Statement by Maria Angelica Arbelaez, Alternate Executive Director for Colombia, on the Review Under the Flexible Credit Line Arrangement, May 4, 2012

Colombia’s very strong track record of macroeconomic policy management, underpinned by robust fiscal and monetary policy frameworks, has reduced vulnerabilities in recent years and helped weather the global financial crisis. The authorities’ policy focus has shifted from supporting the recovery through appropriate countercyclical measures to rebuilding policy buffers through fiscal consolidation, the normalization of monetary policy, and a strengthening of the reserve position.


Colombia’s very strong track record of macroeconomic policy management, underpinned by robust fiscal and monetary policy frameworks, has reduced vulnerabilities in recent years and helped weather the global financial crisis. The authorities’ policy focus has shifted from supporting the recovery through appropriate countercyclical measures to rebuilding policy buffers through fiscal consolidation, the normalization of monetary policy, and a strengthening of the reserve position.

On behalf on my authorities I want to express our gratitude to the Board for the FCLs that Colombia has obtained, and to staff and management for their continued support. The FCLs have been an important complement to the wide policy response to the global crisis, which has involved exchange rate flexibility, countercyclical fiscal and monetary policies, securing precautionary external funding and ensuring a cushion of international liquidity for the country. The FCLs have also signaled the strength of our economy and policy framework.

The Colombian economy was resilient to the global financial crisis of 2008-2009 and the recent troubles in Europe have had virtually no impact on the economic performance. In 2011 the economy grew by 5.9 percent (1.2 percent above the Latin-American average) and will continue to gain momentum in 2012 with an expected growth around 5 percent. Growth has been broad-based, led by both internal demand and exports. Despite the protracted weak external demand in advanced economies, both traditional and non-traditional exports have been dynamic (total exports grew 43 percent in 2011) in part as a result of strong efforts to diversify markets. In addition, confidence stemming from good performance and strong fundamentals was reflected in high consumption, a boom in domestic and foreign investment and an increasingly comfortable access to markets.

Macroeconomic fundamentals continue to be strong. In 2011 the fiscal deficit was lower than expected, the public debt has remained on a downward trend and inflation was subdued. The external position has continued to be favorable stemming from a narrow current account deficit, abundant foreign investment and an adequate international reserve position. The financial sector has remained robust and has played a critical role in supporting growth. Given the commitment of the Colombian authorities to maintain sound economic management complemented with an ambitious agenda of structural reforms it is expected that the good performance will persist in 2012.

Although contagion effects in Colombia have been negligible thus far, a further deterioration of the global growth could have severe negative impacts on the economy, particularly through a decline in commodity exports, remittances and foreign direct investment. Colombia is particularly vulnerable to commodity price shocks, since most of exports are commodities and FDI is concentrated in commodity sectors. The authorities consider that preserving strong fundamentals and macroeconomic policies supported by well-built institutions are the first line of defense against external shocks and continue to see the FCL as a valuable insurance and a complement to reserves in a still highly uncertain global environment.

Fiscal Stance

Colombia has a track record of fiscal discipline and the authorities have been putting in place a comprehensive institutional framework to anchor a credible and healthy long-term fiscal stance. This has allowed a gradual reduction of the fiscal deficit and a significant decline in the public debt. In 2011, the fiscal position was better than expected as a result of lower expenditure and higher revenues, the latter driven by the 2010 tax reform and ambitious measures to improve tax administration. The deficit of the Central Government was 2.9 percent instead of 4 percent; the non financial public sector (NFPS) deficit was 2.2 percent instead of 3.4 percent; and the net public debt ended at 34 percent of GDP, down from 36.6 percent of GDP a year before.

Based on this favorable outcome, the authorities further tightened the fiscal targets for 2012 to 2.8 percent for the Central Government and 1.8 percent for the NFPS. The risks are on the upside owing to larger than expected mining production by around 1 percent of GDP, higher commodity prices and stronger GDP growth. It is noteworthy that fiscal discipline strengthened amidst severe flooding that had been hitting the entire country, leaving enormous losses and infrastructure damage. The authorities are carefully preparing the budget for 2013 with a view to containing the deficit further, but at the same time seeking to accommodate infrastructure spending and the financing of the flood recovery plan.

With an aggregate demand still dynamic, the authorities do not see merit for fiscal stimulus measures at this time and rather continue to build fiscal buffers. However, should further deceleration of domestic and external demand materialize, they are ready to react by using temporary countercyclical tools that were put in place during the financial crisis of 2008-2009 and proved to be effective.

