## 1. Monetary and Financial Conditions (cr17138)

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### Recent developments
- External environment worsened in 2016: trading partners’ growth slowed and average oil prices declined further; foreign participation in the local bond market reached record highs.
- Domestic growth moderated to 2 percent in 2016; investment declined by about 4 percent.
- Headline inflation reached 9 percent in July 2016 (temporary factors); declined to 5.7 percent by year-end 2016.
- Current account deficit narrowed from 6.4 percent of GDP in 2015 to 4.4 percent of GDP in 2016 despite continued decline in oil exports.
- Reserves remained at US$46.3 billion at end-2016.
- External debt increased to about 49 percent of GDP due to higher foreign holdings of government debt (7 percent of GDP).
- Monetary policy: policy rate raised by 200 bps between January and September 2016; cut by 25 bp in December 2016 to 7.5 percent; further cuts of 25 bp in February and March 2017 and a 50 bp cut during Q1 2017 noted.
- Credit: credit gap well below boom levels; consumer (especially credit card) and mortgage credit remained brisk.
- Fiscal: central government headline deficit widened to 4 percent of GDP; structural deficit declined to 2.8 percent of GDP (2.1 percent of GDP using official parameters); implied negative fiscal impulse of -½ percent of GDP at central government level and about -2¼ percent of GDP at consolidated public sector level.
- Structural tax reform (approved December 2016) increased the VAT rate by 3 percentage points in January 2017.
- Social indicators: poverty declined from 20 percent in 2015 to 18 percent in 2016; Gini coefficient declined from 52.2 percent in 2015 to 51.7 percent in 2016.
- Peace agreement: revised agreement approved by Congress on December 1st, 2016; negotiations with ELN underway.

### Safeguards and financial oversight
- Safeguards procedures for Colombia's 2016 FCL arrangement were completed.
- Deloitte issued an unqualified audit opinion on the Banco de la República Colombia’s 2015 financial statements on February 17, 2016; no significant safeguards issues emerged.

### Outlook and projections
- Near-term growth projected to increase to 2.3 percent in 2017; medium-term growth projected at about 3.5 percent.
- Inflation convergence to the 2−4 percent target will be gradual; core inflation remained relatively high as of discussions.
- Current account deficit projected to narrow to 3.8 percent of GDP in 2017; staff estimates CA norm at -2.6 percent of GDP implying about 1 percent of GDP gap versus the 2016 cyclically adjusted CA balance of -3.6 percent of GDP.
- Gross external financing needs projected to decline to about 12 percent of GDP in 2017 and hover around 10 percent of GDP over the medium term.
- Balance of risks rated to the downside; reserves at 139 percent of the ARA metric and the FCL referenced as cushions.

### Global risk considerations and high-level policy advice
- Key global risks identified:
  - retreat from cross-border integration;
  - policy uncertainty and divergence (U.S., Europe);
  - significant further strengthening of the U.S. dollar and/or higher rates;
  - weaker-than-expected global growth including a China slowdown;
  - structurally weak growth in key advanced and emerging economies;
  - lower energy prices.
- Policy advice across risks includes:
  - speed up structural reforms and pro-diversification measures;
  - use the exchange rate and international reserves as shock absorbers;
  - foreign exchange intervention to smooth disorderly behavior;
  - monetary policy support when expectations anchored;
  - speed up high-return public investment projects;
  - provide liquidity support to systemic institutions;
  - develop new financing instruments in line with fiscal sustainability.

### Key policy issues and recommendations
- Overall policy mix: balance reduction of imbalances with support for recovery; gradual softening of monetary and fiscal policy has begun and, together with the tax reform and peace process, will support recovery.
- Monetary policy (staff guidance):
  - Pace of monetary easing contingent on inflation expectations; further progress on disinflation needed.
  - Negative output gap estimated at about -1 percent of GDP.
  - Current policy rate implies a real ex-ante rate of about 3 percent, exceeding neutral real rate of around 1−2 percent.
  - Nominal policy rate could fall to around 6 percent in the second half of the year, implying a restrictive stance (2 percent real), but path depends on inflation and external indicators.
  - External demand should lead rebound in activity to ensure continued reduction of current account deficit toward sustainable levels.
- Fiscal and structural policy:
  - Structural tax reform proceeds estimated at 0.7 percent of GDP; central government deficit expected to narrow to 3.6 percent of GDP in 2017.
  - Consolidated public sector projected deficit of 2.9 percent of GDP as subnational spending execution strengthens.
  - Planned consolidation implies a mild negative fiscal impulse (-0.1 percent of GDP).
  - Priority placed on initiating a downward path for public debt starting the year, including along implementation of the peace agreement.
  - Expenditure-side measures: improve targeting of subsidies and seek expert recommendations to improve expenditure efficiency.
- Financial regulation and supervision:
  - Adoption of Basel III elements underway; a draft conglomerates law under discussion in congress to increase regulatory powers over holding companies of financial conglomerates.

