Colombia: Selected Issues and Statistical Appendix
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This Selected Issues paper provides background information and analysis on recent developments and critical issues for the Colombian economy. The study discusses the unemployment and stresses in the financial system and also focuses on fiscal issues. The following statistical data are presented in detail: national accounts at current prices and at constant prices, savings and investment, value of agricultural crops, mining production, structure of regular gasoline prices, indicators of construction activity, minimum wages, producer price index, interest rates, and so on.

Abstract

This Selected Issues paper provides background information and analysis on recent developments and critical issues for the Colombian economy. The study discusses the unemployment and stresses in the financial system and also focuses on fiscal issues. The following statistical data are presented in detail: national accounts at current prices and at constant prices, savings and investment, value of agricultural crops, mining production, structure of regular gasoline prices, indicators of construction activity, minimum wages, producer price index, interest rates, and so on.

VIII. Reform of Pensions: AN Overview93

126. The Colombian pay-as-you-go (PAYG) pension system is facing problems. The system is generating cash deficits (defined as the difference between contributions and payments to pensioners), and large and increasing actuarial deficits (defined as the present value of the difference between contributions and pensions). This note provides an overview of the system and presents a list of the most pressing problems.

A. The Pension System Before 199394

127. Before the first pension reform in 1993 (Law 100), pensions were organized on a PAYG basis. Contribution rates were low compared to the large benefits provided and the very generous pensions granted to some groups. The most important schemes were the more than 1000 pension plans for public sector employees, including those in decentralized institutions and public enterprises, and a mandatory scheme for private sector workers under the social security institute (ISS).

128. Benefits varied widely between the different plans. Plans for public workers provided more generous benefits than those available to private employees. The majority of the public sector plans were noncontributory, whereas the contribution rate for private workers was 6.5 percent of wages and salaries. Retirement ages were five years lower in the public sector than under the ISS. The replacement rate (the pension as a percent of a worker’s wage during some base period) varied from 75 percent for public workers to 45–90 percent95 for private workers. For both public and private workers, the calculation of the replacement rate was based on the average salary of the last two years before retirement.

129. By the time of the 1993 reform, pensions for public workers were almost entirely financed by the central and regional governments. Pension payments made by the ISS to private sector workers were slightly below the contributions; consequently, the ISS built financial reserves, which were invested in government securities.96 These balances were available to finance future benefit payments only in a bookkeeping sense; from the perspective of the consolidated operations of the public sector, they did not constitute assets that could be drawn down in the future to fund benefits. Instead, they were claims on the public sector itself, and raising taxes, lowering expenditures (other than pensions), or borrowing would be needed to finance a cash deficit of the pension system.

130. The weakness of the pension plans in 1993 were explained by faster demographic change than expected when the different plans were initiated, imbalances of contributions and benefits, inefficient management practices in many plans, a lack of adequate control, and corruption in some cases. Emerging cash imbalances, actuarial deficits, and inequities made clear the need for a change, which would come with Law 100.

B. The Reform of 1993 (Law 100)

131. Law 100 of 1993 was an important step to broaden the coverage of the pension system, reduce inequities, and provide adequate and sustainable retirement benefits; however, as explain below, Law 100 did not fully address the problems. The reform established a dual regime by maintaining the PAYG regime managed by the ISS and introduced, as an alternative, a regime of defined contributions to capitalization funds managed by private institutions. While the insolvent public pension plans would be liquidated, the other plans for public workers would be fully incorporated into the reform in 2014, the end of the transition period.

132. The ISS and the private funds would compete for affiliates who could move back and forth between the regimes every three years. The reform left untouched some special pension regimes; the most important of these were the regimes for teachers, employees of ECOPETROL (the state oil company), and the security forces (army and police).

