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Colombia: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Colombia

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
April 2019
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A Resilient Recovery with Medium-Run Challenges

A. Background

1. Colombia’s very strong policies and pursuit of equity and inclusion—including implementation of the peace agreement—continued in 2018. In the last decade, Colombia’s strong policies underpinned high and stable growth and an orderly adjustment to the large terms of trade shock of 2014–16. Notwithstanding an economic slowdown since 2014, key social indicators gained ground. Poverty and inequality measures kept declining and financial inclusion improved. The peace agreement’s emphasis on rural development stands to reduce income inequality across regions. Additionally, structural and tax reforms have improved the business climate. Colombia was invited to become a full member of the OECD on May 30, 2018.

2. bold>Past Fund Advice. Recent policy measures have been broadly aligned with past Fund advice. Since the 2018 Article IV Consultation, the central bank’s policy stance has continued to be data-dependent and has been well communicated, avoiding any policy surprises. The central government continued to meet the headline deficit target mandated by the fiscal rule. The implementation of the Conglomerates Law and Basel III are proceeding as planned. The 2018–22 National Development Plan (NDP) focuses on alleviating structural bottlenecks identified in past advice, including raising productivity, tackling informality, and improving governance.

B. Recent Developments

3. Colombia’s recovery gained momentum in 2018 (Figure 1). Growth strengthened to 2.7 percent in 2018 from 1.4 percent in 2017, on the back of stronger private consumption, and a modest investment recovery. The recovery was driven by continued policy support, real wage growth, and a dissipation of political uncertainty following the presidential election. Upon taking office, President Duque’s government re-iterated its commitment to policy continuity and maintaining Colombia’s strong macroeconomic policy framework.

Figure 1.Colombia: Recent Economic Developments

Sources: Departamento Administrativo Nacional de Estadísticas (DANE); La Fundación Para la Educación Superior y el Desarollo; Haver Analytics; and IMF staff estimates.

Commodity Prices, Private Consumption and GDP Growth

Sources: Departamento Administrativo Nacional de Estadísticas (DANE) and IMF staff calculations.

Note: Index used rolling weight, 2012M6=100.

4. With demand-driven growth, external imbalances widened (Figure 2). The current account deficit widened to 3.8 percent of GDP in 2018 as recovering domestic demand spurred imports, including for investment goods, while non-oil exports remained sluggish. Capital inflows were robust notwithstanding stress in other EMs during 2018 (Figure 3), and the government has already met its external borrowing plan for 2019 with oversubscribed Eurobond issuances in October and January. The peso depreciated by 7 percent against the U.S. dollar during the year but strengthened by 1 percent in real effective terms. Accordingly, Colombia’s external position is moderately weaker than the level consistent with medium-term fundamentals and desired policy settings. Reserves remained adequate at 118 percent of the ARA metric (130 percent excluding a commodity buffer) (Annex I).

Figure 2.Colombia: Current Account Developments

Sources: DANE; Banco de la República; Bloomberg; Haver Analytics; and IMF staff estimates.

1/ Colombia mix follows closely Brent oil prices.

2/ Weighted by destinations of Colombia’s non-traditional exports.

Figure 3.Colombia: Financial Account Developments

Sources: Banco de la República; DANE; Haver Analytics; Bloomberg; and IMF staff estimates.

1/ Does not include commodity buffers. Uses metric for floating exchange rates.

5. Inflation stood at target in February 2019 (Figure 4). Headline inflation eased to 3.1 percent in 2018Q1, as base effects from the 2017 VAT increase dropped out. Since then, inflation has been stable around its target,1 as core and nontradable inflation both fell close to three percent for the first time in four years. Two-year inflation expectations remain anchored near the central bank’s inflation target. Despite continued slack in the labor market, real wages grew by 2 percent in 2018 as inflation fell.

Figure 4.Colombia: Inflation, Monetary Policy and Labor Market

Sources: DANE; Banco de la República; Haver Analytics; and IMF staff estimates.

6. Subdued credit growth evolved in line with the economic cycle (Figure 6). Commercial credit growth moderated in the first half of 2018, in line with weak investment. Credit quality deteriorated over the same period, particularly for corporate borrowers. However, NPLs have since started to decline and domestic banks have become increasingly willing to lend.

Figure 6.Colombia: Recent Macro-Financial Developments

Sources: Banco de la República; DANE; Bloomberg; and IMF staff estimates.

1/ LA4 corresponds to the average of Brazil, Colombia, Peru and Mexico.

2/ Consumer and commercial credit gaps are computed as percentage-point deviations from an HP-filtered consumer-credit-to-private-consumption ratio and commercial-to-private-investment ratio, respectively.

3/ Data for 2018 refers to Aug 2018.

Credit to GDP and Output Gaps

Sources: BanRep; DANE; and IMF staff calculations.

Note: Output gap estimated through a multivariate filter, credit to GDP gap through an HP Filter.

7. The policy mix has remained somewhat supportive. Monetary policy has been moderately accommodative, after the central Bank cut interest rates by 50bps in 2018H1. At the same time, the fiscal stance was neutral overall last year. Consistent with the fiscal rule, the central government’s headline deficit narrowed to 3.1 percent of GDP in 2018 from 3.6 in 2017, yielding a slightly negative impulse last year (Figure 5), but subnational spending was strong.

Figure 5.Colombia: Fiscal Developments

Sources: Ministerio de Hacienda y Crédito Público; DANE; and IMF staff estimates.

8. The 2018 Financing Law should raise tax revenues in 2019 but will likely create shortfalls thereafter. Tax revenues should increase by 0.7 percent of GDP in 2019 stemming from base changes to VAT and consumption taxes and rate changes to personal income (PIT), wealth and dividend taxes, and from improved administration. A gradual reduction in corporate income tax (CIT) rates and allowing VAT credits on capital goods should lower tax burdens on businesses and will boost investment, but curb tax revenues from 2020 onwards at a time when the fiscal rule calls for significant tightening (Box I, SIP).2

9. Accelerating migration flows from Venezuela pose fiscal challenges (Annex III). According to Migracion Colombia, 1.5 million migrants from Venezuela (including more than 350,000 returning Colombian nationals) reside in Colombia as of December 2018. Staff’s baseline projects that the number of migrants will reach 2½ million by end 2020. A commitment to provide humanitarian support such as health care and education to migrants will result in additional near-term net fiscal costs for Colombia that will peak at around 0.4 percent of GDP in 2020, and gradually decline to 0.1 by 2024, as migrants integrate into the economy and associated growth gains rise over time. In response, the Fiscal Rule Consultative Committee (FRCC) recommended on March 29th to use flexibility within the fiscal rule to modestly relax the deficit target over the next few years. Market reactions to date have been muted.

10. The peace agreement is progressing on most fronts. The Kroc Institute, tasked with monitoring the agreement, reports that steady progress had been made, in line with other major peace accords. The Special Jurisdiction for Peace (JEP) remains under review,3 following the President’s objections to 6 of over 150 articles in the JEP’s Statutory Law. These articles are expected to be reconsidered by Congress and would need further approval by the Constitutional Court.

Box 1.The 2018 Financing Law1

Despite numerous tax reforms, non-oil revenues in Colombia remain comparatively low. Relative to other Latin American and OECD countries, Colombia retains a complex tax code and collects relatively low revenues from PIT and VAT. On the other hand, Colombia has a relatively high CIT rate. The complexity of the tax system together with limited resources at the tax authority has led to widespread evasion (OECD 2015).

The financing law addressed some of these issues in a growth-friendly way. Three higher PIT rates and a wealth tax were introduced to improve progressivity; the corporate tax burden was reduced by lowering CITs, avoiding double taxation at the subnational level and allowing input credit for VAT on capital goods, and more instruments were created to improve tax administration outcomes, including making electronic invoicing compulsory and adoption of tougher sanctions and criminal penalties.

Colombia: 2018 Financing Law Expected Static Revenue Impact (% GDP)
2019202020212022
Total0.7-0.1-0.2-0.6
VAT and consumption tax0.30.30.30.3
Personal income tax0.20.20.20.2
Wealth and dividend taxes0.10.10.10.1
Reduction of corporate income tax, presuntive tax rate, municipal tax0.0-0.2-0.4-0.6
Allowing input credit for VAT on capital goods0.0-0.6-0.6-0.6
Revenue administration gains/anti-evasion0.10.10.10.1
Sources: National authorities and IMF staff estimates.
Sources: National authorities and IMF staff estimates.

Model-based simulations point to sizeable private investment effects from financing Law. Staff simulations suggest that the Law could boost medium-term growth by around 0.2 percent of GDP but will reduce tax revenues in the medium-term. A lower corporate burden through lower CIT and allowing input credit for VAT on capital goods will likely boost investment and potential growth but will not be enough to offset the associated revenue losses (see Figure 1).

Figure 1.Colombia: Impact of Financing Law on Key Variables

Source:GIMF Simulations.

Note: LR denotes the long-run or steady-state.

1 A Staff Issues Note provides further details.

C. Outlook and Risks

11. Growth at 3.6 percent this year and beyond is expected to close the output gap. Moderately accommodative monetary policy, higher fiscal spending at the subnational level,4 and migrants from Venezuela should support domestic demand in 2019. Despite external headwinds, staff projects growth to increase to 3.6 percent this year, driven by continued strength in consumption and an investment rebound—further underpinned by recovering construction, 4G infrastructure spending, improved corporate balance sheets and investment-friendly tax reforms. Correspondingly, credit growth should pick up with the investment recovery. Medium-term potential growth slightly below 3½ percent includes the positive impact of migration flows from Venezuela (Annex III) and incorporates the latest (preliminary) census estimates.

Headline, Tradable and NonTradable Inflation

Sources: Banrep; Haver; and IMF staff forecasts.

12. Inflation should remain near target despite temporary factors. Supply-side shocks (VAT hikes from the Financing Law, el Nino) could lead to transitory increases in inflation. Also, the 2019 minimum wage increase (2.8 percent in real terms) exceeded productivity growth, posing some risk of higher inflation and informality. But with nontradable inflation expected to stay close to 3 percent given favorable indexation dynamics and continued slack, inflation is projected to end 2019 near target.

13. The current account deficit is projected to remain elevated. Strong import growth is expected as domestic demand continues recovering. Export volumes of oil and other commodities are projected flat, but momentum in tourism is expected to continue, while the previous expectation of a rebound in non-traditional exports has been tempered as regional activity picks up slowly. However, the current account deficit is being comfortably financed by stable foreign direct investment and robust portfolio inflows from a more diversified foreign investor base. A challenge will be to reduce external deficits over the medium term to contain the build-up in net foreign liabilities.

14. Heightened risks remain tilted to the downside (RAM). Lower global growth, amid rising protectionism, and a retreat from multilateralism pose risks to Colombia’s exports, including indirectly through lower oil prices. On the financial side, nonresident participation in the local bond market rose encouragingly to an all-time high in 2018 (7.9 percent of GDP), but raises Colombia’s exposure to tightening global financial conditions. Colombia’s strong policies, flexible exchange rate, reserve buffers and FCL access should continue to cushion the effect of external shocks, as confirmed in the staff analysis of risks to capital flows (Annex IV). On the domestic front, risks are broadly balanced. Heightened uncertainty in Venezuela could lead to a further acceleration of migration inflows, with spillovers in terms of fiscal costs for Colombia. Larger migration flows that double the number of Venezuelan migrants by 2024 could result in additional near-term fiscal costs of around ½ percent of GDP relative to the baseline (Annex III). Domestic confidence weakened sharply around the tax debate in congress last year, and a failure to mobilize tax revenues in the future could lead to large cuts in social and investment spending, adversely affecting growth and poverty reduction.

Foreign Participation in Local Government Debt

Sources: National authorities and IMF staff calculations.

Oil Price and Oil Volatility

Sources: Bloomberg, Energy Information Administration and IMF staff calculations.

15. The authorities expect the recovery to gather momentum in 2019 and inflation to remain close to target. Like staff, they project GDP growth to be between 3.4–3.6 percent, supported by strong private consumption and an investment rebound. They also note that there is great uncertainty about the impact of Venezuelan migrants on demand at various horizons given high informality and limited household survey information. The authorities expect inflation to remain close to target. They share staff’s general view on risks and Colombia’s exposures, although they place more weight on domestic risks than staff, including the possibility of further waves of migration that may raise fiscal costs. They agreed with staff’s views on near-term prospects for the current account and capital flows and the potential medium-term external risks of a widening deficit. The authorities broadly agreed with staff’s overall external sector assessment, although they emphasized investment-driven imports, robust foreign direct investment, and diversified portfolio flows as mitigating factors.

Global Risk Assessment Matrix1
Source of Risks (Probability in color; time horizon in bold)ImpactPolicy Advice
Global
Rising protectionism and retreat from multilateralism. In the near term, escalating and sustained trade actions threaten the global trade system, regional integration, as well as global and regional collaboration. Additional barriers and the threat of new actions reduce growth both directly and through adverse confidence effects (increasing financial market volatility). In the medium term, geopolitical competition and fraying consensus about the benefits of globalization lead to economic fragmentation and undermine the global rules-based order, with adverse effects on growth and stability. HighST, MTMediumSpeed up structural reforms and pro-diversification measures.
Sharp tightening of global financial conditions causes higher debt service and refinancing risks; stress on leveraged firms, households, and vulnerable sovereigns; capital account pressures; and a broad-based downturn. The tightening could be a result of:
  • Market expectations of tighter U.S. monetary policy triggered by strong wage growth and higher-than-expected inflation. LowST
  • A sustained rise in risk premiums in reaction to concerns about debt levels in some euro area countries, a disorderly Brexit, or idiosyncratic policy missteps in large emerging markets. MediumST
HighUse the flexible exchange rate as the first line of defense against external shocks and international reserves where needed to address disorderly market behavior.
Weaker-than-expected global growth in key economies:

Euro Area: In the near term, weak foreign demand makes euro area businesses delay investment, while faltering confidence reduces private consumption. Adverse financial market reaction to debt sustainability concerns further dampens growth. A disorderly Brexit could cause market disruption with negative spillovers. In the medium term, disregard for the common fiscal rules and rising sovereign yields for high-debt countries test the euro area policy framework, with adverse impact on confidence and growth. High ST,MT

U.S.: Confidence wanes against a backdrop of a long expansion with stretched asset valuations, rising leverage, and unwinding of the fiscal stimulus, leading to abrupt closure of the output gap rather than a smooth landing. Medium ST,MT

China: In the short term, intensification of trade tensions and/or a housing market downturn prompt a slowdown, which is not fully offset by policy easing. Deleveraging is delayed and financial stresses, including capital outflow and exchange rate pressures, emerge. In the medium term, insufficient progress in deleveraging and rebalancing reduces growth and raises the probability of a larger disruptive adjustment. There would be negative spillovers on the global economy through trade volumes, commodity prices, and financial markets. MediumST, MT
Medium



Medium



Medium
Speed up structural reforms and pro-diversification measures. Monetary policy support if expectations are anchored. Reprioritize public investment projects. Any fiscal measure should preserve the declining debt path.
Large swings in energy prices. Risks to prices are broadly balanced, reflecting offsetting—but large and uncertain—supply and demand shocks. In the near term, uncertainty surrounding the shocks translates to elevated price volatility, complicating economic management and adversely affecting investment in the energy sector. As shocks materialize, they may cause large and persistent price swings. While, on aggregate, higher oil prices would harm global growth, they would benefit oil exporters. MediumST, MTHighUse the flexible exchange rate as the first line of defense against external shocks and international reserves where needed to address disorderly market behavior.
Colombia Specific
Further delays in infrastructure projects, deterioration of credit portfolio quality, continued weakness in exports and softer private consumption. MediumST, MT

Higher than expected migration flows from Venezuela, and/or greater than anticipated costs per migrant, and/or challenges in assimilating migrants results in additional net fiscal costs and lower potential output. MediumST

Shortfalls in mobilizing tax revenue lead to large cuts in public investment and social spending, adversely affecting growth and poverty reduction. MediumMT
Medium



Medium



Medium
Speed up structural reforms and diversification measures. Delay mon. pol. tightening. Reprioritize public investment projects.

