Economy

Overview

In 2006 Colombia had the fifth-largest economy in Latin America, a status that is expected to continue through 2010. Since the liberalization of the economy under the new constitution of 1991, the government has sought to facilitate the gradual transition from a highly regulated economy to a free-market economy through measures such as tariff reductions, financial deregulation, privatization of state-owned enterprises, and adoption of a more liberal foreign-exchange rate. Although the economy became mired in a recession in 1998–99 as a result of external shocks and monetary tightening to curb inflation, it has rebounded since 2003 as a result of confidence in the political and economic policies of President Álvaro Uribe Vélez. The recovery of growth in the gross domestic product (GDP) in 2005 and an overall reduction in criminal and political violence contributed to the favorable conditions that enabled President Uribe to be reelected in May 2006 with a strengthened popular mandate. The economy is expected to remain steady despite continuing weak domestic and foreign demand, slow GDP growth, austere government budgets, and serious internal armed conflict.

Gross Domestic Product (GDP)

Overall GDP increased in real terms by an average of 2.5 percent a year from 1990 to 2002. The real GDP growth indicated that the economy—driven by exports, private investment, and a recovery of household consumption—had rebounded from a GDP growth rate of –4.2 percent in 1999. The upward trend has continued, reaching an estimated 6.1 percent in 2006, although this growth was expected to slow to 4.9 percent in 2007. The GDP totaled an estimated US$133.7 billion in 2006. The estimated origins of GDP by sector in 2006 were agriculture, 12 percent; industry, 35.2 percent (including manufacturing, about 15 percent); and services, 52.7 percent.

Colombia is a lower middle-income country. Real GDP per capita contracted by 6 percent in 1998–2002 and only recovered its 1997 level in 2005, when it reached US$2,290 (or US$7,661 at purchasing power parity). In 2005 the median household income was US$3,904. The estimated GDP per capita for 2006 was US$2,823, a figure that was expected to decline to US$2,791 in 2007 at market exchange rates.

Government Budget

Favorable international conditions such as higher oil prices and Colombia’s economic expansion aided the efforts of the Uribe administration to bring Colombia’s public finances under control. In 2005 the government had revenues estimated at US$46.8 billion and expenditures estimated at US$48.8 billion. The estimated 2006 budget deficit was 5.1 percent of gross domestic product (GDP), as compared with 5 percent of GDP in 2005. The growing public-sector debt was about 46 percent of GDP in 2006. Under President Uribe’s approved second-term reforms of the tax regime, the income tax rate will decline gradually to 35 percent in 2007, 34 percent in 2008, and 33 percent in 2009, while corporate taxes will be lowered and the value-added tax (VAT) simplified.

Inflation

During 1990–2002, the inflation rate averaged 18.1 percent per year, but it gradually fell to an estimated 4.3 percent in 2006. It was expected to remain about the same in 2007–8.

Agriculture, Forestry, and Fishing

Since 2003 the Colombian Institute of Rural Development has managed the agricultural and fishing industries. Agriculture’s share of gross domestic product (GDP) has declined significantly since 1987, when it was almost 21 percent of GDP. During 1990–2001, its share of GDP decreased at an average annual rate of 1.1 percent. In 2006 agriculture accounted for an estimated 12 percent of GDP and employed 22.7 percent of the labor force. Approximately 15 percent of Colombia’s total exports come from agriculture, including livestock and fishing.

A diverse climate and topography allow cultivation of a wide variety of crops. Products include bananas, beef, cassava, cocoa, coffee, corn, cotton, cut flowers, livestock, palm oil, potatoes, rice, soybeans, sugarcane, timber, and tobacco. Coffee remains Colombia’s leading legal cash and export crop, accounting for 6.9 percent of export earnings in 2005 (about US$1.6 billion) and about one-third of employment in agriculture (600,000 people). However, Colombia’s arable land has been used increasingly to cultivate coca for cocaine production. Moreover, endemic guerrilla and paramilitary violence has been a serious problem for many campesinos and cattle ranch owners, and it has discouraged investment in the sector. Consequently, sectoral growth has been declining, from 4 percent in 2004 to 2 percent in 2005.

Colombia has from 53 to 58 million hectares of forest and woodland, only 3 million hectares of which are dedicated to commercial exploitation. The Institute of Hydrology and Environmental Studies estimated in 2004 that Colombia lost around 101,000 hectares of forest in the period from 1994 to 2001. The government is offering incentives to increase forest and woodland by 1.5 million hectares between 2002 and 2025. Roundwood removals in 2004 totaled 8.1 million cubic meters, and sawnwood production totaled 622,000 cubic meters. Much of the harvested wood is used as fuel.

