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
Colombia’s economy slowed in early 2008 after policies were tightened to address overheating during a 2004–07 boom period as President Alvaro Uribe’s security policies attracted international investment. The global crisis caused private investment to collapse in the last quarter of 2008, and the Colombian authorities adopted countercyclical monetary and fiscal policy measures in the last quarter of 2008. The government’s pursuit of sound economic policies prior to the global downturn meant that it was well placed to loosen fiscal and monetary policy to boost domestic demand.
Fiscal policy contributed support of around one percentage point of GDP in 2009, as measured by the change in the combined public sector overall structural balance. The government increased its foreign borrowing while several measures were taken to strengthen financial sector resilience, including an agreement between banks and the superintendent to retain a portion of 2008 profits. The financial system remained sound, untainted by the toxic debt that contributed to the downfall of the sector in the United States, while the government also announced improvements in financial regulation and reforms to develop capital markets.
The government’s fiscal position has inevitably deteriorated due to weak domestic demand, which has affected tax revenues. However, the International Monetary Fund (IMF) expects the fiscal deficit and public debt to resume a downward trend as economic activity recovers, oil-related revenues increase, and government spending is kept in check.
The central bank also adjusted monetary policy swiftly, with a 650 basis point reduction in the policy rate to 3.5% by December 2009, a level at which it remained by April 2010. Despite the reduction in interest rates, the currency strengthened considerably in 2009 and 2010. In the 12 months until March 31, the Colombian peso gained 33%, the most among 26 emerging-market currencies, and bringing the gain to 39% since President Alvaro Uribe took office in 2002. The IMF said, in March 2010, that the flexible exchange rate policy has helped protect the external position in the face of adverse shocks. Policy makers were concerned that the peso rally is driving up the jobless rate and these concerns may be heightened ahead of the May 30, 2010 elections to choose a successor to President Uribe. Alvaro Uribe is a close ally of the United States, which has poured many millions of dollars into Colombia to support its fight against drug cartels and the FARC insurgency. Uribe is credited with pursuing investor-friendly policies that have helped Colombia’s economy to flourish in recent years.
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. However, domestic demand began recovering in the second half of 2009, led by public investment and consumption, and Colombia avoided recession in 2009, achieving growth of 0.4%. The economy also gained strength in GDP as the year progressed, expanding by 2.5% in the fourth quarter of 2009.
The economic slowdown had a positive impact on inflation which fell to 2% in 2009, from 7.7% at the end of 2008. Food price inflation fell to zero in 2009. In 2010, inflation is likely to remain within the central bank’s target range of 2% to 4%, because the effects of El Niño on food inflation are expected to be short-lived and likely to be offset by the output gap and the appreciation of the peso.
Loosening the fiscal purse strings caused the central government’s budget deficit to widen to an estimated 4.5% of GDP in 2009 from 2.7% of GDP in 2008, while Colombia’s net nonfinancial public debt has increased to an estimated 29.5% of the economy in 2010 from 22.4% in 2007.
In March 2010, the IMF said that it expected the Colombian economy to grow by 2.25% in 2010, reflecting the upturn in the world economy and the impact of the expansionary policies that the authorities implemented in 2009. However, high unemployment and reduced exports to Venezuela will limit economic growth in 2010. In January 2010, the jobless rate stood at nearly 15%, the highest level since the 17% recorded in January 2004.
The external current account deficit is expected to widen to 3.1% of GDP in 2010, on account of lower exports to Venezuela and a pickup in oil investment-related imports. The bulk of this deficit would be financed by foreign direct investment, with other private flows also expected to recover, the IMF said. Colombia received US$7.2 billion of foreign direct investment in 2009, after a record US$10.6 billion the previous year, central bank data showed. Around US$5.7 billion of foreign direct investment went into oil and mining in 2009.
Support for Inward Investment and Imports
There are only a few sectors of the economy that are prohibited to foreign investors (such as 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 Banco de la Republica. 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 in so far as qualified managers is concerned.
The country has 10 duty-free zones that provide customs, exchange, and fiscal benefits (source: www.proexport.com.co).
GDP growth: 0.4% (official, 2009)
GDP per capita: US$9,200 (2009 est.)
CPI: 2% (official, December 2009)
Key interest rate: 3.5% (April 30, 2010)
Exchange rate versus US dollar: COL$1,990 (2009)*
Unemployment: 15% (January 2009)
FDI: US$75.99 billion (December 31, 2009 est.)
Current account deficit/surplus: −US$7.136 billion (2009 est.)
Population: 44,205,293 (July 2010 est.)
* Colombian peso
Source: CIA World Factbook except where stated