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Colombia Prepares to Meet Development Challenges

Enhancing Sustainability in the Fiscal Framework

May 15, 2014

Bogota, Colombia's capital city.

The Colombian Government, with World Bank support, is working to ensure its financial sustainability and reduce its vulnerabilities, while sustaining needed social spending. With a strengthened fiscal position, Colombia will be better equipped to meet current and future development challenges.
Project map

Challenge

Colombia’s considerable reliance on oil revenues, relatively high poverty and inequality levels, high exposure to natural disaster risk, and a relatively complex political economy represent major challenges to making the Government’s fiscal framework sustainable. At the same time, sustaining growth in the longer run needs smart investments in infrastructure, health, and education without risking fiscal and debt sustainability.

Solution

The Fiscal Sustainability and Growth Resilient Development Policy Loan series supported a strong program of reforms to strengthen Colombia’s fiscal position. Reforms included the implementation of a Fiscal Rule Law in 2011 that defines an adjustment path for the structural budget deficit. To preserve the Government’s capacity to respond to negative short-run shocks, the targeted deficit indicator took into account short-run fluctuations in commodity prices and the economic cycle. Other supported reforms in the tax system helped to increase revenues. On the expense side, the loan supported measures to mitigate expanding government costs arising from natural disasters and a complex health system. For example, new incentives were created to increase agricultural insurance and clearer criteria were established for health-related reimbursements.

Results

The program’s success was a result of a close consultation with the Government, which took full ownership of the implemented reforms. The program’s comprehensive packaging was not limited to the fiscal system, but clearly identified exposure to health and disaster risks. It also benefited from the Bank’s expertise in other sectors. Results of the program included:

  • The structural fiscal balance was reduced.  The Fiscal Rule Law led to prudent fiscal management and reduced the structural fiscal balance from a predicted deficit of 3.7 percent of GDP in 2011 to an actual deficit of 2.4% in 2013. Furthermore, the rule did not hinder the Government from enacting a counter-cyclical stimulus program amid an economic slowdown in early 2013.
  • Non-oil tax revenues increased.  By supporting tax administration measures and tax reform, the program helped increase non-oil tax revenues from 12.0% of GDP to 12.9% in 2013. By increasing revenues, the Government did not have to cut back on social expenditures to meet the deficit target.
  • Liabilities were contained.
  • Supported reforms in the health sector improved the policy of health cost reimbursements and its monitoring, which has contained recurrent costs outside the mandatory insurance scheme at its 2010 level.
  • New incentives supported by the program led to a doubling of the coverage of insured agricultural area between 2010 and 2013.
  • The number of financial instruments to mitigate natural disaster risks has increased from two in 2010 to three in 2013.

Bank Group Contribution

The Bank provided a loan of US$500 million. The Bank continues to provide assistance to key policy areas through lending and non-lending follow-up projects.

Partners

The Ministry of Finance and Public Credit, Ministry of Health, and Ministry of Agriculture were key partners in this project.

Moving Forward 

The operation led to an intensified policy dialogue with the Government of Colombia. A series of follow up activities supported further lending operations and helped to inform further reforms. For example, the Enhancing Fiscal Capacity to Promote Shared Prosperity Development Policy Loan supported linking fiscal policy to redistribution and the Growth and Competitiveness Development Policy Loan is supporting an agenda of structural reforms to further support growth resilience.

Beneficiaries 

The program’s achievements and, especially, the resulting policy dialogue and follow-up operations ensured fiscal support for important Government programs, such as the conditional cash transfer program Familias en Accion, which expanded from 514,000 households in 2005 to about 2.79 million households in 2012 and benefits poor households.