Colombia: from crisis to recovery

• Author: Lisandro Abrego/Robert Rennhack
• Position: Western Hemisphere Department
• Pages: 24-25

Page 24

Following its worst economic crisis in 30 years, Colombia has successfully turned the economy around through a combination of fiscal reform and consolidation that has trimmed public debt, policies that substantially reduced inflation, and actions to strengthen the financial system (see box).

The policies that have been adopted since 1999, supported by three successive IMF arrangements, have sought to place the country on a path of sustainable growth and reduce inflation while substantially reducing poverty and unemployment.

Since 2002, Colombia's economy has also benefited from a marked improvement in the security situation, although it remains a source of concern. After seven years of IMF economic programs, Colombia exited formal IMF support in November 2006.

Economic recovery

After an initially slow recovery, real economic growth rose to 4 percent by 2004 and accelerated to an estimated 6½ percent in 2006, helped by strong private investment (see chart). This stronger growth, aided by a favorable global economy, has been accompanied by large declines in unemployment and poverty, as well as improved macroeconomic stability and a reduction of vulnerabilities (see table):

* With the recovery in the economy, unemployment declined from 20 percent in 2000 to about 12 percent in 2006, while poverty fell from 64 percent in 1999 to 49 percent in 2005.

* At the same time, inflation fell to its lowest level in decades, to about 4.5 percent in 2006, with the effective implementation of an inflation targeting framework.

* Aided by the fiscal reforms and increased oil prices, the combined public sector deficit was reduced from 5.5 percent of GDP in 1999 to a projected 0.4 percent of GDP in 2006.

This performance-together with the real appreciation of the peso since 2004-helped reduce gross public debt from 57 percent of GDP in 2002 to 45 percent in 2006. In addition, public sector deposits reached an estimated 13 percent of GDP in 2006, up from 8 percent of GDP in 2002.

* Improvements in public debt management have reduced financing costs, diversified funding sources, lengthened the maturity of debt, lowered foreign exchange rate exposure, and enhanced liquidity in the domestic bond market. Since 2004, Colombia has issued about $1.6 billion of global pesodenominated bonds.

* The external sector strengthened, led by sustained growth in exports and a recovery in capital inflows. Net...