Colombia and the IMF |
Press Release: IMF Completes First Review of Colombia's Stand-By Arrangement, Approves US$274 Million Disbursement
June 11, 2003
Country's Policy Intentions Documents
of Intent, Memorandum of Economic and Financial Policies, and Technical
Memorandum of Understanding
Mr. Horst Köhler
Dear Mr. Köhler:
The government remains fully committed to its economic program for 2003-04, which is being supported by the Stand-By Arrangement (SBA) approved by the Fund in January 2003 In the attached Memorandum of Economic Policies (MEP) and Technical Memorandum of Understanding (TMU), we explain the policies we are implementing to ensure that we achieve the program's objectives for 2003. On this basis, we are requesting completion of the first review under the SBA. The second review under the SBA is expected to be completed by November 2003. In the context of this review, we will assess the need for any additional measures to ensure that the fiscal target for 2003 is attained. We will also present our program for 2004, and agree on the schedule and frequency of reviews for 2004. The government will continue to maintain a close policy dialogue with the Fund, and if the need arises, the government stands ready to take additional measures.
1. During the second half of 2002, the government developed an economic program for 2003-04 that is designed to promote more rapid economic growth by strengthening domestic security, improving the fiscal position so as to ease the public debt burden, and advancing structural reforms. The government remains committed to reducing the overall public sector deficit from 3.6 percent of GDP in 2002 to 2.5 percent of GDP in 2003 and 2.1 percent of GDP in 2004. This fiscal stance will halt the rapid increase in public debt, which reached about 52 percent of GDP at end-2002,1 and set the stage for its reduction in subsequent years.2 At the same time, the fiscal framework makes room for real increases in social spending of 8 percent in 2003 and 3 percent in 2004. In addition, the Banco de la República intends to reduce inflation, while maintaining net international reserves at comfortable levels.
2. Structural reforms aim to make the fiscal position sustainable and to strengthen further the financial system. Congress already approved in December 2002 several bold reforms under the program that strengthen tax revenues, reduce the actuarial deficit of the pension system, and diminish transaction costs in the financial system. It has also given the executive special powers to streamline the public sector. Congress also approved a labor market reform that makes it easier for Colombians to gain employment in the formal sector. In May 2003, a comprehensive reform of the teachers' pension system was approved by congress in the context of the National Development Plan. Several other fiscal measures have been included in a nationwide referendum, namely a two-year freeze on many components of public expenditure and the elimination of all nonmilitary special pension regimes (regímenes exceptuados y especiales) that fall outside of the general pension regime. The government is confident that the referendum enjoys popular support and will be approved, most likely later in 2003. A legal review of the referendum by the Constitutional Court is still pending.
3. This program rapidly gained the support from the international community. In mid-January 2003, the International Monetary Fund approved a two-year Stand-By Arrangement that makes available about US$2.1 billion of resources. The World Bank and the Inter-American Development Bank (IDB) are also backing the government's policies, and we expect these institutions to disburse over US$2.5 billion in 2003.
II. Recent Developments
4. Under the program, economic performance has been favorable, although inflation is a concern:
III. Program for 2003
5. The government remains fully committed to its economic program. Real GDP is projected to grow by 2 percent in 2003, while inflation is expected to decline. The external current account deficit is estimated to increase to 2.3 percent of GDP (instead of narrowing to 0.8 percent of GDP as originally envisioned), partly because of lower exports to Venezuela and higher imports of capital goods. Nevertheless, net capital inflows, especially to the public sector, are expected to be sufficient to allow the Banco de la República to meet its objective for net international reserves at end-2003. The performance criteria for net international reserves for June and September 2003 are presented in the attached technical memorandum of understanding (TMU) and are in line with the original program.
6. The overall public sector deficit will decline to 2½ percent of GDP in 2003, as planned. The performance criteria on the overall public sector deficit for June and September 2003 are presented in the attached TMU and are the same as the indicative targets presented in the December 2002 memorandum of economic policies. While fiscal policy faces some risks, the government is committed to achieving the fiscal target for 2003. For this reason it is studying the feasibility of several contingency measures that would safeguard fiscal policy were these risks to materialize. These measures include a rationalization of subsidies on gasoline, diesel, and electricity, a careful management of expenditure commitments in 2003, spending cuts, and bringing forward increases in current revenues scheduled for 2005. The spending cuts would be partly achieved through a decree that would freeze most central government wages. The government may also consider the possibility of issuing long-term bonds on concessional terms.
7. The composition of financing of the overall public sector deficit in 2003 will be prudent and consistent with a recovery of private credit demand. Net public external financing is now expected to amount to over 2 percent of GDP in 2003, compared with 0.3 percent of GDP originally envisaged in the program. The performance criteria on external borrowing for June and September are presented in the attached TMU and reflect this additional financing. As a result, net public domestic borrowing is projected to decline from 3 percent of GDP in 2002 to 0.5 percent of GDP in 2003. If market opportunities arise, the government may seek additional commercial external financing in anticipation of 2004 financing requirements or for liability management purposes.