133. The contribution rate for the public plans that remained open, the ISS pension regime, and the private plans was fixed initially 8 percent of wages and salaries; it was increased gradually to 13.5 percent by 1996 (25 percent paid by employees and 75 percent paid by employers compared to 33 and 67 percent, respectively, before Law 100). At the same time, the retirement age was increased by two years (to 52 years for women and 57 years for men), the minimum number of contributions was raised by 500 weeks to 1,000 weeks, and the replacement rate was fixed at 65 percent. The base salary used to calculate the pension was the average of the last 10 years.

134. Workers with earnings of more than four times the legal minimum wage would have to contribute an additional 1 percent of their income to a newly created solidarity pension fund. Government transfers to the fund would match these contributions. The resources of the fund would be used to supplement the contributions of some groups such as workers with wages below the minimum required to qualify for a pension, and certain other groups.

135. For the transition period to 2014 the system established that men older than 40 years and women older than 35 years in 1994 had to stay in the former system, consisting of the ISS and the funds for public workers that would remain open during the transition. Other contributors could move to capitalization funds or remain in the ISS system; most of the public pension plans were to stop accepting new affiliates. Those who changed affiliation would be provided with recognition bonds whose face value would reflect the present value of their entitlements under the old system. The bonds would be redeemed at the time of retirement.97 During the transition period the retirement age would remain at 55 years for women and 60 years for men; after 2014 the ages would be 57 years for women and 62 years for men.

136. The resources of the private capitalization funds are invested in equities, bonds, and money market instruments. Law 100 established maximum investment limits per instrument and issuer, expressed as a percent of the total investment of the fund. At the time of their retirement, participants in these funds would use the accumulated funds in their individual accounts to purchase an annuity from an insurance company or combine the annuity with withdrawals.

C. Issues to be Addressed in a New Reform

137. As designed, the reform enacted in 1993 did not resolve the problems of the PAYG regime, and some of the principles set down in the reform have not been fully applied. Hence, the actuarial deficit has increased and cash imbalances have emerged in the ISS despite the increase in the contribution rate. The main reason of this is the reduction in the number of contributors, which has been more pronounced than expected at the time of the approval of Law 100, mainly as younger people have chosen the private plans. In addition, the government budget has covered the gap between payments of pensions and contributions for the public plans.

138. The system has also confronted other problems. The option for participants to move back and forth between the ISS and private institutions impose additional costs on the PAYG regime. The changes involve administrative costs, and workers will switch to the ISS if the pension they receive there is higher than what they would receive from private funds.

139. Under Law 100, the regimes that were insolvent in 1993 were to be closed. However, many insolvent schemes were kept open and there are a number of irregularities in granting benefits under some of these schemes. There is no institution in Colombia that audits compliance with the provisions of the original plans and certify the benefits.

140. The reform enacted in 1993 left a number of public plans outside the general system. The pension systems for teachers, oil workers, and security forces are explicitly excluded. As regards pensions for workers of the public oil company (ECOPETROL), a portion of the oil-price windfall of 1999 and 2000 was allocated in public sector entities to fund the pension liabilities of the company. In addition, collective bargaining agreements in public sector entities may provide for more generous benefits than established by Law100%.

141. Colombian private pension funds are required to guarantee a minimum rate of return to their affiliates, defined as a combination of the performance of a reference portfolio of investments and the average returns obtained by the industry. At present, this benchmark leaves no room for investing in long-term instruments and taking reasonable risks to maximize profitability. This restriction prevents these funds from playing an active role in the development of a domestic medium-term securities market.

142. Against the background presented above and the constraint imposed by the need to secure fiscal sustainability of Colombia’s public finances over the medium and longer term, the following paragraphs present a summary of the main issues facing the authorities in designing the next pension reform, which will be presented to congress this year.

  • To avoid large tax increases in the future, the next reform will need to generate a significant reduction in the actuarial deficit of the PAYG system. Therefore, changes in the main pension parameters are needed, including in the retirement ages, the minimum contribution periods, contribution rates, and/or the replacement rates. Also, the possibility open to workers of moving between the PAYG regime and private funds may need to be restricted. At the same time, the option of raising the contribution rates has to be assessed in light of the present payroll taxes and other charges on salaries, which are very high.98 If the system is not overhauled, the cash deficit of the PAYG system (the ISS and the public plans) could grow to 5 percent of GDP in 2010.

