OECD Economic Outlook, Volume 2019 Issue 1

Colombia

Economic growth will strengthen to around 3.5% in 2019 and 2020, as lower corporate taxes boost investment. Low inflation and interest rates will support consumption. With demand-driven growth and weak export performance, the current account deficit will widen. Poverty has fallen, but inequality and informality remain high.

The mildly accommodative monetary policy stance is appropriate, with inflation expectations close to target and unemployment high. Fiscal policy will need to remain moderately prudent to let the deficit decline gradually in line with the fiscal rule. Boosting productivity requires more competition and openness to trade. A better targeting of social policies and further efforts to reduce labour market informality, by cutting non‑wage labour costs further, would reduce inequalities.

Consumption and investment are driving growth

Economic growth continues to gain momentum, underpinned by improving consumer and business confidence and credit markets. Substantial migration inflows from Venezuela are boosting demand. The current account deficit has widened, as imports are rising, particularly of investment goods, while export performance remains weak. The current account deficit remains largely financed by stable foreign direct investment. Unemployment has increased, as employment creation remains feeble and the labour force is increasing due to migration. Price pressures remain contained given the slack in the economy.

Economic growth and inflation: Colombia

1. Core inflation excludes primary food, utilities and fuel.

2. Inflation expectations are defined as the 12-month ahead inflation expectations.

Source: Banco de la República; and OECD Economic Outlook 105 database.

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Colombia: Demand, output and prices

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Further structural reforms would boost inclusive growth

The large inflow of migrants from Venezuela is a major social and economic challenge. Migration can help to boost potential growth, which has fallen in recent years due to lacklustre productivity. However, this requires continuing with the integration policies that help absorb migrants in the labour market, as well as investment in education and health care systems. Since these policies entail an unexpected fiscal cost, fiscal targets have recently been revised, with a slower than envisaged reduction of the deficit. This strikes an appropriate balance between spending needs and reducing the central government’s structural deficit to 1% to ensure medium-term debt sustainability. Ongoing efforts to improve the tax system and boost public spending efficiency will help to improve the fiscal accounts. Broadening the corporate, VAT, and personal tax bases would also help to increase revenues and make the tax mix more efficient and fair.

Stronger and more inclusive growth requires boosting productivity through structural reforms. Improving ports and customs logistics and reducing regulatory burdens would make firms more competitive and help to create better paying jobs. Reducing trade barriers, streamlining the cumbersome licensing system, and promoting further adoption and use of information technology tools would boost firms' competitiveness and productivity. Improving vocational education, by increasing quality and alignment with labour market needs, would foster skills and inclusiveness. A new tourism strategy would help to realise the large untapped potential in this sector.

Informality has fallen in recent years, but more than half of total employment is still informal. This calls for additional efforts, such as further reducing non-wage labour costs, reviewing the minimum wage system to achieve a more job-friendly level and simplifying procedures for the registration of companies and workers' affiliation to social security. Reforming the pension system is urgent to reduce old‑age poverty. Expanding early childhood education, particularly in rural areas, would improve school outcomes and allow more women to take up paid work.

Growth is projected to stay robust

Growth is set to remain strong, supported by higher domestic demand. Investment will be a key driver of growth, aided by a lower tax burden and infrastructure projects. Low and stable inflation and improving financing conditions will support consumption. Upside risks include higher oil prices, which could boost investment further. The tourism sector holds potential for upside surprises, thanks to the end of the armed conflict. Downside risks include regional instability, particularly in Venezuela, additional delays in infrastructure projects, and a spill over of financial volatility in emerging-market economies.