Consider invoking temporary escape clause in fiscal rule, ensure medium-term declining debt path. Seek concessional financing and aid. Speed-up policies to integrate migrants into the labor force.

Speed up structural reforms and diversification measures. Reprioritize public investment projects. Strengthen revenue administration.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). Non-mutually exclusive risks may interact and materialize jointly. “Short term (ST)” and “medium term (MT)” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). Non-mutually exclusive risks may interact and materialize jointly. “Short term (ST)” and “medium term (MT)” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

Macroeconomic Policies

16. The policy mix should balance continued support for the recovery against the need to contain external imbalances. Against a background of robust domestic demand, a narrowing output gap, and an elevated current account deficit, the central government should reduce the fiscal deficit in line with the fiscal rule and rebuild fiscal space. While the central government is constrained by the fiscal rule, there is some space at the general government level where local governments at the subnational level can provide stimulus to support the ongoing recovery. At 4.25 percent, both staff and the Central Bank estimate that the policy rate is moderately below the nominal neutral rate to support demand and subdued credit.5

17. If the recovery materializes as expected, monetary accommodation can be gradually removed. In the near-term, with inflation close to target, anchored inflation expectations, weak credit growth, and the prevailing negative output gap, monetary policy should remain accommodative to safeguard the recovery and insure against heightened downside risks. If the recovery in credit and GDP materializes as projected, the Central Bank should shift to a tightening bias towards the second half of the year to move monetary policy to neutral territory.

18. Adhering to the fiscal rule remains appropriate and would place public debt firmly on a downward path over the medium term. Reducing the central government’s budget deficit is part of a multi-year adjustment required by the fiscal anchor. Following the FRCC recommendations to make some allowances for the Venezuelan migration shock, the revised headline path implies higher deficits in 2019 and 2020 but lower deficits from 2023 to 2024 relative to the 2018 Medium Term Fiscal Framework (MTFF) (see chart).6,7 At the subnational level, low spending execution is expected after local elections, suggesting the consolidated public sector fiscal stance will be contractionary in 2020. Public sector gross debt is projected to steadily decline from about 51 percent in 2018 to around 40 percent of GDP by 2024.

Central Government’s Envisaged Deficit Paths

(Percent of GDP)

Source: Authorities and FRCC.

19. During the Article IV mission, staff recommended that the escape clause could be considered under strict conditions to safeguard the MTFF. Uncertainty around migration flows from Venezuela and its effects pose risks of higher-than-expected fiscal costs that could crowd out key public investment and social spending programs. To work explicitly within the fiscal rule’s contingency framework, the escape clause can be invoked “in case of extraordinary events that may compromise the country’s macroeconomic stability.” However, invoking the clause for the first time involves a trade-off between smoothing the shock versus setting a precedent with possible credibility costs for the fiscal framework. Given this, staff recommended that the following strict conditions be satisfied if the escape clause were to be used in response to an exceptional migration shock from Venezuela: (i) the trigger must be clearly defined as migration-related costs; (ii) temporary deviations from the target should be commensurate with those costs; and (iii) a well-defined plan specifying the fiscal measures to return to the rule’s deficit path in the medium term should be specified. To support confidence in the fiscal anchor, the plan should be well-communicated, and include a calendar and prospective revenue and expenditure measures and be published in the MTFF.

20. Since then, the authorities decided to use flexibility within the fiscal rule in a well-defined manner starting in 2019. Invoking the escape clause would suspend the rule altogether and likely require creating a provisional rule to operate during the suspension period. Instead of this approach, the authorities explored the legal option of adjusting the deficit target in the existing rule to accommodate spending pressures from the Venezuela migration shock, working with the FRCC. The FRCC recommended a modestly relaxed headline deficit path—defined for a fixed period with a pre-specified ceiling on the deviation in the budget deficit in response to the migration shock. Under the proposal, the headline deficit would be allowed to widen in line with migration-related spending pressures, up to ½ percent of GDP in 2019, given the authorities’ projections of around 2½ million migrants residing Colombia by the end of this year. This deviation in the deficit target will decrease by 0.1 percent each year until 2024. The FRCC will monitor implementation annually based on the evolution of the migration shock, as well as its economic and fiscal impact, and can reassess if the deficit path should be modified going forward. This detailed and upfront recommendation from the FRCC to adjust the headline deficit path in response to the migration shock is broadly in line with staff advice for the contingent rule, but the authorities approach relies on introducing flexibility to the existing rule following the shock.

Fiscal Outlook 1/(In percent of GDP; unless otherwise indicated)
201620172018201920202021202220232024
Central Government Fiscal Stance
Headline balance 1/-4.0-3.6-3.1-3.0-2.3-1.8-1.4-1.2-1.0
Total revenue 2/15.015.615.115.515.415.415.315.215.2
Tax revenue13.613.813.614.013.913.913.813.713.7
Expenditure19.019.218.218.517.717.216.716.316.2
o/w Fixed capital formation2.02.41.71.50.80.70.40.40.6
Structural primary non-oil balance-1.2-0.5-0.3-0.4-0.10.00.30.40.3
CG Fiscal Impulse-0.4-0.7-0.20.1-0.3-0.1-0.4-0.10.1
Consolidated Public Sector
Headline Balance 3/-2.3-2.4-2.0-2.1-0.6-0.3-0.4-0.40.0
of which: Subnationals balance0.30.50.7-0.10.50.50.0-0.20.3
Total revenue25.225.425.226.126.226.025.625.525.5
Expenditure27.628.027.428.727.226.726.426.225.9
Structural primary non-oil balance0.40.30.3-0.80.50.60.40.20.4
CPS Fiscal Impulse-2.90.10.01.1-1.3-0.10.20.2-0.2
Public sector gross debt49.849.551.850.648.546.244.242.239.9
Public sector net debt 4/38.638.741.341.640.338.737.335.934.2
Source: National authorities and Fund staff estimates.

The medium-term fiscal outlook is broadly based on the authorities’ medium-term fiscal framework. For 2019, it excludes expected privatization proceeds (0.3 percent of GDP) that, under GFSM 1986, produces a headline deficit of -2.7 percent of GDP estimated by the authorities.

Includes one-off telecom fine in 2017 (0.5 percent of GDP)

For 2016 excludes proceeds from the sale of ISAGEN and for 2019 excludes projected privatization proceeds (0.3 percent of GDP).

Gross debt minus public sector deposits.

Source: National authorities and Fund staff estimates.

The medium-term fiscal outlook is broadly based on the authorities’ medium-term fiscal framework. For 2019, it excludes expected privatization proceeds (0.3 percent of GDP) that, under GFSM 1986, produces a headline deficit of -2.7 percent of GDP estimated by the authorities.

Includes one-off telecom fine in 2017 (0.5 percent of GDP)

For 2016 excludes proceeds from the sale of ISAGEN and for 2019 excludes projected privatization proceeds (0.3 percent of GDP).

Gross debt minus public sector deposits.

21. The authorities broadly agreed on the appropriate mix of macroeconomic policies but see a need for temporary flexibility under the fiscal rule. Given the exceptional migration shock and its attendant fiscal costs that are expected to be persistent, the authorities are using the flexibility embedded within the fiscal rule’s framework. To safeguard the fundamental characteristics of the fiscal rule, the authorities welcomed staff’s advice of defining upfront the trigger, deviation from target, and correction mechanism if the escape clause were to be implemented. The current legal framework suspends the fiscal rule when the escape clause is invoked which was viewed by the authorities and the rules committee as problematic. Hence, they concurred on modestly relaxing the headline deficit targets within the existing rule in response to the Venezuelan migration shock. The authorities believe the FRCC recommendations and monitoring of the fiscal rule under these revisions to be consistent with staff’s approach. To preserve the integrity of the fiscal anchor, there were no changes to the medium-term structural balance objective. On monetary policy, the central bank agreed that policy decisions will continue to be data dependent and that accommodation can be gradually withdrawn if GDP and credit strengthen as expected.

22. Building dollar reserves for the first time since 2014, the central bank’s reserve accumulation program is an appropriate step to maintain external buffers. The Central Bank announced in September 2018 a program to accumulate reserves to enhance the economy’s resilience to external shocks and as part of the authorities’ efforts to prepare for a possible gradual reduction in FCL access, risks permitting (Annex V). Reserves are currently adequate, in line with standard metrics, but will need to rise over time to maintain a sufficient buffer given external financing needs and risks. The program’s market-based mechanism has allowed reserve accumulation without disrupting the smooth functioning of the foreign exchange market, while permitting the flexible exchange rate to remain the primary mechanism of adjustment to external shocks. Staff sees scope, without disrupting the market, for a modestly faster pace of reserve accumulation that would keep the IMF’s standard metric at its current level. The authorities’ stated objective of offsetting reduced FCL access in the future with own reserves would involve additional accumulation. As the economy strengthens, accumulated reserves should continue to be sterilized, as needed, to maintain short-term interest rates close to the policy rate that the central bank judges consistent with attaining its inflation target.

23. The central bank was satisfied with its new program and the pace of reserve accumulation. The authorities agreed that further reserve accumulation was necessary to maintain external liquidity buffers as a backstop to the flexible exchange rate, which remains the first line of defense against external shocks. The authorities view the program as functioning successfully. They thought a faster pace was not necessary under current conditions, but this may change if circumstances do.

Structural Policies

A. Increasing Tax Revenue and Improving Spending Efficiency

24. Rising fiscal challenges will soon require policy actions to address them. At the heart of Colombia’s strong policy frameworks, the MTFF includes the fiscal rule’s structural deficit goal of one percent of GDP by 2022. Within this tightening budgetary envelope, and with tax revenue reductions approved in the Financing Law, staff estimates that in the absence of further revenue mobilization, expenditure reductions in excess of 2 percent of GDP between 2020–24 would be needed. This may be difficult given near-term spending rigidities, including pension commitments, and protracted fiscal costs from migration-related spending. To avoid undesirable cuts in public investment and social spending, the authorities should consider undertaking structural measures on both tax revenues and government spending to build fiscal buffers and maintain investor confidence.

25. Tax revenues should be gradually built up structurally to safeguard key spending given downside risks of revenue shortfalls. Raising tax revenues by 2–3 percentage points, to 16 percent of GDP, would help safeguard key public investment and social spending to support inclusive growth. Measures to lift tax revenues should include: the elimination of preferential regimes for businesses; base broadening for personal income taxes (including a reduction in the standard exemption and threshold at which tax is levied) and the VAT (with direct transfers to the most vulnerable to offset any adverse impact on poverty). These measures could resulting in added revenue gains of around 2 percent of GDP. On tax administration, this could be improved, including through changes to the arrears process, the VAT refunds process and to high-coverage audits. Improvements to DIAN’s IT systems and governance, increased staffing, and training to reduce widespread tax evasion are imperative.

Tax Structure

(Percent of GDP, central government)

Sources: OECD Database and IMF staff calculations.

Note: Colombia data is estimated by Fund staff.

26. Spending efficiency should be enhanced. Efficiency improvements in line with the recommendations made by the expert commission on spending should be pursued.8 These include energy subsidy reform as many of the wealthiest households receive subsidies; and stronger investment project selection and evaluation. The latter, as well as DIAN improvements, should help reduce governance and corruption vulnerabilities. Additionally, increasing the participation of subnational governments in health and education provision using the central government public procurement system’s guidelines would boost the efficiency and progressivity of social programs. Unifying a fragmented budget process between the central government, royalties’ system, and investment budget merits consideration to improve consistency and to better integrate medium-term programs.

27. The authorities agreed in principle to raise tax revenues but believe sufficient gains can be attained through higher growth potential and more efficient tax administration. The authorities share the objective of raising central government tax revenue as a share of GDP toward levels seen in regional peers. The authorities however do not see staff’s projected revenue losses from the Financing Law, expecting instead that the lower tax burden on corporates would provide a larger boost to both GDP growth and tax revenues. On measures, there are plans to introduce new IT systems and electronic invoicing, increase staffing and training and create incentives to foster the careers of strong performers at the DIAN. The authorities have submitted an NDP proposal to unify the operational and investment budgets and streamline subsidies to make them more progressive.

B. Financial Sector Policies

28. Credit growth is expected to increase and NPLs to gradually decline in line with the economic recovery. Alongside the investment rebound, commercial credit demand is expected to strengthen. Last year, credit portfolio quality and a consequent increase in provisions weighed on bank profitability in the first three quarters of 2018 with ROA falling to 1.4 percent in mid-2018 (1 percentage point lower than a year earlier), but now bank profitability and willingness to lend is expected to improve as the corporate credit portfolio strengthens. Banks remain well capitalized with provisions stable at approximately 130 percent of NPLs and core Tier-1 and regulatory capital having been raised to 13.2 percent and 18.9 percent of risk-weighted-assets (RWAs) respectively.9

29. The financial supervisor (SFC) is implementing the Conglomerates Law and Basel III capital and liquidity standards, in line with previous staff advice. The SFC has the authority to supervise 13 identified financial conglomerates covered by the conglomerates law. These will have to comply with capital adequacy requirements by November 2019 and guidelines for conflicts of interest within financial conglomerates will be introduced in February 2020. To bring capital standards closer in line with Basel III, the parameters for calculating risks weighted assets (RWA) will be redefined and the definition of technical capital will be modified to exclude intangible assets in February 2020. The net effect of these two changes will raise most banks’ capital ratios.10 Meanwhile, capital conservation buffers and systemic risk buffers for DSIBs will be gradually introduced over a four-year period (Feb 2020-Feb 2024). The liquidity coverage ratio (LCR) has been modified with the assumed run-off rates now varying with deposit type. By June 2020, banks will also have to comply with the net-stable-funding-ratio (NSFR). The authorities revealed their intention to introduce a capital requirement for operational risk for banks, with a decree outlining the specific details to be published in Q4 2019. Staff welcomed this initiative.

