Economy and Trade
Colombia, along with Ecuador and Venezuela, emerged from the collapse of Gran Colombia in 1830. The country went through an extremely turbulent period in the last four decades of the 20th century, with government forces battling anti-government insurgency groups, with FARC (the Revolutionary Armed Forces of Colombia) being the main grouping. Although domestic security has greatly improved, insurgent attacks continue, and large areas of the countryside are not under government control. There is also crossover between paramilitary groups and out-and-out criminal groups aligned with Colombia’s drug trafficking. Nevertheless, strong fiscal reforms and a business-friendly, pro-market economic environment have helped Colombia to generate sustained growth in the period from 2002 to 2007, before the current global downturn took hold. As a result, Colombia has managed to reduce poverty by 20% and cut unemployment by 25% since 2002. The US–Colombia Trade Promotion Agreement (CTPA) negotiations have also helped to attract record levels of foreign investment. Inequality, underemployment, and narcotics trafficking remain significant challenges.
Economic Policy over 12 Months
In its latest country report on Colombia, the International Monetary Fund (IMF) praised the country for its sound economic policies, and wide-ranging structural reforms. Colombia’s growth since 2003 has outstripped the regional average by a substantial margin, particularly from 2005 to 2007. Underpinning this growth has been a sharp increase in private investment, itself a testimony to a more stable domestic environment, and the government’s business-friendly policies. Substantial foreign direct investments led the Colombian currency to appreciate strongly over this period, although the peso is now depreciating rapidly.
Export growth was solid and broad-based, prior to Colombia’s main export markets being driven into recession by the global downturn. The government has also worked hard to impose fiscal discipline, forcing down what was a hugely excessive public debt ratio, which is now much closer to the average for emerging market economies with investment-grade debt status. According to the IMF, the composition of the public debt has also improved, thanks to a significant reduction in exposure to exchange-rate fluctuations and rollover risks. External debt has fallen sharply, too, and the country is now much less reliant on raising foreign debt. At the same time, international reserves have increased significantly.
Moving to a flexible exchange-rate regime has enhanced the Colombian economy’s ability to withstand shocks. Because foreign participation in Colombian financial markets is limited, and the markets have accumulated significant liquidity buffers, the country is generally in a strong position to confront the challenges posed by the current state of the global economy, the IMF judges.
Inflation is a problem throughout the region. In November 2008, inflation stood at 7.73%, down from 7.94% a month earlier but still a good deal above the Colombian Central Bank’s (Banco de la Republica Colombia, BRD) target of between 3% and 4%. Commenting on its decision to lower its intervention interest rate by 50 basis points in December 2008, the BRD argued that inflation was now the lesser problem, and that world inflation in general can be expected to decrease through 2009 as a result of the global slowdown, which will hit commodity prices. Therefore, the BDR reasons, as long as the Colombian exchange rate holds up, and the government implements appropriate commercial policies, particularly with respect to food imports, the reduction in global inflation should feed through “relatively quickly” to consumer prices in Colombia. Thus, the BRD no longer felt it necessary to keep interest rates high, particularly in the face of weakening production activity figures from industry and commerce. “Weaker growth in demand and output means less inflationary pressure,” it announced in a press release in December 2008.
Economic Performance over 12 Months
Economic growth slipped in 2008 as a result of the global financial crisis, and weakening demand for Colombia’s exports. It declined from 7.25% in the second half of 2007 to 4% in the first half of 2008, and finished the year on 4.1%, according to Colombian government statistics. In response, the administration has cut capital controls, arranged for emergency credit lines from multilateral institutions, and promoted investment incentives, such as Colombia’s modernized free trade zone mechanism, legal stability contracts, and new bilateral investment treaties and trade agreements. The government has also encouraged exporters to diversify their customer base away from the United States and Venezuela, Colombia’s largest trading partners.
Nevertheless, the business sector continues to be concerned about the impact of a global recession on Colombia’s exports, as well as the approval of the CTPA, which is stalled in the US Congress. The BDR has issued long-term guidance on its interest-rate policy for 2009 to 2011. The broad target figure for inflation for 2009, the BDR says, is now 4–5%. The rate for 2010 is being tentatively set at 4%, with the following year’s target being 3%, plus or minus 1%.
Colombia’s exchange rate has been highly volatile. The peso appreciated by about 15% in real terms between the end of 2007 and mid-June 2008, according to the IMF. Then the BDR stepped up its foreign-exchange auctions, which it introduced in March 2008. Instead of monthly US$150 million purchases, it began doing US$20 million daily purchases in the spot market, and, at the same time, it raised reserve requirements on deposits. A steady weakening of the peso forced it to abandon daily purchases in early October. During the second half of 2008, the peso’s real rate weakened by an estimated 20%.
In the view of the IMF, the Colombian government has done better than most, in that it has managed to ensure, through funding obtained from external sources for 2009, that the public sector will be able to meet its external financing requirements without having to tap the markets. The state-owned foreign trade bank, Bancoldex, has been funded externally, as well, and is able to provide loans to banks and corporates if there is disruption to external credit lines. Although asset values have dropped, as is normal in a sharp downturn, the IMF reckons that all the key financial soundness indicators in the economy remain solid. Non-performing loan ratios (NPLs) have risen, particularly for consumer credit, but banks are well provisioned, it says.
Support for Inward Investment and Imports
There are only a few sectors of the economy that are prohibited to foreign investors (defense, and investment in real estate, other than to build premises for the investing company). In all other sectors, according to accountants, KPMG, it is sufficient to register the investment with the BDR. According to the World Competitiveness Yearbook, Colombia ranks no. 1 among the leading economies in Latin America in terms of the availability of skilled labor, and is second as far as qualified managers is concerned.
Tax Exemptions
The country has 10 duty-free zones that provide customs, exchange, and fiscal benefits (source: www.proexport.com.co).
Statistics
GDP growth: 3.5%
GDP per capita: US$9,000
CPI: 7.7%
Key interest rate: 15.6%
Exchange rate versus dollar: peso per US dollar—2.243
Unemployment: 11.8 per cent
FDI: US$65.69 billion
Current account deficit: −U$5.592 billion
Population: 45,644,023
Source: CIA World Factbook except where stated
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