IMF Executive Board Concludes 2015 Article IV Consultation with Colombia

On May 18, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Colombia¹.  

Colombia has enjoyed strong growth over the past several years, among the highest in Latin America. Credible fiscal and inflation targeting frameworks have supported sound macroeconomic policy management, which underpinned robust economic performance during the last decade. Social indicators have improved steadily over this period. Public debt remained low, Colombia’s foreign exchange reserve position strengthened, and the Flexible Credit Line arrangement provided a buffer against elevated external tail risks. The authorities continued to improve the fiscal policy framework and strengthen the social safety net.

Real GDP grew by 4.6 percent in 2014. Unemployment declined to an average of about 9 percent during the year. In the second half of 2014, global oil prices fell sharply by about 40 percent and the peso depreciated, especially in the fourth quarter. As inflation began rising to the mid-point of the target band, and given the slightly positive output gap, the central bank raised the policy rate by 125 basis points to 4.5 percent between May and August. The central government fiscal balance remained broadly unchanged from 2013, meeting the structural balance target, although the headline fiscal deficit increased slightly. The consolidated public sector deficit rose to 1.6 percent of GDP, pushing public debt to about 39 percent of GDP.

The current account deficit widened to 5.2 percent in 2014, but capital inflows were buoyant. Strong inflows of foreign direct investment and portfolio flows more than offset the current account deficit, and gross international reserves rose to 47 billion at year end. This level appears adequate for precautionary purposes but may be insufficient for tail risks. The current account deficit is projected to widen in 2015 due to the oil price decline, but would gradually narrow over the medium term with the slight recovery in oil prices and growth in Colombia’s trading partners, especially the U.S. Moreover, the sharp peso depreciation should help contain imports and spur non-traditional exports.

The banking system and corporate sector have remained in good financial health. Financial soundness indicators have been strong and financial system exposure to the oil sector is very low. Growth in credit to the private sector was buoyant, at 14.7 percent in 2014 (nominal year-over-year) and house price growth has slowed. Corporate profitability was strong, and liquidity remained adequate. Corporate and household debt has increased in 2014, but remains modest by international standards and leverage is within historical norms. 

Growth is expected to slow to 3.4 percent in 2015 given a subdued outlook for investment, especially oil-related, and private consumption. Inflation rose to 4.6 percent in March, due to a weather-related agricultural output supply shock and some pass-through from exchange rate depreciation, but is expected to diminish to 3.6 percent year-over-year by end-December with inflation expectations remaining anchored within the target band of 2−4 percent. In response to lower corporate profits and a partial postponement of dividends from the state oil company, the central government announced an expenditure reduction of 0.7 percent of GDP in 2015, which will also act as a drag on growth. However, the impact of oil shock on the budget and economic growth will be mitigated by the sharp depreciation of the peso (20 percent vis-à-vis the U.S. dollar since mid-2014), and the operation of the fiscal rule, which allows a smoother adjustment to the permanent decline in wealth. 

Growth is expected to gradually rise toward its potential (around 4.25 percent) over the medium term, supported by the government’s Public-Private Partnership-based infrastructure program and a gradual recovery in oil prices and external demand. However, risks threaten on the downside, including higher interest rates and financial volatility, a protracted period of slower growth in advanced and emerging economies, economic or political stress in neighboring countries, and a delayed implementation of the infrastructure program. 

Executive Board Assessment²

Executive Directors welcomed Colombia’s continued robust economic performance and financial stability, underpinned by prudent management and strong policy frameworks including a fiscal rule, an inflation targeting regime, and a flexible exchange rate. Substantial progress has also been made in reducing unemployment and poverty in recent years. Directors noted, however, that Colombia is facing headwinds from the sharp fall in the price of oil, a key export. Given elevated external risks, Directors stressed the need for stepped-up efforts to further enhance the resilience of the economy. They supported an eventual exit from the Flexible Credit Line arrangement with the Fund once external risks have receded.

Directors commended the authorities for their commitment to the structural fiscal rule. They highlighted the importance of mobilizing non-oil revenues to meet the authorities’ medium term fiscal targets while protecting social and infrastructure spending. This requires a comprehensive tax reform, with the objectives of simplifying the tax structure, increasing progressivity, broadening the tax base, and improving tax administration. Directors looked forward to the recommendations of the recently established expert commission on these matters.

Directors supported the broadly neutral stance of monetary policy, but encouraged the authorities to stand ready to take appropriate action if growth falters. They noted that the current level of official international reserves provides adequate insurance in normal times, and that the exchange rate has adjusted flexibly in line with fundamentals. Directors considered that the widening current account deficit, largely financed through foreign direct investment, is likely to narrow over time on the back of the exchange rate depreciation and ongoing fiscal consolidation.

Directors noted that the financial system is sound, profitable, and well-provisioned, with low exposure to the oil sector. They commended the authorities for the progress in addressing cross-border risks and strengthening the regulatory and supervisory frameworks. Continued efforts are nonetheless crucial to boost the resilience of financial institutions, and to strengthen supervision of complex financial conglomerates. Directors also underscored the importance of further improving risk-based supervision, enhancing regional cooperation primarily in Central America, deepening the capital market, and promoting financial inclusion.

Directors welcomed the authorities’ inclusive growth agenda. They agreed that key priorities are to reduce informality in the economy, improve competitiveness and infrastructure, and foster social mobility, especially through better education and health care. Directors recognized the benefits of the authorities’ fourth generation road investment program—implemented with appropriate funding and safeguards—in reducing infrastructure gaps and helping diversify sources of growth. More broadly, they supported initiatives to promote private participation in the economy, including through divestiture of a public utility company.

 Press Release at IMF web page

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1/ Under 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.

2/ At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.