30. The planned regulatory measures should further strengthen the regulatory framework. The introduction of the Conglomerates Law is an important step to strengthen the stability of the financial system and mitigate risks associated with Colombian banks’ exposure to Central America. The gradual implementation of additional capital buffers is appropriate to prevent credit supply bottlenecks. However, redefining technical capital and risk weighted assets in 2020 will temporarily lower required capital ratios for most banks until Basel III capital standards are fully implemented. Heightened supervisory vigilance would therefore be appropriate during this transitional period. With NPLs elevated, the SFC should remain alert and proactive to ensure that problem assets continue to be sufficiently provisioned for. Furthermore, staff welcome the SFC’s continued commitment to closely monitor the modified loans portfolio to avoid build-up of excess credit risk.

Box 2.The Conglomerates Law and Implementing Basel III Capital Standards

The Conglomerates Law follows previous FSAP recommendations.13 financial conglomerates have been identified of which 6 with holding companies in Colombia. The new law grants the SFC supervisory powers at the conglomerates level and focuses on risk management, capital adequacy, exposure limits and conflicts of interest—specified in its three decrees:

  • Decree 246 of 2018: Grants the SFC the authority to exclude entities from consolidated supervision.
  • Decree 774 of 2018: Stipulates capital adequacy level for conglomerates and aggregates consolidated technical capital and capital requirements to avoid double counting.
  • Decree 1486 of 2018: i) Defines related parties of financial conglomerates, ii) gives guidelines for identifying, administrating and revealing conflicts of interest, and iii) policy for defining exposure limits, intra-group and with related parties.

Redefining RWAs and technical capital in February 2020 will increase capital ratios on average. RWAs currently correspond to 77 percent of total assets in Colombia, higher than in comparable countries. When applying the new weights for RWAs for 14 banks, they currently account for 67 percent of total assets. The positive effect this will have on banks’ capital ratio will only be partially offset by the exclusion of intangible assets from technical capital.

Risk-weighted-assets

(Percentage of total assets)

Sources: Superintendencia Financiera de Colombia.

Note: Colombia-new refers to 14 banks with new weights (active Feb 2020).

Banks are well capitalized ahead of the introduction of additional capital buffers. By February 2024, the conservation buffer of 1.5 percent and the systemic buffer for domestic systemically important banks (DSIBs) will be in effect. This will increase the total capital requirement for DSIBs to 11.5 percent (8.5 for tier 1 capital (T1)) compared to todays’ 9 percent (4.5 percent for T1). However, DSIBs currently meet this requirement (see graph) and no disruption to the supply of credit is expected during the transition period.

Capital Ratios

Sources: Superintendencia Financiera de Colombia.

Note: New requirement will be active in Feb 2024.

31. The authorities communicated that they will be more reliant on financial supervision during the transition period for new financial regulations. The SFC expressed their continued commitment to exercise vigilance following a period of rising NPLs and to continue to closely monitor banks’ modified loans portfolios. The authorities also agreed that during the transition period under which additional capital buffers are introduced, financial stability would be more reliant on financial supervision.

C. Structural Reforms to Boost Inclusive Growth and Improve External Competitiveness

32. The impressive social gains of the last decade have continued but at reduced speed. While the slowdown since the end of the commodity boom has resulted in a slower pace of poverty eradication, the poverty rate in 2017 was roughly half the level of 2002. Inequality has continued to fall over the past years but remains at a high level in absolute terms, requiring continued policy attention.

33. Weak productivity growth has been a long-standing concern and will need to be tackled for Colombia to converge to high income status. Colombia’s total factor productivity (TFP) level remains close to that of 1990. As highlighted in previous staff reports, a repetition of the oil-driven investment boom of the 2000s is unlikely and labor force participation is already high by international standards (although there is room for higher female participation). Higher productivity growth is thus crucial to boost potential growth. And while structural improvements allowed progress in several dimensions of competitiveness, notably tertiary education enrollment expanded significantly since 2010 and labor informality fell continuously since the 2012 tax reform, international indicators suggest a need for additional reforms (figure 7). Lack of innovation, infrastructure gaps and an inefficient legal system are among the factors holding back productivity and competitiveness.

Poverty and Inequality

Sources: DANE.

Total Factor Productivity

(Constant national prices, 1990=1)

Source: Penn World Tables 9.

34. The draft NDP rightly emphasizes entrepreneurship and improvements to the business environment to strengthen Colombia’s cost competitiveness. The plan recognizes that stagnant productivity growth constitutes a major challenge to Colombia’s developmental ambitions and thus proposes several concrete measures to improve it. These include providing firms with information and incentives for technology adoption, improving human capital and reducing skills mismatches (most prominently, by pushing forward a new national qualification system) and expanding access to credit for SMEs and start-ups.

35. To address transport costs, a continued focus on closing Colombia’s substantial infrastructure gaps is warranted. The flagship 4G infrastructure program has progressed more slowly than expected, partly due to uncertainty created by Odebrecht-related corruption revelations in a previous generation infrastructure project, and partly due to red tape, particularly on environmental permits. The government expects eight new projects to achieve financial closure this year but official support for implementation remains important.

36. On trade-related costs, non-tariff barriers should be reviewed. While the level of tariffs is relatively low on average, a reduction in tariff dispersion remains important. Furthermore, enhancing the efficiency of procedures to export and import—including handling of goods at ports and inspection processes—would reduce trade costs and reduce the scope for corruption.11

37. The NDP also serves as a roadmap for reducing regulatory costs and improving governance. Several important reforms are included in the areas of state efficiency (such as the introduction of a compulsory regulatory impact assessment) and the fight against corruption (preventive measures to improve transparency and monitoring, strengthened enforcement) (Box 3). As noted in the 2018 Article IV Staff Report for Colombia, the anti-corruption framework has already been strengthened substantially over the past years and tackling corruption at the subnational level was identified as an important priority going forward. The NDP proposes giving targeted technical assistance to municipalities as a first step. Pending priorities to tackle corruption include legislation to protect whistleblowers and regulation on lobbying activities.

Box 3.The 2018–22 National Development Plan (NDP)

A new 4-year NDP is expected to be approved by Congress in May 2019. The national development plan carries legal power and is a constitutional requirement for any incoming administration. It consists of three pieces: (i) the so-called bases of the plan, a document which sets out strategic guidelines as well as specific policy actions, (ii) the investment plan and (iii) the key legal dispositions which are debated by Congress. After extensive consultation around the country, the national development plan is being debated in Congress during Spring 2019.1

The NDP aims to increase equity via the pillars of entrepreneurship and legality:

  • A major aim of the NDP is to boost productivity. The NDP also emphasizes a reduction in firm informality which it aims to achieve by redesigning the firm registration fee (previous staff advice) and further advancing the single business window, among other measures.
  • Improving efficiency is another important focus. To guarantee higher-quality regulations, a compulsory regulatory impact assessment will be introduced, and ex post evaluation of standards will be strengthened. The government will also aim to cut red tape. To boost efficiency of private markets, the competition authority will be strengthened.
  • The fight against corruption features prominently. The discussion acknowledges high corruption perceptions and the erosion of public trust associated with it. To tackle corruption, it proposes preventive measures to improve transparency and monitoring as well as strengthening enforcement and increasing punishments.
1 The NDP will provide an important test of the government’s ability to pass key structural reforms.

38. The authorities’ efforts to facilitate labor market integration and deepen financial inclusion are welcome. On financial inclusions, account ownership increased significantly over the past years, including for women and in rural zones, but a strong urban-rural divide remains (Figure 8).12 The NDP sets out several initiatives to stimulate the use of digital payment methods and focus attention on rural financial inclusion. The authorities have also made substantial efforts to integrate migrants from Venezuela into the labor market, regularizing many of them (Annex III), asking for minimum documentation to register migrants with the national employment service and facilitating the certification of skills and diplomas.

Figure 8.Colombia: Financial Inclusion

Source: Global Findex.

1/ The percent of adults (age15+) who report having an account at a finanical institution or personally using a mobile money service in the past 12 months.

2/ LAC refers to Latin America & Caribbean (excluding high income). MIC refers to Middle income countries. Both LAC and MIC refer to the World Bank Global Findex classification.

3/ The percent of adults (age15+) who report personally using a mobile money service in the past 12 months.

4/ The percent of adults (age15+) who report personally receiving payments from the government in the past 12 months directly into a financial institution account or into a card.

39. Looking beyond the NDP, justice and pension reform remain priorities. While legal reform has proven difficult in previous attempts, it would have a large positive effect on productivity, as well as improving governance and reducing the scope for corruption, and currently enjoys relatively broad public support (Annex VI). In addition, pension reform that improves progressivity and coverage while guaranteeing sustainability of pension benefits remains crucial.

40. The authorities expect substantial productivity gains from measures taken in the NDP. The NDP is estimated to raise productivity growth by 0.5 percentage points due to a combination of structural reforms and investment programs, in turn contributing to a further lowering in poverty as job creation rises. The authorities are confident that the 4G infrastructure program will make additional progress this year (around 0.5 percent of GDP) given further financial closures and higher appetite from financial institutions to participate in the program following the resolution of pending legal cases. The authorities believe that the strategies to reduce inequality (including measures to make pensions more equitable) put forward in the NDP will lead to substantial improvements over the coming four years. Finally, the NDP provides measures to improve the coordination between agencies to address the migration flows from Venezuela.

Staff Appraisal

41. Supported by its very strong policy frameworks and well-executed policies, Colombia’s recovery is gaining momentum amid heightened risks. The last interest rate cuts by the Central Bank in 2018 appropriately reduced the ex-ante real policy rate to moderately accommodative levels. If the recovery in credit and GDP materializes as expected, monetary policy should shift to a tightening bias towards the second half of the year. Fiscal consolidation should continue to reduce headline deficits in line with those mandated by the fiscal rule, which have been modestly relaxed to accommodate persistent spending pressures associated with the migration shock.

42. Monetary policy and a flexible currency are the best instruments to guard against downside risks if they were to materialize. Risks to growth remain tilted to the downside. Lower global growth, amid rising protectionism, poses risks to Colombia’s exports. And while market expectations for higher U.S. interest rates have receded, a sudden tightening in global financial conditions remains a risk. On the domestic front, the projected rebound in investment by Colombian businesses may not fully materialize, particularly if infrastructure spending and construction remain sluggish.

43. The external sector position is moderately weaker than implied by fundamentals and desirable policy settings. While ongoing fiscal consolidation according to the fiscal rule should raise national saving, structural policies to strengthen external competitiveness and boost non-oil exports remain essential. The Central Bank’s reserve accumulation program is a proactive step to maintain external buffers and has been well-executed—permitting a continued smooth functioning of the foreign exchange market. Staff sees scope, without disrupting the market, for a modestly faster pace of reserve accumulation that would keep the IMF’s standard metric at its current level.

44. Structural fiscal policy efforts are needed to rebuild policy space and reduce public debt. Faced with a tightening budgetary envelope, spending pressures stemming from migration flows, as well as prospective revenue shortfalls from the Financing Law, the authorities should raise structural tax revenues through tax reforms, including the elimination of preferential regimes for businesses and base broadening for personal income taxes and VAT, and improved tax administration. This would safeguard the fiscal framework and insure against downside risks of revenue shortfalls by bringing down debt on a durable basis without having to rely on undesirable cuts in public investment and social spending. Moreover, further spending efficiency gains should be made in line with the expert commission’s findings, including energy subsidy reform and stronger investment project selection and evaluation. Further strengthening tax administration, including through stronger sanctions, would complement the structural fiscal adjustment effort whilst safeguarding future spending priorities.

45. The authorities’ use of flexibility within the fiscal rule is understandable given the sizeable and persistent nature of the migration shock, and well-defined implementation and future measures to reduce the deficit will be important for credibility. Uncertainty around accelerating migration flows and its effects pose risks of higher-than-expected fiscal costs that could crowd out key public investment and social spending programs. Staff supports adjusting the deficit targets under the strict conditions outlined by the FRCC but revising the fiscal rule’s contingency framework would be instrumental to handle exceptional shocks in the future without having to modify the existing fiscal rule after the shock has occurred. Staff welcomes the FRCC’s recommendations to revise the fiscal rule’s law along these lines. To reinforce confidence in the fiscal anchor, the plan should also include prospective revenue raising and expenditure tightening measures to be published in the MTFF. International support for Colombia’s highly commendable policy responses and relief measures to assist the Venezuela crisis would reinforce its efforts.

46. Banks have adjusted well to the previous economic downturn and the transition to a new regulatory framework and supervisory agenda appears on track. Staff supports the implementation of the Conglomerates Law as an important step towards preserving financial stability. The gradual convergence of capital and liquidity requirements towards Basel III standards will further strengthen the financial regulatory framework and improve its transparency, without unduly dampening of credit supply. The SFC’s monitoring of modified loans will help avoid delayed recognition of asset deterioration.

47. Structural reforms remain instrumental to foster inclusive growth and enhance external competitiveness. Colombia has made impressive progress in reducing poverty and inequality over the past fifteen years. Better targeted subsidies, closing infrastructure gaps, and reducing skills mismatches would help cement social gains. Emphasis on entrepreneurship and improving the business environment take on renewed importance to strengthen external competitiveness. Strengthening the rule of law and reducing corruption is also an important challenge as is legal reform that receive wide popular support and are growth friendly (Annex VI). The national development plan rightly identifies many of these issues, providing a strategic roadmap for reforms—including fighting informality, improving efficiency, and enhancing productivity. In addition, pension reform that improves progressivity and coverage while guaranteeing sustainability of pension benefits remains crucial.