The fisheries and aquaculture sector, which employed 88,000 people in 2001, accounts for less than a quarter of the agriculture sector’s percentage of national production. Low fish consumption and rudimentary fishing techniques apparently account for the relatively marginal performance of the fishing industry, despite a huge potential for both aquaculture and sea fishing along Colombia’s 3,208 kilometers of coastline. The total catch in 2004 was 211,385 metric tons. Authorized and unauthorized foreign ships commonly fish in Colombian waters.

Mining and Minerals

Despite its immense hydrocarbon potential, only 20 percent of Colombia’s potential reserves are currently in production. Total crude oil production averaged 526,000 barrels per day in 2005, down from 810,000 barrels per day in 1999. The steady decline is due to a lack of sizable new reserve discoveries. Declining domestic oil production means that Colombia will have to import oil in the medium to long term. With its limited refining capacity, the country is already importing some refined products, especially gasoline and fuel oils. The country’s current refining capacity is about 300,000 barrels per day. Colombia is the world’s tenth-largest producer of hard coal, with coal production in 2005 totaling 59 to 61 million metric tons. About 90 percent of domestic coal production, which is entirely handled by foreign companies, is exported. In 2005 Colombia was the world’s sixth-largest coal exporter, ranking after China and ahead of the United States. It was also the largest producer in Latin America of ferronickel in 2005 (39,700 metric tons).

Natural gas production and consumption each totaled an estimated 6.18 billion cubic meters in 2004. Gas for the domestic market is produced at the Cusiana–Cupiagua oil and gas fields in the northeastern province of Casanare in the Llanos Basin. However, the Guajira Basin accounts for most current production. More than 60 percent of natural gas demand comes from the Atlantic coastal region in Guajira Department, where industry and the electricity sector are the main users.

Industry and Manufacturing

Industry accounted for 35.2 percent of gross domestic product (GDP) in 2006, including about 15 percent for manufacturing. Industry’s share of employment in 2006 was 18.7 percent. Manufacturing has been expanding rapidly since May 2006. Major manufactured products include beverages, cardboard containers, cement, chemicals, electrical equipment, machinery, metal products, pharmaceuticals, plastic resins and manufactures, textiles and garments, transport equipment, and wood products. In late 2000, construction began recovering from a major five-year downturn and was the fastest-growing subsector, driving GDP growth in 2003–5; it jumped from a 9.1 percent GDP growth rate in 2004 to 27.6 percent in 2005. Construction contributed an estimated 6.7 percent of GDP in 2005.

Energy

Colombia is self-sufficient in energy. Electricity-generating capacity has remained at nearly 13.5 gigawatts since the mid-1990s. Of that total, an average of 66 percent was hydroelectric and 34 percent thermal. With installed electricity-generating capacity of 13.4 gigawatts in 2004, Colombia produced 46,571 gigawatt-hours of electricity; hydropower accounted for 78 percent of the electricity; thermal power, 21 percent; and other renewable sources, 1 percent. The country’s heavy dependence on hydroelectric generation makes it vulnerable to disruptions caused by drought. As a result of Colombia’s great potential in terms of its coal, gas, and oil reserves, the energy sector accounts for 51 percent of total investment.

Services

The services sector accounted for 52.7 percent of gross domestic product (GDP) in 2006. In the first trimester of 2006, the services sector’s share of employment was 60 percent. This sector includes commerce; communications; electricity, gas, and water; financial services; tourism; and transportation.

Representing nearly 18 percent of GDP, financial services are centered in Bogotá, Medellín, and, to a lesser extent, Cali. The banking sector has been consolidating since 2004, when domestic banks reportedly controlled 84 percent of the assets and foreign banks, 16 percent. The foreign-owned banks generally cater to multinational corporations and high-income customers. The total number of domestic banks (commercial and mortgage) was reduced to 10 in 2006. The financial system is characterized by a multi-banking model, although only two banking groups own almost half the country’s bank assets. The Bank of the Republic (Banco de la República—Banrep) operates as the central bank. Since the government bailed out the banking sector in 1999 at a cost of 7 percent of GDP, most banks have been modernizing and by mid-2001 had returned to profitability. Online banking transactions increased by 67 percent from 2004 to 2005. Since its creation in 2005, the Financial Superintendency, a new financial authority, has supervised and regulated the banking sector as well as public companies and private pension funds, in coordination with the Ministry of Finance and Public Credit and two other agencies. Since the Bogotá, Cali, and Medellín stock markets merged in 2002 to create the Colombian Securities Exchange (Bolsa de Valores de Colombia—BVC), the BVC has received massive inflows of domestic investment. From US$24.6 billion at the end of 2004, market capitalization soared to US$50.7 billion at the end of 2005.

