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

Arrangement Under the Flexible Credit Line and Cancellation of Current Arrangement-Press Release and Staff Report

Abstract

Arrangement Under the Flexible Credit Line and Cancellation of Current Arrangement-Press Release and Staff Report

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 7.848 billion (384 percent of quota). The existing FCL arrangement for SDR 8.18 billion (400 percent of quota), which was approved on June 13, 2016, will be cancelled. 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 six FCL arrangements 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, followed by three two-year FCL arrangements in the amount of SDR 3.870 billion (500 percent of quota) approved on May 6, 2011, June 24, 2013, and June 17, 2015, respectively, which were also treated as precautionary. The third, approved on June 17, 2015, was cancelled before its expiration upon approval of a successor two-year FCL arrangement in the amount of SDR 8.18 billion (400 percent of quota) on June 13, 2016. Colombia’s very strong economic fundamentals and institutional policy frameworks allowed the authorities to cushion the impact of the global financial crisis through countercyclical monetary and fiscal policies and, more recently, respond to shocks such as the 2015-16 drop in commodity prices and the collapse of the Venezuelan economy. The FCL arrangements supported the policy framework and provided 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, Colombia has had nine arrangements since 1999, but has not drawn on Fund resources since 1971.

3. Colombia’s total external debt has increased following the oil price shock, but is expected to decline over the medium-term (Table 1). External debt relative to GDP remained stable at about 22 –26 percent up to 2013. It increased to 42.5 percent in 2015, due mostly to valuation effects of exchange rate depreciation but also to larger financing needs arising from the widening of current account deficits. After peaking at 49.6 percent in 2016, the ratio has been gradually declining. The bulk of this debt is long term and owed by the public sector. Private sector external debt is relatively low, although it has increased from 8.8 percent of GDP in 2012 to 17.0 percent of GDP in 2017. The current account deficit, which surged to 6.4 percent of GDP in 2015 driven by a reduction in commodity exports, has narrowed faster than expected to 3.4 percent of GDP in 2017, helped mostly by subdued imports. Staff’s updated external debt sustainability analysis suggests that external debt ratios would steadily decline over the medium-term and remain manageable even under large negative shocks.3

Table 1.

Colombia: Total External Debt, 2012–17

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Sources: Colombian authorities and IMF staff estimates.

The Proposed Flexible Credit Line Arrangement—Risks and Impact on Fund Finances

4. If the full amount available under the proposed FCL arrangement were disbursed:

  • 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 50.0 and 33.5 percent of GDP, respectively, with Fund credit representing 3.5 percent of GDP (Table 2). At its peak, Colombia’s outstanding use of GRA resources would account for 7.0 percent of total external debt, 11.6 percent of public external debt, and 22.0 percent of gross international reserves.4

  • 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 2022 at about SDR 4.04 billion, or close to 1.5 percent of GDP.5 In the same year, external debt service to the Fund would peak at 8.8 percent of exports of goods and services, and account for about 50 percent of public external debt service.

Table 2.

Colombia: Capacity to Repay Indicators1/

(In SDR millions, unless otherwise indicated)

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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 30, 2018. 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.

5. The proposed arrangement under the FCL would have a marginal immediate impact on the Fund’s liquidity, and the Fund’s potential credit risk exposure would be moderate:

  • Relative to the current situation, the proposed arrangement would result in a slight increase in the Fund’s modified forward commitment capacity (FCC), by SDR 0.3 billion or about 0.2 percent (Table 3).6 The cancellation of the current arrangement with access level of SDR 8.18 billion and approval of the proposed one with access level of 7.848 billion would have a marginal positive net impact on the FCC.7 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 SDR 1.6 billion.8

  • If the resources available under the FCL arrangement were fully drawn, GRA credit to Colombia would be about 17.3 percent of total GRA credit. This would make Colombia a borrower with the third largest credit outstanding among current arrangements, and reduce the concentration of Fund credit in the top five users of Fund resources from about 78 percent to about 74 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 about 45 percent of the Fund’s current precautionary balances.