  • Regardless of the changes in the main pension parameters, during the transition period of the forthcoming reforms, the prospective cash deficits of the ISS and the public plans that have remained open are a matter of concern. Therefore, one important objective of the next reform would be to define a short transition period, and if changes in the main pension parameters should prove insufficient, additional receipts would need to be allocated to the system; for example, a reallocation of some of the payroll taxes might serve to enhance the finances of the ISS and the public plans to help reduce the financial gap.

  • For financial and equity reasons, the public sector regimes excluded from Law 100, should be included in the general system. At the same time, balanced by the right of collective bargaining, some limits on labor contracts for public sector workers granting benefits over those defined by the general regime would need to be established.

  • Because of the irregularities in granting benefits and problems regarding personal records of affiliates, a public agency might be created to enforce compliance with the rules of the system and certify benefits.

  • For efficiency and financial reasons, new regulations to let private funds diversify their portfolio are needed.

Statistical Appendix Tables

Table 1.

Colombia: National Accounts at Current Prices

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Sources: Colombian authorities, and staff estimates.

Changes in percent of preceding year’s GDP.

Table 2.

Colombia: National Accounts at Constant Prices

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Sources: Colombian authorities, and staff estimates.

Changes in percent of preceding year’s GDP.

Table 3.

Colombia: Aggregate Supply and Demand at Constant Prices

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Sources: Colombian authorities; and Fund staff estimates.

Changes in percent of preceding year’s GDP.

Table 4.

Colombia: Saving and Investment

(In percent of GDP)

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Sources: Colombian authorities; and Fund staff estimates.

Includes errors and omissions.

Table 5.

Colombia: Value of Agricultural Crops 1/

(Percentage changes; at constant 1975 prices)

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Sources: Ministry of Agriculture.

Calculated on the basis of changes in the volume of output as estimated by the Ministry of Agriculture.

Table 6.

Colombia: Coffee Stocks, Production, Exports, and Prices

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Sources: International Coffee Organization (ICO); National Federation of Coffee Growers; and Fund staff estimates.

Registered domestic sales of semiprocesed coffee by the Coffee Federation.

As measured by the indicator price for Colombian mild Arabica coffee.

A 125-kg load is equal to 214.34 pounds of green coffee.

Table 7.

Colombia: Coffee Stocks, Production, Exports, and Prices

(In thousands of 60-kg bags)

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Source: National Federation of Coffee Growers.
Table 8.

Colombia: Volume of Manufacturing Production 1/

(Annual percentage change)

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Source: National Department of Statistics (DANE).

Excluding the coffee husking process.

First three quarters.

Table 9.

Colombia: Mining Production

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Sources: Banco de la República.

Oil information: January-July 1999 and 2000.

Production from El Cerrejón-Zona Norte. From June 1996 onwards, it includes: Producción Rom, Planta de Lavado and Intercar.

Sea water salt and mineral salt.

Table 10.

Colombia: National Production and Consumption of Petroleum Products

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Source: ECOPETROL.

White products include regular and premium gasoline, industrial benzene, kerosene, jet fuel, and propane.

Black products comprise crude oil as fuel and diesel fuel oil; and natural gas expressed in equivalent fuel-oil barrels.

The figure for Total Consumption in every year corresponds to August.

Table 11.

Colombia: Structure of Regular Gasoline Prices

(End of period)

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Source: Ministry of Mines and Energy.

Since January 1999, the refinery price includes a department tax, which was reintroduced after it was eliminated in 1995.

Table 12.

Colombia: Indicators of Construction Activity

(Average percentage change, unless otherwise indicated)

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Sources: Banco de la República and National Department of Statistics (DANE).

