OREANDA-NEWS. March 22, 2016. A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision. 

An International Monetary Fund (IMF) mission, headed by Jorge Rold?s, visited Bogot? during March 7-18, 2016 to conduct the country’s annual Article IV consultation, part of the IMF’s regular surveillance of all member countries. At the end of the discussions, Mr. Rold?s issued the following statement:

Colombia’s strong policy framework and timely policy actions allowed the economy to withstand the large decline in oil prices and post one of the strongest growth performances in the region in 2015. However, the near-term outlook poses additional challenges as the country faces a further weakening in global and regional conditions as well as local weather-related shocks, with less space for countercyclical policies. The authorities’ proactive and coordinated policy response will help continue an orderly adjustment process needed to reduce macroeconomic imbalances and restore growth in the near-term. The medium-term outlook is favorable, with growth projected to gradually pick up supported by the authorities’ infrastructure and development agenda.

An orderly adjustment with remarkable resilience

Colombia showed strong resilience to changing global conditions in 2015. Despite facing a terms-of-trade shock larger than most of its peers, Colombia posted one of the highest growth rates in the region and achieved important social gains with improvements in poverty reduction and income inequality. Growth was underpinned by a relatively resilient growth in real private consumption. The decline in oil prices eroded exports and fiscal revenue, and led to a strong depreciation of the peso which fueled inflationary pressures as the external adjustment process got under way. The central government reaffirmed its commitment to the fiscal rule and achieved its structural balance target through timely expenditure cuts and revenue increases from the end-2014 tax reform. The central bank initiated a tightening cycle in September to ensure the anchoring of inflation expectations and contain the widening current account deficit. Latest data suggests the policy tightening has started to be transmitted to the economy through a welcome moderation in credit and domestic demand, while there are some initial signs that the currency depreciation is boosting industrial activity and that inflation expectations have started to moderate.

Policies to engineer a “soft landing”

Further policy tightening will help guide the economy through an additional weakening in global conditions during 2016. The Colombian economy is facing a further large decline in oil prices relative to our last consultation but with somewhat weaker initial conditions than in 2015. Inflation is above target, the current account deficit and public debt have further increased, and the availability of external financing has weakened somewhat—as in other emerging markets. In this context, the mission welcomes the proactive and coordinated policy response from the authorities. The central government’s commitment to contain the headline fiscal deficit through well-targeted expenditure cuts together with some further monetary policy tightening will help moderate domestic demand and contribute to the adjustment of the external current account deficit to a more modest level of capital inflows. The mission welcomes the authorities’ efforts to protect key social programs from the expenditure cuts announced in February, and also notes that if growth were to weaken further, additional cuts might be needed. The mission is encouraged by the authorities’ effective debt-management operations which reduces financing needs. Depending on macroeconomic conditions, monetary policy will continue to be tightened to guide inflation expectations toward the target band. The floating exchange rate will remain the first line of defense against swings in global financial conditions, while the central bank’s transparent foreign currency intervention mechanism will prevent disorderly movements in the exchange rate and ease liquidity pressures. Under this policy-induced moderation in domestic demand, the mission projects growth to moderate to 2.5 percent in 2016, helping set the foundations for faster growth in the medium term.

Slowdown to be followed by a gradual but steady recovery

The medium-term outlook is favorable. The mission projects growth to gradually improve over the medium-term and reach 4.3 percent in 2020 supported by the 4G infrastructure agenda and some recovery in non-traditional exports and oil prices. The current account deficit will gradually decline and approach its medium-term sustainable level through a combination of import compression and export expansion. The mission welcomes the authorities’ structural reform agenda, which is rightly focused on strengthening business competitiveness including through simplified customs procedures, infrastructure investment and a streamlined regulatory framework. The mission supports progress in the 4G agenda, including innovative funding structures and the timely sale of ISAGEN. Moreover, other reform measures to strengthen education and disseminate managerial best practices and innovation, reduce subsidies and import tariffs, stand to facilitate the needed productive transformation and diversification away from commodities.

The mission shares the authorities’ urgency for the adoption of a structural tax reform that mobilizes revenue and improves progressivity and business competitiveness. The additional revenue is essential to help protect key infrastructure and social programs while complying with the fiscal rule. The mission welcomes the thrust of the recommendations of the commission of tax experts and encourages the authorities to seek a prompt approval and implementation of their own version of the reform. The authorities’ commitment to clearly specify all peace-related expenditures in the upcoming medium-term fiscal framework is also welcome.

The external environment continues to pose further downside risks but there are also upside risks. The main risks stem from Colombia’s still significant near-term external financing needs and potential capital inflow reversals resulting from volatile global financial conditions. Further declines in oil prices could fuel additional currency depreciation and inflation. On the upside, bringing the peace process to fruition could further improve business confidence and capital inflows, reinforcing the recovery that will follow the necessary adjustment process.

Macro-financial linkages require a sharpened focus and continued vigilance

The financial system was also resilient to changing global financial conditions and a slowdown in credit but there is a need for continued vigilance. The real growth in bank credit has moderated in recent months but some areas are still growing at a fast pace. Consumption-related credit has slowed down more markedly in line with subdued durable-good consumption; however, commercial credit has remained buoyant due in part to corporates’ efforts to replace external credit lines. Corporate and household leverage remains modest by international standards. However, some corporate sectors exhibit a weaker financial position, but their impact on banks balance sheets remain contained. Liquidity pressures have risen in some parts of the financial system as a result of changes in intermediaries’ liabilities structure and the associated increase in funding cost, but they remain manageable. The mission welcomes the authorities’ continued surveillance and analysis of corporate developments and their impact on the financial system under various stress scenarios.

The mission welcomes the authorities’ continued efforts to improve financial supervision and regulation. Since December 2015 the supervisor has the authority to impose higher levels of capital and liquidity to financial institutions that exhibit a higher risk profile, enhancing its ability to manage potential financial vulnerabilities. The mission welcomes recent supervisory assessments of financial institutions solvency and liquidity positions and more stringent stress tests that would help detect and address emerging vulnerabilities in the current juncture. The mission encourages the supervisory authority to engage in further communication efforts to explain the peculiarities of the Colombian regulatory regime and the strengths of the supervisory framework. The mission also welcomes recent efforts to identify systemic conglomerates and stressed the important to approve the financial conglomerates law which would further expand the authorities’ ability to manage risks including those stemming from cross-border operations.

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The mission wishes to thank the Banco de la Rep?blica, the Ministerio de Hacienda y Cr?dito P?blico, and other ministries, and public and private sector entities for their cooperation, open discussions, and hospitality.