Colombia—Assessment of the Impact of the Proposed Flexible Credit Line Arrangement on the Fund’s Finances and Liquidity Position

This paper discusses an arrangement under the Flexible Credit Line (FCL) for Colombia. Colombia is well placed to confront challenges posed by the ongoing global downturn. Access under an FCL arrangement of SDR 6.966 billion, which the authorities intend to treat as precautionary, would support Colombia’s policy framework and strategy, while reducing the likelihood of balance of payments pressures stemming from a change in investor sentiment. IMF staff believes that Colombia fully meets the FCL qualification criteria, and recommends approval of the arrangement.

Abstract

This paper discusses an arrangement under the Flexible Credit Line (FCL) for Colombia. Colombia is well placed to confront challenges posed by the ongoing global downturn. Access under an FCL arrangement of SDR 6.966 billion, which the authorities intend to treat as precautionary, would support Colombia’s policy framework and strategy, while reducing the likelihood of balance of payments pressures stemming from a change in investor sentiment. IMF staff believes that Colombia fully meets the FCL qualification criteria, and recommends approval of the arrangement.

1. This note assesses the impact of the proposed Flexible Credit Line (FCL) arrangement for Colombia on the Fund’s finances and liquidity position, in accordance with the policy on the FCL.1 The proposed arrangement would cover a 12-month period, and be in an amount of SDR 6.966 billion (900 percent of quota). The full amount of access proposed would be available throughout the arrangement period, in one or multiple purchases.2 The authorities intend to treat the arrangement as precautionary.

I. Background

2. Colombia had three Fund arrangements during the past decade but has not drawn on Fund resources since 1971 (Table 1). Colombia had a series of Stand-By Arrangements (SBAs) in close succession from the late 1950s to mid-1970s. It last made purchases in 1971 and extinguished its remaining outstanding obligations to the Fund in 1972. Following a quarter century without Fund arrangements, Colombia’s economic performance deteriorated markedly in 1998–99 as a result of external shocks and intensified domestic tensions. To address the economic difficulties, a three-year Extended Arrangement (EA) under the Extended Fund Facility (EFF) was approved to support the authorities’ economic reform program in 1999. No drawings were made under this EA which was followed by two precautionary SBAs, the last of which expired in November 2006. With the support of these three successive Fund arrangements, Colombia successfully adopted wide ranging macroeconomic and structural reforms.

Table 1.

Colombia: IMF Financial Arrangements, 1999–2005

(In millions of SDR)

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Source: Finance Department.

3. Total external debt is relatively low and expected to remain sustainable even in the face of further significant negative shocks (Table 2).3 External debt has been declining relative to GDP in recent years, and was below 20 percent as of end-2008. The bulk of this debt is long-term and owed by the public sector. Private sector external debt has declined to about 7 percent of GDP. Over the medium term, the external current account deficit is expected to decline as a share of GDP, and be largely financed by FDI. Debt sustainability analysis suggests that external debt ratios would remain manageable even under significantly negative shocks.

Table 2.

Colombia: Total External Debt, 2005–09

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Source: Colombian authorities and IMF staff estimates.

Projected.

II. Impact on the Fund’s Finances and Liquidity Position

4. The substantial access under the proposed arrangement could add significantly to the Fund’s credit exposure. In terms of SDRs, the proposed FCL arrangement would be more than three and a half times Colombia’s largest arrangement to date. If the full amount available under the FCL arrangement—which the authorities intend to treat as precautionary—were drawn, Colombia’s outstanding use of GRA resources would reach SDR 6.966 billion, an individual country exposure which has previously been exceeded only for seven members.

5. If the full amount available under the proposed FCL arrangement were purchased in 2009:

  • Colombia’s external debt position would increase somewhat, with Fund credit representing still a relatively modest part of this debt: total external debt would rise to about 30 percent of GDP initially, and public external debt would rise to about 22 percent of GDP, with Fund credit at about 5 percent of GDP (Table 3). At its peak in 2009–11, Colombia’s outstanding use of GRA resources would account for about 18 percent of total external debt, and slightly less than one-quarter of public external debt, and close to one-third of reserves.