48. Staff does not recommend approval of the retention of the exchange restriction arising from the special regime for the hydrocarbon sector, since the authorities have no plans for its removal. Colombia has a floating exchange rate regime (de jure: free floating; de facto: floating) and maintains an exchange restriction subject to Fund approval under Article VIII arising from the special regime for the hydrocarbon sector (see IMF Country Report No. 13/35 for details).

49. Staff recommends that the next Article IV takes place on the standard 12-month cycle.

Figure 7.Colombia: Structural Indicators

Sources: World Economic Forum; World Bank; Fraser Institute; World Trade Organization (WTO); Global Trade Alert; Organization for Economic Co-operation and Development (OECD); United Nations (UN); and IMF staff estimates.

1/ LAC and Advanced Economies refer to IMF WEO classification. LA6 refers to Argentina, Brazil, Chile, Colombia, Mexico, and Peru.

2/ The scale is adjusted to 0–100 from the original scale of 0–10 by multiplying 10.

3/ The indicators reflect no judgment as to WTO compliance of underlying measures, nor whether certain measures (such as trade defense) are an appropriate response to the actions of other countries. The “ease of starting a business” indicator is based on perceptions as part of an established IFC survey process.

4/ Import (export) coverage ratio, except for “# of FDI measures”.

Table 1.Colombia: Selected Economic and Financial Indicators
I. Social and Demographic Indicators
Population (million), 201849.8Unemployment rate, 2018 (percent)9.7
GDP, 2018Adult illliteracy rate (ages 15 and older), 20165.3
Per capita (US$)6,684Net secondary school enrollment rate, 201778.8
In billion of Col$984,803Gini coefficient, 201750.8
In billion of US$333Poverty rate, 201726.9
Life expectancy at birth (years), 201674.4
Mortality rate, (under 5, per 1,000 live births), 201714.7
Sources: Colombian authorities; UNDP Human Development Report; World Development Indicators; and IMF staff estimates.

Based on bilateral COL Peso/USD exchange rate.

For 2019, it excludes expected privatization proceeds (0.3 percent of GDP) that, under GFSM 1986, produces a headline deficit of -2.7 percent of GDP estimated by the authorities.

IMF staff estimate.

Includes the quasi-fiscal balance of Banco de la República, sales of assets, phone licenses, and statistical discrepancy.

Includes foreign holdings of locally issued public debt (TES); does not include Banco de la República’s outstanding external debt.

Excludes Colombia’s contribution to FLAR; includes valuation changes of reserves denominated in currencies other than U.S. dollars.

II. Economic Indicators
Projections
20142015201620172018201920202021202220232024
(In percentage change, unless otherwise indicated)
National income and prices
Real GDP4.73.02.11.42.73.63.73.63.73.73.6
Potential GDP3.93.53.12.93.33.33.23.33.33.33.4
Output Gap1.51.00.0-1.6-2.2-1.8-1.4-1.0-0.7-0.30.0
GDP deflator2.12.45.15.14.23.43.13.03.03.03.0
Consumer prices, end of period (eop)3.76.85.84.13.23.23.03.03.03.03.0
External sector
Exports (f.o.b.)-5.6-32.2-11.616.411.7-2.67.40.03.64.54.2
Imports (f.o.b.)7.8-15.4-16.92.312.24.06.33.85.15.25.3
Export volume-0.31.7-0.22.5-2.74.16.9-0.13.63.73.1
Import volume7.8-1.1-3.51.26.84.65.93.14.24.44.1
Terms of trade (deterioration -)-4.5-17.53.79.310.3-4.10.01.0-0.10.60.7
Real exchange rate (depreciation -) 1/-6.9-20.6-4.85.60.8NANANANANANA
Money and credit
Broad money10.011.69.56.46.910.29.99.79.89.49.0
Credit to the private sector14.716.87.712.88.49.89.710.811.811.712.7
Policy rate, eop4.55.87.54.84.3NANANANANANA
(In percent of GDP)
Central government balance 2/-2.4-2.9-4.0-3.6-3.1-3.0-2.3-1.8-1.4-1.2-1.0
Central government structural balance 3/-3.7-3.6-3.2-2.3-2.2-2.4-2.0-1.6-1.2-1.0-1.0
Combined public sector (CPS) balance 4/-1.8-3.4-2.3-2.4-2.0-2.1-0.6-0.3-0.4-0.40.0
CPS non-oil structural primary balance-3.5-2.60.40.30.3-0.80.50.60.40.20.4
CPS fiscal impulse0.7-0.9-2.90.10.01.1-1.3-0.10.20.2-0.2
Public debt43.350.449.849.551.850.648.546.244.242.239.9
Public debt, excluding Ecopetrol40.545.745.446.149.348.546.544.642.841.239.2
Gross domestic investment24.023.823.322.321.022.121.722.322.422.622.7
Gross national savings18.817.419.019.017.218.217.918.618.718.819.0
Current account (deficit -)-5.2-6.3-4.3-3.3-3.8-3.9-3.8-3.7-3.7-3.7-3.8
External debt 5/30.042.149.447.346.748.748.748.147.947.246.2
Of which: public sector 5/18.926.531.930.328.929.528.928.027.526.625.5
(In percent of exports of goods and services)
External debt service40.263.268.173.769.974.175.778.474.976.976.5
Interest payments6.29.911.310.910.715.015.115.114.914.914.8
(In billion of U.S. dollars; unless otherwise indicated)
Exports (f.o.b.)56.938.634.139.744.343.146.346.448.050.252.3
Of which: Petroleum products29.014.610.813.216.815.216.514.314.114.314.3
Gross international reserves 6/46.846.346.247.148.351.253.255.157.058.960.8
Sources: Colombian authorities; UNDP Human Development Report; World Development Indicators; and IMF staff estimates.

Based on bilateral COL Peso/USD exchange rate.

For 2019, it excludes expected privatization proceeds (0.3 percent of GDP) that, under GFSM 1986, produces a headline deficit of -2.7 percent of GDP estimated by the authorities.

IMF staff estimate.

Includes the quasi-fiscal balance of Banco de la República, sales of assets, phone licenses, and statistical discrepancy.

Includes foreign holdings of locally issued public debt (TES); does not include Banco de la República’s outstanding external debt.

Excludes Colombia’s contribution to FLAR; includes valuation changes of reserves denominated in currencies other than U.S. dollars.

Sources: Colombian authorities; UNDP Human Development Report; World Development Indicators; and IMF staff estimates.

Based on bilateral COL Peso/USD exchange rate.

For 2019, it excludes expected privatization proceeds (0.3 percent of GDP) that, under GFSM 1986, produces a headline deficit of -2.7 percent of GDP estimated by the authorities.

IMF staff estimate.

Includes the quasi-fiscal balance of Banco de la República, sales of assets, phone licenses, and statistical discrepancy.

Includes foreign holdings of locally issued public debt (TES); does not include Banco de la República’s outstanding external debt.

Excludes Colombia’s contribution to FLAR; includes valuation changes of reserves denominated in currencies other than U.S. dollars.

Table 2a.Colombia: Summary Balance of Payments(In millions of US$, unless otherwise indicated)
Projections
20142015201620172018201920202021202220232024
Current account balance-19,761-18,564-12,028-10,295-12,660-13,264-13,356-13,941-14,717-15,569-16,543
Goods balance-4,640-13,478-9,149-4,572-5,317-8,453-8,510-10,570-11,777-12,730-13,930
Exports, f.o.b.56,89938,57234,09039,67644,31643,15046,34446,36448,04150,21052,333
Commodities41,12224,18020,40725,74929,07427,26429,33827,73927,80828,41128,847
Fuel28,98814,56610,79613,16716,76915,18416,47514,33614,14514,32014,309
Non-fuel12,1349,6149,61212,58212,30412,08012,86413,40313,66314,09114,538
Non-traditional exports11,65110,4189,52010,06210,71511,39112,18913,40814,61415,78417,046
Other4,1263,9744,1633,8654,2334,4954,8175,2175,6196,0156,440
Imports, f.o.b.61,53952,05043,23944,24849,63351,60354,85456,93459,81962,94066,264
Consumer goods13,12011,10310,11410,16111,27311,46612,22212,81613,59014,40215,273
Intermediate goods26,27821,81418,80918,88921,50221,93523,49024,39725,50526,77328,124
Capital goods20,16017,40712,52713,21014,81416,01616,83117,31318,18519,08920,052
Other1,9801,7261,7891,9882,0442,1872,3102,4072,5382,6772,815
Services balance-7,222-4,789-3,531-3,917-3,809-3,528-3,682-3,274-3,132-3,013-2,802
Exports of services7,1567,4267,7718,4619,45710,14710,82911,57712,42213,31514,233
Imports of services14,37812,21511,30212,37813,26613,67514,51114,85115,55416,32717,035
Primary income balance-12,521-5,728-5,229-8,404-11,140-9,346-9,691-9,139-9,396-9,989-10,581
Receipts3,9974,4834,9965,4786,1126,9857,3367,8168,3228,7469,187
Expenditures16,51810,21110,22513,88217,25216,33117,02716,95617,71818,73519,769
Secondary income balance4,6225,4315,8816,5987,6068,0648,5279,0429,58810,16310,771
Financial account balance-19,287-18,244-12,278-9,641-11,975-13,264-13,356-13,941-14,717-15,569-16,543
Direct Investment-12,268-7,507-9,334-10,145-5,890-8,209-9,391-10,004-10,687-11,410-12,063
Assets3,8994,2184,5163,6905,1213,9594,0354,1244,2164,3084,399
Liabilities16,16711,72513,85013,83511,01112,16813,42614,12814,90315,71816,462
Oil sector4,7322,5022,3863,1062,1152,3372,5782,7132,8623,0183,161
Non-oil sectors11,4359,22311,46410,7298,8969,83110,84811,41512,04112,70013,300
Portfolio Investment-11,564-9,166-4,839-1,6181,224-5,368-3,579-3,575-3,631-3,287-3,091
Assets7,097-4755,1896,2001,5721,0421,3251,4431,5301,6241,711
Liabilities18,6618,69110,0287,8183486,4104,9045,0185,1604,9114,801
Equity1,823640-364473-8231,1081,2571,2411,133889779
Debt instruments16,8388,05110,3927,3451,1715,3023,6473,7774,0274,0224,022
General government12,8355,6518,7926,0114,5293,5802,3012,3852,6352,6302,630
Banks-174001,100300-800385239286286286286
Corporates and households4,0202,0005001,034-2,5581,3371,1071,1071,1071,1071,107
Derivatives6091,956-62236266000000
Other Investments-501-3,9432,3531,246-8,563-2,607-2,306-2,282-2,319-2,791-3,309
Change in reserve assets4,4374161645141,1882,9201,9201,9201,9201,9201,920
Net errors and omissions472320-249652679000000
Sources: Banco de la República and IMF staff estimates and projections.
Sources: Banco de la República and IMF staff estimates and projections.
Table 2b.Colombia: Summary Balance of Payments(In percent of GDP)
Projections
20142015201620172018201920202021202220232024
Current account balance-5.2-6.3-4.3-3.3-3.8-3.9-3.8-3.7-3.7-3.7-3.8
Goods balance-1.2-4.6-3.2-1.5-1.6-2.5-2.4-2.8-3.0-3.1-3.2
Exports, f.o.b.14.913.112.112.713.312.813.112.412.212.111.9
Commodities10.88.27.28.38.78.18.37.47.16.86.6
Fuel7.65.03.84.25.04.54.73.83.63.43.3
Non-fuel3.23.33.44.03.73.63.63.63.53.43.3
Non-traditional exports3.13.53.43.23.23.43.53.63.73.83.9
Other1.11.41.51.21.31.31.41.41.41.41.5
Imports, f.o.b.16.117.715.314.214.915.315.515.315.215.115.1
Consumer goods3.43.83.63.33.43.43.53.43.53.53.5
Intermediate goods6.97.46.76.16.56.56.76.56.56.46.4
Capital goods5.35.94.44.24.44.84.84.64.64.64.6
Other0.50.60.60.60.60.60.70.60.60.60.6
Services balance-1.9-1.6-1.2-1.3-1.1-1.0-1.0-0.9-0.8-0.7-0.6
Exports of services1.92.52.72.72.83.03.13.13.23.23.2
Imports of services3.84.24.04.04.04.14.14.04.03.93.9
Primary income balance-3.3-2.0-1.8-2.7-3.3-2.8-2.7-2.5-2.4-2.4-2.4
Receipts1.01.51.81.81.82.12.12.12.12.12.1
Expenditures4.33.53.64.55.24.84.84.54.54.54.5
Secondary income balance1.21.92.12.12.32.42.42.42.42.42.5
Financial account balance-5.1-6.2-4.3-3.1-3.6-3.9-3.8-3.7-3.7-3.7-3.8
Direct Investment-3.2-2.6-3.3-3.3-1.8-2.4-2.7-2.7-2.7-2.7-2.7
Assets1.01.41.61.21.51.21.11.11.11.01.0
Liabilities4.24.04.94.43.33.63.83.83.83.83.7
Oil sector1.20.90.81.00.60.70.70.70.70.70.7
Non-oil sectors3.03.14.13.42.72.93.13.13.13.13.0
Portfolio Investment-3.0-3.1-1.7-0.50.4-1.6-1.0-1.0-0.9-0.8-0.7
Assets1.9-0.21.82.00.50.30.40.40.40.40.4
Liabilities4.93.03.52.50.11.91.41.31.31.21.1
Equity0.50.2-0.10.2-0.20.30.40.30.30.20.2
Debt instruments4.42.73.72.40.41.61.01.01.01.00.9
General government3.41.93.11.91.41.10.70.60.70.60.6
Banks0.00.10.40.1-0.20.10.10.10.10.10.1
Corporates and households1.10.70.20.3-0.80.40.30.30.30.30.3
Derivatives0.20.7-0.20.10.00.00.00.00.00.00.0
Other Investments-0.1-1.30.80.4-2.6-0.8-0.7-0.6-0.6-0.7-0.8
Change in Reserve Assets1.20.10.10.20.40.90.50.50.50.50.4
Net errors and omissions0.10.1-0.10.20.20.00.00.00.00.00.0
Sources: Banco de la República and IMF staff estimates and projections.
Sources: Banco de la República and IMF staff estimates and projections.
Table 3.Colombia: Operations of the Central Government 1/(In percent of GDP, unless otherwise indicated)
Projections
20142015201620172018201920202021202220232024
Total revenue16.516.115.015.615.115.515.415.415.315.215.2
Current revenue14.314.613.713.913.714.114.014.013.913.813.8
Tax revenue14.314.513.613.813.614.013.913.913.813.713.7
Net income tax and profits5.04.84.66.06.46.86.96.86.86.86.8
Goods and services5.15.14.85.25.45.55.05.05.05.05.0
Value-added tax5.15.14.85.05.25.34.84.84.84.84.8
International trade0.50.50.50.50.50.50.50.50.50.50.5
Financial transaction tax0.80.80.80.70.80.80.80.80.80.80.8
Stamp and other taxes2.83.22.91.50.60.40.70.80.60.60.5
Nontax revenue2.31.71.31.81.51.51.51.51.41.41.4
Property income0.20.40.40.40.20.20.20.20.20.20.2
Other2.11.20.91.41.31.21.31.41.31.31.3
Total expenditure and net lending19.219.119.019.218.218.517.717.216.716.316.2
Current expenditure14.715.115.615.515.215.715.715.315.014.714.4
Wages and salaries2.22.42.32.32.22.22.22.22.22.22.2
Goods and services0.80.80.80.90.91.11.21.11.01.01.0
Interest2.22.62.92.92.92.92.82.82.82.62.5
External0.50.50.70.70.70.70.70.70.70.70.7
Domestic1.72.02.32.32.22.32.12.02.11.91.9
Current transfers9.49.49.69.49.29.49.59.39.18.98.8
Capital expenditure4.34.03.43.73.02.82.12.01.71.71.8
Fixed capital formation2.92.72.02.41.71.50.80.70.40.40.6
Capital transfers1.31.31.31.31.31.31.31.31.31.21.2
Net lending0.00.00.00.00.00.00.00.00.00.00.0
Overall balance 2/-2.4-2.9-4.0-3.6-3.1-3.0-2.3-1.8-1.4-1.2-1.0
Memorandum items:
Oil-related revenues 3/2.61.10.20.20.61.01.01.21.21.11.2
Structural balance 4/-3.7-3.6-3.2-2.3-2.2-2.4-2.0-1.6-1.2-1.0-1.0
Structural primary non-oil balance-3.3-1.6-1.2-0.5-0.3-0.4-0.10.00.30.40.3
Fiscal Impulse-0.2-1.7-0.4-0.7-0.20.1-0.3-0.1-0.4-0.10.1
Non-oil balance-5.3-4.0-4.1-3.8-3.6-4.0-3.3-3.0-2.6-2.3-2.2
Primary balance-0.2-0.4-1.0-0.6-0.2-0.10.51.01.41.51.5
Nominal GDP (in Col$ trillion)762.9804.7863.8920.2984.81,055.71,129.01,205.81,288.51,376.61,469.7
Sources: Ministry of Finance; Banco de la República; and IMF staff estimates and projections.

