Colombia: Assessment of the Impact of the Proposed Flexible Credit Line Arrangement on the Fund’s Finances and Liquidity Position
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
10 Jul 2013
eISBN:
9781484339992
Language:
English
Keywords:
ISCR; CR; FCL arrangement; Colombia; deficit; credit to Colombia; liquidity position; FCL drawing; fund's liquidity; sustained track record; Debt service
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This staff report on Colombia’s arrangement under the Flexible Credit Line highlights economic policies and development. Colombia’s economic performance in recent years has been very strong, underpinned by a very strong institutional framework and prudent macroeconomic management. Following a sharp slowdown in 2008–2009, output growth rebounded vigorously, and inflation stayed within the official target range. A very strong policy framework—comprising an inflation-targeting regime, a flexible exchange rate, effective financial sector supervisionand regulation, and a medium-term fiscal framework—provided policy space to undertake timely and effective countercyclical measures to mitigate the effects of the global financial crisis, and skillful policy management helped maintain strong growth with low inflation.

Abstract

This staff report on Colombia’s arrangement under the Flexible Credit Line highlights economic policies and development. Colombia’s economic performance in recent years has been very strong, underpinned by a very strong institutional framework and prudent macroeconomic management. Following a sharp slowdown in 2008–2009, output growth rebounded vigorously, and inflation stayed within the official target range. A very strong policy framework—comprising an inflation-targeting regime, a flexible exchange rate, effective financial sector supervisionand regulation, and a medium-term fiscal framework—provided policy space to undertake timely and effective countercyclical measures to mitigate the effects of the global financial crisis, and skillful policy management helped maintain strong growth with low inflation.

Introduction

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 equivalent to SDR 3.870 billion (500 percent of quota). It would succeed the previous FCL arrangement with identical access, which expired on May 5, 2013. 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.

Background

2. Colombia has had three FCLs since 2009. 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, and a two-year FCL arrangement in the amount of SDR 3.870 billion (500 percent of quota) approved on May 6, 2011, which were also treated as precautionary. Colombia’s strong economic fundamentals and institutional policy frameworks allowed the authorities to cushion the impact of the crisis through countercyclical monetary and fiscal policies, with the FCL arrangements providing additional insurance against a deterioration of global conditions or specific shocks. No drawings have been made under any of the FCL arrangements. As discussed in Annex I, Colombia has had six arrangements since 1999, but has not drawn on Fund resources since 1971.

3. Colombia’s 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 small rise in external debt, which increased from 19.7 percent of GDP in 2008 to 23.2 percent in 2009, falling to about 21 percent of GDP in 2012.3 The bulk of this debt is long term and owed by the public sector. Private sector external debt is also very low, although it has increased somewhat from 7.2 percent of GDP in 2008 to 8.8 percent of GDP in 2012, reflecting liquidity conditions in international credit markets as well as investment opportunities in commodity export sectors. Over the medium term the external current account deficit, currently about 3 percent of GDP, 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.4

Table 1.

Colombia: Total External Debt, 2007–12

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Sources: 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 2013:

  • 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 22.4 and 14.3 percent of GDP, respectively, with Fund credit at 1.5 percent of GDP (Table 2). At its peak, Colombia’s outstanding use of GRA resources would account for 6.7 percent of total external debt, 10.5 percent of public external debt, and 12.7 percent of gross international reserves.

    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 May 16, 2013. 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.

  • External debt service including obligations to the Fund would increase over the medium term, but would remain manageable. Colombia’s projected debt service to the Fund would peak in 2017 at about SDR 2 billion, or close to 0.6 percent of GDP.5 In the same year, external debt service to the Fund would peak at 3.6 percent of exports of goods and services, and account for about 27 percent of public external debt service which would rise to 13.1 percent of exports of goods and services.

6. The approval of the arrangement would have a small impact on the Fund’s liquidity, and the Fund’s potential credit risk exposure would also be modest:

  • The proposed arrangement would reduce the Fund’s modified forward commitment capacity (FCC) by about 1.5 percent (Table 3).6 However, this decline would offset an increase in the FCC that resulted from the expiration of the previous arrangement of the same size. If Colombia were to draw under the FCL arrangement, it would be automatically excluded from the Financial Transaction Plan (FTP) and the FCC would decline by an additional SDR 619 million.7

    Table 3.

    FCL Arrangement for Colombia—Impact on GRA Finances

    (In SDR millions, unless otherwise indicated)

    article image
    Source: Finance Department.

    The FCC measures the Fund’s capacity to make new credit commitments. It reflects resources available under the NAB during the current activation period. The FCC does not include about US$461 billion in bilateral pledges from members to boost IMF resources. These resources will only be counted towards the FCC once: (i) individual bilateral agreements are effective and (ii) the associated resources are available for use by the IMF, in accordance with the borrowing guidelines and the terms of these agreements.

    The decline in the FCC would be equal to 80 percent of Colombia’s quota.

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

  • If the resources available under the FCL arrangement were fully drawn, GRA credit to Colombia would be about 4.2 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 80 percent to about 78 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 34 percent of the Fund’s current precautionary balances.

Assessment

7. The proposed arrangement will have a small effect on the Fund’s liquidity. The Fund’s liquidity is expected to remain adequate after the approval of the proposed FCL arrangement for Colombia. Even if Colombia were to draw, the effect on the Fund’s liquidity would be small. 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. If fully drawn, the arrangement would account for only a small share of total GRA credit outstanding and be well below the existing level of precautionary balances. Moreover, given Colombia’s sustained track record of implementing very strong policies, including during the global financial crisis, its commitment to maintain such policies in the future, and its low external debt, its capacity to repay the Fund is projected to remain strong even if potential downside risks from a reversal of favorable commodity prices and external financing conditions were to arise. 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 six 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. This arrangement was cancelled and a new two-year FCL was approved in May 6, 2011 increasing the access to SDR 3.870 billion.

Table I.1.

Colombia: IMF Financial Arrangements, 1999–2011

(In millions of SDR)

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Source: Finance Department.

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.

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

For comparison, Mexico’s and Poland’s external debt was about 24 percent and 70 percent in 2012, respectively.

4

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

5

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.

6

The FCC measures the Fund’s capacity to make new credit commitments. It reflects resources available under the NAB during the current NAB activation period. The FCC does not include about US$461 billion in bilateral pledges from members to boost IMF resources. These resources will only be counted towards the FCC once: (i) individual bilateral agreements are effective and (ii) the associated resources are available for use by the IMF, in accordance with the borrowing guidelines and the terms of these agreements.

7

Taking into account resources held as prudential balance, the decline in the FCC would be equal to 80 percent of Colombia’s quota.

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Cover IMF Staff Country Reports
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. Western Hemisphere Dept.
Volume/Issue:
Volume 2013: Issue 201
Publisher:
International Monetary Fund
ISBN:
9781484339992
ISSN:
1934-7685
Pages:
49
DOI:
https://doi.org/10.5089/9781484339992.002