From 1999 onwards, it includes nine metropolitan areas.

Index of producer prices, Banco de la República.

Table 13.

Colombia: Quarterly Survey of Unemployment and Participation Rates

(In percent)

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Source: National Department of Statistics (DANE).

For seven metropolitan areas (Bogota, Medellin, Cali, Barranquilla, Bucaramanga, Giron, and Manizales).

Preliminary.

Table 14.

Colombia: Minimum Wages

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Source: National Department of Statistics (DANE).

Deflated by the consumer price index for low-income workers.

Table 15.

Colombia: Nominal and Real Wage Indicators in Manufacturing 1/

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Source: National Department of Statistics (DANE).

Including only production workers; excluding coffee husking activities.

Nominal wage deflated by consumer price index.

From corresponding period of previous year.

Table 16.

Colombia: Producer Price Index

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Source: Banco de la Republica.

Excluding construction materials.

Table 17.

Colombia: Items Subject to Price Controls 1/

(In percentage weight of middle-income group CPI)

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Source: Banco de la Republica.

Direct control: the increment in prices has to be approved by the government. Indirect control: the increment in prices is proposed by the producer to the government 15 days in advance of the due date, and the increment in price takes effect if the government does not disapprove the proposal.

Includes both refined and unrefined sugar.

Surveillance over producers, but not consumers.

Table 18.

Colombia: Operations of the Combined Public Sector

(In billions of Colombian pesos)

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

Excludes proceeds of financial transaction tax in 1999 from revenue and expenditure.

Includes local fees, penalties and oil stabilization fund.

Includes expenditure on an accrual basis not included in other outlays.

Includes residual differences between items above and below the line.

Transfer to Caja Agraria in 1999, interest payments on public banks restructuring bonds and mortgage debt relief related costs.

For 2000 includes the floating debt of non financial public enterprises.

Includes nonrecurrent fees from telecommunications licensing.

Table 19.

Colombia: Operations of the Central Administration

(In billions of Colombian pesos)

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Source: Ministry of Finance and Public Credit.

Excludes proceeds of financial transaction tax in 1999 from revenue and expenditure.

Includes expenditure on an accrual basis not included in other outlays.

Includes interest payments to the rest of the nonfinancial public sector.

Table 20.

Colombia: Operations of the Central Administration

(In percent of GDP)

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Sources: National Department of Planning; CONFIS; and Fund staff estimates.

In percent of annual GDP.

Excludes proceeds of financial transaction tax in 1999 from revenue and expenditure.

Includes expenditures on an accrual basis not included in other outlays.

Includes interest payment to the rest of or on behalf of the nonfinancial public sector.

Table 21.

Colombia: Operations of the Social Security System 1/

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Source: Ministry of Finance and Public Credit.

Includes the social security, CAJANAL, CAPRECOM and other funds covering employees of the central administration.

Transfers from central administration are computed on an accrual basis for year 2000.

Includes floating debt of the Instituto del Seguro Social for year 2000.

Table 22.

Colombia: Operations of the National Decentralized Agencies 1/

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Source: Ministry of Finance and Public Credit.

Includes the road construction fund, the agricultural and social agencies and the oil stabilization fund.

Includes statistical discrepancies resulting from differences in intersectoral transfers.

Table 23.

Colombia: Operations of the Central Government 1/

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Source: Ministry of Finance and Public Credit.

Includes central administration; social security; and national decentralized agencies.

Includes expenditure on an accrual basis not included in other outlays.

Table 24.

Colombia: Operations of the Local Nonfinancial Public Sector 1/

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Source: Ministry of Finance and Public Credit.

Includes local governments (municipalities, departments, and districts) and local nonfinancial enterprises comprising water, telephone, and electricity companies; and Medellin metro system.

Beginning in 1997, local government balance is measured from financing data; and accounts include estimates of unrecorded expenditure. Data for 1997 not fully comparable with earlier periods.

Table 25.

