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Strong inflationary pressures at the
beginning of the year appear to have abated, which has left the Central Bank
confident to maintain interest rates at historical lows. As a result,
investment activity is rebounding strongly. The external sector is profiting
from a competitive exchange rate and is also recovering strongly. Private
consumption, however, is growing very moderately, as Colombians continue to
battle deteriorating real incomes and rising unemployment. |
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Economic activity continues to
evolve favourably
The favourable interest rate setting and improved credit conditions
continued to drive a strong recovery in the economy in the second quarter.
According to the National Statistical Department (DANE), industrial
production rose 3.3% in May over the same month last year, which was up
from a 2.9% drop in April. According to DANE, the current push behind
industrial production is the result of heightened activity in the
construction sector and increased external demand. In particular, the
strong growth spurt in output of basic metals, chemicals and synthetic
fibres is driving the industry’s current expansion.
Private consumption lags rest of
economy
Private consumption, however, continues to suffer from the deterioration
in real wages in the wake of the 20.0% currency depreciation last year and
rising unemployment (16.9% in June). According to DANE, retail sales
(excluding fuels) rose a modest 0.47% over the same month last year, which
was down from 3.8% growth observed the previous month. Key behind the
decline was a drop in food and non-alcoholic beverages and pharmaceutical
product sales, which dropped 7.0% and 3.1% respectively over the same
month last year. On the upside, consumers appear to be taking advantage of
the low interest rate setting, as automobile and motorcycle sales were up
16.9% over the same month last year, while office equipment and furniture
sales rose 12.6% for the same period.
Growth outlook positive amid
improved prospects for domestic demand
Participants continue to be optimistic about growth prospects this year,
as the exports should remain robust and firms are likely to continue to
step up their investment activities to take advantage of the current low
interest rate environment. Consumption, however, is anticipated to remain
more subdued, amid government efforts to abide by strict fiscal discipline
and consumers’ struggle with higher unemployment levels and deteriorating
real wages. Nevertheless, the current Consensus figure of 2.5% for this
year’s GDP growth is on the upper end of the government’s 2.0 to 2.5%
projection range and is a 0.1 percentage point notch above last month’s
figure. Domestic demand should pick up notably next year and help drive a
more robust expansion, with the economy expected to grow 3.3%.
Government fiscal plan for 2004
banks on referendum and requests to increase IMF target
On 29 July, the Uribe administration presented its government spending
plan for 2004. The 77.6 trillion peso (US$ 24.8 billion) budget for next
year would generate a consolidated fiscal deficit of 2.5% of GDP, which
would be above the 2.1% of GDP target agreed to with the International
Monetary Fund (IMF) under the terms of the US$ 2.1 billion stand-by
agreement approved on 15 January. The increased spending is attributed
principally to a 14.6% nominal increase military spending and a 29.4% hike
in pension outlays but is expected to receive approval by the IMF.
Externally, the government expects to finance the budget with US$ 1.2
billion in sovereign bonds and US$ 1.2 billion in loans from multilateral
lending institutions. The balance of 14.7 trillion pesos (US$ 4.7 billion)
will be sought via domestic markets in the form of Treasury securities.
The success of the government’s current fiscal agenda will depend heavily
on the approval of a constitutional referendum on 25 October, which, among
administrative reforms, will seek to set a maximum amount for public
service pensions and freeze the government’s operational spending, social
security and regional outlays as well as public enterprises for the next
two years. The government estimates that the approval of the referendum
will provide fiscal savings of 1.5 trillion pesos (US$ 530 million or 0.7%
of GDP) this year and 3.0 trillion pesos (US$ 968 million or 1.2% of GDP)
in 2004. Participants appear to be confident in the voter approval, as the
fiscal deficit forecast for this year is on target with the government’s
estimate and next year’s is just a 0.1 percentage point notch above the
official target.
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