The International Monetary Fund (IMF) published its comments this week after the 2022 mission on the Article IV Consultation, as the review that the body makes of economies every year is known. Hamid Faruqee, head of mission for Colombiaspoke with Portafolio about how he perceives the Colombian economy, which is expected to grow 4.5% in 2022, and highlighted the fiscal strength that the country has been showing.
(Read: Analysts see moderation in inflation during February).
The 2021 GDP was higher than expected, how does the IMF perceive that result?
This is good news, a growth of 10.6% is quite a high rate for Colombia, it shows resilience and strength in the economy, coming from a historic recession in 2020. The figures changed, the recession was actually bigger, from – 7%, and the growth forecast in Colombia would summarize it as one of resilience in 2021 and one of momentum in 2022. One of the main drivers of growth was consumption.
On the public side are the responses to the government crisis, support programs given Covid-19 and health spending. On the private side, we saw that as the economy opened up more, released much of the pent-up demand of households that accumulated savings during the pandemic.
Another aspect in terms of resilience is the financial sector. Colombia’s banking system has had a real stress test during the pandemic. We believe that the credit cycle looks good in the future. Banks seem willing to extend more credit, which would help growth. We see a dynamic that continues and our growth forecast is 4.5% for 2022. It is a very solid rate, we will be looking at the exact figure in greater detail after digesting what the Dane presented regarding GDP. We were very close to 10.6%, so I don’t think we will have very big changes. We expect consumption to continue to support growth and also exports.
Hamid Faruqee, head of the IMF Mission for Colombia.
Courtesy
What risks do you see for the country in 2022?
On the risk side there are a couple of factors I would mention. In the case of external or global risks, there is still the pandemic. In addition, Colombia now has a wider current account deficit, almost 6% of GDP in 2021, and that increases the country’s dependence on external financing for that deficit, and also on changes in external financing conditions. Inflation in the US or Europe is prompting many central banks in advanced economies to raise interest rates, and this may have implications in emerging markets, especially those that rely on external financing. These would be potential risks for Colombia.
(What’s more: Closing the gap between employment and GDP, the challenge for this 2022).
How do you see the fiscal panorama?
The fiscal development of 2021 gives us a lot of encouragement. The central government deficit ended up being quite a bit smaller, -7.1% compared to an original estimated deficit of -8.6%. It’s a very good result for 2021 and much of it is because growth was better than expected. Colombia received higher tax collection, greater economic activity, and from the spending side there was not a very big change, so the deficit fell more than we thought. And there is a chance Colombia will repeat those results in 2022.
For this year the Government expects a deficit of -6.2% and our advice is that they continue doing what they did in 2021, with the tax collection earnings, that those be saved and that would help reduce the deficit even more. That would help the new government face a lower adjustment burden in its first year. We think that also helps with the current situation, given that inflation is high.
How do you perceive Colombia in the face of inflation and the efforts to control it?
Inflation continues to rise, the January figures reached almost 7%, driven by supply shocks, higher food, fuel, transport and import prices as a result of the dsupply chain disruptions. Some of those shocks are going to continue in the first half of this year, but more than that, one of the things that worries us and that I think is part of the reason why Banco de la República has been raising interest rates interest is that we also see imbalances in supply and demand. We see a wider current account deficit and underlying inflation pressures.
From the Monetary Fund we hope to work
with the new government, no matter who it is
That is one of the reasons why, in the findings of the mission, we have supported Banco de la República in the monetary policy tightening, we believe that it is appropriate with its mandate to curb inflation, and from the central bank’s point of view it is important to continue to control the situation. There has been a slight increase in inflation expectations and those are things where Banco de la República will be very attentive and thinking about a tightening cycle in its policies in order to manage these price pressures.
(Keep reading: The country’s challenges after consolidating an economic growth of 10.6%).
There are shocks on the supply side that complicate the challenges from the point of view of monetary policy. It will be important for the Banco de la República to concentrate this tightening in the first half of the year given the lag in the transmission of monetary policies so that inflation is guided towards that downward path.
What impact can the election year have on the economy?
It is a very important year for Colombia due to the presidential elections. At this time it is not clear what direction they will take. Analysts talk about the effects that uncertainty has on investing. The most important question is where the country will go next, it is very difficult to say, it will depend on who wins the elections and what the new Government’s policy strategy is. From the Monetary Fund, we hope to work with the new government, no matter who it is. Colombia and the Fund have had a long and very good working relationship and our expectations are that this relationship will continue.
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