Includes central administration only.

For 2019, it excludes expected privatization proceeds (0.3 percent of GDP) that, under GFSM 1986, produces a headline

deficit of -2.7 percent of GDP estimated by the authorities.

Includes income tax payments and dividends from Ecopetrol corresponding to earnings from the previous year.

In percent of potential GDP. Adjusts non-commodity revenues for the output gap and commodity revenues for differentials between estimated equilibrium oil price and production levels. Adjustments are made to account for fuel subsidy expenditures and the accrual of Ecopetrol dividends.

Sources: Ministry of Finance; Banco de la República; and IMF staff estimates and projections.

Includes central administration only.

For 2019, it excludes expected privatization proceeds (0.3 percent of GDP) that, under GFSM 1986, produces a headline

deficit of -2.7 percent of GDP estimated by the authorities.

Includes income tax payments and dividends from Ecopetrol corresponding to earnings from the previous year.

In percent of potential GDP. Adjusts non-commodity revenues for the output gap and commodity revenues for differentials between estimated equilibrium oil price and production levels. Adjustments are made to account for fuel subsidy expenditures and the accrual of Ecopetrol dividends.

Table 4.Colombia: Operations of the Combined Public Sector 1/(In percent of GDP, unless otherwise indicated)
Projections
20142015201620172018201920202021202220232024
Total revenue27.626.325.225.425.226.126.226.025.625.525.5
Tax revenue19.920.119.319.419.219.619.519.519.419.319.3
Nontax revenue7.76.25.96.06.06.56.76.56.26.16.2
Financial income0.50.50.50.50.50.50.50.50.50.50.5
Operating surplus of public enterprises 2/-0.3-0.3-0.2-0.3-0.2-0.3-0.3-0.3-0.3-0.3-0.3
Other 3/7.56.05.65.85.76.36.56.35.95.96.0
Total expenditure and net lending 4/29.429.727.628.027.428.727.226.726.426.225.9
Current expenditure21.822.022.322.121.722.021.921.721.521.321.1
Wages and salaries5.35.25.15.15.15.05.05.05.05.05.0
Goods and services3.13.13.13.13.13.43.43.33.23.23.2
Interest2.63.13.63.43.23.23.13.02.82.72.5
External0.60.81.01.01.01.01.01.01.01.01.0
Domestic2.02.32.62.42.32.12.11.91.81.71.5
Transfers to private sector8.07.77.77.77.57.67.67.67.67.6
Other 5/2.82.82.82.82.82.82.82.82.82.82.8
Capital expenditure7.67.75.35.95.76.75.35.04.94.94.7
Statistical discrepancy0.00.00.00.00.00.00.00.00.00.00.0
Nonfinancial public sector balance-1.8-3.4-2.4-2.6-2.2-2.6-1.0-0.7-0.8-0.8-0.3
Quasi-fiscal balance (BR cash profits)-0.10.00.10.10.10.30.30.20.30.30.3
Fogafin balance0.10.10.10.10.10.10.10.10.10.10.1
Net cost of financial restructuring 6/0.00.00.00.00.00.00.00.00.00.00.0
Combined public sector balance 7/-1.8-3.4-2.3-2.4-2.0-2.1-0.6-0.3-0.4-0.40.0
Overall financing1.83.32.83.02.61.80.80.70.60.40.0
Foreign, net2.82.51.61.11.21.51.11.11.11.11.1
Domestic, net-1.00.81.31.91.40.3-0.2-0.40.6-0.7-1.1
Memorandum items:
Overall structural balance 8/-3.1-3.5-1.3-0.9-1.2-1.9-0.7-0.3-0.4-0.6-0.3
Primary balance 9/0.8-0.21.41.01.21.12.52.72.42.32.5
Oil-related revenues 10/4.02.01.11.21.62.42.52.42.22.22.2
Total public debt 11/43.350.449.849.551.850.648.546.244.242.239.9
Nominal GDP (In Col$ trillion)762.9804.7863.8920.2984.81,055.71,129.01,205.81,288.51,376.61469.7
Sources: Ministry of Finance; Banco de la República; and IMF staff estimates and projections.

The combined public sector includes the central, regional and local governments, social security, and public sector enterprises. Excludes Ecopetrol.

For 2016, excludes proceeds from the sale of ISAGEN and for 2019, it excludes projected privatization proceeds.

Includes royalties, dividends and social security contributions.

Expenditure reported on commitments basis.

Includes adjustments to compute spending on commitment basis and the change in unpaid bills of nonfinancial public enterprises.

Interest payments on public banks restructuring bonds and mortgage debt relief related costs.

For 2019, excludes privatization proceeds.

Adjusts non-commodity revenues for the output gap and commodity revenues for differentials between estimated equilibrium oil price and production levels. Adjustments are made to account for fuel subsidy expenditures and the accrual of Ecopetrol dividends. Excludes private pension transfers from revenues.

Includes statistical discrepancy. Overall balance plus interest expenditures.

Includes income tax payments and dividends from Ecopetrol that correspond to earnings from the previous year, and royalties to local governments.

Includes Ecopetrol and Banco de la República’s outstanding external debt.

Sources: Ministry of Finance; Banco de la República; and IMF staff estimates and projections.

The combined public sector includes the central, regional and local governments, social security, and public sector enterprises. Excludes Ecopetrol.

For 2016, excludes proceeds from the sale of ISAGEN and for 2019, it excludes projected privatization proceeds.

Includes royalties, dividends and social security contributions.

Expenditure reported on commitments basis.

Includes adjustments to compute spending on commitment basis and the change in unpaid bills of nonfinancial public enterprises.

Interest payments on public banks restructuring bonds and mortgage debt relief related costs.

For 2019, excludes privatization proceeds.

Adjusts non-commodity revenues for the output gap and commodity revenues for differentials between estimated equilibrium oil price and production levels. Adjustments are made to account for fuel subsidy expenditures and the accrual of Ecopetrol dividends. Excludes private pension transfers from revenues.

Includes statistical discrepancy. Overall balance plus interest expenditures.

Includes income tax payments and dividends from Ecopetrol that correspond to earnings from the previous year, and royalties to local governments.

Includes Ecopetrol and Banco de la República’s outstanding external debt.

Table 5.Colombia: Monetary Indicators 1/
Projections
20142015201620172018201920202021202220232024
(In billions of Col$, unless otherwise indicated)
Central Bank
Net Foreign Assets112,111.1145,823.2138,859.3140,586.1155,540.8166,226.6176,078.0184,747.5193,598.9202,429.2211,429.6
Gross official reserve assets112,101.2145,726.0138,631.7140,724.9161,491.6172,173.1182,032.7190,698.2199,549.6208,381.2217,380.8
In billions of US$46.946.346.247.249.752.654.556.458.460.362.2
Short-term foreign liabilities25.043.120.264.849.044.752.848.848.850.149.2
Other net foreign assets34.9140.3247.9-74.0-5,901.9-5,901.9-5,901.9-5,901.9-5,901.9-5,901.9-5,901.9
Net domestic assets-42,428.7-63,301.3-54,259.4-51,773.4-57,459.8-61,085.2-63,635.0-64,658.5-65,272.4-65,324.1-65,058.3
Net credit to the public sector-21,025.7-9,269.8-5,989.4-2,492.2-1,525.1-1,621.3-1,689.0-1,716.1-1,732.4-1,733.8-1,726.7
Net credit to the financial system6,768.06,525.05,678.63,808.49,016.59,585.49,985.510,146.210,242.510,250.610,208.9
Other-28,171.0-60,556.5-53,948.6-53,089.6-64,951.3-69,049.4-71,931.6-73,088.5-73,782.5-73,840.9-73,540.5
Monetary base69,682.482,522.084,599.988,812.798,081.0105,141.4112,443.0120,089.1128,326.5137,105.1146,371.3
Currency in circulation56,393.866,739.569,222.074,057.680,653.386,459.292,463.498,750.9105,524.6112,743.4120,363.1
Deposit money banks reserves13,205.215,711.515,283.314,671.517,322.534,497.536,935.739,473.242,169.545,058.048,121.3
Other deposits83.470.994.783.6105.2105.2105.2105.2105.2105.2105.2
Financial system
Net foreign assets92,814.8131,762.9130,824.5128,443.1142,180.9151,905.0160,761.9168,389.9176,119.3183,753.8191,492.1
In billions of US$38.841.843.643.043.846.448.249.851.553.254.8
Net domestic assets269,523.0272,760.4312,192.4343,012.9361,655.9403,252.6449,350.2501,130.4558,695.2619,818.6684,359.0
Net credit to public sector30,800.132,253.434,552.842,087.746,375.262,308.567,212.572,854.474,695.076,362.477,262.1
Credit to private sector323,152.2377,281.0406,280.2458,277.8496,870.2545,556.0598,718.4663,379.5741,389.0828,434.6933,301.7
Other net-84,429.2-136,774.0-128,640.6-157,352.6-181,589.5-204,611.9-216,580.7-235,103.6-257,388.8-284,978.3-326,204.8
Broad money362,337.8404,523.3443,016.9471,456.0503,836.8555,157.6610,112.0669,520.3734,814.5803,572.4875,851.1
(Annual percentage change)
Credit to private sector14.716.87.712.88.49.89.710.811.811.712.7
Currency14.918.33.77.08.97.26.96.86.96.86.8
Monetary base7.018.42.55.010.47.26.96.86.96.86.8
Broad money10.011.69.56.46.910.29.99.79.89.49.0
(In percent of GDP)
Credit to private sector42.446.947.049.850.551.753.055.057.560.263.5
Currency7.48.38.08.08.28.28.28.28.28.28.2
Monetary base9.110.39.89.710.010.010.010.010.010.010.0
Broad money47.550.351.351.251.252.654.055.557.058.459.6
Memorandum items:
CPI inflation, eop3.76.85.84.13.23.23.03.03.03.03.0
Nominal GDP (In Col$ billions)762,903804,692863,782920,194984,8031,055,6931,129,0071,205,7791,288,4881,376,6321,469,671
Sources: Banco de la Republica; and IMF staff estimates and projections.

For the year of 2018: Preliminary. Data from the Other Depository Corporations Survey only available through October 2018.

Sources: Banco de la Republica; and IMF staff estimates and projections.

For the year of 2018: Preliminary. Data from the Other Depository Corporations Survey only available through October 2018.

Table 6.Colombia: Medium-Term Outlook
Projections
20142015201620172018201920202021202220232024
(In percent of GDP, unless otherwise indicated)
Real GDP (in percent change)4.73.02.11.42.73.63.73.63.73.73.6
Consumer prices (in percent change; eop)3.76.85.84.13.23.23.03.03.03.03.0
Gross national savings18.817.419.019.017.218.217.918.618.718.819.0
Private sector13.213.616.115.713.713.913.414.114.414.614.5
Public sector5.63.82.93.43.54.34.44.44.34.24.4
Gross domestic investment24.023.823.322.321.022.121.722.322.422.622.7
(In percent of GDP, unless otherwise indicated)
Nonfinancial public sector 1/
Revenue27.626.325.225.425.226.126.226.025.625.525.5
Expenditure29.429.727.628.027.428.727.226.726.426.225.9
Current expenditure21.822.022.322.121.722.021.921.721.521.321.1
Capital expenditure7.67.75.35.95.76.75.35.04.94.94.7
Primary balance 2/3/-0.2-0.4-1.0-0.6-0.2-0.10.51.01.41.51.5
Overall balance 2/3/-1.8-3.4-2.4-2.6-2.2-2.6-1.0-0.7-0.8-0.8-0.3
Combined public sector balance 3/-1.8-3.4-2.3-2.4-2.0-2.1-0.6-0.3-0.4-0.40.0
External financing2.82.51.61.11.21.51.11.11.11.11.1
Domestic financing-1.00.81.31.91.40.3-0.2-0.40.6-0.7-1.1
External current account balance-5.2-6.3-4.3-3.3-3.8-3.9-3.8-3.7-3.7-3.7-3.8
Trade balance-1.2-4.6-3.2-1.5-1.6-2.5-2.4-2.8-3.0-3.1-3.2
Exports14.913.112.112.713.312.813.112.412.212.111.9
Imports16.117.715.314.214.915.315.515.315.215.115.1
Financial account balance-5.1-6.2-4.3-3.1-3.6-3.9-3.8-3.7-3.7-3.7-3.8
Direct Investment-3.2-2.6-3.3-3.3-1.8-2.4-2.7-2.7-2.7-2.7-2.7
Portfolio Investment-3.0-3.1-1.7-0.50.4-1.6-1.0-1.0-0.9-0.8-0.7
Other Investments and Derivatives0.0-0.70.60.5-2.6-0.8-0.7-0.6-0.6-0.7-0.8
Change in Reserve Assets1.20.10.10.20.40.90.50.50.50.50.4
Gross public sector debt 4/43.350.449.849.551.850.648.546.244.242.239.9
Gross public sector debt, excluding Ecopetrol40.545.745.446.149.348.546.544.542.841.239.3
Total public net debt 5/32.942.138.638.741.341.640.338.737.335.934.2
Memorandum items:
Nominal GDP (in Col$ billion)762,903804,692863,782920,194984,8031,055,6931,129,0071,205,7791,288,4881,376,6321,469,671
Crude oil, spot price96.250.842.852.868.359.259.058.157.657.658.0
Sources: Colombian authorities and IMF staff estimates and projections.