*COLOMBIA — INTERNATIONAL MONETARY FUND (content unit cr17138).*

---

### Box 1. Monetary and Financial Conditions

### Monetary stance and neutral real interest rate
- Staff’s updated estimates: monetary policy and broad financial conditions remained tight in 2016.
- Range for the real neutral interest rate assessed to be 1‒2 percent.
- Central Bank provided a range of estimates for the real neutral rate with the median at 1.4 percent.
- Implication: the (ex-ante) real monetary policy rate has been at contractionary levels during 2016.

### Financial conditions, FCI, and macroeconomic impact
- Financial conditions remained tight in 2016, amplifying monetary policy impact.
- FCI normalized around 0 over 2001–16; values above zero indicate “loose” and below zero “tight” conditions.
- Impulse response: a 1 standard deviation tightening of financial conditions lowers GDP growth by about 0.25 percentage points within 12 months.
- Staff inference: observed cumulative tightening would continue weighing on growth in 2017 (by about 0.2 ppts).

### Mortgage credit, housing prices, and macro‑financial risks
- Real mortgage credit growth: 6.8 percent (reported in Box 1); later noted accelerated to about 7 percent at end-2016.
- Around 30 percent of mortgages originated in 2016 were subsidized.
- Staff estimated a house price gap of 13.5 percent (see SIP Chapter 2); later noted real estate prices about 13 percent above fundamentals.
- Mitigating factors:
  - Low loan-to-value ratios (well below the 70 percent regulatory ratio).
  - Small mortgage portfolios of banks: 13 percent of total.
  - Macroprudential measures adopted after the 1999 financial crisis (LTV limits, full recourse, no prepayment penalties, fixed-rate mortgages).

### Corporate and household balance sheets; credit risk
- Corporate debt: 46 percent of GDP, composed mostly of local bank loans; leverage and profitability worse than historical average as of 2015.
- Household debt: 20 percent of GDP.
- Household debt service burden: 10 percent of disposable income.
- Rising credit card debt noted as an upward risk to NPLs amid recent labor market softening.
- Non-performing loans (NPLs):
  - Increased marginally during 2016; spiked in January 2017 to 3.7 percent.
  - NPLs largest in microcredit: 7.5 percent NPLs in January 2017; microcredit accounts for 2.8 percent of total loan portfolio.
  - Commercial loan book: 55 percent of total loans.
  - Consumer loans: 27.7 percent of total loans.
- Sectoral NPL increases largest in mining, with notable increases in commerce, construction, transportation, agriculture.

### Banking system resilience and stress test outcomes
- Capital adequacy as of 2016Q3: 17.6 percent.
- Official stress test scenario: sudden temporary increase in EMBIG spreads (200 basis points) and a drop in global confidence calibrated to mimic a sovereign downgrade.
  - Result: commercial NPLs increase from about 3 percent to near 10 percent in a two-year horizon.
  - Cumulative bank losses would reach 21.1 percent of bank equity.
  - Bank solvency would remain above the 9 percent regulatory minimum as part of provisioning needs would be covered from existing countercyclical buffers.
- Strong prudential standards have cushioned shock impacts.
- Largest non-bank financial companies (pension funds, insurance companies, trust companies) remain strong; earnings of stock-brokerage firms (1.4 percent of financial system assets) have weakened.

### Timing and dynamics of credit risk
- Long lags estimated in NPL response to shocks:
  - Oil prices affect NPLs after three quarters, highest impact after 9 quarters.
  - Exchange rate: small immediate impact; largest after 6 quarters.
  - Real GDP: immediate impact, largest after 4 quarters.
  - Credit growth: affects NPLs mostly after 3 quarters.
- Implication: NPLs can respond to shocks one to two years after the initial shock; further increases possible.