Table 3.

Colombia: FCL Arrangement—Impact on GRA Finances

(In SDR millions, unless otherwise indicated)

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Source: Finance Department.

The FCC is defined as the Fund’s stock of usable resources less undrawn balances under existing arrangements, plus projected repurchases during the coming 12 months, less repayments of borrowing due one year forward, less a prudential balance. The FCC does not include resources under the 2016 Borrowing Agreements; these 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 the agreeements.

Current FCC minus access under the proposed arrangement plus the quota-financed portion of the arrangement being cancelled. The arrangement to be cancel was approved after the February 2016 de-activation of the NAB and is, as the proposed successor arrangement, fully financed with quota resources. The concomitant cancellation of the existing arrangement and approval of the proposed arrangement slightly increases the FCC as the access amount for the proposed FCL arrangement is below that of the existing FCL arrangement.

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

Assessment

6. The proposed arrangement will have only a marginal immediate effect on the Fund’s liquidity. The Fund’s liquidity is expected to remain adequate on approval of the proposed FCL arrangement as the concomitant cancellation of the current arrangement would fully offset the liquidity impact of the proposed new arrangement and result in a marginal positive net impact on the FCC. Even if Colombia were to draw, the effect on the Fund’s liquidity would be small. Nevertheless, in view of persistent risks to global growth and financial stability, a close monitoring of the liquidity position is warranted.

7. Colombia intends to treat the FCL arrangement as precautionary, but the Fund’s credit exposure would remain moderate in the event of a drawing. If fully drawn, the arrangement would account for about 17.3 percent of total GRA credit outstanding and be below the existing level of precautionary balances. Some indicators including external debt and debt service show that Colombia’s capacity to repay the Fund has slightly strengthened compared to 2016 when the current FCL arrangement was approved. Moreover, Colombia’s sustained track record of implementing very strong policies, including during the global financial crisis and the recent sharp drop in oil prices, its commitment to maintain such policies in the future, and its moderate external debt mitigate risks to the Fund from potential exposure to Colombia. Against this background, Colombia’s capacity to repay is projected to remain strong even if potential downside risks were to arise from a sudden, sharp tightening of financial conditions as a result of an unexpected increase in inflation and/or an escalation of trade or geopolitical tensions.

Annex. History of IMF Arrangements

1. Colombia had nine Fund-supported arrangements since 1999, but has not drawn on Fund resources since 1971 (Table l.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 arrangement was approved on May 6, 2011 increasing the access to SDR 3.870 billion. This was followed by two successor FCL arrangements with the same access, which were approved on June 24, 2013 and June 15, 2015, respectively. The arrangement in 2015 was cancelled before its expiration upon approval of a successor two-year FCL arrangement with the increased access of SDR 8.18 billion on June 13, 2016.

Table 1.

Colombia: IMF Financial Arrangements, 1999–2017

(In millions of SDR)

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Source: Finance Department.

2. 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

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

4

Since drawing would typically occur after a shock, the macroeconomic variables are likely to be worse than under the baseline presented in Table 2; for example, under an illustrative adverse scenario employed to measure access (see Colombia—Arrangement Under the Flexible Credit Line and Cancellation of the Current Arrangement, 5/14/18) in which world oil prices are assumed to decline by 28 percent relative to the baseline), reserves may be drawn down by US$7.2 billion in 2018, suggesting that Colombia’s peak GRA credit would rise from 19.3 percent to 22.0 percent of gross international reserves in 2018. This does not materially impact staff’s current view of Colombia’s capacity to repay.

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

In accordance with the definition, the FCC reflects resources available under the NAB during the current NAB activation period. The FCC does not include the 2012 Borrowing Agreements. 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

No NAB-financed portion exists for the current FCL arrangement, which was approved after February 2016.

8

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