The Executive Board of the International Monetary Fund (IMF) have said Colombia has maintained a strong economic performance in the recent years by improving the country’s policy framework.
“[They have done this] by including a fiscal sustainability principle in the constitution; introducing a structural fiscal balance rule; overhauling the oil and mining royalties system; and implementing a comprehensive tax reform that replaced payroll taxes with a corporate income tax,” said the board in a statement on Monday.
| -Cardenas |
Colombia’s Minister of Finance and Public Credit, Mauricio Cardenas said on Tuesday morning that the government’s policies were responsible for the progress.
“We have made progress but we want it faster, this is our asset, a strong economy that has not been left to chance but has been a systematic effort by the Government of President Juan Manuel Santos to make reforms that the country needed,” said Cardenas in a press release from the ministry.
Good governance the key: government
He said Colombia is an example when it comes to the implementation of economic policies. This is seen in an economic growth based on sound fiscal figures to higher employment and lower inflation, according to a press release from the Ministry of Finance and Public Credit.
MORE: Good governance delivered economic growth for Colombia in 2013: Santos
“The IMF is giving a boost of support to Colombia when considering that the outlook will continue to be positive in 2014, a year in which we expect growth of 4.5%,” Cardenas said.
Looking at Colombia’s GDP the number reached a high with 6.6% in 2011 and then decreased to 4.0% in 2012 but the GDP rebounded strongly in especially the second half of 2013 while the employment rose as well. And the projection for 2014 is that the economy is to grow 4.5%, according to IMF.
MORE: IMF estimates Colombia’s economy to grow 4.5% in 2014
Structural reform needed
The directors of the Executive Board emphasized that it is crucial to continue efforts to enhance productivity to raise Colombia’s competitiveness and that it is important to foster more inclusive growth through structural reform.
The board encouraged the authorities to further reduce non-wage costs and address labor market rigidities. They also recommended fostering financial inclusion by reducing the cost of access to finance and developing products tailored to low-income households, according to IMF.
They also underlined that the increase in geopolitical and emerging market risks, could present challenges even for strong and well-managed economies like Colombia.
Growing the formal economy through tax reform
The Ministry highlighted the IMF focus on Government initiatives such as the Tax Reform Plan and the Plan to Enhance Productivity and Employment (PIPE ) had positive effects on job creation and the reduction of inflation during 2013.
MORE: Tax reform helping drive Colombia’s ‘promising’ economy: IMF
In 2008, 74.2 % of all Colombian labor force was considered informal, that is, not regulated or taxed by government. This left many without health or employment benefits. By 2011 Colombia still had one of the highest unemployment rates in Latin America, according to an international labor report.
To combat this, the tax reforms formulated in 2012 and introduced in January 2013 reduced the tax paid by companies for each employee (payroll tax) and replaced it with a tax on the profits they earn by making use of that labor.
MORE: Colombia passes progressive tax reform
MORE: Colombia’s tax reform a ‘bold move’: World Bank
While unemployment and the informal economy are still large, the structural reforms appear to have grown the formal economy.
According to the IMF, the international body holds bilateral discussions with members every year. The visiting staff collect economic and financial information about the country, and discusses the country’s economic developments and policies with officials after which they draft a report to bring to the Executive Board.