### Policy implications and authorities’ actions
- Exchange rate flexibility will remain the first line of defense against external shocks; central bank to consider interventions as appropriate.
- Reserves are ample; the FCL represents an additional buffer.
- Macroprudential and supervisory actions recommended / underway:
  - Continued vigilance of corporate risks and progress on pending FSAP recommendations.
  - Strengthen supervision by the SFC, including proper loan classification and monitoring of restructuring practices.
  - Upgrade regulations toward Basel III; adoption of Basel capital buffers including Tier 1 requirements (6 percent) expected.
  - Conglomerates law expected to be adopted during the first half of the year to align group-wide capital with risks.
- Authorities’ measures to limit housing vulnerabilities: LTV limits and housing financing characteristics (full recourse, no prepayment penalties, fixed-rate mortgages).

*Source: IMF staff estimates and analysis as presented in the content unit.*

---

### Potential GDP, structural reforms, and growth drivers

### Potential GDP growth outlook
- Staff’s central scenario: annual potential GDP growth to slow to about 3½ percent between 2017 and 2022.
- Potential growth projected to moderate to a range of 2.8 to 4.1 percent, with central projection of 3.5 percent in 2022.
- Capital contribution to potential growth projected at 1.5 percentage points in 2017−22.
- Labor contribution capped at 1.4 percentage points in 2017−22, down from 2.3 percentage points in 2001−16.
- Productivity growth could reach 0.6 to 1.1 percent by 2022 under strong reform implementation.
  - Potential productivity contributions identified:
    - development plans related to the peace agreement: up to 0.5 percentage points;
    - productivity gains from better infrastructure: up to 0.25 percentage points;
    - improvements in the business environment and removal of barriers to trade: up to 0.1 percentage points.

### Structural reform agenda and growth drivers
- Peace agreement expected to improve medium-term growth up to 0.5 percentage points.
- 4G infrastructure agenda aimed at reducing the infrastructure gap, fostering private investment and exporter market access.
- Reduction of tariff and non-tariff barriers: government noted recent efforts have removed 75 percent of export barriers identified by the private sector.
- Pilot projects on innovation and managerial skills increased the number of products and markets Colombia exports to.

### Implementation risks and financing for 4G projects
- Bank lending standards to 4G projects tightened amid cancellation of a previous PPP-project.
- Government measures to compensate creditor banks and strengthen the PPP legal framework aim to facilitate private financing.
- FDN resources, including proceeds from the sale of ISAGEN, will remain an important source of financing.

### Regional convergence and peace agreement implementation priorities
- National GDP per capita expanded by 50 percent during 2000-2015; top 5 regions doubled GDP per capita; bottom 5 regions saw GDP per capita decline by about 13 percent.
- National education attainment improved from 7 to 9 years (15 or older population), with a 3-year gap between top and bottom region (Bogota and Vichada).
- Peace agreement implementation: 15-year horizon; short-term priorities include municipalities with significant coca production, FARC presence or lacking state presence; priority also given to low income per capita conflict-affected municipalities.

### Staff appraisal and recommended adjustments
- Colombia achieved relatively strong GDP growth in 2016 with declining poverty and modestly reduced income inequality despite shocks.
- Recommended policy adjustments:
  - Conditional on anchoring inflation expectations, withdraw some monetary tightening to support recovery while further bringing the current account deficit toward medium-term equilibrium.
  - Mild negative fiscal impulse expected this year is adequate to help place public debt-to-GDP ratio on a downward path and help external adjustment.
  - Credit growth expected to remain subdued with tightening lending standards.

### Risks and buffers
- Downside risks:
  - Gross external financing needs remain relatively large, exposing Colombia to global financial volatility.
  - U.S. tax policy decisions could negatively affect exports and capital inflows.
  - Delays in structural reform agenda could hinder recovery in private investment and potential growth.
- Policy buffers:
  - Flexible exchange rate regime as first line of defense.
  - Reserves adequate for precautionary purposes.
  - FCL represents an additional buffer.

### Financial sector resilience and regulatory priorities
- Financial system well capitalized, liquid, and profitable.
- Recommended actions:
  - Continue adopting best international supervision and regulation standards.
  - Ensure proper bank loan classification and restructuring practices.
  - Add staff at the Financial Superintendency to manage credit risks.
  - Timely introduction of Basel III capital standards and the conglomerates law.

