Colombia: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
01 Mar 1999
eISBN:
9781451808735
ISBN:
9781451808735
Language:
English
Keywords:
ISCR; CR; Colombia; inflation uncertainty; potential GDP; customs; interbank interest rate market; core inflation; exchange rate pressure; monetary management; interbank interest rates; Exchange rates; Monetary base; International reserves; exchange certificate
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This Selected Issues paper and Statistical Appendix analyzes economic developments in Colombia during 1996–99. Output growth slowed sharply in 1996 and early 1997, but subsequently rebounded owing to stronger exports, a temporary boom in world coffee prices, and an easing of credit policy. Despite efforts at addressing the fiscal imbalances, the nonfinancial public sector deficit widened further to more than 4 percent of GDP in 1997. Monetary policy during 1996 and most of 1997 was geared toward stimulating domestic demand.

Abstract

This Selected Issues paper and Statistical Appendix analyzes economic developments in Colombia during 1996–99. Output growth slowed sharply in 1996 and early 1997, but subsequently rebounded owing to stronger exports, a temporary boom in world coffee prices, and an easing of credit policy. Despite efforts at addressing the fiscal imbalances, the nonfinancial public sector deficit widened further to more than 4 percent of GDP in 1997. Monetary policy during 1996 and most of 1997 was geared toward stimulating domestic demand.

I. OVERVIEW1

Background

The Samper administration that took office in August 1994 inherited a solid economic situation, which was considerably strengthened by the implementation of important structural reforms by the previous Gaviria administration (1990-94). However, difficult challenges remained to be addressed, including the persistence of inflation, large regional and socioeconomic disparities, serious gaps in infrastructure, and an unsettled security situation. Against this background, the new government indicated its intention to increase public spending on the social sectors and infrastructure, maintain competitiveness, and promote employment growth as set out in the development plan for 1995-98. The plan envisaged a further rise in government spending, a consolidation of earlier structural reforms, and a phased reduction in inflation to 10 percent by 1998. Government spending pressures were aggravated by increased revenue sharing under the fiscal decentralization mandated by the 1991 constitution as the central government continued to bear much of its original expenditure responsibilities, and by growing pressures on security and judicial outlays. As a result, the nonfinancial public sector deficit shifted from balance in 1993 to a deficit of 2.6 percent of GDP in 1996, notwithstanding the implementation of an important tax reform in late 1995 which sought to improve the structure of the tax system, reduce evasion, and increase revenues.

Large capital inflows in 1993-96 associated with positive interest rate differentials, increased investor confidence, and expectations of revaluation created by large oil discoveries complicated monetary management and provided an additional stimulus to domestic demand, while inflation inertia fueled wage growth. As a result, the external current account shifted from a surplus in 1990-92 to a 6 percent of GDP deficit by 1996 and inflation remained in the range of 19-23 percent Output growth averaged 5½ percent during 1992-95, but subsequently slowed to 2 percent in 1996 in response to political uncertainty, weakening confidence, and a tightening of credit policy in late 1995 in an effort to dampen the growth of credit and domestic demand (Table 1). To allow for greater flexibility in the operation of monetary policy, the authorities replaced the “crawling peg” exchange rate arrangement in early 1994 with a 14 percentage point band. Following a steady depreciation over the preceding seven years, the real effective exchange rate appreciated considerably from 1990 through mid-1997 owing to the large capital inflows, rapid increase in public sector spending (particularly on nontradables), faster productivity growth in the tradables than in the nontradables sector, and terms of trade gains.

Table 1.

Colombia: Selected Economic Indicators

(Annual percentage change)

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Sources: Colombian authorities; and Fund staff estimates.

Data in last two columns refer to the first two quarters of corresponding year.

Excludes agricultural foodstuffs, public services, and transport.

Based on the Information Notice System. Data in last two columns refer to year through August.

