Colombia: Colombia Economy Profile 2011

Real GDP growth in 2010 is projected at about 2¼ percent, reflecting the upturn in the world economy and the impact of the expansionary policies of 2009. The full-year effect of lower
exports to Venezuela (which staff estimates will lower 2010 growth by ¾ percentage points) will dampen the recovery.5 Over the medium-term, real GDP growth is expected to rise to 5 percent until the output gap is closed, and thereafter settle at 4½ percent.

Inflation expectations indicators in early 2010 suggest that end-year inflation may be around 3.8 percent, near the top of the target range. However, the effects of El Niño on food inflation are likely to be offset by the output gap and peso appreciation. Over the medium-term, inflation is expected to remain well within the target range of 2–4 percent.

The combination of lower exports to Venezuela and an envisaged increase in oil investment-related imports are projected to widen the external current account deficit to 3.1 percent of GDP in 2010. The bulk of the deficit would be financed by FDI, with other private flows also expected to recover. Over the medium term, the current account deficit is expected to decline to about 1 percent of GDP, driven by higher exports (including from the expected increase in oil production), improvements in commodity prices, and a gradual recovery in trade with Venezuela.

 

Staff updated the authorities’ medium-term fiscal framework (MTFF), published in mid-2009, with the revised 2010 budget, the latest WEO assumptions, an improved outlook for oil production, and higher spending in roads and health care. The updated projection shows a combined public sector deficit of 3.5 percent of GDP in 2010, and a gradual decline thereafter to levels around 1½ percent of GDP.7 This fiscal consolidation would bring the public debt to GDP ratio to about 32 percent by 2014-15 (similar to the end-2008 level).

While the baseline scenario assumes an important increase in oil production over the medium term, there is significant upside potential in the oil sector. This could result in significant higher oil production, and overall output, over the medium to long term. Key downside risks to growth include the uncertainty surrounding the strength of the global recovery, and increased political tensions with Venezuela, which could have a larger and more protracted adverse impact on activity.