The authorities have developed a clear and transparent public credit strategy fully consistent with the short and medium-term fiscal plan. Among the achievements of 2011 were reducing financing risk, building liquidity buffers, decreasing risk perception, enhancing debt profile and limit external exposure. The next step is to adapt the debt strategy to the fiscal rule which operation is envisaged for 2014.

Monetary Policy and Exchange Rate

Long run inflation expectations are well anchored by the Inflation Targeting framework. Owing to strong economic growth, abundant capital flows, favorable terms of trade and relatively rapid growth in consumption credit, the authorities tightened the monetary policy for most of 2011 and early in 2012 and increased interest rates during the period by 2.25 basis points. Core inflation edged up and surpassed the mid-point range of 3 percent and inflation expectations were in the upside of the range. However, signs of moderation of the economic activity and credit since March as well as a decline in monthly inflation since end-2011 have not warranted further increases of the policy interest rate over the last two months. The authorities remain vigilant over the evolution of the demand for credit as well as asset prices, especially real estate, and stand ready to act should the external crisis deepen.

Capital inflows remain substantial, mostly FDI. Portfolio inflows rose recently but are still small and other private inflows have been offset by outflows. FDI has had a very positive impact on the economy, not only through higher tax receipts but also through the second-round effect of increased private domestic investment. Nonetheless, the country has experienced pronounced exchange rate appreciation, even greater than that of its peers, and has been tightly linked to the faster reduction in the sovereign risk premium.

Exchange rate flexibility has been the first shock absorber, but the authorities remain attentive to the disruptions that the surge of capital flows and their volatility may cause. In order to select the appropriate policy, the central bank is looking closely at the kind of inflows, currency misalignment, risks of financial instability and long term fundamentals. The program of daily purchases of foreign exchange (US$20 million per day) was recently extended, with the primary objective of maintaining a stable level of reserves. Macro-prudential measures have also been put in place and are an important component of the policy toolkit. The government is also taking administrative steps to mitigate exchange appreciation such as barring the repatriation of foreign currency dividends from the oil company, Ecopetrol. In addition, structural measures have been adopted to improve competitiveness, including the amendment of import tariffs on capital goods and other tax adjustments.

Financial Sector

The financial sector remains solid and highly profitable (with profits above pre-crisis levels). Regulation and supervision are strong and have improved further with the creation of the Financial Stability Committee (FSC) in which the Ministry of Finance, the Central Bank and the Financial Superintendency participate.

Credit continues to grow dynamically (22 percent in 2011), led by corporate and consumption borrowing. Non-performing loans are moderate (close to 2 percent) and they are well provisioned. In addition, in November of 2011 prudential regulation was strengthened through an update of the criteria to value guarantees by banks and an increase of provisions for consumption credit. The system is well capitalized with an average capital ratio of 14.9 percent, well above the 9 percent statutory minimum. Nonetheless, the authorities see room for improving the quality of capital and plan to implement in June 2012 a new regulation on capital which changes the components of Tiers I, II and III to align with international standards. Banks are liquid and liquidity standards were recently strengthened in the line with Basel III standards. The FSC is analyzing Systemically Important Financial Institutions (SIFIs) and interconnectedness, with a view to either increasing capital or improving supervision.

The financial sector has low vulnerability to the ongoing financial difficulties in Europe. Banks are mainly funded by local deposits with low exposures to European banks. The largest banks are domestic and foreign banks are mostly small and subsidiaries, therefore subject to the same regulation and supervision as domestic banks.

Structural Reforms

The government has undertaken an ambitious reform agenda. Among the most important achievements of 2011 were the introduction of a fiscal rule, the inclusion of the principle of fiscal sustainability in the Constitution, a comprehensive reform to royalties, labor formalization and healthcare reform. In the second quarter of 2012 the authorities plan to submit to Congress a comprehensive tax reform package, followed by pension reform legislation in the second semester.

The main objective of the tax reform is to promote economic growth. The new tax structure is intended to improve equity, enhance competitiveness, increase formalization, improve transparency and meet international best practices. In addition, it creates new tools to minimize tax elusion and evasion.

Final Remarks

The Colombian authorities are committed to preserving strong fundamentals and macroeconomic policies supported by well-built institutions. The FCL has been extremely helpful during past and current troubles in the global economy serving as an insurance against external shocks, and has complemented well the authorities’ wide policy response. Colombia has treated the FCLs as precautionary and will continue to do so.

Colombia: Review Under the Flexible Credit Line Arrangement--Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Colombia
Author: International Monetary Fund. Western Hemisphere Dept.