A. Summary

1. After decades of sound economic management which was reflected in a solid record of economic growth and stable, albeit moderately high inflation, Colombia has experienced large macroeconomic imbalances in recent years (Box 1). To a considerable extent, the deterioration in economic performance reflects a marked weakening in the public finances, which has placed upward pressures on interest rates and the real exchange rate. Output growth slowed sharply in 1996 and early 1997, but subsequently rebounded owing to stronger exports, a temporary boom in world coffee prices, and an easing of credit policy. Despite efforts at addressing the fiscal imbalances, the nonfinancial public sector deficit widened further to over 4 percent of GDP in 1997. Growing market concerns about the sustainability of the large fiscal and external current account deficits was a key factor in the emergence of downward pressures on the exchange rate in the second half of 1997, which intensified in early 1998. Monetary policy during 1996 and most of 1997 was geared toward stimulating domestic demand, but was tightened in the first half of 1998 in an effort to contain the exchange rate pressures. As a result, interest rates rose considerably, which contributed to a weakening in economic activity and financial system performance indicators. Against this background, the central bank depreciated the exchange rate band by 9 percentage points in early September 1998 in the face of heightened global pressures on financial markets.

B. Developments in 1997-98

2. An easing of liquidity conditions initiated in 1996 contributed to a rebound in economic activity in mid-1997, and by the fourth quarter of the year annual real GDP growth had risen to 5.4 percent. Real growth of domestic demand increased in response to lower real interest rates, higher coffee grower incomes owing to a temporary surge in export prices, and continued brisk growth in public sector expenditures. Exports of goods and nonfactor services increased more than 11 percent, following several years of sluggishness (Statistical Appendix Table 2). Output continued to advance at a rapid pace during the first quarter of 1998 but subsequently slowed considerably, as growth in domestic demand weakened in response to a rise in real interest rates, and increased uncertainty associated with the presidential elections and stepped-up insurgent activity.

3. Employment growth accelerated in 1997, but a simultaneous pickup in the expansion of the labor force resulted in a rise in the unemployment rate to 12 percent by end-year (Statistical Appendix Table 13). Minimum wages were increased by 21 percent in early 1997 compared with 19 percent in 1996 (Statistical Appendix Table 14), which contributed to an acceleration in growth of real wages for the year (Statistical Appendix Tables 15 and 16). Nevertheless, annual growth of unit labor costs slowed to around 5 percent by late 1997 from nearly 30 percent at the start of the year, as productivity growth accelerated sharply.

4. The rise in unemployment, together with a slower pace of exchange rate depreciation through the first part of 1997, contributed to a decline in consumer price inflation to 18 percent from 22 percent in 1996 (representing the first year that the official inflation target was attained since it was first announced in 1991) (Table 3). Upward pressures on inflation re-emerged in the first half of 1998 owing to the impact of the El Niño weather phenomenon on food prices. By contrast, “core inflation” which excludes food prices and public service and transport tariffs, declined to 15½ percent in September 1998 from 17.2 percent in December 1997.

Table 2.

Colombia: Real GDP by Sector of Origin

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Sources: Colombian authorities; and Fund staff estimates.
Table 3.

Colombia: Consumer Price Index

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Source: National Department of Statistics (DANE).

5. In the wake of the deteriorating fiscal situation, an unexpectedly large foreign reserve gain in December 1996 and a surge in private sector external borrowing registrations, the government declared an “economic emergency” in January 1997 that included a tax on most foreign borrowing and other initiatives designed to boost public sector revenues and forestall a further sharp real appreciation of the currency. The constitutional court subsequently overturned the economic emergency in March 1997, and in response the authorities adopted a number of measures, which included intensifying the “sand in the wheels” restrictions on foreign borrowing,2 raising import tariffs on most goods by 2.5-5 percentage points for 90 days, and cutting investment outlays. The initiatives contributed to a nearly 1 percentage point decline in the central administration deficit during 1997, following three consecutive years of increases (Statistical Appendix Table 20). Despite this progress, further efforts at fiscal consolidation were constrained by the mandatory revenue sharing arrangements and the relatively rigid outlays on wages, interest payments, and national security. As a result, the nonfinancial public sector deficit widened by an additional 1.7 percentage points of GDP to 4.3 percent of GDP (Table 4), as the decentralized sector (mainly the territorial governments) ran up considerable bank debt, and the national coffee fund failed to build substantial reserves at a time of record world prices. The deficit was financed by external borrowing, asset sales, and domestic bond placements that were facilitated by ample liquidity in the financial system.

