Reform Efforts to Help Sustain Growth in Colombia

Strong economic recovery under way, thanks to skilled economic management

Growth projected at 4½ percent in 2014, despite external downside risks

Addressing the infrastructure gap is key medium-term challenge

“Colombia’s economic prospects are favorable, and the authorities’ continued efforts to implement key macroeconomic and structural reforms will help sustain growth over the medium term,” said the IMF’s mission chief for Colombia, Valerie Cerra.

Growth rebounds

Real growth rebounded strongly in the second half of 2013, driven by higher public investment and a solid expansion in private consumption. Overall, real economic growth in 2013 averaged 4.3 percent, up from 4 percent in 2012.

In light of slow demand growth during the first half of the year, the IMF welcomed the central bank’s decision to hold the policy interest rate low at 3.25 percent between April 2013 and April 2014. The reallocation of central government spending to provide targeted stimulus (for example, through mortgage interest subsidies) and the use of royalties for investment spending by sub-national governments also supported growth in 2013.

“Job creation was robust, particularly in the formal sector of the economy, and the unemployment rate declined to 9.7 percent in 2013, the lowest mark in the last decade,” added Cerra.

At the same time, inflation remained well within the 2–4 percent target range, thanks to well-anchored inflationary expectations.

Favorable outlook

Colombia’s economic outlook is favorable. The economy is projected to grow at around potential—estimated at 4½ percent—in 2014 and beyond. Inflation is expected to remain low, as the authorities are committed to adjust the policy rate as necessary to keep inflation within the target range.

Colombia remains exposed to external risks due to potential spillovers in commodity markets, financial markets, and trade with partner countries. While a pickup in advanced countries’ growth would benefit Colombia, downside risks associated with emerging markets and geopolitical tensions have increased over the past year.

“The authorities have ample policy space to counteract the negative effects of any shocks. Colombia also has a comfortable level of international reserves, reinforced by its access to the IMF’s Flexible Credit Line, which provides insurance to countries with very strong policies and track records,” pointed out Cerra.

Improving policy management

Over the past several years, Colombia’s very...