Excludes Ecopetrol.

Includes statistical discrepancy.

For 2016, excludes proceeds from the sale of ISAGEN and for 2019, it excludes projected privatization proceeds.

Includes debt of the non-financial public sector, plus Ecopetrol, FOGAFIN and FINAGRO.

Gross debt minus financial assets (public sector deposits in domestic and foreign financial institutions).

Sources: Colombian authorities and IMF staff estimates and projections.

Excludes Ecopetrol.

Includes statistical discrepancy.

For 2016, excludes proceeds from the sale of ISAGEN and for 2019, it excludes projected privatization proceeds.

Includes debt of the non-financial public sector, plus Ecopetrol, FOGAFIN and FINAGRO.

Gross debt minus financial assets (public sector deposits in domestic and foreign financial institutions).

Table 7.Colombia: Financial Soundness Indicators 1/(In percent, unless otherwise indicated; end-of-period values)
2009201020112012201320142015201620172018 2/
Capital Adequacy
Regulatory capital to risk-weighted assets17.217.316.918.117.017.016.917.518.618.9
Regulatory Tier 1 capital to risk-weighted assets13.413.013.413.712.011.711.411.412.413.2
Capital (net worth) to assets 3/14.214.214.314.714.814.914.116.216.116.5
Asset Quality and Distribution
Nonperforming loans to gross loans4.02.92.52.82.82.92.83.14.24.8
Provisions to nonperforming loans140.1175.0182.0163.9160.7151.3155.5153.5134.7127.3
Gross loans to assets64.367.970.469.668.269.370.269.370.169.9
Earnings and Profitability
ROAA3.53.43.33.12.82.92.73.02.22.5
ROAE26.223.723.021.219.519.818.918.313.715.9
Interest margin to gross income54.055.658.458.761.360.658.753.759.258.5
Noninterest expenses to gross income43.247.049.347.247.044.643.441.243.941.3
Liquidity
Liquid assets to total assets 4/24.622.121.521.621.419.818.918.018.618.7
Liquid assets to short-term liabilities 4/47.842.743.743.641.940.339.939.942.642.1
Deposit to loan ratio98.893.591.494.796.391.693.292.692.791.5
Other
Foreign-currency-denominated loans to total loans4.26.97.77.57.38.48.36.96.15.7
Foreign-currency-denominated liabilities to total liabilities7.19.811.510.511.913.513.911.811.010.5
Net open position in foreign exchange to capital 5/0.50.61.00.60.50.71.35.56.45.1
Source: Superintendencia Financiera.

Total Banking System. All deposit-taking institutions.

Data updated until 2018 Q3.

Large increase in 2016 due to a change to IFRS in January 2016 where deposit insurance that used to be recorded as a liability is now recorded as capital.

Data after 2011 refers to broader definition of liquid assets in line with international standards.

Since January 2016, goodwill and retained earnings started to be recorded in foreign currency. Before January of 2016, they were recorded in Colombian pesos and weren’t included in the foreign exchange position.

Source: Superintendencia Financiera.

Total Banking System. All deposit-taking institutions.

Data updated until 2018 Q3.

Large increase in 2016 due to a change to IFRS in January 2016 where deposit insurance that used to be recorded as a liability is now recorded as capital.

Data after 2011 refers to broader definition of liquid assets in line with international standards.

Since January 2016, goodwill and retained earnings started to be recorded in foreign currency. Before January of 2016, they were recorded in Colombian pesos and weren’t included in the foreign exchange position.

Table 8.Colombia: Indicators of External Vulnerability 1/(In billions of US$, unless otherwise indicated)
Projections
20142015201620172018201920202021202220232024
Exports of GNFS64.146.041.948.153.853.357.257.960.563.566.6
Imports of GNFS75.964.354.556.662.965.369.471.875.479.383.3
Terms of trade (y/y percent change)-4.5-17.53.79.310.3-4.10.01.0-0.10.60.7
Current account balance-19.8-18.6-12.0-10.3-12.7-13.3-13.4-13.9-14.7-15.6-16.5’
In percent of GDP-5.2-6.3-4.3-3.3-3.8-3.9-3.8-3.7-3.7-3.7-3.8
Financial account balance-19.3-18.2-12.3-9.6-12.0-13.3-13.4-13.9-14.7-15.6-16.5
Of which: Foreign direct investment (net)-12.3-7.5-9.3-10.1-5.9-8.2-9.4-10.0-10.7-11.4-12.1
Of which: Portfolio investment (net)-11.6-9.2-4.8-1.61.2-5.4-3.6-3.6-3.6-3.3-3.1
Total external debt (in percent of GDP) 2/30.042.149.447.346.748.748.748.147.947.246.2
Of which: Public sector (in percent of GDP) 2/18.926.531.930.328.929.528.928.027.526.625.5
In percent of gross international reserves243.9267.0302.1312.6321.9320.4323.4325.6330.7333.0333.4
Short-term external debt (in percent of GDP) 3/3.95.55.35.36.26.56.46.46.36.36.2
Of which: Public sector (in percent of GDP)0.20.20.20.20.20.20.20.20.20.20.2
Of which: Private sector (in percent of GDP)3.75.35.05.16.06.26.26.26.16.16.0
Amortization of MLT external debt (in percent of GNFS exports)15.020.918.131.928.720.222.624.020.522.822.6
External interest payments (in percent of GNFS exports)6.29.911.310.910.715.015.115.114.914.914.8
Gross international reserves 4/46.846.346.247.148.351.253.255.157.058.960.8
In months of prospective GNFS imports8.710.29.89.08.98.98.98.88.68.58.3
In percent of broad money25.931.431.929.528.428.927.926.625.424.323.2
In percent of short-term debt on residual maturity basis plus current account deficit108.7129.3114.0105.9108.0106.7105.1108.1103.7102.3105.6
In percent of ARA 5/151.9152.4137.9129.4130.1130.6128.0125.7123.8121.2119.7
Nominal exchange rate (Col$/US$, period average)2,0012,7423,0552,9512,956NANANANANANA
Real effective exchange rate (percentage change, + = appreciation)-6.9-20.6-4.85.60.8NANANANANANA
Sources: Banco de la República; and IMF staff estimates and projections.

GNFS stands for goods and nonfactor services; MLT stands for medium and long-term.

Includes foreign holdings of locally issued public debt (TES).

Original maturity of less than 1 year. Stock at the end of the previous period.

IMF definition that excludes Colombia’s contribution to Fondo Latinoamericano de Reservas (FLAR) and includes valuation changes of reserves denominated in other currencies than U.S. dollars.

Excluding commodity buffer. Coverage including a buffer for oil price uncertainty was 118 percent of the metric at end-2018.

Sources: Banco de la República; and IMF staff estimates and projections.

GNFS stands for goods and nonfactor services; MLT stands for medium and long-term.

Includes foreign holdings of locally issued public debt (TES).

Original maturity of less than 1 year. Stock at the end of the previous period.

IMF definition that excludes Colombia’s contribution to Fondo Latinoamericano de Reservas (FLAR) and includes valuation changes of reserves denominated in other currencies than U.S. dollars.

Excluding commodity buffer. Coverage including a buffer for oil price uncertainty was 118 percent of the metric at end-2018.

Table 9.Colombia: External Debt Sustainability Framework, 2014–24(In percent of GDP, unless otherwise indicated)
ActualProjections
20142015201620172018201920202021202220232024Debt-stabilizing non-interest current account 6/
Baseline: External debt30.042.149.447.346.748.748.748.147.947.246.2-2.9
Change in external debt4.312.17.3-2.1-0.62.0-0.1-0.6-0.2-0.7-1.0
Identified external debt-creating flows (4+8+9)1.812.44.1-4.0-0.7-0.1-0.6-0.6-0.6-0.6-0.5
Current account deficit, excluding interest payments4.14.82.61.62.11.61.31.41.41.51.5
Deficit in balance of goods and services3.16.24.52.72.73.63.53.73.83.83.8
Exports16.815.714.815.416.115.816.215.515.415.315.2
Imports19.921.919.318.218.919.419.619.319.119.119.0
Net non-debt creating capital inflows (negative)-3.3-1.7-1.4-2.9-1.5-2.4-2.6-2.7-2.7-2.6-2.6
Automatic debt dynamics 1/1.09.32.8-2.7-1.30.70.70.70.60.60.6
Contribution from nominal interest rate1.01.61.71.71.72.42.42.32.32.32.2
Contribution from real GDP growth-1.2-1.2-0.9-0.6-1.2-1.7-1.7-1.7-1.7-1.7-1.6
Contribution from price and exchange rate changes 2/1.18.92.1-3.8-1.9
Residual, incl. change in gross foreign assets (2–3) 3/2.5-0.33.21.90.22.10.50.00.4-0.1-0.5
External debt-to-exports ratio (in percent)178.4268.5333.4306.1289.3308.1300.7309.6311.8308.9###
Gross external financing need (in billions of US dollars) 4/41.543.135.840.544.544.848.050.651.054.957.6
in percent of GDP10.914.712.713.013.413.313.613.612.913.213.1
Scenario with key variables at their historical averages 5/10-Year Historical Average10-Year Standard Deviation48.750.251.553.254.555.3-2.1
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (in percent)4.73.02.11.42.73.51.93.63.73.63.73.73.6
GDP deflator in US dollars (change in percent)-4.7-25.2-5.68.84.10.411.8-2.41.11.81.81.91.9
Nominal external interest rate (in percent)4.14.03.83.83.94.50.75.15.25.15.05.05.0
Growth of exports (US dollar terms, in percent)-4.8-28.2-9.015.011.73.818.8-0.97.31.34.45.14.8
Growth of imports (US dollar terms, in percent)7.7-15.3-15.13.811.14.415.73.86.33.55.05.25.1
Current account balance, excluding interest payments-4.1-4.8-2.6-1.6-2.1-2.41.2-1.6-1.3-1.4-1.4-1.5-1.5
Net non-debt creating capital inflows3.31.71.42.91.52.31.22.42.62.72.72.62.6
Source: IMF staff estimates.

Derived as [r – g – r(1+g) + ea(1 + r)]/(1+g + r+gr) times previous period debt stock, with r – nominal effective interest rate on external debt; r- change in domestic GDP deflator in US dollar terms, g – real GDP growth rate, e – nominal appreciation (increase in dollar value of domestic currency), and a – share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1 + r)]/(1+g+r+gr) times previous period debt stock, r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Source: IMF staff estimates.

Derived as [r – g – r(1+g) + ea(1 + r)]/(1+g + r+gr) times previous period debt stock, with r – nominal effective interest rate on external debt; r- change in domestic GDP deflator in US dollar terms, g – real GDP growth rate, e – nominal appreciation (increase in dollar value of domestic currency), and a – share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1 + r)]/(1+g+r+gr) times previous period debt stock, r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Table 10.Colombia: External Debt Sustainability: Bound Tests 1/2/(External debt in percent of GDP)
Sources: IMF staff estimates.

Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.One-time real depreciation of 30 percent occurs in 2020.
Sources: IMF staff estimates.

Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.One-time real depreciation of 30 percent occurs in 2020.
Annex I. External Assessment
Colombia: External Assessment
Overall Assessment
Foreign asset and liability position and trajectory (NIIP)Background. Colombia’s NIIP was -46 percent of GDP at end-2018, a decline of 19 percent of GDP compared to end-2013. Cumulative net inflows of financial liabilities contributed 22 percent of GDP to this decline. This was partially offset by valuation gains of 4 percent of GDP arising from the depreciation of the peso versus reserve currencies, since a large portion of external liabilities is denominated in pesos (most FDI, plus a large proportion of portfolio liabilities).

Assessment. While gross external financing needs are moderate at about 13 percent of GDP annually, the external stability (ES) approach suggests a need for eventual external adjustment, as the projected medium-term current account balance is about 1.5 percent of GDP lower than that required to stabilize the NIIP at its end-2018 level.
Overall Assessment: The external position is moderately weaker than implied by medium-term fundamentals and desirable policies. This assessment is driven by the estimated current account gap of -1.8 percent of GDP. However, there is a wide range of uncertainty surrounding this estimate. Mitigating factors include the composition and stability of capital flows, adequate reserve coverage, and a flexible exchange rate that has long served as the primary mechanism of adjustment to external shocks.

Potential policy responses: Ongoing fiscal consolidation according to the fiscal rule is likely to raise national saving over the medium term. Structural policies to improve competitiveness and boost non-oil exports remain essential but will only improve the external position over the medium term. Key priorities include lowering non-tariff trade barriers that raise input costs for exporters, enhancing customs procedures, reducing transportation costs, and improving infrastructure.
Current accountBackground. The current account balance (CAB) of -3.8 percent of GDP in 2018 was a larger deficit than the 3.3 percent in 2017 but smaller deficit than the -4.5 percent of GDP 2013–17 average. Imports increased as domestic demand recovered, offsetting higher oil exports. Non-oil exports were sluggish, reflecting soft regional growth and one-off factors such as weak harvests. Investment growth increased to 3.5 percent, the strongest performance since the oil price decline of 2014–15, while an increase in public saving from fiscal consolidation was offset by lower private saving. The medium-term CAB is projected at -3.8 percent of GDP, with expected declines in oil exports-GDP, modestly higher non-traditional exports as regional growth recovers, and buoyant tourism exports as that sector continues its recent deepening.

