Colombia: 2011 Article IV Consultation--Staff Report ... ?· staff is of the view that fiscal policy…

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  • IMF Country Report No. 11/224

    Colombia 2011 ARTICLE IV CONSULTATION COVER 2011 Article IV ConsultationStaff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Colombia Under Article IV of the IMFs Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2011 Article IV consultation with Colombia, the following documents have been released and are included in this package: The staff report for the 2011 Article IV consultation, prepared by a staff team of the

    IMF, following discussions that ended on June 23, 2011, with the officials of Colombia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 7, 2011. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

    A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its July 20, 2011 discussion of the staff report that concluded the Article IV consultation.

    A statement by the Executive Director for Colombia.

    The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

    Copies of this report are available to the public from

    International Monetary Fund Publication Services 700 19th Street, N.W. Washington, D.C. 20431

    Telephone: (202) 623-7430 Telefax: (202) 623-7201 E-mail: Internet:

    International Monetary Fund Washington, D.C.

    July 2011



    Near term policy stance. The economic recovery is well-entrenched, with growth projected

    for this year at somewhat above potential. Inflation pressurges are contained, the financial

    system is solid, international reserves are strong, the sovereign debt rating has been raised

    this year to investment grade by all three ratings agencies, and the FCL appears to have

    bolstered market confidence. Monetary policy is moving toward a more neutral position, but

    staff is of the view that fiscal policy remains stimulative. With the output gap projected to

    close in early 2012 and the balance of risks tilted toward overheating, staff cautioned that the

    burden of dampening potential demand pressures in the near term would fall too much on

    monetary policy.

    Strengthening of the fiscal framework. Colombias fiscal institutions are very strong and

    will be further strengthened by recently approved fiscal reforms, including a fiscal rule to

    support existing fiscal responsibility legislation, inclusion of fiscal sustainability as a

    constitutional criterion, and a revamping of the allocation and use of royalty payments that

    will generate important savings. Still, staff underscored that revenue collections are relatively

    low compared with regional peers and welcomed the authorities plans (presently under

    discussion) to reduce distortions in the tax system and promote formal sector activity that, in

    turn, would increase revenue and, in staffs view, facilitate compliance with the fiscal rule.

    Financial sector oversight. Financial system supervision is very strong and is being

    strengthened further through initiatives to bolster cross-border and consolidated

    supervision. Assessing capital adequacy under Basel III terms is just beginning, and staff

    urged that the timetable for assessing the impact of its requirements be accelerated. An

    FSAP update is scheduled for early 2013.

    Labor markets. High rates of structural unemployment and poverty and widespread labor

    informality constitute longstanding policy challenges.

    July 7, 2011



    Approved By Miguel A. Savastano and Lorenzo Giorgianni

    Discussions took place in Bogot during June 1323. Staff representatives comprised A. Wolfe (Chief), V. Cerra, M. Garca-Escribano, and C. Faircloth (all WHD), D. Mendoza (MCM), and T. Miyoshi (SPR). Ms. Arbelez (OED) attended the meetings.


    BACKGROUND ____________________________________________________________________________________ 4

    RECENT DEVELOPMENTS _________________________________________________________________________ 5

    OUTLOOK _________________________________________________________________________________________ 8

    POLICY DISCUSSIONS __________________________________________________________________________ 18

    A. Near-Term Policy Stance ______________________________________________________________________ 18

    B. Strengthening the Medium-Term Fiscal Framework___________________________________________ 21

    C. Monetary, Exchange Rate, and Reserve Management Policies ________________________________ 24

    D. Financial Sector Oversight ____________________________________________________________________ 27

    E. Improving Labor Market Performance _________________________________________________________ 28

    STAFF APPRAISAL ______________________________________________________________________________ 29


    1. Selected Economic and Financial Indicators __________________________________________________ 32

    2. Summary Balance of Payments _______________________________________________________________ 33

    3a. Operations of the Central Government ______________________________________________________ 34

    3b. Operations of the Central Government ______________________________________________________ 35

    4a. Operations of the Combined Public Sector __________________________________________________ 36

    4b. Operations of the Combined Public Sector __________________________________________________ 37

    5. Monetary Indicators __________________________________________________________________________ 38

    6. Financial Soundness Indicators Total Banking System ________________________________________ 39

    7. Medium-Term Outlook _______________________________________________________________________ 40

    8. External Debt Sustainability Framework, 2006-2016 __________________________________________ 41

    9. Public Sector Debt Sustainability Framework, 2006-2016 _____________________________________ 43


    1. Recent Economic Developments ______________________________________________________________ 12

    2. Labor Market Developments and Challenges _________________________________________________ 13



    3. Financial Markets Developments _____________________________________________________________ 14

    4. Financial Soundness Indicators: Colombia and Other Emerging Markets _____________________ 15

    5. External Sector Developments ________________________________________________________________ 16

    6. Reserve Coverage in International Perspective _______________________________________________ 25

    7. External Debt Sustainability: Bound Tests _____________________________________________________ 42

    8. Public Debt Sustainability: Bound Tests _______________________________________________________ 44


    1. Capital Inflows to Colombia ____________________________________________________________________ 9

    2. Colombias Foreign Exchange (FX) Intervention in the Latin American Context ______________ 10

    3. Labor Market Issues and Challenges __________________________________________________________ 11

    4. Macroprudential Policies ______________________________________________________________________ 20

    5. Exchange Rate Assessment ___________________________________________________________________ 26




    1. The Colombian economy exhibited resilience during the global financial crisis

    and is undergoing a solid recovery.

    Colombias strong policy frameworks,

    including its inflation-targeting regime and

    medium-term fiscal framework, provided the

    authorities with policy space to undertake

    timely and effective countercyclical measures

    in response to the 2008-09 global crisis.

    Following a short-lived contraction, economic

    activity started to recover in the second half of

    2009, supported by fiscal and monetary

    stimulus, which helped keep real GDP growth

    in positive territory. The central bank lowered

    the policy rate by 600 basis points (to

    3.5 percent) over the course of 2009, and the

    combined public sector deficit widened to

    2.7 percent of GDP (compared with near

    balance in 2008).

    2. The presidential elections of 2010 had little effect on macroeconomic policies

    or investors risk perceptions. Elections took

    place in May and June 2010, and a new

    administration (of President Santos) took office

    in early August. The central bank governor

    remained in his position (as stipulated by the

    central bank law), and the new Minister of

    Finance launched initiatives that supported his

    predecessors efforts to strengthen the fiscal

    framework (e.g., by adopting a fiscal package

    that included rationalizing tax incentives and

    submitting to congress important structural

    fiscal reforms). In addition, the new

    government completed the negotiation of a

    free-trade agreemen