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1994-05-02
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<text>
<title>
Colombia: Economic Policy
</title>
<article>
<hdr>
Economic Policy and Trade Practices: Colombia
</hdr>
<body>
<p>1. General Policy Framework
</p>
<p> Colombian economic policy is traditionally conservative,
generally based on free-market principles. During 1991, the
Colombian government accelerated the economic liberalization
plan ("apertura") which had been initiated in February of 1990
under former President Barco. The chief achievements of the
program include substantial tariff reductions, the virtual
elimination of prior import license requirements, liberalized
foreign investment regulations, reform of the labor code and
decentralization of the financial sector. A new Ministry of
Foreign Trade was created to coordinate foreign trade policy and
will begin operation in January of 1992. Further significant
components of apertura are beginning to be implemented,
including privatization of ports and railroads, and
de-monopolization of the telecommunication sector. Under the
administration of President Gaviria, the pace of apertura has
accelerated substantially.
</p>
<p> Two state-owned companies dominate the petroleum and coal
industries (ECOPETROL and CARBOCOL), but operate in partnership
with domestic and foreign private companies rather than as
monopolies. The Gaviria administration plans to reduce its
fiscal deficit and create greater economic efficiency through
a vigorous privatization program. Among the projects already
well advanced are: abolition of the monopoly of the state
telecommunication company (Telecom) concerning domestic
telephone and value-added services; reprivatization of five
state banks (three have been sold in the period July-October
1991) in which the Government intervened during the 1982-83
financial sector crisis; elimination of monopolistic management
of the nation's ports (Law 1 of 1991) by the Colombian port
company (Colpuertos), and drafting of a privatization plan which
targets December 1992 for the sale of the ports it now manages;
separation of maintenance and operation from administration
functions of the country's rail system, and opening the former
to private or mixed company management in conjunction with the
Colombian railroad company, Ferrovias; concentrated efforts to
sell the state's equity in 27 companies over the next four
years, under the direction of the Industrial Development
Institute (IFI) (six have already been sold, another 10 are in
negotiation); and the scheduled sale of over 20 hotels owned by
the Colombian government. Additionally, the new foreign
investment regulations (Law 9 of 1991 and CONPES Resolution 51)
permit foreign investment in public utilities with the prior
approval of the National Planning Department.
</p>
<p> The Colombian government's fiscal, monetary, and debt
management policies have remained conservative. Colombia has not
restructured its commercial bank debt; instead, the country has
successfully refinanced maturing principal payments. In April
1991, the Colombian government signed a four-year, USD 1.775
billion "Hercules" refinancing package with its commercial
creditors.
</p>
<p> The Colombian government intends to reduce the consolidated
public sector fiscal deficit to 0.5 percent of GDP in 1991
through a combination of revenue increases and limiting
expenditures. (The fiscal deficit in 1990 was 2.0 percent of
GDP, down sharply from 7.0 percent reached in 1986.) Tax
revenues have increased 61 percent over last year's levels thus
far in 1991, primarily by means of improved collection, an
increase in the value-added tax from 10 to 12 percent, expanding
the range of transactions subject to the VAT, and by imposing
a three percent tax on some foreign exchange transactions. These
new fiscal revenues offset the reduction in import duty and
surcharge revenues resulting from the Colombian government's
economic liberalization program. The government avoids money
creation to finance the deficit, using instead a flexible
combination of domestic and external borrowing.
</p>
<p> Following the collapse of the International Coffee Agreement
in 1989, Colombian coffee export volume grew by 26 percent in
the 1989-90 crop year. However, 1990-91 exports have leveled
off. The continued relatively low price of coffee has caused a
severe fiscal drain on the national coffee fund, from which
producers are paid the difference between the internal support
price and the world export price. The fund could be depleted
within one year if coffee prices do not rise to the $1.00/lb.
level. The increase in oil prices due to the Gulf Crisis caused
the value of oil exports to surpass that of coffee in 1990 for
the first time. Coal exports also increased, as did those of
non-traditional products such as bananas, flowers, and leather
goods.
</p>
<p> Financial sector reforms enacted in 1991 resulted in a
complete liberalization of Colombia's foreign exchange regime.
On June 21, the Central Bank closed its foreign exchange window
and turned over all transactions with the public to the
commercial financial system. To slow down the monetization of
foreign exchange inflows, the Central Bank began emitting 90-day
exchange certificates by which it purchased the excess of
foreign exchange balances from the commercial banks. The
maturity on these certificates was later extended to 365 days.
</p>
<p> Inflation remains a persistent problem in Colombia, reaching
32.4 percent in 1990. Despite maintaining a highly restrictive
monetary policy, the government has had difficulty reducing
inflation primarily due to the massive inflows of capital
attracted by high real interest rates, a limited tax amnesty,
and tight internal credit policies. At the end of the third
quarter of 1991, reserves reached $7.1 billion, an increase of
$2.4 billion from December 1990. Monetary authorities have
experimented with various restrictive monetary policies,
including a 100 percent marginal reserve requirement (imposed
for 9 months), an increase in average reserve requirements,
large open market operations, and real appreciation of the peso.
</p>
<p>2. Exchange Rate Policies
</p>
<p> Decree Law 9, approved in January 1991, completely revised
Colombia's foreign exchange regime. Colombia now has
essentially a free-market exchange system. Although the Central
Bank establishes an official exchange rate, based on a
crawling-peg daily devaluation of the peso, it is basically only
a reference rate. This crawling peg devaluation of the official
exchange rate is intended to adjust for the relative inflation
rates between Colombia and its major trading partners in order
to maintain the real exchange rate. However, all commercial
transactions are now conducted at free exchange rates determined
by the financial markets. The discount on the foreign exchange
certificates issued by the Central Bank is the best indicator
of the free market exchange rate. The Colombian government may
intervene in the financial markets to keep the peso within a ten
percent band of the official rate by buying and selling
exchange certificates.
</p>
<p>3. Structural Policies
</p>
<p> Prices: The pricing system in Colombia is essentially
free-market. The major exceptions are price controls on a small
number of products including pharmaceuticals, gasoline, and
public utilities. Colombian government policies regarding the
retail prices of certain pharmaceutical products have to some
degree reduced U.S. imports and discouraged U.S. investment in
this sector, although in mid-1990 some of these price controls
were relaxed. In the agricultural sector, a government
procurement agency (IDEMA) establishes price bands for a small
group of commodities, attempting to moderate market price swings
for those products through selective imports. The support price
for coffee, which has a major macroeconomic impact, also is
negotiated periodically between the coffee federation and the
government. Controlled prices are regularly adjusted in line
with inflation.
</p>
<p> Taxation: Colombia enacted a c