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The IMF has announced its intention to
grant Colombia a new two-year, US$ 2 billion stand-by agreement. The package
exceeded expectations and served to bolster investor confidence. However,
the government has to adjust public sector finances while facing a less
propitious economic growth setting. |
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Colombia receives IMF endorsement
On 21 October, the International Monetary Fund (IMF) gave its preliminary
endorsement of the new governments’ economic plans by announcing its
intention to renew the stand-by agreement with the country. The Fund
proposes a new two-year agreement to total US$ 2 billion. The government
is currently drafting its letter of intent and is planning to sign the new
accord by 19 December, when the existing US$ 2.7 billion, three-year
stand-by agreement expires. Preliminary releases show that the government
is planning to lower the fiscal deficit from an estimated 4.0% of GDP this
year to 2.4% of GDP in 2003 and further to 1.8-2.0% of GDP in 2004. Growth
for the coming year is estimated at 1.5% on the low and at 2.5% on the
high end of projections. In order to meet a target of a 1.5% of GDP
primary surplus next year (up from 0.7% this year), the government plans
to implement broad ranging tax reforms and to lower public expenditure,
particularly by lowering payments in the framework of the regional revenue
sharing arrangements, via national referendum. The Central Bank shall
strive to lower inflation from a 5-6% range next year to 5.0% in 2004.
Finally, the preliminary agreement stipulates that the government defines
explicit targets for international reserves and limits in external debt
payments.
Central Bank confident about meeting
inflation target this year but reality less promising
Consumer prices rose 0.56% in October, which was up from the 0.36% monthly
rate observed in September. The principal cause behind the increase was
higher food prices, while most other price categories remained below the
overall increase in the consumer price index. The October increase brought
the annual inflation rate to 6.4%, confirming the upward trend prompted by
the pass-through of accelerated currency depreciation of recent months to
domestic prices. More importantly for this year’s inflation target, the
accumulated inflation rate reached 5.88%, which is coming very close to
the Central Bank’s 6% target for this year. Participants do not expect
monetary authorities to comply with stated objectives for this year with
the annual inflation rate expected to close above the target this year.
In its inflation report for the third quarter of this year, the Central
Bank confirms its objective to meet this year’s target. However, next
year’s inflation forecast was raised from 4.5% to 5.5%, which still
remains on target but clearly indicates increased concerns about the
prospects for inflation next year. Officials note that the recent
acceleration in the peso depreciation is likely to abate next year, as
Brazil election jitters subside. However, increased economic activity –
GDP growth is likely to accelerate from this year’s 1.6% to 2.5% in 2003 -
along with likely gasoline and public service tariffs hikes, the
broadening of the tax base of the value added tax and the heightened
possibility that the El Niño weather phenomenon will affect food
prices, is likely to increase inflationary pressures next year. Higher
inflationary expectations have been reflected in the Consensus for some
months now. Thus, participants have only marginally adjusted forecasts
upward by 0.1 percentage points, considering that annual inflation will
exceed the Central Bank target.
Interest
rates maintained low despite inflation surge
Despite the emerging upward trend in inflation, the Central Bank has
maintained the monetary reins loose. Following a 9 basis point rise in
September, the benchmark 90-day DTF interest rate remained virtually
unchanged in October at 7.9%. Since the end of last year nominal interest
rates have dropped 354 basis points and at current levels remain at
historical lows. Nevertheless, participants anticipate that increased
inflationary pressures will prompt monetary officials to raise interest
rates in the coming two months with the DTF rate expected to rise 1.6
percentage points to 9.5% by year-end. Panellists also anticipate that the
current inflationary outlook will induce the Central Bank to raise
interest rates by a further 50 basis points next year, as the DTF rate is
expected to reach 10.0% by the end of 2003.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Colombia. For more details please click here.
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