Headquartes IMF in Washington DC

A year-old tax reform aimed at making it cheaper to hire people is helping to drive Colombia’s “promising” economy, the International Monetary Fund (IMF) said.

National tax reforms were one of the key factors driving economic growth in Colombia, along with anti-inflation measures, a flexible exchange rate, effective financial sector control, and a prudent fiscal policy, IMF Mission Chief for Colombia, Valerie Cerra, told Colombia Reports in emailed responses to questions.

“Colombia is advancing on structural reforms, as demonstrated by the tax reform approved at the end of last year. It should help reduce non-wage labor costs, promote job creation in the formal sector and reduce inequality,” she said.

Cerra, who represents the global body which aims to stabilize the international monetary system, said Colombia’s growth is projected at 4.5% in the medium term with inflation remaining in the 2-4 per cent official range.

IMF Managing Director Christine Lagarde told CNN Spanish two weeks ago that Colombia was one of the “economies to watch” in Latin America in the next year.

Growing the formal economy

In 2008, 74.2 % of all Colombian labor force was considered informal, that is, not regulated or taxed by government. This left many without health or employment benefits. By 2011 Colombia still had one of the highest unemployment rates in Latin America, according to an international labor report.

To combat this, the tax reforms formulated in 2012 and introduced in January 2013 reduced the tax paid by companies for each employee (payroll tax) and replaced it with a tax on the profits they earn by making use of that labor.

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While unemployment and the informal economy are still large, the structural reforms appear to have grown the formal economy.

MORE: Colombian unemployment lowest in 12 years, rural unemployment still high

This vindicates the move by President Santos, who was criticized at the time by Senator Jorge Robledo for raising income taxes on employees while giving tax breaks to employers.

Still Barriers to Growth

Cerra said key bottlenecks for growth remain, for example, inadequate infrastructure and combating inequality.

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“However, the ambitious program for infrastructure investment, particularly the new generation of road concessions, should help alleviate these bottlenecks, provided that the implementation remains fiscally responsible,” she said, “Looking forward, we encourage authorities to ensure that economic growth benefits all segments of society by continuing their efforts to foster inclusive growth and reduce labor market informality.”

Sources

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