  • External debt service would increase over the medium-term, but would remain manageable. Colombia’s projected debt service to the Fund would peak in 2013 at about SDR 3.6 billion, or about 2 percent of GDP.4 In terms of exports of goods and services, debt service to the Fund would peak at about 12 percent, accounting for slightly over half of total public external debt service.

Table 3.

Colombia: Capacity to Repay Indicators 1/

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Sources: Colombian authorities, Finance Department, World Economic Outlook, and IMF staff estimates.

Assumes full drawings under the FCL upon approval. The Colombian authorities have expressed their intention to treat the arrangement as precautionary, as balance of payments pressures have not materialized.

Based on the rate of charge as of April 23, 2009. Includes surcharges under the system currently in force and service charges.

Staff projections for external debt, GDP, gross international reserves, and exports of goods and services, as used in the staff report that requests the proposed FCL, adjusted for the impact of the assumed FCL drawing.

6. Consistent with the level of access under the arrangement, the impact on the Fund’s liquidity, and on its potential credit risk exposure, would be substantial:

  • The proposed arrangement would reduce Fund liquidity by the full amount of available access (Table 4). Approval of the proposed arrangement would reduce the one-year forward commitment capacity (FCC) by SDR 6.966 billion. In addition to quota resources included in the FCC, the Fund also has supplementary resources under the borrowing agreement with Japan.

  • If the resources available under the FCL arrangement were fully drawn, GRA credit to Colombia as a share of total GRA credit would be about 25 percent. As a result, the concentration of Fund credit among the top five users of Fund resources would increase to about 88 percent.

  • Potential GRA exposure to Colombia would be large in relation to the current level of the Fund’s precautionary balances. If the resources available under the arrangement were fully drawn, Fund credit to Colombia would be roughly equivalent to the Fund’s current precautionary balances.

Table 4.

FCL Arrangement for Colombia—Impact on GRA Finances

(In SDR millions, unless otherwise indicated)

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Sources: Finance Department.

The FCC measures the Fund’s capacity to make new credit commitments over the next 12 months. Does not include proposed commitments to Romania (SDR 11.4 billion) and Poland (SDR 13.7 billion).

Based on current Fund credit outstanding plus full drawings under the proposed FCL.

III. Assessment

7. The proposed arrangement would have a large but manageable impact on Fund liquidity. Nonetheless, the Fund’s liquidity has declined rapidly in recent weeks, and is likely to continue to decline as the Board considers forthcoming requests for arrangements. This underscores the need for continued close monitoring of liquidity, and to expedite the efforts to bring new borrowing agreements into effect to supplement the Fund’s resources.

8. Colombia intends to treat the FCL arrangement as precautionary, but if it did prove necessary to draw, the Fund’s credit exposure to Colombia would be large. The authorities’ proven track record and their commitment to maintaining sound policies in the future provide very strong assurances that they would react appropriately to any balance of payments difficulties. Risks to the Fund are contained by the very strong rules-based policy setting, Colombia’s very strong record of debt servicing, as well as the manageable external debt service profile, even in the event that the authorities were to draw the full amount available under the arrangement. Against this background, Colombia’s capacity to repay is projected to remain strong. Nonetheless, the scale of the Fund’s potential exposure to Colombia—in conjunction with the recent commitments to other members and the prospects for further credit expansion in the pipeline—underscores the need to strengthen the Fund’s precautionary balances.

1

See GRA Lending Toolkit and Conditionality—Reform Proposals (3/13/09), and GRA Lending Toolkit and Conditionality—Reform Proposals (3/24/09).

2

If the full amount is not drawn in the first six months of the arrangement, subsequent purchases are subject to a review of Colombia’s continued qualification for the FCL arrangement.

3

A more detailed description and analysis of external and public debt is provided in the staff report.

4

The figures on debt service used in this report are calculated assuming that full amount available under the arrangement is purchased upon approval of the arrangement, and that all repurchases are made as scheduled.

Colombia: Arrangement Under the Flexible Credit Line: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Colombia
Author: International Monetary Fund