Growth of tourism has been slow for several decades because of the country’s reputation for criminal, political, and narcotics-related violence and remains a marginal activity, even though conditions have improved under the Uribe government. Colombia remains on the U.S. Department of State’s list of 31 countries with “travel warnings.” Although the tourism sector accounts for only about 1 percent of GDP, it is an important foreign-exchange earner. International tourism receipts totaled US$1.3 billion in 2005 and an estimated US$1.5 billion in 2006. Despite low rates of tourism, reduced violence in recent years has allowed hotel occupancy rates to begin to recover, reaching 63 percent in 2006. Relatively isolated and safe tourism areas on the Caribbean, such as Cartagena and Santa Marta and the Caribbean islands of San Andrés and Providencia, are among the most popular Colombian tourism destinations. However, Bogotá was the most popular Colombian city for international visitors in 2005. The government has been promoting road travel and providing incentives for hotel construction and tourist projects in natural parks and ecological sites such as the Amazon and the coffee zone. One of the most rapidly growing subsectors of Colombian tourism is ecotourism.

Labor

During 2001–5, the working-age population grew by 1.9 percent and the labor force by 1.4 percent. Colombia has a generally well-educated and trained workforce, which totaled an estimated 20.5 million people in 2005. Trade union militancy has declined in recent decades as a result of high unemployment, the loss of prestige of the unions, and paramilitary attacks on union members. The local business community is represented by the Union Council, which is a federation of sectoral interests. Although nonskilled labor wages are protected from declining in real terms by strict minimum-wage regulation, businesses have reduced skilled labor wages and increased layoffs.

The national unemployment rate has declined since 2000, when it reached a high of 19.7 percent. By 2005 it had dropped to an estimated 11.8 percent, but it rose to 12.7 percent in the third quarter of 2006, possibly because of a new accounting methodology. Despite the uptick, the gradual downward trend is expected to continue over the next 10 years as the working-age population expands more slowly than the population in general. Underemployment, which has affected more than 30 percent of the working population since 2001, also rose in the third quarter of 2006 to 35.4 percent, as compared with 32.6 percent in 2005.

Foreign Economic Relations

The United States has long been Colombia’s most important trading partner. Colombia and the United States reached agreement on a major Andean free-trade agreement in February 2006, and the George W. Bush administration signed it on November 22, 2006. However, U.S. congressional reservations remained, and congressional ratification in both countries is needed in order for it to come into effect in 2008. Colombian exports to the Andean countries—including Venezuela, traditionally Colombia’s second-largest trading partner—have accounted for about 20 percent of total Colombian exports since 2000. Colombia has signed free-trade agreements with Chile, Mexico, and Venezuela, as well as with the Caribbean Community and Common Market (Caricom). The Uribe administration strongly favors extending these bilateral trade agreements across the hemisphere. Another principal destination for Colombian exports is the European Union (EU). Germany is Colombia’s principal EU trading partner. Both the United States and the EU grant preferential access to Colombian exports under the Generalized Preferences System.

Imports

Aided by currency appreciation, imports have soared since 1991, when the government cut tariffs and eliminated nontariff barriers on imports. Imports of goods (free on board—f.o.b.) amounted to an estimated US$22.8 billion in 2006. The trend of rising imports is expected to continue, totaling a projected US$27.7 billion in 2007. The major suppliers of imported goods in 2005 were the United States, 28.1 percent; Venezuela, 6.4 percent; Mexico, 5.9 percent; and Brazil, 5.5 percent. Colombia’s principal imports include machinery, industrial and oil and gas industry equipment, grains, chemicals, transportation equipment, mineral products, consumer products, metal and metal products, plastic and rubber, paper products, and aircraft supplies.

