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IMF: COLOMBIA Staff Report -- May 2010

IMF: COLOMBIA Staff Report -- May 2010

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DMSDR1S-4175650-v1-Colombia 2010 IMF Country Report for the Staff Report for the 2010 Article IV Consultation_ Supplement_ PIN_ etc--April2010.DOC May 3, 2010 (2:24 PM)
© 2010 International Monetary Fund
May 2010IMF Country Report No. 10/105January 29, 2001 January 29, 2001 January 29, 2001January 29, 2001 2010 January 29, 2001
Colombia: 2010 Article IV Consultation—Staff Report; Public Information
N
otice onthe Executive Board Discussion; and Statement by the Authorities of Colombia
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions withmembers, usually every year. In the context of the 2010 Article IV consultation with Colombia, thefollowing documents have been released and are included in this package:
 
The staff report for the 2010 Article IV consultation, prepared by a staff team of the IMF,following discussions that ended on February 12, 2010, with the officials of Colombia oneconomic developments and policies. Based on information available at the time of thesediscussions, the staff report was completed on March 17, 2010. The views expressed in thestaff report are those of the staff team and do not necessarily reflect the views of theExecutive Board of the IMF.
 
A Public Information Notice (PIN) summarizing the views of the Executive Board asexpressed during its March 31, 2010 discussion of the staff report that concluded theArticle IV consultation.
 
A statement by the authorities of Colombia.The document listed below has been or will be separately released.Selected IssuesThe policy of publication of staff reports and other documents allows for the deletion of market-sensitiveinformation.
Copies of this report are available to the public fromInternational Monetary Fund
Publication Services700 19
th
Street, N.W.
Washington, D.C. 20431Telephone: (202) 623-7430
Telefax: (202) 623-7201E-mail:publications@imf.orgInternet: http://www.imf.org
International Monetary FundWashington, D.C.
 
INTERNATIONAL MONETARY FUNDCOLOMBIA
Staff Report for the 2010 Article IV Consultation
Prepared by the Staff Representatives for the 2010 Consultation with Colombia(In consultation with other departments)Approved by Miguel Savastano and Tamim BayoumiMarch 17, 2010
Executive Summary
 
Context and recent developments.
Following near zero growth in 2009, economicactivity is expected to pick up in 2010, supported by accommodative monetary and fiscal policies and a sound financial system. Key short term challenges include containingsecond-round effects on inflation from anticipated supply shocks, as well as mitigatingthe effects of a possible surge in capital inflows. A strong institutional policy framework  bodes well for sustained growth and low inflation in the medium term.
 
Key policy recommendations:
 
o
 
 Near-term policy stance.
Monetary and fiscal policies should protect the nascentrecovery. A tightening of the policy stance should await stronger evidence that therecovery is self-sustained.
o
 
Capital flows
. The exchange rate should continue to be the main shock absorber inthe event of a surge in capital inflows. If the recovery is firm, fiscal tightening shouldalso be considered.
o
 
 Reserve coverage.
While the current level of reserves is broadly adequate, there isscope to increase coverage as the balance of payments strengthens.
o
 
 Fiscal consolidation.
While the fiscal position is not weak, lower levels of debt wouldhelp protect against risks, and improve prospects of regaining investment grade.
o
 
 Fiscal rule.
Setting a target on a “broad” structural balance (including the central andregional governments) would establish a clear link to public debt and ensureconsistency between the stances of the different levels of government.
 
Authorities’ views:
The authorities concur with staff’s advice on the policy stance for 2010; and on the key role of exchange rate flexibility to absorb external shocks. Theyregard their reserve levels as adequate, but agree that higher levels would be desirable if conditions allow. They consider their medium term debt targets as reasonably ambitious, but agree that lower debt levels would provide more space to deal with contingent risks.They see the benefits of a fiscal rule applicable to a broad aggregate, but tend to favor acentral government rule that is more under their control.
 
2Contents PageI. Recent Economic Developments ............................................................................................3
 
II. Macroeconomic Outlook .......................................................................................................9
 
III. Policy Discussions .............................................................................................................11
 
IV. Staff Appraisal ...................................................................................................................20Boxes1. Debt Levels and Sovereign Debt Ratings ....................................................................142. Alternative Fiscal Rules for Colombia ........................................................................153. Reducing the Procyclicality of Prudential Regulations ...............................................22Figures1. Recent Economic Developments ...................................................................................42. Impact of the Global Financial Crisis ............................................................................53. Financial Soundness Indicators: Colombia and Other Emerging Markets ....................84. Emerging Markets: Gross International Reserves, 2009 .............................................185. Surge in Nonperforming Loans: Simulation Results ...................................................216. External Debt Sustainability: Bound Tests ..................................................................337. Public Debt Sustainability: Bound Tests .....................................................................34Tables1. Selected Economic and Financial Indicators ...............................................................242. Summary Balance of Payments ...................................................................................253. Operations of the Central Government ........................................................................264. Operations of the Combined Public Sector ..................................................................275. Monetary Indicators .....................................................................................................286. Financial Soundness Indicators Total Banking System ...............................................297. Medium-Term Outlook ................................................................................................308. External Debt Sustainability Framework, 2005
2015 ................................................319. Public Sector Debt Sustainability Framework, 2005
2015 .........................................32AppendixBackground and Summary of Informational Annexes ............................................................35

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