8. Monetary policy will continue to be conducted within a framework of inflation targeting and a floating exchange rate. As envisaged in the December 2002 memorandum of economic policies, the target path for inflation is being revised upward by 0.4 percentage points to account for the first round effect of the VAT reform approved in December 2002. The Banco de la República remains committed to making the necessary policy adjustments to keep inflation within the targeted range.
9. The government is carrying out the structural reforms explained in the December 2002 memorandum of economic policies (see Table 2):
10. The government is preparing a timetable to remove remaining exchange restrictions in connection with its acceptance of the obligations under Article VIII under the Fund's Articles of Agreement. To that end, the Banco de la República recently reached agreement with China to eliminate the bilateral payments agreement between these two countries on June 30, 2003. Specific dates for beginning to phase out the remaining restrictions will be established during subsequent program reviews.
11. The safeguards assessment was very favorable, calling for few recommended adjustments to the accounting practices of the Banco de la República. The Banco de la República already has a strong financial control environment and complies with most of the International Accounting Standards (IAS). However with a view to enhancing international transparency, it intends to fully adopt IAS, to the extent that these do not conflict with established accounting regulations and the law. The Banco de la República also intends to adopt as a more permanent feature the requirement for an annual external audit conducted by an external audit firm, with international experience and exposure.
Table 2. Colombia: Structural Performance Criteria and Benchmarks Under the SBA1
1 At end-2002, public debt amounted to 55 percent of GDP according to the IMF definition, which includes the financial public sector.
2 This IMF definition differs from data published by the authorities by including debt of the financial public sector.
1. This memorandum sets out specific performance criteria for June 30, 2003 and September 30, 2003, and the structural performance criteria and structural benchmarks for the remaining period of the program. This TMU supplements the TMU of December 2, 2002, which presents all the definitions of the variables used to monitor performance under the program.
I. Fiscal Targets
A. Performance Criterion on the Overall Deficit of the Combined Public Sector1
(i) The quarterly ceilings on the combined public sector deficit will be adjusted upward (larger deficit), and the ceiling on net disbursements of medium- and long-term external debt of the public sector (see below) will be adjusted upward by the full amount of any concessional loan disbursements beyond what is currently envisaged under the program, up to a maximum of 0.5 percent of GDP or US$360 million for 2003 as a whole, in support of the government's domestic security program "Seguridad Democrática." A loan will be considered concessional if it has at least a 35 percent grant element at the time of loan approval using the commercial interest reference rate (CIRR) as discount rate.
(ii) The cumulative quarterly ceilings on the combined public sector deficit will be adjusted downward by 130 percent of the revenue (gross deposits) of the petroleum stabilization fund (FAEP), as currently defined in the law, in excess of the baseline set out in the table below.
Baseline Assumption for Oil Stabilization Fund Revenue (FAEP)
II. Monetary Targets
3. Reflecting the BR's inflation targeting framework for monetary policy, quarterly targets for 2002 and 2003 have been established for the 12-month rate of consumer price inflation, measured by the Indice de precios al consumidor (IPC) compiled by the Departamento Administrativo Nacional de Estadisticas (DANE). The authorities will complete consultations with the Fund (Executive Board) on the proposed policy response before requesting purchases from the Fund in the event that the observed quarterly inflation were to deviate from the programmed quarterly baseline target by 2 percentage points or more, as set out in the table below. In the event that the actual inflation deviates significantly from the programmed target within the 2 percentage points margin in any calendar quarter, the BR staff will report to the IMF staff on the reasons for the deviation and the policy response adopted, if any. The BR will provide Fund staff with monthly information and analysis of inflationary developments and forecasts, and keep the staff informed of all policy actions taken to achieve the inflation objectives of the program.
4. Adjustment. The inflation targets for June, September, and December 2003 have been adjusted upward by the direct effect of the VAT reform estimated at 0.4 percentage point.
Performance Criterion on Inflation1
III. External Targets
A. Performance Criterion on NIR of the BR
5. Adjustment. The quarterly NIR targets may be adjusted downward by up to US$2.0 billion to help secure orderly foreign currency market conditions consistent with transparent rules used by the central bank for foreign exchange intervention. In the event that NIR declines by US$1.0 billion during any 30-day period, the authorities will complete consultations with the Fund (Executive Board) on the proposed policy response before requesting purchases from the Fund.
B. Performance Criterion on the Net Disbursement of
C. Performance Criterion on Net Disbursement of
IV. Structural Performance Criteria
6. These are described in the Table 2 of the Memorandum of Economic Policies.