Exports

Exports of goods (free on board—f.o.b) amounted to an estimated US$23.5 billion in 2006. The trend of increasing exports has reflected higher commodity prices and growing foreign demand, as well as the Uribe government’s export-oriented strategy. Traditional exports—oil, coal, coffee, and nickel—reached US$5 billion in 2005. Although coffee represented 60 percent of exports in 1987, in 2005 it was in third place behind oil and coal because of low international prices in recent years. Colombia exports about half of its oil production, with most of it (156,000 barrels per day) going to the United States. Oil exports generate about US$2 billion a year and represent more than 20 percent of Colombia’s exports and about 4.5 percent of the gross domestic product (GDP). Exports of coal rose to US$2.6 billion in 2005, or 12.3 percent of total exports. Despite relatively high prices, export volumes of coal fell by 16 percent and coffee by 6 percent in the first half of 2006. Although oil volumes increased only slightly during this period, revenues from Colombia’s most valuable export increased by 35 percent because of higher international prices. The most significant nontraditional exports include agricultural products (cut flowers, bananas, and sugar), mining products (ferronickel, gold, cement, and emeralds), and industrial products (textiles and apparel, chemicals, pharmaceuticals, cardboard containers, printed material, plastic resins, and manufactures). The main destinations of exports in 2005 were the United States, 40.4 percent; Venezuela, 9.2 percent; Ecuador, 5.7 percent; and Peru, 3.5 percent.

Balance of Trade

Exports grew faster than imports during the 1999–2006 period, allowing Colombia to report positive trade balances. Exports of goods (free on board—f.o.b.) amounted to an estimated US$23.5 billion and imports of goods f.o.b. to an estimated US$22.8 billion in 2006.

Balance of Payments

The current account showed a deficit of an estimated US$2.2 billion in 2006, or about 1.7 percent of gross domestic product. The estimated current-account deficit during 2006–10 is expected to widen as a result of a rising import bill and higher debt interest payments. Although the current-account deficit has been growing in recent years, it was more than offset in 2005 by a high surplus of US$3.3 billion on the capital account. (The capital account totaled US$38.7 billion in 2005.) Moreover, the deficit has continued to be fully covered by long-term financing flows, including foreign direct investment and remittances. Colombia’s foreign currency reserves (in convertible foreign currencies) totaled an estimated US$16.3 billion in 2006.

External Debt

Colombia’s foreign debt remains one of the country’s main weaknesses. The external debt rose to an estimated US$35.1 billion in 2006 and was projected to continue rising. The paid debt-service ratio as a percentage of annual export earnings was an estimated 28.2 percent in 2006.

Foreign Investment

Foreign direct investment (FDI) has grown strongly since the early 1990s, when the government passed laws to stimulate foreign investment in nearly all sectors of the economy by eliminating restrictions on foreign inflows, creating a privatization program, and opening foreign investment in the oil industry. The central bank reported that FDI jumped to US$10.1 billion in 2005 (from US$3.2 billion in 2004), mainly as a result of the acquisition of two of Colombia’s largest corporations (beer and tobacco producers) by investors in South Africa and the United States. In 2005 the sectors with the largest FDI inflows were manufacturing (53 percent of the total of US$10.2 billion), mining and quarrying (19 percent), and oil (12 percent). In 2005 the United Kingdom, with 37 percent of total investments, was the main source of FDI, followed by the United States, with 14 percent. Areas closed to FDI include defense and national security, disposal of hazardous wastes, and real estate. The government also reserves ownership in strategic areas such as natural resources, but foreign companies may participate in exploration and exploitation.

Currency and Exchange Rate

Colombia’s currency is the peso (pl., pesos), which equals 100 centavos. Peso banknotes are issued in the following denominations: 1,000, 2,000, 5,000, 10,000, 20,000, and 50,000 pesos. The peso is formally abbreviated as COP and informally as COL$ or Ps. After modest devaluations in 1999–2002, the peso appreciated in 2004–5 as a result of increased remittances from Colombians working abroad, foreign direct investment, and portfolio investment. It began depreciating in March 2006 and lost about 5 percent of its value during the next six months. The peso ended 2006 trading at Ps2,239 per US$1, similar to its level at the end of 2005. Its average exchange rate in 2006 was Ps2,404 per US$1. The average exchange rate forecast for 2007 is Ps2,570 per US$1. The peso is expected to continue depreciating to approximately Ps2,900 per US$1 at the end of 2010 because of the growing current-account deficit.

Fiscal Year

Calendar year.

Library of Congress – Federal Research Division Country Profile: Colombia, February 2007