OECD Economic Outlook, Volume 2019 Issue 2

Colombia

Economic growth is projected to remain robust in the coming two years, despite external headwinds. Investment will be a key driver of growth, aided by tax reforms and ambitious infrastructure projects. Low interest rates will support consumption, while unemployment will start falling. High inequality and informality will remain major policy challenges.

The mildly accommodative monetary policy stance is appropriate, with inflation expectations close to target and still high unemployment. Fiscal policy will need to consolidate to reduce the deficit gradually in line with the fiscal rule. Boosting productivity requires stronger competition and increased openness to trade. A better targeting of social policies and reforms to boost job quality and reduce informality would allow for more widespread sharing of the benefits of growth.

Consumption and investment are driving growth

Economic growth has risen, fostered by strong domestic demand driven by improving credit markets and a positive response from companies to the tax incentives granted in a recent tax reform. The current account deficit has widened, as imports are rising while export performance remains weak. Unemployment has increased despite stronger growth, as employment creation remains too feeble to accommodate the labour force increase due to immigration. Inflation has increased in 2019, driven mainly by increases in food prices and a moderate effect of the peso depreciation, but it remains within the target range.

Contributors to 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 106 database.

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Colombia: Demand, output and prices

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Further structural reforms are needed to boost inclusive growth

Fiscal policy needs to consolidate to reduce the central government’s structural deficit to 1% of GDP, in line with the fiscal rule, and to stabilise the public debt-to-GDP ratio. The tax reform going through congress will boost investment. But further measures to raise revenues are likely to be needed in the medium term to meet the fiscal rule and the necessary social and public investment expenditures. It is essential to boost tax revenues in a sustainable manner, while at the same time achieving a tax system more favourable to growth and equity. This could be attained by broadening the bases of personal taxes and VAT, and reducing the corporate income tax rate and eliminating its numerous tax exemptions. To increase revenues, environmental taxes and tax administration efficiency could be boosted.

Stronger and more inclusive growth requires boosting productivity through structural reforms. Raising competition, improving port and customs logistics, and reducing trade and non-trade barriers and regulatory burdens would increase exports, make firms more productive and create quality jobs. The large inflow of migrants 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 formal labour market, as well as investment in training and healthcare systems.

To ensure that the benefits of growth are more widely shared by all, a comprehensive strategy is needed to foster the creation of formal high-quality jobs. This requires reforms in various areas, such as reducing non-wage labour costs, reviewing the minimum wage system to achieve more job-friendly outcomes, improving the quality and relevance of education and training, and adopting measures to integrate more women into the labour market. Reforming the pension system is urgent to reduce old-age poverty and inequality.

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 ambitious infrastructure projects. Still low interest rates, inflation within the target of the central bank, and decreasing unemployment will support consumption. The current account deficit will widen in the context of demand-driven growth and weaker export performance. Upside risks include higher oil prices, which could boost investment further. Downside risks include stronger-than-anticipated weakness in the external environment, driven by trade tensions and regional instability, and additional delays in infrastructure projects.