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

Colombia’s strong institutional frameworks and sound policy management have underpinned a strong macroeconomic performance and contributed to reducing vulnerabilities. The Colombian economy exhibited great resilience during the global crisis, and the output recovery is well entrenched. The impact on fund finances, risks, and safeguards are discussed. The Colombian authorities viewed that the uncertainties surrounding the external environment remain elevated and that a successor flexible credit line (FCL) arrangement with a duration of two years would provide useful protection against continuing external risks.

Abstract

Colombia’s strong institutional frameworks and sound policy management have underpinned a strong macroeconomic performance and contributed to reducing vulnerabilities. The Colombian economy exhibited great resilience during the global crisis, and the output recovery is well entrenched. The impact on fund finances, risks, and safeguards are discussed. The Colombian authorities viewed that the uncertainties surrounding the external environment remain elevated and that a successor flexible credit line (FCL) arrangement with a duration of two years would provide useful protection against continuing external risks.

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.1 The proposed arrangement would cover a two-year period and access would be in an amount of SDR 3.870 billion (500 percent of quota). It would succeed the existing FCL arrangement of SDR 2.322 billion (300 percent of quota), which would be cancelled immediately prior to the approval of the new arrangement. 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. Against the backdrop of a global economic and financial crisis, a one-year FCL arrangement in an amount equivalent to SDR 6.966 billion (900 percent of quota) was approved on May 11, 2009, which the authorities treated as precautionary. This arrangement was succeeded by another one-year FCL arrangement in an amount equivalent to SDR 2.322 billion (300 percent of quota) approved on May 7, 2010, which was also treated as precautionary. Colombia’s strong economic fundamentals and institutional policy frameworks helped the authorities cushion the impact of the crisis through countercyclical monetary and fiscal policies, with the FCL arrangements providing additional insurance against a further deterioration of global conditions. No drawings have been made under either the May 2009 FCL arrangement or the existing arrangement approved in May 2010. As discussed in Annex I, Colombia had five arrangements since 1999, 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 was declining relative to GDP during the years preceding the recent crisis. The global shock resulted in a temporary rise in external debt, which increased from 19.7 percent of GDP in 2008 to 22.9 percent in 2009, but resumed a downward trend in 2010 falling to 20.9 percent of GDP. The bulk of this debt is long term and owed by the public sector. Private sector external debt has declined to 7.2 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.3

Table 1.

Colombia: Total External Debt, 2005-10

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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 3.870 billion.

5. In case the full amount available under the proposed FCL arrangement is disbursed in 2011:

  • Colombia’s total external debt would remain moderate, with Fund credit representing still a relatively modest fraction: total external debt and public external debt would initially reach 22.5 and 15.3 percent of GDP, respectively, with Fund credit at 1.9 percent of GDP (Table 2). At its peak, Colombia’s outstanding use of GRA resources would account for 8.7 percent of total external debt, 12.6 percent of public external debt, and 16.8 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 2015 at about SDR 2 billion, or close to 0.8 percent of GDP.4 In terms of exports of goods and services, external debt service to the Fund would peak at 4.4 percent that year. It would account for about 28 percent of public external debt service, which would increase to 15.8 percent of exports of goods and services.

Table 2.

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.

Based on the rate of charge as of April 14, 2011. 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. 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 forward commitment capacity (FCC) by about 0.6 percent on a net basis (Table 3).5 The liquidity impact of the proposed arrangement would be partially offset by the cancellation of the existing FCL arrangement, so that the net reduction in the FCC would be SDR 1.548 billion. In addition, the availability of supplementary resources under the recently activated NAB greatly bolstered the Fund’s resources mitigating the possible impact of the proposed arrangement on the Fund’s liquidity position.

  • If the resources available under the FCL arrangement were fully drawn, GRA credit to Colombia would be about 5.6 percent of total GRA credit. This would make Colombia the seventh largest borrower among current arrangements, and reduce the concentration of Fund credit in the top five users of Fund resources from about 70 percent to 66 percent.

  • Potential GRA exposure to Colombia would be below 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 half of the Fund’s current precautionary balances.

Table 3.

FCL Arrangement for Colombia–Impact on GRA Finances

(In SDR millions, unless otherwise indicated)

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Sources: Finance Department.

The FCC is determined on the basis of ordinary resources and amounts made available under bilateral borrowing and note purchase agreements and under multilateral standing borrowing arrangements. It reflects activation of the NAB for a six-month period through September 30, 2011.

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

Excluding Colombia’s existing FCL.

II. Assessment

7. The proposed arrangement has an overall modest and manageable impact on the Fund’s liquidity. The current liquidity position is sufficiently strong to accommodate the impact of the proposed arrangement, particularly so since the proposed cancellation of Colombia’s existing FCL arrangement would partially offset the initial reduction in the FCC arising from the new arrangement. Nevertheless, in view of the uncertainty surrounding the recovery from the global crisis and the likelihood of continuing strong demand for Fund financing, a close monitoring of the liquidity position is warranted.

8. Colombia intends to treat the FCL arrangement as precautionary, but the Fund’s credit exposure would remain moderate even with a drawing. Hence, given Colombia’s sustained track record of implementing very strong policies, including during the global financial crisis, and its commitment to maintaining such policies in the future, the capacity to repay is projected to remain strong. Nonetheless, the scale of the Fund’s potential exposure—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 five Fund arrangements since 1999, but has not drawn on Fund resources since 1971 (Table I.1). A one-year FCL arrangement equivalent to SDR 6.966 billion was approved on May 11, 2009 to support Colombia’s economic policies and bolster confidence during the crisis. A successor one-year FCL arrangement equivalent to SDR 2.322 billion was approved on May 7, 2010. Prior to the FCL arrangement approved in 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 result 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, 1999–2010

(In millions of SDR)

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Source: Finance Department.
1

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, as amended.

2

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

3

A more detailed description 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 the full amount available under the arrangement is purchased upon approval of the arrangement, and that all repurchases are made as scheduled.

5

As of April 20, 2011 the FCC includes resources available under the NAB during the currently effective sixmonth activation period, which ends on September 30, 2011. See The Fund’s Liquidity Position–Review and Outlook (4/13/11)

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 Alternate Executive Director for Colombia
Author: International Monetary Fund