March 29, 2024
The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Colombia on March 27, 2024
With the sharp growth slowdown in 2023 from an overheated post-pandemic position, the Colombian economy has reached more sustainable levels of economic activity and domestic demand. This has been underpinned by appropriately tight macroeconomic policies over the last two years, which have supported an impressive reduction in domestic and external imbalances built up during 2021-22.
The Colombian economy is set to continue its transition toward a more sustainable level of demand and economic activity with domestic imbalances continuing to narrow further in 2024. Real GDP is expected to expand by 1.1 percent and inflation to gradually fall to around 5 percent (y/y) by end-2024 on the back of prudent macroeconomic policies. Meanwhile, the current account deficit is projected to stabilize around 3.0 percent of GDP this year.
Although risks to the outlook remain elevated and to the downside, Colombia’s very strong economic fundamentals, policies, and policy frameworks support its resilience. On the external front, risks emanate from an intensification of geopolitical tensions, tighter global financial conditions, and disruptions to supply chains, which could adversely impact Colombia’s growth and inflation. Domestically, a stronger El Niño, weaker private demand, miscalibration of policies, or reform uncertainties could hinder economic activity and/or lead to higher inflation. The two-year Flexible Credit Line (FCL) arrangement, with access amount equivalent to SDR7.1557 billion (about US$9.8 billion) 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]
Directors commended the authorities for their very strong macroeconomic policies and policy frameworks, which have facilitated a marked reduction in domestic and external imbalances despite a challenging environment. Directors highlighted that the Flexible Credit Line (FCL) further supports resilience by providing additional external buffers against tail risks and enhancing market confidence. Noting the downside risks to the outlook, Directors emphasized the importance of continued careful calibration of macroeconomic policies to durably reduce remaining imbalances, while also advancing Colombia’s social agenda. Structural reforms aimed at boosting productivity and supporting the energy transition would also be important.
Directors commended the fiscal consolidation efforts in the past two years as well as the continued gradual removal of distortive fuel subsidies. They also welcomed the authorities’ continued commitment to the fiscal rule. Noting that the fiscal plan for 2024 poses risks, Directors broadly encouraged the authorities to take proactive steps to scale back current spending plans while protecting the vulnerable. Directors underscored that this would help lower borrowing costs and also support disinflation efforts. Reorienting public expenditures toward investment would also facilitate the energy and climate transition and enhance potential growth.
Directors commended the central bank’s tight monetary policy stance which resulted in a significant decline in the inflation rate. Moving forward, a cautious and data driven monetary policy normalization remains important with effective communication to better anchor inflation expectations. Directors also agreed that Colombia’s flexible exchange rate regime should continue to facilitate external adjustments and welcomed the central bank’s plan to proactively build additional international reserves.
Directors agreed that the financial sector remains resilient and recommended continued close monitoring of risks, including given rising NPLs, and encouraged continued progress in implementing the 2022 FSAP recommendations. They emphasized that managing potential financial stability risks from the proposed pension reform would be important.
To boost sustainable medium term growth, Directors recommended reforms aimed at lifting productivity and encouraging private investment. They emphasized that reforms to healthcare, pensions, and labor markets should be designed within the existing policy frameworks, while preserving fiscal and financial stability, and balancing equity and efficiency considerations. Directors commended the authorities’ objective of reducing the country’s reliance on oil and coal and noted the importance of a well designed and executed energy transition and export diversification plan. They also encouraged the authorities to step up efforts to further strengthen governance and transparency, and mitigate corruption risks.
[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