### Exchange restriction on the hydrocarbon sector
- Staff does not recommend approval of retention of the exchange restriction arising from the special regime for the hydrocarbon sector.
- Colombia has a floating exchange rate regime (de jure: free floating; de facto: floating) and maintains an exchange restriction subject to Fund approval under Article VIII arising from the special regime for the hydrocarbon sector.

*Source: IMF staff calculations.*

---

### Selected key statistics and medium-term projections (as reported)

- Real GDP (percent change): 2013: 4.9; 2014: 4.4; 2015: 3.1; 2016: 2.0; 2017 (proj): 2.3; 2018–2022 (proj): 3.0, 3.5, 3.6, 3.6, 3.6
- Potential GDP (percent change): 2013: 4.2; 2014: 4.3; 2015: 3.3; 2016: 3.0; 2017–2022 (proj): 3.1, 3.2, 3.3, 3.4, 3.5, 3.5
- Output Gap (percent of potential GDP): 2016: -0.1; 2017–2022 (proj): -0.9, -1.0, -0.6, -0.4, -0.2, 0.0
- Consumer prices (average, percent): 2016: 7.5; 2017–2022 (proj): 4.5, 3.2, 3.0, 3.0, 3.0, 3.0
- Consumer prices (end of period, percent): 2016: 5.7; 2017–2022 (proj): 4.1, 3.0, 3.0, 3.0, 3.0, 3.0
- Policy rate (end of period): 2016: 7.5
- Current account (percent of GDP): 2016: -4.4; 2017–2022 (proj): -3.8, -3.3, -3.1, -2.9, -2.9, -2.7
- Gross international reserves (GIR, US$ billions): 2016: 46.2; 2017–2022 (proj): 46.2; 46.5; 46.5; 46.7; 46.4; 46.6
- Gross public sector debt (percent of GDP): 2016: 50.2; 2017–2022 (proj): 48.5; 47.9; 46.7; 44.9; 42.9; 40.6
- Public gross financing needs (percent of GDP): 2016: 6.4; 2017–2022 (proj): 5.5; 5.3; 3.7; 4.7; 3.4; 2.9; 1.8; 1.8
- Regulatory capital to risk-weighted assets (percent): 2016: 17.5
- Nonperforming loans to gross loans (percent): 2016: 3.1; NPLs spiked to 3.7 percent in January 2017.
- Total external debt (US$ billions): 2016: 138.8; 2017–2022 (proj): 148.6; 156.8; 164.6; 172.2; 179.2; 186.4
- GIR/GDP (percent): 2016: 16.4; 2017–2021 (proj): 15.1; 14.4; 13.6; 13.0; 12.2; 11.6

*Source: IMF staff report and tables for Colombia (cr17138).*

---

*Prepared by The Western Hemisphere Department (In collaboration with other Departments); April 17, 2017. Source: IMF staff report (content unit cr17138).*

### 1. Monetary and Financial Conditions ____________________________________________________________  10

### 1. Monetary and Financial Conditions

### Recent developments
- External environment worsened in 2016: trading partners’ growth slowed and average oil prices declined further; foreign participation in the local bond market reached record highs.
- Domestic growth moderated to 2 percent in 2016 driven by a slowdown in domestic demand; investment declined by about 4 percent.
- Temporary factors pushed headline inflation to 9 percent in July 2016; inflation declined to 5.7 percent by year-end 2016.
- Current account deficit narrowed from 6.4 percent of GDP in 2015 to 4.4 percent of GDP in 2016 despite continued decline in oil exports.
- Reserves remained at US$46.3 billion at end-2016.
- External debt increased to about 49 percent of GDP due to higher foreign holdings of government debt (7 percent of GDP).
- Monetary policy: the policy rate was raised by 200 bps between January and September 2016; cut by 25 bp in December 2016 to 7.5 percent.
- Credit: the credit gap remained well below boom levels; consumer (especially credit card) and mortgage credit remained brisk.
- Fiscal: central government headline deficit widened to 4 percent of GDP; structural deficit declined to 2.8 percent of GDP (2.1 percent of GDP using official parameters for long-run oil prices and potential GDP); implied negative fiscal impulse of -½ percent of GDP at central government level and about -2¼ percent of GDP at consolidated public sector level.
- Structural tax reform approved in December 2016 increased the VAT rate by 3 percentage points in January 2017.
- Social indicators: poverty declined from 20 percent of the population in 2015 to 18 percent in 2016; Gini coefficient declined from 52.2 percent in 2015 to 51.7 percent in 2016.
- Peace agreement: revised agreement approved by Congress on December 1st, 2016; negotiations with ELN underway.
- Early 2017 indicators suggested subdued activity: retail sales and industrial production weakened in January 2017; policy rate cut by 50bp during Q1 2017.