Colombia: Operations of the General Government 1/

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Source: Ministry of Finance and Public Credit.

Includes central government; and local nonfinancial public sector.

Includes expenditure on an accrual basis not included in other outlays.

Table 26.

Colombia: Operations of the Consolidated National Enterprises

(In billions of Colombian pesos)

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Source: Ministry of Finance and Public Credit.
Table 27.

Colombia: Operations of the Consolidated National Enterprises

(In percent of GDP)

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Source: Ministry of Finance and Public Credit.

In percent of annual GDP.

Table 28.

Colombia: Operations of Selected Nonfinancial Public Enterprises

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Source: Ministry of Finance and Public Credit.
Table 29.

Colombia: Summary Accounts of the Banco de la Republica (BR)

(End of period stocks; in billions of Colombian pesos)

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Source: Banco de la Republica.

As of 1993, estimated on the basis of the profit/loss statement and including cash effects of operations accrued in the previous year and not registered in the bank’s profit/loss statement.

Includes adjustment for exchange rate valuation account, net credit to FOGAFIN, and transfers to the central government of the BR accrued profits.

Table 30.

Colombia: Summary Accounts of the Commercial Banks 1/

(End of period stocks; in billions of Colombian pesos)

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Source: Banco de la Republica.

Includes the BCH.

Includes adjustment for exchange rate valuation account and net credit to FOGAFIN.

Table 31.

Colombia: Summary Accounts of the Specialized Financial Institutions 1/

(End of period stocks; in billions of Colombian pesos)

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Source: Banco de la Republica.

Comprises development finance corporations, commercial finance companies, savings and loan institutions, cooperative institutions, and development banks (BANCOLDEX, FINAGRO, FINDETER). Excludes FOGAFIN.

Includes adjustment for exchange rate valuation account and net credit to FOGAFIN.

Table 32.

Colombia: Summary Accounts of the Financial System

(End of period stocks; in billions of Colombian pesos)

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Source: Banco de la Republica.

Includes adjustment for exchange rate valuation account, net credit to FOGAFIN, and transfers to the central government of the BR accrued profits.

Starting in the week of November 24,2000, the bonds issued by the financial system are included in the group of liabilities of the financial system.

Table 33.

Colombia: Summary Accounts of the Banco de la Republica

(Percentage change) 1/

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Source: Banco de la Republica.

In relation to the stock of liabilities of the Banco de la Republica to the private sector at the beginning of the period, valued at fixed annual exchange rates.

As of 1993, estimated on the basis of the profit/loss statement and including cash effects of operations accrued in the previous year and not registered in the bank’s profit/loss statement.

Includes adjustment for exchange rate valuation account, net credit to FOGAFIN, and transfers to the central government of the BR accrued profits.

Table 34.

Colombia: Summary Accounts of the Financial System

(Percentage change) 1/

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Source: Banco de la Republica.

In relation to the stock of liabilities of the Financial System to the private sector at the beginning of the period, valued at fixed annual exchange rates.

Includes adjustment for exchange rate valuation account, net credit to FOGAFIN, and transfers to the central government of the BR accrued profits.

Table 35.

Colombia: Financial Indicators

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Source: Banco de la Republica.

“Nonsectorized” data may not exclude all assets and liabilities of the nonfinancial public sector from M1, M3, and credit to the private sector.

Currency in circulation plus demand deposits.

M1 + quasi-money + fiduciary deposits + bank acceptances + bonds issued by financial institutions.

Table 36.

Colombia: Interest Rates

(In percent)

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Source: Banoo de la Republica.

Average yield on three-month deposits.

Average rates based on survey of financial intermediaries.

Table 37.

Colombia: Requirements for Monetary Reserves, Reserve-Substituting Investments, and Obligatory Investments

(In percent of financial institutions liabilities)

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Source: Banco de la Republica.

Obligatory invesments refers to a 5 percent obligatory investment in Titulos de Desarrollo Agropecuario Class B and 2 percent in Class A (FINAGRO).

