OECD Economic Outlook, Volume 2018 Issue 1

Colombia

Growth is projected to pick up to about 3%, as lower interest rates, stronger infrastructure spending, lower corporate taxes and higher oil prices all boost investment. Private consumption will also strengthen, as falling inflation lifts real wages. Exports will improve on the back of a stronger outlook for trading partners. Unemployment will start to fall. Social indicators are improving, but informality and inequality remain high.

The current monetary policy stance is appropriate given current inflation, but a somewhat more accommodative monetary policy would be needed if inflation and inflation expectations continue to fall. Fiscal policy strikes an adequate balance and will need to remain moderately prudent so that the deficit declines gradually, in line with the fiscal rule. Significant social spending needs may require raising more revenue over time. Productivity would be boosted by reforms to improve the business environment and the quality of education. Further efforts to reduce labour market informality, such as by reducing non‑wage labour costs, and to reduce gender gaps, by expanding the provision of childcare, would make growth more inclusive.

Growth is gathering pace

The economy showed signs of revival in the second half of 2017, as the headwinds from the oil price shock started to fade. Economic growth is strengthening, albeit at a gradual pace. Inflation will fall further in 2018 towards the 3% target, as the effect of the VAT hike in early 2017 dissipates. The current account deficit has narrowed markedly. Imports slowed along with domestic demand, and exports, boosted by higher oil prices, started to grow. The labour market remains subdued, as labour market participation declined, the unemployment rate rose to 9.4% in 2017, and employment weakened.

Structural reforms would boost inclusive growth

With inflation decelerating sharply over 2017, the central bank has gradually and appropriately eased its policy rate since December 2016. Inflation is projected to fall further, and a slightly more accommodative monetary policy would be appropriate. Fiscal policy is projected to be moderately contractionary to reduce the central government deficit to 1% of GDP by 2022, in line with the fiscal rule. This strikes an appropriate balance between social needs, the gradual recovery and the need to ensure debt sustainability. Oil‑related fiscal revenues will increase in 2018, but further measures to raise revenues may be needed in the coming years as social spending needs will increase.

Colombia

Source: OECD Economic Outlook 103 database; and Central Bank of Colombia.

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Stronger and more inclusive growth requires boosting productivity through structural reforms, which would also support regional development and the peace transition. Improving road and ports infrastructure and reducing regulatory burdens would make firms more competitive and create better paying jobs. Improving education and active labour market policies would support workers in acquiring new skills, thereby raising productivity and reducing economic disparities.

Colombia. Demand, output and prices

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Informality has fallen in recent years, but nearly half of all workers in the main cities still work in the informal sector. This calls for stronger efforts to reduce labour market informality, such as further reducing the tax burden on wages and simplifying procedures for the registration of companies and workers’ affiliation to social security. Expanding early childhood education would improve school outcomes and allow more women to take up paid work. Increasing the coverage and benefit levels of the public minimum income‑support programme would make the pension system more progressive and help to reduce poverty and inequality.

Growth is set to rise

Growth is projected to strengthen, supported by rising domestic demand. Investment will be a key driver of growth, aided by low interest rates and higher oil prices. Declining inflation will push real incomes up and support consumption. Upside risks include stronger oil or coal prices, which would boost investment further. Thanks to the end of the armed conflict, the tourism sector also holds potential for upside surprises. Downside risks include a faster‑than‑expected normalisation of US monetary policy, which could increase volatility and the risk of lower capital inflows. An escalation of migratory flows from Venezuela may imply higher spending needs in short‑term, particularly in health and education, but, if well managed, it can also boost growth prospects.