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

This report focuses on Colombia’s economic policy framework and the policy response to the global crisis. In recent years, Colombia’s policies strengthened a strong macroeconomic performance, which helped in achieving higher tax revenues and restraint on current spending. Colombia was not affected too severely by the global crisis. The impact of the crisis was mitigated by the authorities through countercyclical monetary and fiscal policies. The monetary stance is expected to remain supportive unless there are signs of domestic demand pressures guided by the inflation targeting framework.

Abstract

This report focuses on Colombia’s economic policy framework and the policy response to the global crisis. In recent years, Colombia’s policies strengthened a strong macroeconomic performance, which helped in achieving higher tax revenues and restraint on current spending. Colombia was not affected too severely by the global crisis. The impact of the crisis was mitigated by the authorities through countercyclical monetary and fiscal policies. The monetary stance is expected to remain supportive unless there are signs of domestic demand pressures guided by the inflation targeting framework.

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 FCL arrangements.5 The proposed arrangement would cover a 12-month period, be in an amount of SDR 2.322 billion (300 percent of quota), and succeed the existing FCL arrangement of SDR 6.966 billion (900 percent of quota), which would be cancelled upon approval of the new arrangement. The full amount of access proposed would be available throughout the arrangement period, in one or multiple purchases.6 The authorities intend to treat the arrangement as precautionary.

V. Background

2. Against the backdrop of a global economic and financial crisis, a one-year precautionary FCL arrangement equivalent to SDR 6.966 billion was approved on May 11, 2009. Colombia’s strong economic fundamentals and institutional policy framework helped the authorities cushion the impact of the crisis through countercyclical monetary and fiscal policies, with the FCL arrangement providing additional insurance against a further deterioration of global conditions; no drawings have been made under the existing FCL arrangement. As discussed in Annex I, Colombia had four arrangements during the past decade, but has not drawn on Fund resources since 1971.

3. Colombia’s level of total external debt is moderate and expected to remain sustainable even in the event of further significant negative shocks (Table 1). External debt, which was declining relative to GDP during the years preceding the recent crisis, increased from 19.2 percent of GDP in 2008 to 22.5 percent in 2009. The bulk of this debt is long term and owed by the public sector. Private sector external debt has declined to about 6.5 percent of GDP. Over the medium term the external current account deficit is expected to decline as a share of GDP, and to be largely financed by FDI. Debt sustainability analysis suggests that external debt ratios would remain manageable even under significant negative shocks.7

Table 1.

Colombia: Total External Debt, 2005-09

article image
Source: Colombian authorities and IMF staff estimates.

4. Colombia has no outstanding debt to the Fund. Full drawing under the proposed FCL arrangement—which the authorities intend to treat as precautionary—would bring Colombia’s outstanding use of GRA resources to SDR 2.322 billion.

5. In case the full amount available under the proposed FCL arrangement is disbursed in 2010:

  • Colombia’s external debt would remain moderate, with Fund credit representing still a relatively modest part of this debt: Total external debt and public external debt would initially reach about 22 and 16 percent of GDP, with Fund credit being 1.3 percent of GDP (Table 2). At its peak, Colombia’s outstanding use of GRA resources would account for 6 percent of total external debt, 8.1 percent of public external debt, and 11.4 percent of gross international 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 2014 at about SDR 1.2 billion, or close to 0.5 percent of GDP.8 In terms of exports of goods and services, external debt service to the Fund would peak at 3 percent, accounting for slightly over 20 percent of public external debt service, which would increase to 14.5 percent of exports of goods and services.

Table 2.

Colombia: Capacity to Repay Indicators 1/

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

Assumes full drawings under the FCL upon approval.

Based on the rate of charge as of April 14, 2010. 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. Reflecting the level of access under the arrangement, the impact on the Fund’s liquidity, and on its potential exposure to credit risk, would be modest:

  • The proposed arrangement would reduce the Fund’s one-year forward commitment capacity (FCC) by about 1.5 percent (Table 3). The liquidity impact of the proposed arrangement would initially be more than offset by the cancellation of the existing FCL arrangement. In the absence of a new arrangement, however, the FCC would have increased by SDR 6.966 billion at the expiration of the existing FCL arrangement in mid-May. The availability of supplementary resources under the bilateral loan and note purchase agreements greatly bolsters the Fund’s resources and thus mitigates the relative impact that the proposed arrangement would have on the Fund’s liquidity position.

  • 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 5 percent. This would make Colombia the sixth largest borrower among current arrangements and reduce the concentration of Fund credit in the top five users of Fund resources from about 78 percent to 74 percent.

  • Potential GRA exposure to Colombia would be moderate 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 equivalent to about one-third of the Fund’s current precautionary balances.

Table 3.

FCL Arrangement for Colombia--Impact on GRA Finances

(In SDR millions, unless otherwise indicated)

article image
Sources: Finance Department.

The FCC measures the Fund’s capacity to make new credit commitments over the next 12 months. It includes the liquidity effects of resources made available under borrowing and note purchase agreements.

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

Excluding Colombia’s existing FCL.

VI. Assessment

7. The proposed arrangement has a modest and manageable impact on the Fund’s liquidity. The current liquidity position is sufficiently strong to accommodate the liquidity impact of the proposed arrangement, in particular as the proposed cancellation of Colombia’s existing FCL arrangement would more than offset the initial reduction in FCC arising from the new FCL arrangement. However, the liquidity position could change quickly, particularly if there is further demand for large arrangements. This underscores the need for continued close monitoring of liquidity, and to continue the efforts to bring new borrowing agreements on line to supplement the Fund’s resources.

8. Colombia intends to treat the FCL arrangement as precautionary, but even if it did prove necessary to draw, the Fund’s credit exposure to Colombia would be moderate. Colombia’s overall external debt and debt service ratios are expected to remain moderate even with a drawing under the arrangement. Hence, given Colombia’s sustained track record of implementing very strong policies, including during the global financial crisis, and commitment to maintaining such policies in the future, 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 increase in lending to other members and the prospects for further credit expansion under already existing or possible new Fund arrangements—underscores the need to strengthen the Fund’s precautionary balances.

ANNEX I. Colombia: History of IMF Arrangements

Colombia had four Fund arrangements during the past decade but has not drawn on Fund resources since 1971 (Table I.1). Prior to the one-year precautionary FCL arrangement approved in May 2009, Colombia had a series of Stand-by Arrangements (SBAs) from the late 1950s to the mid-1970s. It last made purchases in 1971 and settled 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 results of external shocks and intensified domestic tensions. To address the economic difficulties, a three-year Extended Arrangement under the Extended Fund Facility (EFF) was approved in 1999 to support the authorities’ economic reform program. No drawings were made under this arrangement, which was followed by two precautionary SBAs, the last of which expired in November 2006. In the period covered by these three Fund arrangements, Colombia successfully adopted wide ranging macroeconomic and structural reforms.

Table I.1.

Colombia: IMF Financial Arrangements, 1999–2009

(In millions of SDR)

article image
Source: Finance Department.
5

See GRA Lending Toolkit and Conditionality-Reform Proposals (3/13/09) and Flexible Credit Line (FCL) Arrangements, Decision No.14283-(09/29), adopted March 24, 2009.

6

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.

7

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

8

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 and Cancellation of the Current Arrangement: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the authorities of Colombia
Author: International Monetary Fund