Assessment. The EBA model estimates a cyclically-adjusted CAB norm of -0.1 percent of GDP and a cyclically-adjusted CAB gap of -4.7 percent of GDP for 2018. Nevertheless, identified policy gaps were assessed to be improving the CAB by 0.6 percent of GDP. Staff assesses the CAB to be moderately weaker than justified by medium-term fundamentals and desirable policies, with a point estimate for the CAB gap of -1.8 percent of GDP and a range of -0.5 to -3.1 percent of GDP given the EBA model’s wide standard error for Colombia. This incorporates the following adjustments (see technical background notes for details): 1) the contribution of oil exports to the norm is reduced by 1.8 percent of GDP given Colombia’s investment needs and the channeling of government oil revenue to infrastructure investment projects with a high social return and that are also expected to boost competitiveness in the medium term; 2) the contribution of demographic variables to the norm is reduced by 0.6 percent of GDP given a large recent jump in migration from Venezuela that is not captured in the population statistics in the EBA model; and 3) the cyclically-adjusted CAB is adjusted up by 0.5 percent of GDP to account for highly depressed demand in markets for Colombia’s non-traditional exports.
CA Assessment 2018Actual CA-3.8Cycl. Adj. CA-4.7EBA CA Norm-0.1EBA CA Gap-4.7Staff Adj.-2.9Staff CA Gap-1.8
Real exchange rateBackground. The period average real effective exchange rate (REER) index appreciated by 1 percent in 2018 and was 33 percent weaker than in 2013, driven by lower oil prices.

Assessment. EBA REER level and index approaches estimated an undervaluation of 12–13 percent in 2018. Applying a semi-elasticity of -0.14 to the gap from the CAB approach suggests a REER overvaluation of between 4 and 22 percent. Overall, staff judges the REER gap consistent with the CAB gap at 13 percent, though with a wide range of uncertainty (+/- 9 percent) given: the poor fit of the EBA CAB model for Colombia, with large unexplained residuals that have been persistently biased; the substantial differences in results across the REER and CA approaches; the delayed recovery in non-oil exports despite the flexible exchange rate that has been permitted to adjust in response to external shocks, which suggests that additional CAB adjustment could be in the pipeline if activity picks up in key non-oil export markets; and the structural distortions that are holding back exports (see IMF Country Reports 18/128 and 18/129 for further discussion).
Capital and financial accounts: flows and policy measuresBackground. Current account deficits have in the last decade been financed primarily by capital inflows to FDI and portfolio debt securities. Net FDI inflows in 2018 were 1.8 percent of GDP, below the historical average but within the normal range of variation, and were diversified across the petroleum, mining, financial, and other sectors. Net inflows into domestically-issued government debt remained robust at 1.1 percent of GDP, and sovereign issuance on the international market in October 2018 and January 2019 was heavily oversubscribed.

Assessment. The stability of FDI flows, sound macroeconomic policies, and a track record of uninterrupted market access have underpinned capital inflows, including during periods of stress such as the global financial crisis and the recent emerging markets selloff.
FX intervention and reserves levelBackground. Colombia’s gross reserves increased by US$750 million in 2018, including through purchases of US$400 million in December under a program to accumulate reserves (see Annex V). This was the first FX intervention since 2014. End-2018 reserves amounted to US$47.9 billion, equivalent to14.5 percent of GDP and 8.9 months of prospective imports. Reserve purchases so far in Q1–2019 are $2.1 billion (an increase of over 4 percent), including a one-off $1 billion purchase from the Treasury stemming from the proceeds of a recently-issued Eurobond.

Assessment. The flexible exchange rate has long served as the primary mechanism of adjustment to external shocks. Reserve coverage has declined since 2015 but remains adequate. For 2018, coverage is estimated at 118 percent of the ARA metric including a commodity buffer (given the uncertainty of future oil exports as embodied in options contracts on oil futures prices), and 130 percent excluding the commodity buffer. Access to resources available under Colombia’s FCL provides an additional liquidity buffer equivalent to about 27 percent of the ARA metric.
Technical Background NotesThe details of the adjustments made to the CAB assessment are as follows:

1) The contribution of oil exports is adjusted downward to account for Colombia’s investment needs relative to the EBA sample. This is based on Colombia’s: i) infrastructure gap relative to rivals in export markets (see IMF Country Report 16/129); ii) higher public fixed capital formation (5.6 percent of GDP compared to 4.0 percent of GDP for the EBA sample and 2.8 percent of GDP for other Latin American economies); and iii) relatively efficient practices in public investment management—on par with OECD peers and significantly higher than other Latin American economies (see April 2016 IMF Regional Economic Outlook, Western Hemisphere: Managing Transitions and Risks).

2) An estimated 1.2 million immigrants from Venezuela have taken up residence in Colombia, of which a large share arrived in 2018. This implies annual average population growth of over 2.5 percent, substantially above the underlying growth of about 0.8 percent used in the CAB model. Furthermore, in staff’s baseline the stock of the immigrant population is projected to remain high throughout the forecast horizon, and this population is relatively younger than the overall Colombian population (Annex III). A conservative adjustment based on the model’s coefficients has been applied (one third of the model’s estimated impact), given the uncertainty surrounding the impact and that higher population growth via immigration could affect both the actual CAB and the norm through various channels.

3) The main component of the standard cyclical adjustment is based on the GDP-weighted output gap of the EBA sample, while the relevant concept for Colombia’s current account is demand from non-traditional export destinations, which is a driver of export volumes of these products (export volumes of petroleum and mining products are assumed to be inelastic to external demand). Given the exceptional decline in demand from Venezuela (which is otherwise not reflected in the standard cyclical adjustment since Venezuela is not included in the model), this adjustment aims to capture a part of the reduction in Colombia’s non-traditional goods exports to Venezuela, which have historically been above 1.5 percent of GDP.
Annex II. Public Sector Debt Sustainability Analysis (DSA)

The public debt figures reported for Colombia cover the non-financial public sector. Debt rose significantly in the aftermath of the large terms of trade shock in 2014 but has been broadly stable since 2015. Under the baseline scenario, the non-financial public sector gross debt ratio is projected to gradually decline for 51.8 percent in 2018 to around 40 percent in 2024. Risks largely reflect the rapid increase in non-resident holdings of local currency debt but reflects a more diversified investor base. Colombia’s public debt is expected to remain sustainable with high probability in the medium term.

Baseline Scenario

1. At the end of 2018, the non-financial public sector (NFPS) gross debt is estimated to have increased to 51.8 percent of GDP from 49.5 percent in 2017. The increase was primarily driven by an increase in externally denominated debt in response to last year’s exchange rate depreciation. In terms of composition, around 91 percent of NFPS debt corresponds to central government debt1 Of the central government debt, around 2/3 is denominated in local currency with the remainder primarily denominated in U.S. dollars.

2. The NFPS gross debt ratio is expected to decline gradually over the forecast scenario, driven primarily by expected primary surpluses at general government level, and to a lesser extent by favorable growth dynamics. If real GDP growth, real interest rates, and other debt-creating flows remain at their projected levels for 2024, the debt-stabilizing primary balance is estimated at ˗0.1 percent of GDP. Projected primary balances exceed this value and, thus, place NFPS on a declining path.

Realism of Baseline Scenario

3. The baseline assumptions seem plausible as staffs forecasts are not systematically biased (based on historical projection errors). Furthermore, fan charts show limited uncertainty around the baseline (the symmetric fan chart has a width of about 20 percent of GDP). The assumed adjustment in the primary balance reflects a gradual reduction in structural expenditures, in the absence of higher tax revenues, which is realistic when compared to similar adjustments made by other countries (Figure 2). A historical scenario also yields a downward sloping path for debt, albeit as slower pace, reflecting lower historical primary surpluses relative to the baseline scenario.

Figure 1.Colombia: Public Sector DSA Risk Assessment

(Nonfinancial Public Sector Debt)

Source: IMF staff estimates.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.

4/ EMBIG, an average over the last 3 months, 30-Nov-18 through 28-Feb-19.

5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

Figure 2.Colombia: Public Sector DSA – Realism of Baseline Assumptions

Source : IMF staff estimates.

1/ Plotted distribution includes all countries, percentile rank refers to all countries.

2/ Projections made in the spring WEO vintage of the preceding year.

3/ Not applicable for Colombia, as it meets neither the positive output gap criterion nor the private credit growth criterion.

4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.

Risks

4. The share of NFPS debt held by non-residents is above its risks benchmark, partly reflecting a rapid increase of foreign investors’ participation in Colombia’s local currency public debt market since 2013. This largely reflects the reduction of the capital gains tax as part of the tax reform in 2013 and the inclusion of Colombian bonds in JP Morgan’s EM-GBI in 2014. Refinancing risks are mitigated by a more diversified foreign investor base and given continued robustness of portfolio inflows (including during periods of stress such the global financial crisis and the recent emerging markets selloff). Additionally, the authorities continue to emphasize on extending maturities and minimizing roll-over risk.2

Figure 3.Colombia: Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

(In percent of GDP, unless otherwise indicated)

Source: IMF staff estimates.

1/ Public sector is defined as non-financial public sector.

2/ Based on available data.

3/ EMBIG.

4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

5/ Derived as [(r – π(1+g) – g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

6/ The real interest rate contribution is derived from the numerator in footnote 5 as r – π (1+g) and the real growth contribution as -g.

7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Figure 4.Colombia: Public DSA – Composition of Public Debt and Alternative Scenarios

Composition of Public Debt

Source: IMF staff estimates.

Figure 5.Colombia: Public DSA – Stress Tests

Source: IMF staff estimates.

Annex III. Quantifying the Macroeconomic Effects of Migration Flows from Venezuela

Context and Size of Shock

1. Official estimates suggest that 1.2 million Venezuelans were permanently residing in Colombia by end-2018. At the same time, nearly 350,000 Colombians that were residing in Venezuela have returned to their home country. The influx of Venezuelan migrants into Colombia accelerated last year, increasing almost threefold compared to 2017. In the baseline scenario, similar migrant inflows are expected for 2019 and 2020 but net inflow are projected to be zero thereafter. Assuming the same demographic profile of migrants as in 2018 (67 percent of arriving Venezuelan migrants were of working age), implies Colombia’s working age population will rise by around 2 million by the end of the forecast horizon.1

Stock of Venezuelan Migrants Permanently Residing in Colombia

(In thousands)

Sources: National authorities; Reina and others (2018); and IMF staff estimates.

Working Age Population

(14–65 years; in thousands)

Sources: DANE and IMF staff estimates.

2. Venezuelan migrants have shown a higher participation rate as compared to Colombians (77 versus 64 percent). However, the participation rates should gradually converge in the medium-term. On the other hand, migrants to date have shown lower employment rates compared to natives in the first year after arrival (82 versus 91 percent). The employment rates are also assumed to converge to that of natives over the medium-term. Based on these assumptions, the number of employed workers will increase by around 1.3 million by 2024.

Employed Workers

(In thousands)

Sources: DANE and IMF staff estimates.

Effects on Potential Growth

3. Production function methods use information on capital, labor and productivity to estimate potential growth. This annex uses this approach to estimate the effects of migration flows from Venezuela on potential output The production function takes the following form:

where Y is potential output, A is total factor productivity, K is the capital stock in the economy, L is the potential labor input, and 1 – α is the labor share in national income. Potential growth is calculated as Δln(A) + αΔln(K) + (1 – α)Δln(L). A similar decomposition can be made for actual GDP. As in Lanau and others (2017)2, the labor share is set at 66 percent, labor is adjusted by human capital using the index in the Penn World Tables, and capital is utilization adjusted.3

4. Results suggest that the effects of migration flows from Venezuela on Colombia’s potential GDP growth are sizable in the near-term. However, the contribution of labor accumulation was partly offset by an important reduction in TFP. This deterioration in TFP can be explained by (i) many migrants joining the informal sector, and (ii) evidence of significant skills mismatches. These frictions are expected to ease over the medium-term, particularly after 2020, as migrants get fully absorbed into the labor market and migrant flows recede. Against this backdrop, potential growth is expected to settle around 3.4 percent, 0.1 percentage points above the previous baseline in the medium-term, although the near-term impact is more sizeable at around 0.2–0.3 in 2018–19.

Decomposition of Potential GDP Growth
Potential GDP GrowthCapitalLaborTFP
Baselinew/ MigrationBaselinew/ MigrationBaselinew/ MigrationBaselinew/ Migration
20183.03.31.61.61.42.50.0-0.8
20193.03.21.51.51.42.40.1-0.7
20203.33.31.71.71.32.20.3-0.5
20213.33.31.61.61.21.20.50.5
20223.43.31.61.61.21.20.60.6
20233.33.31.61.61.11.10.60.6
20243.33.41.61.61.11.10.60.7
Sources: Authorities; Penn World Tables; and IMF staff estimates.
Sources: Authorities; Penn World Tables; and IMF staff estimates.

5. Staff estimates are close to those produced by other organizations. World Bank estimates point to potential output increases around 0.2 percent of GDP if 500,000 migrants are able to enter the labor market Preliminary work undertaken by the authorities (National Planning Department – DNP for Spanish initials, 2018) point to larger gains between 0.2–0.9 percent in GDP growth between 2018 and 2021. The main channel in the DNP study is through the generation of between 500,000 and 2 million informal jobs which would boost consumption by 0.3 to 1.1 percent, and investment by 0.2 to 0.6 percent. Reina and others (2018) estimate that migration could boost potential output between 0.1 and 0.5 percent depending on the number of migrants that integrate into the labor market.

Fiscal Costs

6. Colombia is providing substantial humanitarian support. The authorities’ initial set of responses sought to support refugees such as guaranteeing emergency health care access and making documentation requirements for access to education for children more flexible.

7. Staff’s starting point for quantifying the fiscal costs of the migration are based on the authorities’ estimates of observed expenditure outcomes. Staff assumes that the fiscal costs per migrant are the same as those used by the authorities.

Venezuelan Migration Projections

(In thousands)

Source: Authorities and IMF staff projections.

