Colombia - Economy

In 2020 Colombia’s economy shrank 7 percent, according to government data. After accelerating to 3.3 percent in 2019, economic growth was on track to accelerate further in 2020, but the COVID-19 pandemic hit the economy hard, causing the worst recession in almost half a century. The Government announced a sizable fiscal package for 2020 and 2021 totaling over COP 31 trillion (or almost 3 percent of 2019 GDP), to provide additional resources for the health system, increase transfers for vulnerable groups through the expansion of existing programs and the establishment of new ones (Ingreso Solidario, an unconditional cash transfer program, and VAT reimbursements for low-income segments of the population), delayed tax collection in selected sectors, lower tariffs for strategic health imports, and help for hard-hit firms to pay employees (Programa de Apoyo al Empleo Formal, PAEF). In addition, the government also set up special lines of credit and loan guarantees for firms in sectors that have been deeply affected by the crisis.

A rebound in growth was expected for 2021-2022, provided that the vaccination plan proceeds as planned, that there are no further outbreaks of COVID-19 that require mobility restrictions, and that the government maintains economic agents’ confidence in a plan to normalize deficit and debt over the medium term. The low interest rate environment, facilitated by the central bank, is expected to boost private consumption growth.

Colombia has a track record of prudent macroeconomic and fiscal management, anchored on an inflation targeting regime, a flexible exchange rate, and a rule-based fiscal framework, which allowed the economy to grow uninterrupted since 2000. Also, Colombia halved poverty over the past ten years. However, productivity growth is low and it has actually been a drag on economic growth. A large infrastructure gap, low skill levels, low trade integration and barriers to domestic competition are among the factors that weigh on total factor productivity. Exports are highly concentrated in non-renewable commodities (oil in particular), which increases the exposure of the economy to price shocks. Finally, Colombia is one of the countries with the highest income inequality and labor market informality in Latin America.

While the well publicised security issues in Colombia can be a deterrent to companies to do business there, many well-known companies operate there and do so very profitably. Despite years of violence, Colombia has managed to maintain long-term sustainable growth and remains one of the larger economies in Latin America. Crude oil, coal, coffee and cut flowers are Colombia's principal legal exports. Security, by and large, tends to be a manageable risk. More problematic to most businesses operating there, however, is often instability of the legal and tax frameworks, to which frequent changes are made, therefore making medium to long term planning very difficult.

The Uribe administration (2002-2010) sought to maintain prudent fiscal policies and pursued tough economic reforms including tax, pension, and budget reforms. It opened the oil and gas sector in Colombia, forcing the state-owned petroleum company, Ecopetrol, to compete alongside private sector companies for exploration/production rights. This action led to increased foreign direct investment in the extractive industries and almost a doubling in oil production.

The Santos administration has been promoting economic growth through additional economic reforms and by pursuing free trade agreements with other South American and Asian countries, as well as with the European Union, the United States, and Canada. The average unemployment rate in 2011 (Jan.-Nov.) was around 10.9%, down from 12% in 2009. Despite recent improvements in Colombia’s economy, the country continues to have a high rate of poverty (37.2%) and one of the highest levels of income disparity in the world.

Colombia's economic growth in the last decade can be attributed to an increase in security, resulting in greater foreign investment; economic reforms in the oil and gas sectors; prudent monetary policy; and export growth fueled in part by the Andean Trade Promotion and Drug Eradication Act (ATPDEA) of 2002. Investments as a percentage of GDP were around 28% in mid-2011, which was higher than both Brazil and Chile.

Contraband smuggled into Colombia is part of multi-billion-dollar money laundering operations that damage legitimate businesses, undermining Colombia's bid to reinvent itself as a thriving economy after decades of political and drugs violence. In complicated schemes, Colombian traffickers receive drug money from overseas dealers in the form of goods, often shipped along with legitimate merchandise. Once the goods are sold and a sales receipt given, the drug money is clean. The amount of money laundered from the trafficking of drugs, arms and human beings in Colombia is estimated by experts to be as much as $17 billion a year - more than 5 percent of the economy's total value and more than total foreign direct investment last year. Exports also are part of the laundering business. Fake paperwork is created for overseas sales that do not exist. Once the paperwork is filed at the customs office, cash from international drug deals can enter without raising suspicion.

Economists projected growth of up to 6% for 2011, and Colombia’s third-quarter 2011 GDP growth was 7.7%. It is estimated that the economy will grow between 4% and 5% in 2012. Per capita GDP has doubled since 2002, while unemployment fell from 15.7% in 2002 to 9.2% in November 2011. Colombia has concluded or is pursuing free trade agreements (FTAs) with the EU, Turkey, Panama, South Korea, Japan, Switzerland (July 2011), Canada (August 2011) and the United States (ratified in October 2011 with entry into force expected in 2012). It also has trade agreements with Mexico, Chile, Central America, the Andean Community of Nations, and Mercosur.