### Safeguards and financial oversight
- Safeguards procedures for Colombia's 2016 FCL arrangement were completed; Deloitte issued an unqualified audit opinion on the Banco de la República Colombia’s 2015 financial statements on February 17, 2016; no significant safeguards issues emerged.

### Outlook and projections
- Near-term growth projected to increase to 2.3 percent in 2017; medium-term growth projected at about 3.5 percent, underpinned by non-commodity exports, infrastructure spending, and improved confidence from the peace agreement.
- Inflation convergence to the 2−4 percent target will be gradual; core inflation remained relatively high as of discussions.
- Current account deficit projected to narrow to 3.8 percent of GDP in 2017; staff estimates CA norm at -2.6 percent of GDP implying about 1 percent of GDP gap versus the 2016 cyclically adjusted CA balance of -3.6 percent of GDP.
- Gross external financing needs projected to decline to about 12 percent of GDP in 2017 and hover around 10 percent of GDP over the medium term.
- Balance of risks rated to the downside; reserves at 139 percent of the ARA metric and the FCL referenced as cushions.

### Global Risk Assessment Matrix (high-level points)
- Key global risks identified: retreat from cross-border integration, policy uncertainty and divergence (U.S., Europe), significant further strengthening of the U.S. dollar and/or higher rates, weaker-than-expected global growth including a China slowdown, structurally weak growth in key advanced and emerging economies, and lower energy prices.
- Policy advice across risks includes: speed up structural reforms and pro-diversification measures; use the exchange rate and international reserves as shock absorbers; foreign exchange intervention to smooth disorderly behavior; monetary policy support when expectations anchored; speed up high-return public investment projects; provide liquidity support to systemic institutions; develop new financing instruments in line with fiscal sustainability.

### Key policy issues and recommendations
- Policy mix must balance reduction of imbalances with support for recovery; gradual softening of monetary and fiscal policy has begun and, together with the tax reform and peace process, will support recovery.
- Monetary policy:
  - Pace of monetary easing contingent on inflation expectations; further progress on disinflation needed.
  - Negative output gap estimated at about -1 percent of GDP.
  - Current policy rate implies a real ex-ante rate of about 3 percent, exceeding neutral real rate of around 1−2 percent.
  - Nominal policy rate could fall to around 6 percent in the second half of the year, implying a restrictive stance (2 percent real), but path depends on inflation and external indicators.
  - External demand should lead rebound in activity to ensure continued reduction of current account deficit toward sustainable levels.
- Fiscal and structural policy:
  - Structural tax reform proceeds estimated at 0.7 percent of GDP; central government deficit expected to narrow to 3.6 percent of GDP in 2017.
  - Consolidated public sector projected deficit of 2.9 percent of GDP as subnational spending execution strengthens.
  - Planned consolidation implies a mild negative fiscal impulse (-0.1 percent of GDP).
  - Priority shared to place public debt on a downward path starting the year, including along implementation of the peace agreement.
  - Expenditure-side measures: improve targeting of subsidies and seek expert recommendations to improve expenditure efficiency.
- Financial regulation and supervision:
  - Adoption of Basel III elements underway; a draft conglomerates law under discussion in congress to increase regulatory powers over holding companies of financial conglomerates.

*COLOMBIA — INTERNATIONAL MONETARY FUND (content unit cr17138).*

### Box 1. Monetary and Financial Conditions

### Box 1. Monetary and Financial Conditions

### Monetary stance and the neutral real interest rate
- Staff’s updated estimates suggest both monetary policy and broad financial conditions remained tight in 2016.
- The range for the real neutral interest rate is assessed to be 1‒2 percent.
- Different methodologies used to estimate the neutral interest rate: uncovered interest parity; a Taylor rule; a standard consumption-smoothing model; a DSGE model; and the Hodrick-Prescott (HP) filter (see SIP Chapter 1).
- The Central Bank provided a range of estimates for the real neutral rate with the median at 1.4 percent.
- Implication: the (ex-ante) real monetary policy rate has been at contractionary levels during 2016, contributing to attenuate inflation pressures and anchoring expectations.

