Colombia’s economic growth rate is expected to decline from previous projections as it reduces its reliance on commodity-based industries, according to the Organization for Economic Cooperation and Development (OECD).
The OECD, a group of 34 developed nations to which Colombia is currently applying, expects the Colombian economy to grow 3.3% in 2015 and 3.7% in 2016, a full percentage point below its previous forecast last November.
The estimate is in par with that of the International Monetary Fund, which in April said it expects the Colombian economy to grow 3.4% this year.
Lower commodity prices and reduced domestic consumption were to blame for the adjustment, said the OECD.
Reduced prices for oil and mining products will likely lower public spending because tax revenues from commodity businesses will also decline. Domestic consumption is projected to decline because of weaker employment numbers, which will lead to tighter household budgets.
Additionally, as the global prices of fossil fuels dropped in the last quarter of 2014, foreign investment in the oil and mining sector followed.
The drop in oil prices and the consequent drop in foreign investment, reduced the value of the peso.
This weaker peso is expected to result in a temporary rise of inflation but also boost export growth as cheaper products like flowers and coffee will be more attractive to consumers overseas. Increased foreign demand, combined with better roads and other infrastructure, are expected to help boost exports and lead a recovery in 2016, according to the report.
The OECD recommended that Colombia’s central bank maintain a neutral monetary policy, neither raising nor lowering interest rates, so that inflation expectations would remain steady.
More longterm tax revenue was also recommended to help fund continued social investment policies, however it was also recommended that taxes on business investment outside the oil and mining industries be reduced. Efforts to make the finance industry more competitive were also suggested as it would lower the cost of borrowing for business investment.
Recommendations for tax reform and increased competitiveness in the banking sector may be points of contention in Colombian politics. Last year a powerful banking association voiced concern over constantly changing tax policies. The association itself may have input on both tax reform and any reforms that permit increased competitiveness in banking.
Most importantly, the OECD report recommended a speedy implementation of infrastructure project investments centered around transportation, as these projects are critical for improving Colombia’s trade prospects and reducing its reliance on oil and mining, which currently represent 70% of exports.
The administration of President Juan Manuel Santos does appear to be taking this last recommendation seriously. The latest large-scale investment program that included infrastructure was rolled out in May.
Sources
OCDE rebaja perspectivas economicas de Colombia para 2015 y 2016 (Caracol Radio)