As the most industrially diverse member of the Andean Community, Colombia has five major industrial centers--Bogota, Medellin, Cali, Barranquilla, and Bucaramanga--each located in a distinct geographical region. Colombia's industries include mining (coal, gold, and emeralds), oil, textiles and clothing, agribusiness (cut flowers, bananas, sugarcane, and coffee), beverages, chemicals and petrochemicals, cement, construction, iron and steel products, and metalworking. There is also a burgeoning service economy comprised of tourism and information technology exports (call centers, software development, and animation).

Colombia's diverse climate and topography permit the cultivation of a wide variety of crops. In addition, all regions yield forest products, ranging from tropical hardwoods in the lowlands, to pine and eucalyptus in the colder areas. Cacao, sugarcane, coconuts, bananas, plantains, rice, cotton, tobacco, cassava, and most of the nation's beef cattle are produced in the hot regions from sea level to 1,000 meters elevation. The temperate regions--between 1,000 and 2,000 meters--are better suited for coffee, flowers, corn and other vegetables, pears, pineapples, and tomatoes. The cooler elevations--between 2,000 and 3,000 meters--produce wheat, barley, potatoes, cold-climate vegetables, flowers, dairy cattle, and poultry.

While Colombia continues to face challenges in terms of labor rights, it has committed to sweeping reforms under the Labor Action Plan announced by Presidents Obama and Santos on April 7, 2011. The Colombian Government has committed to doubling the labor inspectorate by hiring 480 inspectors over the next 4 years. A significant number of these inspectors will be dedicated to addressing worker rights abuses in the palm oil, sugar, mines, ports, and flowers sectors. Preventive inspections in these sectors and for temporary service agencies have already begun. New legislation also establishes criminal penalties, including imprisonment, for employers that undermine the right to organize and bargain collectively or threaten workers who exercise their labor rights. In November 2011, the Government of Colombia established a separate Labor Ministry and appointed new Labor Minister Rafael Pardo to provide better institutional capacity to protect labor rights.

To address issues of impunity in crimes against labor unionists, the Colombian Government exceeded its Action Plan commitments in appointing 100 full-time judicial police inspectors for labor violence cases, and has developed improved training for judicial police investigators and prosecutors on such cases. Priority labor violence cases remain open, but Colombia is showing a commitment to reduce the number of unresolved cases. The Colombian Government has also expanded its protection program for threatened union activists, and reduced the backlog of risk assessments for unionists applying for protection.

Colombia is the United States' fourth-largest export market in Latin America behind Mexico, Brazil, and Chile. U.S. exports to Colombia from January through November 2011 were $13.1 billion, up 20% from the previous year. U.S. imports from Colombia from January through November 2011 were $20.9 billion, up 47% from 2010 due to high crude oil prices and the weak dollar. Colombia's major exports are petroleum, coal, coffee, nickel, cut flowers, and bananas. The United States is Colombia's largest trading partner, representing about 42% of Colombia's exports and 26% of its imports as of November 2011. Colombia is the United States’ sixth-largest supplier of crude oil (September 2011).

Colombia is a fast-growing market with a good investment climate and is increasingly seen as a regional leader in trade and security. Colombia has considerable mineral and energy resources, especially coal and natural gas reserves. Mining and energy-related investments have grown because of higher oil prices, increased demand, improved output, and pro-business reforms, along with improved security conditions. Improved security has allowed for greater economic and social development and helped attract higher levels of foreign direct investment, particularly in extractive industries (crude oil, natural gas, and coal). These reforms have significantly liberalized Colombia’s petroleum sector, leading to an increase in exploration and production contracts from both large and small hydrocarbon industries. Ecopetrol was the first Colombian company to earn a spot in the Fortune 500.

Foreign direct investment (FDI) inflows totaled $6.76 billion in 2010, with most investment concentrated in extractive industries. FDI was reaching historic levels as of third-quarter 2011; it was U.S. $10.8 billion, equaling its record year in 2008. The Colombian Ministry of Finance predicted that total 2011 FDI might reach U.S. $13 billion. According to Central Bank data, this would represent the largest inflow of FDI in Colombia’s history. On average, the United States has been the largest source of new FDI in Colombia, particularly in mining and hydrocarbon projects. The bulk of total new investment in Colombia is in the manufacturing, mining, and energy sectors. The only activities closed to foreign direct investment are defense, national security, and disposal of hazardous wastes.