Press Release No. 03/04

Press Release: IMF Approves a US$2.1 Billion Stand-By Credit for Colombia

January 15, 2003

The International Monetary Fund (IMF) today approved a two-year SDR 1.5 billion (about US$2.1 billion) Stand-By Arrangement for Colombia in support of its economic program through 2004. The approval opens the way for the immediate release of SDR 193.5 million (about US$264 million). Colombian authorities intend to treat the stand-by credit as precautionary.

Following the Executive Board's discussion on Colombia, Horst Köhler, Managing Director and Chairman, said:

"Confronted with a difficult domestic security situation and a challenging external environment, the new government of Colombia has embarked on a strong reform program. The Executive Board commends the government's rapid and determined action to address the fiscal pressures, which emerged in 2002, and to develop a comprehensive strategy for stability, growth, and improved social equity. The strong ownership of the program and the broad political consensus on the need for reforms have generated a momentum of change that will help to successfully address the challenges ahead and secure a robust recovery of Colombia's economy and employment outlook.

"The government's program, supported by a two-year precautionary Stand-By Arrangement, aims at strengthening macroeconomic and structural policies. In particular, public debt dynamics will be improved by significantly reducing the fiscal deficit over 2003-04 and continuing the fiscal consolidation over the medium term.

"Key components of the program include the tax, pension, and labor market reforms that were recently passed by congress, as well as measures to streamline the public administration and improve its productivity. In addition, continued vigilance by the central bank will help control inflationary pressures.

"The Executive Board is encouraged by the authorities' firm commitment to lasting improvement of the security situation. This, together with a sustained implementation of the reform measures, including those envisaged in the national referendum, will be key to achieving the program's objective of laying the basis for a durable recovery," Mr. Köhler said.

Program summary

After staging a steady recovery from the 1998-99 crisis, the economic situation in Colombia worsened in the first half of 2002. Peace negotiations with the guerrillas broke down in February, followed by escalating violence. Economic activity remained sluggish, consumption was subdued by uncertainty associated with high unemployment levels, and exports weakened as a result of the world economic slowdown and low international coffee prices. At the same time, fiscal consolidation went off track, due in part to an increase in military expenditure.

The government of President Álvaro Uribe, who took office in August 2002, moved quickly to halt the fiscal deterioration by introducing cuts in the budget for 2003, imposing a one-off wealth tax under emergency legislation, preparing a tax package, and setting in motion a structural reform agenda. In recent months, economic activity has recovered somewhat, but real GDP is projected to rise only modestly for the year as a whole.

The government's economic program, which is supported by the IMF stand-by arrangement, aims at achieving fiscal consolidation and putting in place structural reforms that lay the basis for sustained growth and better income distribution. On the fiscal front, the authorities intend to take the measures needed to ensure public debt sustainability and maintain Colombia's record of servicing its debt. Accordingly, the program calls for increases in tax revenue and expenditure cuts, supported by key structural reforms and administrative improvements in the public sector. The government aims to achieve a substantial increase in tax revenue in 2003, based principally on a wealth tax, an income tax surcharge, and a broadening of the VAT tax base. The measures would yield 1.6 percent of GDP in 2003. Further savings will be achieved through a reduction in public spending. Overall, the combined public sector deficit would be reduced to 2.5 percent of GDP in 2003 and 2.1 percent in 2004 from an estimated 4 percent in 2002. Net external financing of the public sector is projected to fall from 1 percent in 2002 to about 0.3 percent of GDP in 2003, while domestic financing is projected to fall from 3.1 percent of GDP in 2002 to 2.3 percent.

The monetary policy will continue to be cast within a framework of inflation targeting. The program is based on a reduction of inflation from 7 percent in 2002 to around 5.5 percent in 2003 and to 4 percent in 2004. Also, the authorities will continue to strengthen the operating environment of the banking system and foster risk management based on international best practices.

As part of the structural reform agenda, the government intends to move forward in the implementation of the pension and labor market reforms approved by congress in late 2002, and plans to reform the special pension regimes. The government will also continue the modernization program for the public sector, reform the budget code, and improve the finances of the health services of the Social Security Institute.

Colombia is an original member of the IMF; its quota is SDR 774 million (about US$1.1 billion); and it has no outstanding use of IMF credit.