8. The key assumptions used by the authorities:

  • Education: costs include expenditure on preschool, primary and secondary education and these are computed from certified per capita cost for education services. It also includes costs associated with the school feeding program and school transportation.
  • Healthcare: costs include subsidized capitation payments (UPC), average emergency costs per-patient without public insurance and vaccination and public health costs.
  • Early childhood care: per capita costs for early childhood care are used.
  • Humanitarian help: use the average cost of providing immediate humanitarian help for displaced persons.
Estimates of Near-Term Fiscal Cost of Migration flows from Venezuela(Percent of GDP)
AuthoritiesDesk
Costs20192020201920202021202220232024
Education0.20.20.20.20.20.20.10.1
Health0.10.20.10.20.20.20.10.1
Childhood0.10.10.10.10.10.10.00.0
Humanitarian0.00.00.00.00.00.00.00.0
Housing0.00.00.00.00.00.00.00.0
Water/Sanitation0.00.00.00.00.00.00.00.0
Inst. Strength0.00.00.00.00.00.00.00.0
Security0.00.00.00.00.00.00.00.0
Labor0.00.00.00.00.00.00.00.0
Total0.40.40.40.50.40.40.30.3
Source: National authorities and IMF staff estimates.
Source: National authorities and IMF staff estimates.

9. On the revenue side, staff made the following assumptions:

  • Per capita revenues from VAT and consumption taxes were computed for 2017. These per capita revenues were scaled by the relative wage of migrants from Venezuela migrants in 2017 relative to Colombians with a further adjustment to capture lower productivity effects in 2018. The resulting per capita revenues were multiplied by the stock of Venezuelan migrants.
  • Total revenues from personal and corporate income taxes were divided by the stock of employment in 2017 to obtain revenues by employed worker. These were scaled by the same relative wage rate for Venezuelans to Colombians to obtain personal and corporate income taxes per Venezuelan worker. These were multiplied by the stock of employed workers.
Estimates of Net Fiscal Cost from Migrants from Venezuela(Percent of GDP)
201920202021202220232024
Education0.20.20.20.20.10.1
Health0.10.20.20.20.10.1
Childhood0.10.10.10.10.00.0
Humanitarian0.00.00.00.00.00.0
Housing0.00.00.00.00.00.0
Water/Sanitation0.00.00.00.00.00.0
Inst. Strength0.00.00.00.00.00.0
Security0.00.00.00.00.00.0
Labor0.00.00.00.00.00.0
Total Expenditure0.40.50.50.40.30.3
Goods & Services-0.1-0.1-0.1-0.1-0.1-0.1
PIT & CIT-0.1-0.1-0.1-0.1-0.1-0.1
Total-0.1-0.2-0.2-0.2-0.2-0.2
Net effect0.30.40.20.20.10.1
Source: IMF staff estimates.
Source: IMF staff estimates.

10. The overall net fiscal costs are significant over the near term but fade over the medium term as migrants from Venezuela are gradually integrated into the labor force.

Sensitivity Analysis

11. A further deterioration of the economic and social crisis in Venezuela could result in a surge of migration flows to Colombia. Assuming that the number of Venezuelan migrants in Colombia doubles by the end of the forecast horizon to around 6 million could increase potential GDP growth by an additional ½ percentage point in the near term relative to the baseline with migration, without affecting potential growth in the medium term. The net fiscal costs would be roughly double throughout the projection period relative to the baseline.

Venezuela Migration Scenarios

(In thousands)

Source: Authorities and Staff estimates

12. A rapid and peaceful resolution of current political and social conflicts could result in several of Venezuelan migrants returning to their home country. In a scenario in which the number of Venezuelan migrants in Colombia is halved by 2024 to 700 thousand, could result in a minor deceleration in potential growth in the near-term, with no effect in the medium term. The net fiscal costs would be roughly halved in the near term and dissipate by 2024.

Annex IV. Portfolio Inflows: A Capital Flows at Risk Approach

1. Colombia has attracted large portfolio inflows in the last decade. After low levels in the early 2000s, there has been a significant upward shift since 2009, with flows to various instruments (Figure 1). These include private debt, equity inflows (predominantly from 2010–14), government foreign currency issuance, and since 2013 sizable inflows to local currency government bonds (TES).1 In 2018 inflows were flat, with continued government inflows but outflows of equity and private debt

Figure 1.Colombia: Composition of Net Portfolio Liability Flows

(Percent of GDP)

Sources: Haver Analytics and IMF staff calculations.

2. The drivers of and prospects for portfolio inflows are assessed using the capital-flows-at-risk approach.2 This approach models portfolio flows using quantile regressions. This permits the entire distribution of flows to be modeled, allows the drivers of flows to be different during periods of large inflows than at times of large outflows, and enables the evaluation of risks in addition to a baseline scenario. Given their magnitude and sensitivity to external conditions, the net flow of liabilities to non-residents is modeled. The model uses information in a given period to predict flows one year and two years ahead, which also helps minimize endogeneity concerns.

3. Both external and domestic factors affect the distribution of portfolio inflows. Figure 2 highlights a few important facts by comparing the coefficients (and corresponding standard errors) for the regression on median portfolio inflows with the coefficients for the tenth and 90th percentiles of the distribution:

  • Higher ten-year U.S. Treasury yields typically reduce portfolio flows to Colombia, except when inflows are high, e.g. in periods when sentiment toward emerging markets (EMs) is positive.
  • Increases in the Colombian monetary policy rate tend to increase inflows for the next year, especially when flows are depressed. However, by the second year the tighter policy is likely to lead to outflows as economic activity slows.
  • Higher real oil prices and a higher sovereign rating tend to raise inflows and higher EMBI spreads tend to lower them over the entire distribution at both the one-year and two-year horizons (though with a wide range of uncertainty surrounding the estimate on EMBI spreads).

Figure 2.Colombia: Drivers of Net Portfolio Liability Flows

Source: IMF staff estimates.

4. The baseline outlook for portfolio inflows is less favorable than in recent years but does not signal a large probability of outflows. Figure 3 compares the historical distribution of flows since 2009 with the predicted frequency distribution of flows generated using staff's baseline scenario and the external assumptions for the April 2019 World Economic Outlook. The forecast distribution of inflows is lower than the historical data owing to lower real oil prices and higher real U.S. interest rates than the 2009–18 average, but still signals net inflows of almost two percent of GDP. In addition, the left tail of the forecast distribution is close to that of the historical data, suggesting a continued low probability of extreme outflows.

Figure 3.Colombia: Frequency Distribution of Net Portfolio Inflows

(Percent of GDP)

Sources: Haver Analytics; and IMF staff calculations and estimates.

5. The range of potential outcomes would be more adverse if external conditions deteriorated. To gauge the sensitivity of the forecast distribution of inflows, model predictions were generated assuming shocks to the three external variables of either one or two standard deviations.3Figure 4 compares the resulting forecast distributions with the baseline. Under the one standard deviation shock, median inflows are projected at about 1.4 percent of GDP, with just under 10 percent probability of net outflows. Under a shock of two standard deviations, median projected inflows are less than 0.4 percent of GDP, with a 30 percent probability of net outflows. This illustrates both the resilience of portfolio flows to Colombia under most plausible external conditions, and the magnitude of potential tail risks.

Figure 4.Colombia: Frequency Distribution of Net Portfolio Inflows

(Percent of GDP)

Sources: Haver Analytics; and IMF staff calculations and estimates.

Annex V. Reserve Accumulation Program

1. The Central Bank announced a program to accumulate international reserves in September 2018. The announcement explicitly linked this decision to preparations for “a potential reduction of the Flexible Credit Line.”1 The duration and amount of purchases are at the discretion of the central bank, which has so far set an accumulation ceiling of up to US$400 million per month.

2. The Central Bank conducts this program through monthly auctions of “put” options. These options permit market participants to sell U.S. dollars to the Central Bank at the prevailing market rate, during any period in which the peso-dollar exchange rate is stronger than its previous 20 business days average. Partly based on previous experience, the authorities believe this mechanism minimizes the impact on the spot exchange rate since purchases depend on market conditions and the actions of market participants. Their communications have also emphasized that the program is not designed to engineer a depreciation or target a specific exchange rate level.

3. Market reaction to the program has been favorable, with substantial excess demand for the options. Through end-March, Central Bank purchases have amounted to US$1.5 billion.2 All options were quickly exercised in December and January, with periods following when the conditions for further purchases still would have been met, which suggests the monthly ceiling on the amount of options available could be higher without disrupting the smooth functioning of the foreign exchange market (Figure 1).

Figure 1.Colombia: Reserve Accumulation: Exchange Rate Condition and Monthly Purchases

Sources: National authorities; Haver Analytics; and IMF staff estimates.

4. Reserve accumulation is bolstering external buffers. Reserve coverage has declined since 2015 but remains adequate, estimated at 118 percent of the ARA metric including the oil buffer at end-2018, and 130 percent excluding the oil buffer (Figure 2). Looking to the medium term, without further reserve accumulation, coverage would decline given continued projected increases in external liabilities, exports, and broad money (Figure 3), implying some accumulation would be necessary to maintain coverage in the adequate range (Figure 2). Indeed, reserve accumulation would need to be maintained at the pace likely under the authorities’ program or modestly faster throughout the forecast horizon to keep ARA coverage at the current level. The authorities’ stated objective of offsetting reduced FCL access with own reserves would involve additional accumulation.

Figure 2.Colombia: Liquidity Buffers

(as percent of ARA metric)

Source: IMF staff calculations.

Figure 3.Colombia: Reserve Adequacy Metric

(Billion U.S. dollars)

Sources: IMF, WEO; and IMF staff calculations.

5. The Central Bank will sterilize FX purchases as needed to pursue its inflation target. To date, there has been no significant money market impact from the additional liquidity associated with FX purchases. Indeed, other factors have led the central bank to increase liquidity provision through repo operations. Sterilization to maintain short-term interest rates at their target will likely involve additional interest costs or foregone interest revenue, if the inflation outlook requires tightening the monetary stance, but the costs should be manageable given the modest differential between Colombian interest rates and the return on international reserves, and the positive net income of the central bank in recent years.

Annex VI. Reform Priorities for Colombia

1. Given the large number of possible structural reforms the government could focus on, which ones should it prioritize? To provide a high-level assessment of reform priorities, staff followed the approach described in Biljanovska and Sandri (2018) which combines information on public support for reform areas with estimates of their TFP impact1 The analysis only considers individual reforms, thus potentially overlooking interaction effects of reform packages. Given the complexity of the link between structural reforms and TFP gains, the analysis in this Annex should be taken as indicative rather than definite. Other measures, such as closing infrastructure gaps, which are not considered as part of this annex, also remain key priorities and are discussed in the main body of the staff report.

2. The analysis suggests that reforms to the legal system should be a priority. Structural reforms in the areas of banking, trade openness, labor markets, product markets and the legal system are considered. Improvements to the legal system are estimated to have the strongest economic impact and according the Latinobarometro survey data also have relatively high public support2

Economic Impact and Public Support for Reforms

Source: IMF staff calculations.

3. Survey data indicates that within the legal system, impartiality of courts and legal enforcement of contracts are two areas of concern for economic agents. Congestion of courts appears to be a major constraint on legal efficiency in practice. Legal practitioners in Colombia point out that it is not uncommon for delays of around 8 years from the start of an investigation to the final judgement. And in a typical commercial litigation case, it is likely that due to court congestion a first-instance ruling might be rendered three years from the date of admission, even though in theory judges are bound to produce their decision on commercial disputes within one year.

1

The CPI basket was rebased to December 2018.

2

The originally proposed Financing Law proved contentious in Congress and its initial revenue-raising measures were watered down, partly reflecting the government’s small governing majority.

3

As part of the accord, the JEP was established as a transitional justice system to investigate war crimes committed during Colombia’s internal conflict.

4

Higher subnational spending is expected ahead of mid-year local elections.

5

Staff and the Central Bank both estimate that the real neutral rate is around 1.5 percent.

6

Staff estimates that to achieve the headline deficits mandated by the fiscal rule, sizeable cuts to fixed capital formation will be needed, although privatization proceeds in 2019 may partly be used to maintain expenditures at 2018 levels. This would create an accounting discrepancy between staff’s and authorities’ figures. Note that the authorities employ the GFSM 1986 manual whereby privatization proceeds may be reported as government revenues. Under GFSM 2014, this is not the case.

7

The revised deficit path also includes a reassessment of the economy’s cyclical position which was deemed to be stronger relative to the 2018 MTFF, implying lower headline deficits between 2019 and 2026.

8

Bernal and others (2018), Informe Final de la Comision del Gasto y la Inversion Publica.

9

The authorities’ stress testing exercise showed an aggregate solvency ratio remaining above the 9 percent regulatory requirement, although for some institutions (less than 10 percent of assets) solvency would fall below the regulatory minimum.

10

The redefining of RWAs is expected to lower them from circa 77 percent to closer to 67 percent of total assets (Box 2).

11

While non-automatic import licenses are more prevalent than for other OECD countries, this does not seem to be a key binding constraint on trade since the licenses are security-related, mainly confined to weaponry and chemicals that could be used in the production of illegal drugs.

12

There is a discrepancy in the World Bank’s survey based Findex data on account ownership (demand-side data) and the authorities data reported in the Financial Inclusion Report which is collected from financial institutions (supply-side data). The latter shows somewhat higher account-ownership. Both data sources show a positive trend over the past years, however.

1

Ecopetrol’s debt at around 3.0 percent of GDP is included as part of the NFPS.

2

See Estrategia de gestion de la deuda de mediano plazo 2018–22.

1

Working age population defined as individuals between ages 14–65. These numbers are highly uncertain.

2

IMF Working Paper No. 17/238.

3

Migrants and natives are assumed to have the same human capital levels. This is broadly borne out in the data for end-2018 but there is uncertainty about the educational composition of the 2019–20 migrant waves.

1

This was partly in response to a reduction in the tax rate on foreign holdings (IMF, 2014) and an increase in the weight in global indexes tracking emerging market local currency bonds (Arslanalp and Tsuda, 2015).

2

The methodology was originally developed by Adrian and others (2018) to assess risks to GDP growth, and applied to capital flows by Goel and Koepke (2018).

3

The two standard deviations shock implies an extreme tail event, with an increase of over 200 basis points in real U.S. Treasury yields and a decline in real oil prices to near their lows after the 2014–15 oil price shock. While the results illustrate the potential magnitudes, the estimated flows are likely lower bounds, as no policy response is incorporated.

2

On February 1, the Central Bank purchased US$1 billion from the Treasury at the prevailing market rate. This was a one-off transaction to monetize the proceeds of a recently-issued Eurobond.

1

“Structural Reform Priorities for Brazil”, IMF Working Paper No. 18/224.

2

The TFP impact refers to the estimated increase in the one-year ahead TFP growth rate from closing the structural gap with the advanced country average. Latinobarometro data refers to the question “What is the most important for the development of Colombia?”. Responses are averaged for 2016 and 2017 and mapped into structural reforms as explained in Biljanovska and Sandri (2018). Banking sector reform is not shown in the matrix figure given that Colombia is estimated to have a strong framework already.

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