Table 4.

Colombia: Operations of the Combined Public Sector

(In percent of GDP)

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Sources: Ministry of Finance and Public Credit; and Banco de la República.

Includes expenditure financed by increase in floating debt and, beginning in 1996 based on financing data, an adjustment for unrecorded local government expenditure.

Balance of Banco de la Republica on a cash basis.

Includes nonrecurrent fees from telecommunications licensing.

Includes army and police wages and pensions, and purchases of goods and services.

6. The external current account deficit widened further to nearly 6 percent of GDP in 1997, as imports rose sharply during the second half of the year in response to an increase in domestic demand and rising expectations for exchange rate depreciation (Table 5). Export growth accelerated owing to higher world coffee prices and a surge in nontraditional exports, especially to Venezuela (the main outlet for these products), reflecting developments in that country and a real depreciation of the peso vis-à-vis the bolivar. Despite a sizable increase in privatization flows (which totaled nearly US$3.2 billion or 3.4 percent of GDP) and portfolio investment (mostly government bonds and stock market purchases), net capital inflows (including errors and omissions) slowed for the first time in several years. The weakening largely reflected a sharp turnaround in both short- and medium-term external borrowing by the private sector, which fell in response to a decline in differentials between domestic and foreign interest rates.3

Table 5.

Colombia: Summary Balance of Payments

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Sources: Banco de la Republica; and Fund staff estimates.

Includes errors and omissions, contributions to international organizations; and changes in net foreign assets resulting from privatization.

Excludes net exports of petroleum products and related services; and imports related to investment in new oil fields.

7. Monetary policy during 1996 and most of 1997 was geared toward stimulating domestic demand and forestalling a further appreciation of the real exchange rate. In this regard, measures aimed at reducing interest rates were introduced beginning in March 1996. Specifically, the monetary authorities took steps to lower reserve requirements on bank deposits,4 reduce the yield on central bank bills and lower the intervention band for interbank interest rates. These factors, together with a weakening in private sector credit growth from the rapid pace observed in earlier years, contributed to a significant decline in interest rates from their peak in mid-1996. The benchmark three-month deposit and lending rates declined by about 11 percentage points to 23 percent and 33 percent, respectively, by September 1997, though lending rates remained relatively high in real terms (Statistical Appendix Table 36).

8. Against the backdrop of reduced expectations concerning oil sector prospects, the peso weakened to the depreciated end of its trading band during the second half of 1997 amid growing market concerns about the sustainability of the large fiscal and external current account deficits, the decline in domestic interest rates, and a deterioration in the security situation. Despite significant intervention by the authorities, pressures on the peso intensified in early 1998 in response to political uncertainty in the period leading up to the presidential elections, and contagion from the Asian crisis. The increasingly adverse market sentiment toward Colombia was also evidenced in a rise in sovereign bond spreads on ten-year bonds in the secondary market, which rose to 350 basis points in June 1998 from 160 basis points a year earlier—considerably higher than for other investment grade-rated countries. To contain the exchange rate pressures, the central bank tightened liquidity conditions in February 1998 by raising the interbank interest rate band by 3 percentage points to 23-30 percent and increasing the yield on open market bills. It also sought to encourage greater capital inflows by relaxing the nonremunerated deposit requirement on external borrowing.5 Monetary policy was further tightened in May through the suspension of base money as the main intermediate target for monetary policy, and the liberalization of interbank interest rates.