Table 38.

Colombia: Reserves, Open Market Instruments, and Exchange Certificates

(In billions of Colombia pesos at end of eriod unless otherwise indicated)

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

Demand, savings, and time deposits with commercial banks, development finance corporations, and commercial finance companies.

U.S. dollar-denominated certificates valued at exchange rate indicated in memorandum item.

Table 39.

Colombia: Selected Sectoral Credit Lines

(In millions of Colombian pesos, end of period)

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Sources: Banco de la Republica; and Superintendencia Bancaria.
Table 40.

Colombia: Lending Rates of Sectoral Credit Funds

(In percent)

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Source: Banco de la Republica.

DTF is the average (effective annual) rate on three-month time deposits in the financial system.

Market rates are set freely and are not subject to interest rate ceilings.

Table 41.

Colombia: Reserve Substituting and Obligatory Investments of Financial Institutions by Instrument

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Source: Banco de la Republica.
Table 42.

Colombia: Net International Reserves of the Banco de la República

(In millons of U.S. dollars)

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Source: Banco de la Republica.
Table 43.

Colombia: Merchandise Exports

(In millions of U.S. dollars, unless otherwise indicated)

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

Including special goods traded in the free trade zones.

Special goods traded in the free trade zones.

Table 44.

Colombia: Nontraditional Exports 1/

(In millions of U.S. dollars)

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Source: National Department of Statistics (DANE).

Traditional exports comprise coal, gold, coffee, petroleum products, nickel and emeralds.

Excluding special goods traded in the free trade zones.

Table 45.

Colombia: Tax Credit Certificates for Exports

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Source: Banco de la Republica.

Value of certificates issued in relation to value of exchange surrenders for minor exports.

Table 46.

Colombia: Exports by Country of Destination

(In percent of total)

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Source: National Department of Statistics (DANE).

Latin American Integration Association.

Table 47.

Colombia: Imports by Economic Category

(In millions of U.S. dollars)

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Sources: Banco de la Republica; and National Department of Statistics (DANE).
Table 48.

Colombia: Imports by Country of Origin

(In percent of total)

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Source: National Department of Statistics (DANE).

Latin American Integration Association.

Table 49.

Colombia: Tariff Rate Indicators

(In percent)

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Source: National Planning Department

Excludes automobiles and agricultural products.

Table 50.

Colombia: External Public Loans 1/

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Source: Banco de la Republica.

On a commitment basis.

Interest rates for loans based on LIBOR estimated as the sum of individual interest spreads plus the average daily rate on six-month deposits in the year the loan was contracted.

Includes general purpose loans.

Includes publicly guaranteed loans.

Table 51.

Colombia: External Debt and Debt Service

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Source: Banco de la República.

APPENDIX I

Colombia: Summary of the Tax System

(As of January, 2001)

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93

Prepared by José Gil-Díaz.

94

This section is based on the chapter “Pension System Reform,” Colombia-Selected Issues and Statistical Appendix, SM/98/251, 1998.

95

Under ISS, the minimum pension could be obtained after 500 weeks; for each 30 weeks of additional contributions, the replacement rate increased by 3 percent up to a 90 percent maximum.

96

Until the appearance of cash deficits, in 2000, the ISS had continued investing its reserves in public paper.

97

The calculation of the value the bonds has become very complex since the records of many workers were inadequately filled and filed. Taking into consideration these difficulties, the bonds have been calculated as the amount that would have been accumulated to finance an annuity similar to a pension in the old system.

98

Payroll taxes in Colombia (as percent of the payroll) are: (i) pension contributions, 13.5 percent; (ii) health insurance, 12.0 percent; (iii) severance fund contributions, 8.3 percent; (iv) accident insurance, 2.5 percent; (v) training, 2.0 percent; and (vi) familiar and other allowances, 7.0 percent. Total: 45.3 percent (36.2 percent paid by the employer and 9.1 percent paid by the worker).

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