IMF Executive Board Approves New Two-Year US$5.45 Billion Flexible Credit Line Arrangement for Colombia

EXECUTIVE SUMMARY Background: Colombia’s strong economic policy framework, comprising an inflation- targeting regime, a flexible exchange rate, effective financial sector supervision and regulation, and a fiscal policy guided by a structural balance rule, has underpinned strong economic performance in recent years. These policies and institutions also help smooth the large terms of trade shock the country is facing, allowing a gradual adjustment to a new equilibrium. Outlook: In the baseline scenario, growth is expected to decelerate to 3.4 percent in 2015 but gradually return toward potential (4¼ percent) over the medium term and inflation to remain at the midpoint of the central bank’s 2–4 percent target range. The current account deficit would gradually narrow in line with the expected mild rebound in oil prices and the sustained growth in Colombia’s trading partners, while net private capital inflows would remain strong. The authorities are firmly committed to maintaining their sound policy framework and strengthening policy buffers in the period covered by the proposed arrangement. Risks: Risks associated with emerging markets have increased since the 2014 Article IV consultation. Despite strong fundamentals, Colombia is facing a permanent adjustment to weaker external conditions while being vulnerable to tail risks, especially a surge in financial volatility, protracted growth slowdown in trading partners, and a further decline in oil prices. Flexible Credit Line (FCL): The authorities are requesting a successor two-year FCL arrangement for 500 percent of quota (SDR 3.87 billion), which they intend to treat as precautionary, and cancellation of the current arrangement which expires on June 23, 2015. The access requested would provide Colombia with reasonable cover in an adverse external scenario. The authorities consider access to the FCL to be temporary and have signaled their intention to phase out its use as external risks recede. Staff assesses that Colombia meets the qualification criteria for access to Fund resources under the FCL arrangement, and recommends its approval by the Executive Board. Fund liquidity: The proposed commitment of SDR 3.87 billion would have only a marginal impact on the Fund’s liquidity position. Process: An informal meeting to consult with the Executive Board on a possible FCL arrangement for Colombia was held on May 22, 2015.

Abstract

EXECUTIVE SUMMARY Background: Colombia’s strong economic policy framework, comprising an inflation- targeting regime, a flexible exchange rate, effective financial sector supervision and regulation, and a fiscal policy guided by a structural balance rule, has underpinned strong economic performance in recent years. These policies and institutions also help smooth the large terms of trade shock the country is facing, allowing a gradual adjustment to a new equilibrium. Outlook: In the baseline scenario, growth is expected to decelerate to 3.4 percent in 2015 but gradually return toward potential (4¼ percent) over the medium term and inflation to remain at the midpoint of the central bank’s 2–4 percent target range. The current account deficit would gradually narrow in line with the expected mild rebound in oil prices and the sustained growth in Colombia’s trading partners, while net private capital inflows would remain strong. The authorities are firmly committed to maintaining their sound policy framework and strengthening policy buffers in the period covered by the proposed arrangement. Risks: Risks associated with emerging markets have increased since the 2014 Article IV consultation. Despite strong fundamentals, Colombia is facing a permanent adjustment to weaker external conditions while being vulnerable to tail risks, especially a surge in financial volatility, protracted growth slowdown in trading partners, and a further decline in oil prices. Flexible Credit Line (FCL): The authorities are requesting a successor two-year FCL arrangement for 500 percent of quota (SDR 3.87 billion), which they intend to treat as precautionary, and cancellation of the current arrangement which expires on June 23, 2015. The access requested would provide Colombia with reasonable cover in an adverse external scenario. The authorities consider access to the FCL to be temporary and have signaled their intention to phase out its use as external risks recede. Staff assesses that Colombia meets the qualification criteria for access to Fund resources under the FCL arrangement, and recommends its approval by the Executive Board. Fund liquidity: The proposed commitment of SDR 3.87 billion would have only a marginal impact on the Fund’s liquidity position. Process: An informal meeting to consult with the Executive Board on a possible FCL arrangement for Colombia was held on May 22, 2015.

The Executive Board of the International Monetary Fund (IMF) today approved a successor two-year arrangement for Colombia under the Flexible Credit Line (FCL) in an amount equivalent to SDR 3.87 billion (about US$5.45 billion). The Colombian authorities stated their intention to treat the new arrangement as precautionary and do not intend to draw on it.

Following the Executive Board’s discussion on Colombia, Mr. David Lipton, First Deputy Managing Director and Acting Chairman of the Board, issued the following statement:

“Colombia has a track record of very strong policy frameworks, including an inflation-targeting regime, a flexible exchange rate, effective financial sector supervision and regulation, and a fiscal policy guided by a structural balance rule. The authorities are firmly committed to maintain such policies and undertake further initiatives to strengthen the resilience of the economy, boost competitiveness, and foster inclusive growth.

“Colombia’s macroeconomic policies have provided flexibility to mitigate the impact of the recent sharp decline in world oil prices. The fiscal rule represents an important buffer against oil price fluctuations, allowing a smooth adjustment of expenditure to a dimmer medium-term oil outlook. The flexible exchange rate regime continues to play an important shock-absorbing role in helping the economy adapt to shifts in global economic and financial conditions, and the banking and corporate sectors remain in good financial health. The central bank has also taken advantage of abundant capital inflows to further build up international reserves.

“However, adverse external risks pose strong headwinds, and, if they materialize, could weaken the country’s external position. Access to the Fund’s FCL will continue to play a significant role in supporting the authorities’ policies in the presence of these downside risks. A successor FCL arrangement, which the authorities intend to continue to treat as precautionary, will provide policy flexibility and serve as a temporary insurance that reinforces market confidence. The authorities intend to phase out the use of the FCL facility as global risks affecting Colombia decrease substantially.”

Background:

Colombia’s first FCL arrangement was approved on May 11, 2009 (see Press Release No. 09/161) and was renewed on May 7, 2010 (see Press Release No. 10/186), May 6, 2011 (see Press Release No. 11/165), and June 24, 2013 (see Press Release No. 13/229).

The FCL was established on March 24, 2009 and further enhanced on August 30, 2010 (see Press Release No. 10/321). The FCL is available to countries with very strong fundamentals, policies, and track records of policy implementation and is particularly useful for crisis prevention purposes. FCL arrangements are approved for countries meeting pre-set qualification criteria (see Press Release No. 09/85). The FCL is a renewable credit line, which could be approved for either one or two years. Two-year arrangements involve a review of eligibility after the first year. If the country draws on the credit line, the repayment period is between three and five years. There is no cap on access to Fund resources under the FCL, and access is determined on a case-by-case basis. Qualified countries have the full amount available up-front, with no ongoing conditions. There is flexibility to either draw on the credit line at the time it is approved, or treat it as precautionary.

Colombia: Arrangement Under the Flexible Credit Line and Cancellation of the Current Arrangement
Author: International Monetary Fund. Western Hemisphere Dept.