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U.S. Department of State

Department Seal Advisory Committee on International Economic Policy
Colombia: Emerging Market Economy/Democracy

Background Paper
Released by the Bureau of Economic and Business Affairs
U.S. Department of State, Washington, DC October 26, 2000
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Colombia is a constitutional, multiparty democracy. President Andres Pastrana and members of a bicameral legislature were elected in generally free, fair, and transparent elections in 1998. Gubernatorial and mayoral elections are scheduled for October 29.

Colombia's economy is recovering from last year's recession, with about 3% growth expected this year, though unemployment remains stubbornly high around 20%. Inflation is expected to stay below the 10% target for 2000. Colombia is broadly on-track with its 3-year $2.7 billion precautionary IMF program and received a favorable review from the Fund in early September. Reducing the non-financial public sector fiscal deficit is at the core of Colombia's IMF program. High oil prices have generated higher than forecast government revenues, helping the Government of Colombia (GOC) meet its fiscal target this year.

The IMF is concerned that it may be difficult for Colombia to remain on track with its program, because disagreements between President Pastrana and the opposition Liberal Party (which controls the Congress) has slowed action on fiscal reform measures to reduce the deficit in 2001 and 2002. The three key pending reforms are: a constitutional amendment reducing the planned growth in transfers to sub-national governments; measures to strengthen public pension funds; and tax reforms that would reduce the top marginal income tax rate and broaden the tax base. Income tax reform may pass this year, but the other two measures have little prospect of passage until 2001. Finance Minister Juan Manuel Santos has also spoken of the need to reduce expenditures by cutting the public sector work force.

Privatization is proceeding more slowly than planned. The Government of Colombia announced October 2 it had sold coal mining company CARBOCOL to an international consortium for $383 million. However, the privatization of the Bogota Telephone Company was suddenly cancelled on September 20, legal issues have postponed the privatization of electricity generator ISAGEN, and the sale of power transmission company ISA has been delayed until the first half of 2001. The GOC plans to finance the shortfall in privatization revenues with higher domestic and foreign debt issuance.

Colombia's overall public sector debt is about $30 billion (35.5% of GDP), of which $22 billion is external. Public and private external debt is $43.8 billion, or 45% of GDP. Public sector debt amortization will rise from $3.9 billion to $5.3 billion next year. International reserves are $8.4 billion, high by regional standards and when compared to imports and short-term liabilities.

Last year's recession and currency depreciation helped reduce the current account deficit to $1.0 billion (1.1% of GDP) in 1999, as exports rose and imports fell. The IMF's revised projection for the 2000 current account deficit is $0.9 billion (1.1% of GDP), with exports increasing $2.0 billion (including an 11% rise in non-oil exports) and imports up 9%. Export revenues could be negatively affected by continuing guerilla attacks on the main oil pipelines, which would reduce oil exports, and the new regulations on banana imports set by the European Union, the primary customer for Colombian bananas. The GOC is hoping that the U.S. Congress will include the Plan Colombia Trade Act in an end-of-year bill in order to keep Colombia's apparel exports to the United States competitive with those from the Caribbean and Central American countries, which benefit from the preferential treatment provided in the Caribbean Basin Trade Partnership Act (CBTPA). The United States and Colombia have not concluded a Bilateral Investment Treaty.

Colombia's efforts to spur economic development are impeded by the security situation, with violence fed by drug trafficking proceeds. Plan Colombia is the GOC's strategy to overcome the manifold and intertwined challenges the country faces. The United States is joining other international donors in supporting the plan, the total cost of which the GOC estimates at $7.5 billion. The U.S. contribution of just over $1.3 billion has a major counter-drug component, but also a significant amount ($230 million) of funding for social assistance, alternative development, judicial reform, strengthening respect for human rights, and economic development. Approximately $900 million of the three-year, $7.9 billion support package the international financial institutions announced for Colombia last year will be allocated to programs associated with Plan Colombia.

U.S. support for judicial reform in Colombia includes helping the Governmenmt of Colombia transition into a modern accusatorial system of criminal justice, assisting the law enforcement training academy, training prosecutors, public defenders and "vetted" Colombian law enforcement units specializing in investigating human rights violations, and strengthening the Governmenmt of Colombia's anti-kidnapping capabilities.

Web Site: U.S. Support for Plan Colombia

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