Latest recommendations from the International Monetary Fund, IMF to Colombia

April 7, 2024

While full of praise for the government’s macroeconomic policies, the IMF acknowledges that the recessionary policies have been successful in reducing inflation and warns of an eventual overshoot in public spending.

International Monetary Fund, IMF, Más Colombia

In mid-February of this year, the IMF technical team that visited the country prepared a preliminary report on its perception of the Colombian economy.

On March 27, based on this preliminary report, the IMF published its official statement on the economy and ratified the preliminary report made by the technical team, adding some considerations.

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The IMF’s diagnosis of Colombia

The IMF praised the “duly restrictive economic policies of the last two years”, and pointed out as positive the growth of 1.2% during 2023, which rectifies the “unsustainably high levels after the pandemic”.

In addition, the IMF noted with satisfaction the decrease in inflation to 8.4% “despite the necessary increases in regulated prices” such as gasoline.

In parallel, the IMF recorded a decrease in credit growth from 18% year-on-year growth in August 2023 to 3% in December 2023 and added that the current account deficit went from 6% in 2022 to 3% in 2023 on account of lower imports and tourism receipts.

According to the IMF, by 2024, growth is expected to amount to 1.3%, with a further moderation in household consumption. In addition, according to the report, the forecast is for a gradual recovery of private investment and a slight increase in the current account deficit due to a recovery of imports.

Warnings about dangers and threats

Among the threats to the economy, the IMF points to uncertainty over social and energy transition reforms which “could raise borrowing costs and deteriorate private investment”.

However, the IMF insists on continued compliance with the fiscal rule and the inflation targeting framework, which are ratified as the main objective of macroeconomic policy.

In addition, the report emphasizes that “it will be necessary to proceed with caution in future reductions of the monetary policy interest rate”.

The IMF’s concern is that Colombia should strengthen its international reserves to meet its credit commitments and improve its level of confidence in the market.

In the midst of these warnings, a couple of positive aspects stand out. On the one hand, the IMF positively assessed the fiscal policy and even pointed out that the fiscal rule goals were exceeded. According to the report, the decrease in the weight of debt in GDP is largely due to the appreciation of the peso.

In addition, the IMF points out that the government’s financial program is at the limit of the fiscal rule and that its results may be uncertain as they depend on improvements in tax administration and the rapid resolution of fiscal arbitrage.

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In the event that these goals are not met satisfactorily, spending plans would have to be reduced, even in advance, and the reduction of fuel subsidies would have to be maintained; this implies redirecting spending towards investment.

The report also shows the IMF’s concern about the pension reform due to its effects on the financial and capital markets and that it should be implemented in accordance with Colombia’s fiscal frameworks, i.e., in accordance with the fiscal rule.

Among the recommendations, the report states that “it will be necessary to improve the business climate, for example, by simplifying regulation, reducing the rigidity of the labor market, offering more certainty in public policy”.

In its prudent and diplomatic language, the IMF recognizes that it is not concerned about the social and productive situation but about macroeconomic balances, even if these imply recessionary policies.

Nor does the IMF fail to express its concern about the possibility that the cost of the reforms may exceed the budget, and it even recommends a preventive reduction in social spending.

Balances would guarantee access to the capital market and the promotion of foreign investment, objectives that correspond to the IMF’s mission, which is to provide stability to international capital flows to developing countries such as Colombia.