priorities — concise list
- Consolidate fiscal gains and aim for a sustained reduction in the fiscal deficit consistent with the medium-term fiscal framework and SIL objectives.
- Mobilize additional revenue of 1 – 1 ½ percent of GDP over the medium term while protecting poorer households through compensatory measures.
- Continue accelerated monetary tightening early in the year to contain inflation and anchor expectations.
- Maintain and build external buffers, including international reserves and the FCL.
- Strengthen financial supervision, data, bank resolution arrangements, and macroprudential tools; monitor credit quality closely.
- Advance structural reforms: labor and firm formalization, targeted social protection delivery (SISBEN IV, social registry), TPS integration, energy subsidy reform, public procurement improvements, and green recovery initiatives (sovereign green bonds, environmental taxes).
Staff Concluding Statement of the 2022 Article IV Mission, February 15, 2022