9. These steps—together with a favorable market reaction to the election of President Pastrana in late June—resulted in a temporary easing in exchange market pressures through mid-August. However, the tightening in monetary policy resulted in a significant increase in interest rates, which contributed to a deterioration in financial sector performance indicators.6 Moreover, exchange rate pressures re-emerged in late August in the context of intensified pressures on emerging market countries. Net international reserves fell by US$220 million during the first half of August, bringing the decline to US$1.5 billion since their peak of US$10.4 billion in August 1997. In response, the central bank depreciated the exchange rate band by 9 percentage points in early September. A fiscal package was announced by the Pastrana administration at the same time, aimed at reducing the nonfinancial public sector deficit to 2 percent of GDP in 1999 through a widening of the VAT base, spending cuts, enhanced efforts at combating tax evasion and contraband, local government tax reform, and changes in the mandatory revenue arrangements. Despite the adoption of a tighter fiscal stance and continued efforts at maintaining a tight monetary policy, the financial markets situation remained difficult through end-September as the exchange rate depreciated by 8 percent to within 2 percentage points of the depreciated end of the new trading band, 90-day deposit rates remained close to 40 percent, and the interbank interest rate market was characterized by considerable volatility. Stock market prices fell by an additional 5 percent in September, bringing the decline for the year as whole to 50 percent in U.S. dollar terms—the lowest level since 1993.

10. Real exchange rate movements in recent years have broadly tracked developments in nominal exchange rates. In real effective terms, the peso appreciated by 2 percent during the first seven months of 1998, compared with an average 7 percent per annum in the seven year preceding period. Recent wage developments present a somewhat more favorable picture of competitiveness during the past year, as unit labor costs in U.S. dollar terms fell by nearly 20 percent during the year ended March 1998.

11. The growth of money and credit aggregates accelerated considerably in 1997 in response to the pickup in domestic demand and steps taken by the central bank to ease liquidity. Annual broad money (M3+bonds) growth, in real terms, rose from 0.4 percent in October 1996 to 5.8 percent in December 1997, while base money growth rose to 25 percent at end-1997 compared with 20 percent under the authorities’ monetary program. Nevertheless, the pace of financial deepening slowed somewhat last year, as financial system liabilities to the private sector as a share of GDP was essentially unchanged at 41 percent, after increasing steadily from 30 percent in 1991. The decline in net international reserves and the decision by the central bank in May to suspend base money as the main intermediate target for monetary policy resulted in a sharp slowdown in annual base money growth during 1998 to 6½ percent in September 1998—well below the authorities’ pre-established target range. Broad money growth declined by somewhat less during this period, as the rise in interest rates resulted in a shift toward holdings of interest-bearing assets. Mirroring the periodic adjustments in the stance of monetary policy mentioned above, credit expansion, in real terms, fluctuated during 1997-98, rising from 3.6 percent in 1996 to 7.9 percent in 1997 and subsequently declining to 3.3 percent in September 1998.

Table 6.

Colombia: Summary Accounts of the Financial System

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Sources: Banco de la Republica; and Fund staff estimates.

All annual changes in foreign currency stocks valued at a constant exchange rate.

Changes in relation to private sector liabilities at the beginning of the period. Rates of growth of money and quasi-money are with respect to themselves.

Changes in relation to currency issue at the beginning of period.

Corresponds mainly to the sum of the stock of open market bills and exchange certificates.

Includes M3 plus bonds issued by financial institutions.

End of period annual rates.

Table 7.

Colombia: External Debt and Debt Service

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Sources: Banco de la Republica; and Fund staff estimates.
Table 8.

Colombia: Public Sector External Debt by Creditor 1/

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Source: Banco de la Republica.

Does not include short-term public debt or publicly guaranteed private debt.

1

Prepared by Reva Krieger and Keiko Honjo.

2

Specifically, the maximum maturity of loans subject to the nonremunerated deposit requirement first introduced in 1993 was extended from three to five years in March 1998, and to all maturities in May 1998. The latter modification also included a reduction in the rate to 30 percent from 50 percent.

3

A shift in borrowing toward domestic sources was facilitated by measures adopted which allowed for the prepayment of external debt.

4

The objective of these measures was also to reduce the dispersion in reserve requirements.

5

Specifically, the nonremunerated deposit requirement on external borrowing was reduced from 30 percent to 25 percent in February 1998, and the period was lowered from 18 months to 12-month duration.

6

A full discussion of recent financial sector performance is contained in Chapter III.

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Cover IMF Staff Country Reports
Colombia: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Volume/Issue:
Volume 1999: Issue 006
Publisher:
International Monetary Fund
ISBN:
9781451808735
ISSN:
1934-7685
Pages:
133
DOI:
https://doi.org/10.5089/9781451808735.002