Press Release No. 05/95

The Executive Board of the International Monetary Fund (IMF) approved today an 18-month, SDR 405 million (about US$ 613 million) Stand-By Arrangement to support Colombia's economic program through November 2006. An amount equivalent to SDR 193.5 million (about US$292.2 million) will be made immediately available, with the remaining balance distributed in five equal installments of SDR 42.3 million (about US$64 million). However, the authorities intend to treat the arrangement as precautionary, and therefore do not intend to draw on the credit available.

The Board has also completed the fourth and final review under an SDR 1.55 billion (about US$2.34 billion) Stand-By Arrangement that was approved on January 15, 2003 (see Press Release No. 03/04), and which will end effective May 2, 2005 at the authorities' request. In completing the review, the Board approved Colombia's request for waivers of the non-observance of two performance criteria. No drawings were made under the expiring arrangement either.

Following the Executive Board's discussion of Colombia,
Anne O. Krueger, First Managing Director and Acting Chair, made the following statement:

"Colombia's economic performance continued to improve during 2004, reflecting strong policy implementation as well as the favorable external environment. Economic activity showed solid growth, unemployment and poverty fell, and inflation declined to the lowest level in decades. The external sector strengthened, aided by broad-based export growth as well as sizable net capital inflows. The combined public sector deficit fell sharply in 2004, supported by unexpectedly high world oil prices as well as a large surplus of the autonomous local and regional governments. This helped reduce the public debt further.

"For 2005-06, economic policies seek to sustain this strong performance. The successor 18-month Fund arrangement will allow for a gradual exit from Fund financial support. Fiscal policy continues to aim at reducing the public debt. In line with this objective, the government is targeting a decline in the combined public sector deficits in 2005 and 2006, based on prudent assumptions about the world oil price and the overall balance of the local and regional governments. The authorities also intend to save most of any oil price windfall. Monetary policy will target a gradual decline in inflation in 2005-06, in the context of a managed float exchange rate policy.

"Structural reforms continue to advance. The authorities intend to press for congressional approval by June 2005 of the revised budget code, the constitutional amendment for pension reform, and the new securities market law. The authorities are continuing to strengthen the financial system. In particular, one state-owned bank was restructured in March 2005, and another one will be brought to the point of sale by end-2005. The government intends to continue building political support for key medium-term reforms, such as strengthening tax policy and improving the system of revenue sharing. These policies will help lay the foundation for continued growth with stable prices over the medium term", Ms. Krueger said.

Program Summary

Colombia performed very well under the program approved in January 2003. The authorities' sound policy implementation continued to reduce vulnerabilities and foster economic growth. Real GDP increased steadily in 2003-04, helping reduce unemployment. Inflation declined to the lowest level in decades and the external sector strengthened, with a low current account deficit and strong capital inflows in 2004. Fiscal consolidation, together with the real appreciation of the peso, lowered gross public debt from about 60 percent of GDP at end-2002 to about 53 percent by end- 2004, together with a sizable increase in public deposits. Likewise, the financial sector continued to perform well.

The new program seeks to support the authorities' macroeconomic framework-especially with regard to fiscal policy and public debt reduction-during the upcoming transition to a new government to take office in August 2006. By maintaining sound economic policies in the coming 18 months, the country will strengthen its credibility further and continue to reduce economic vulnerabilities, which are crucial to achieve sustained economic growth.

The program envisages real GDP to rise by 4 percent a year in 2005-6, while inflation would decline to 5 percent in 2005 and to 3-5 percent in 2006. Net international reserves are projected to stay at around
US$12.2 billion by end-2005.

Fiscal policy in 2005-06 will stay on the path to reduce public debt to close to 40 percent of GDP by 2010. The fiscal targets assume that spending by local and regional governments will return to normal levels following a sharp and unexpected decline in 2004. The combined public sector deficit would amount to 2.5 percent of GDP in 2005 and decline to 2.0 percent in 2006. As a result, public debt would decline to about 50 percent of GDP by end- 2006. These targets will be reduced by a significant share of any price windfall, lowering public debt further.

The government intends to continue to advance key structural fiscal reforms, which include a constitutional amendment to the pension regime, a new securities law, and a reform of the budget code. The government will bring the state-owned bank Granahorrar to the point of sale, and will also try to privatize some small electricity firms with an estimated book value of 0.8 percent of GDP.

Colombia is an original member of the IMF; its quota is SDR 774 million (about US$1.17 billion); and it has no outstanding use of IMF credit.

Colombia: Selected Economic Indicators
	2000	2001	2002	2003	Prel. 2004	Proj. 2005
(Annual percentage change, unless otherwise indicated)
National income and prices
Real GDP	2.9	1.5	1.9	4.0	4.0	4.0
Consumer prices (end-of-period)	8.7	7.6	7.0	6.5	5.5	5.0
Nominal exchange rate (end-of-period, depreciation +)	19.0	2.8	25.0	-3.0	-14.0	...
Real effective exchange rate (depreciation-)	-2.6	1.5	-17.4	-5.2	11.4	...
Money and credit 1/
Broad money	-2.1	7.0	5.3	6.5	16.7	11.1
Credit to the private sector	-8.6	1.7	4.0	9.2	12.2	14.6
Real interest rate (90-day time deposits; percent per year)	4.2	3.6	0.7	1.4	2.2	...
(In percent of GDP, unless otherwise indicated)
External sector
Current account (deficit-)	0.9	-1.4	-1.7	-1.5	-1.0	-2.8
External debt	46.1	47.5	52.3	46.0	37.1	35.9
Of which: public sector	26.3	28.5	31.9	29.6	24.1	22.7
Net official reserves (in months of imports of goods and services)	6.6	7.8	7.6	6.5	7.1	6.5
Savings and investment
Gross domestic investment	13.7	14.5	14.2	14.9	14.0	15.3
Gross national savings	14.6	13.2	12.6	13.5	12.9	12.5
Public finances
Combined public sector balance	-3.4	-3.2	-3.7	-2.7	-1.3	-2.5
Nonfinancial public sector balance	-3.5	-3.5	-4.2	-3.2	-1.7	-2.5
Central administration balance	-5.7	-5.7	-6.4	-5.4	-5.5	-6.1
Public sector debt 2/ 3/	47.7	51.8	60.2	56.0	52.9	50.4
Sources: Colombian authorities; and IMF staff estimates and projections.