IMF Executive Board Concludes 2023 Article IV Consultation with Colombia
March 23, 2023
Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Colombia on March 22, 2023.Benefiting from an effective policy response to the pandemic and highly favorable terms of trade, Colombia’s economy grew at 7.5 percent year-on-year in 2022; one of the fastest rates among emerging economies. Against this robust recovery, high commodity prices, and weather-related shocks, headline inflation reached 13.3 percent year-on-year in February 2023 and the current account deficit widened from 5.6 in 2021 to 6.2 percent of GDP in 2022.
The Colombian economy is now undergoing a necessary transition towards a more sustainable growth path. Macroeconomic policies that had been tightened last year and are expected to carry on this year, are facilitating this transition, along with a slowing global growth and higher global borrowing costs. This necessary cooling of the economy would in turn bring inflation towards the central bank’s target by end-2024 and narrow the current account deficit gradually to its historical average (about 4 percent of GDP), the bulk of which will financed through foreign direct investment.
While downside risks persist and remain elevated, Colombia’s very strong economic fundamentals, policies, and policy frameworks support its resilience. On the external front, global financial conditions could tighten more sharply than anticipated with negative knock-on effects on commodity prices, capital outflows and domestic demand. Domestic risks cannot be discarded; special care will be needed to prudently manage and keep communicating the sequence of reforms and ensure that macroeconomic policies are sufficiently tight to reduce internal and external imbalances. The two-year Flexible Credit Line (FCL) arrangement, with access amount equivalent to SDR7.1557 billion (about US$9.8 billion) that was approved in April 2022, provides additional external buffers against tail risk scenarios on a precautionary basis, enhancing Colombia’s already strong resilience.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. Following a robust recovery from the COVID-19 pandemic, the Colombian economy is undergoing a necessary transition toward sustainable growth. Directors noted, however, that downside risks—including related to tighter global financial conditions and high inflation—are elevated. They commended the authorities’ very strong policies and institutional policy frameworks, which support the country’s resilience and are helping correct macroeconomic imbalances, while improving equity and social inclusion.
Directors welcomed the strong fiscal adjustment in 2022 and the planned adjustment in 2023, which go beyond the consolidation required by the fiscal rule. They observed that the planned adjustment strikes a balance between improving the deficit while using the progressive tax reform to increase social spending. Directors welcomed the authorities’ commitment to implement the fiscal rules going forward. They generally agreed that improving fiscal balances slightly beyond the fiscal rule path in the coming years would help reduce financing needs, strengthen the convergence of public debt to its medium-term anchor, build buffers, and durably reduce external imbalances, though a few Directors did not see a need for tightening beyond the fiscal rule in the medium term. Continued efforts to gradually remove distortive fuel subsidies remain important.
Directors commended the central bank’s decisive monetary policy tightening consistent with its inflation targeting framework. They welcomed the commitment to maintain a tight monetary stance until price pressures and inflation expectations are on a firm downward trend, and emphasized the importance of effective central bank communication in this regard. Directors noted that the external position is sustainable, and that the flexible exchange rate should continue to play its role in facilitating external adjustment, as long as financial stability is not compromised. They noted that the Flexible Credit Line continues to provide additional external buffers against tail-risks and enhances market confidence. While the financial sector remains resilient, Directors emphasized the need to closely monitor risks and emerging vulnerabilities. They encouraged continued progress in implementing the 2022 FSAP recommendations supported by Fund technical assistance.
Directors were encouraged by the objectives of the healthcare, pensions, and labor markets reforms, and emphasized that reforms should be prudently implemented, while preserving fiscal and financial stability. They commended the authorities’ objective of reducing Colombia’s reliance on oil and coal, and noted that a successful transition would require developing a well-communicated and gradual plan that balances the energy needs of the domestic economy and its foreign exchange generation capacity with the transition of the global economy to a low-carbon one. Directors also encouraged the authorities to continue advancing on the governance and anti-corruption agenda.
[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 .
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Table 1. Colombia: Selected Economic and Financial Indicators |
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Jose de Haro
Phone: +1 202 623-7100Email: MEDIA@IMF.org