### Financial conditions, FCI, and macroeconomic impact
- Financial conditions remained tight in 2016, amplifying monetary policy impact.
- Staff constructed an FCI purged of cyclical influence (by controlling for GDP growth) and direct effects of monetary policy decisions (by controlling for the policy rate).
- The FCI is normalized around 0 over the observation period (2001–16); values above zero indicate “loose” and below zero “tight” conditions.
- Impulse response function analysis: a 1 standard deviation tightening of financial conditions lowers GDP growth by about 0.25 percentage points within 12 months.
- Staff inference: the observed cumulative tightening in financial conditions would continue weighing on growth in 2017 (by about 0.2 ppts).

### Mortgage credit, housing prices, and macro‑financial risks
- Mortgage credit remains resilient despite tighter overall financial conditions.
- Real mortgage credit growth: 6.8 percent (reported in Box 1).
- Around 30 percent of the mortgages originated in 2016 were subsidized.
- Staff estimated a house price gap of 13.5 percent (see SIP Chapter 2), indicating house prices are slightly misaligned with fundamentals.
- Later staff notation: real mortgage credit growth accelerated to about 7 percent at end-2016 (Box 2 / paragraph 21).
- Staff estimate: real estate prices are about 13 percent above the level implied by fundamentals (forthcoming SIP Chapter 2).
- Mitigating factors:
  - Low loan-to-value ratios (well below the 70 percent regulatory ratio).
  - Small mortgage portfolios of banks: 13 percent of total.
  - Macroprudential measures adopted after the 1999 financial crisis, including LTV limits and housing financing characteristics (full recourse, no prepayment penalties, fixed-rate mortgages).

### Corporate and household balance sheets; credit risk
- Corporate debt: 46 percent of GDP, composed mostly of local bank loans; leverage and profitability worse than historical average as of 2015.
- Sectors with largest share of problem loans (data up to September 2016): agriculture, mining and transport — which combined represent 15 percent of total commercial loans.
- Household debt: 20 percent of GDP.
- Household debt service burden: 10 percent of disposable income.
- Rising credit card debt noted as an upward risk to NPLs amid recent labor market softening.
- Non-performing loans (NPLs):
  - Increased marginally during 2016, spiked in January 2017 to 3.7 percent.
  - NPLs largest in microcredit: 7.5 percent NPLs in January 2017; microcredit accounts for 2.8 percent of the total loan portfolio.
  - Commercial loan book: 55 percent of total loans.
  - Consumer loans: 27.7 percent of total loans.
- Sectoral NPL increases largest in mining, with notable increases in commerce, construction, transportation, agriculture.

### Banking system resilience and stress test outcomes
- Capital adequacy as of 2016Q3: 17.6 percent (well-above the regulatory minimum).
- Bank profitability: within the historical average despite the slowdown in credit.
- Official stress tests:
  - Scenario: sudden and temporary increase in EMBIG spreads (200 basis points) and a drop in global confidence calibrated to mimic a sovereign downgrade.
  - Result: commercial NPLs increase from about 3 percent to near 10 percent in a two-year horizon.
  - Cumulative bank losses would reach 21.1 percent of bank equity.
  - Nonetheless, bank solvency would remain above the 9 percent regulatory minimum as part of provisioning needs would be covered from existing countercyclical buffers.
- Strong prudential standards (including on provisioning and collateral) have cushioned shock impacts.
- Performance of largest non-bank financial companies (pension funds, insurance companies, trust companies) remains strong; earnings of stock-brokerage firms (1.4 percent of financial system assets) have weakened.

### Timing and dynamics of credit risk
- Staff estimates indicate long lags in the response of banking system NPLs to economic shocks:
  - Oil prices affect NPLs after three quarters, with the highest impact after 9 quarters.
  - Exchange rate has a small immediate impact; largest impact after 6 quarters.
  - Real GDP has an immediate impact, with the largest impact occurring after 4 quarters.
  - Credit growth affects NPLs mostly after 3 quarters.
- Implication: NPLs can respond to shocks even one to two years after the initial shock; NPLs could further increase from current levels.

### Policy implications and authorities’ actions
- The authorities and staff agreed exchange rate flexibility will remain the first line of defense against external shocks; central bank will consider intervention tools as appropriate.
- Reserves are ample; the FCL represents an additional buffer against tail-risk events.
- Macroprudential and supervisory actions recommended / underway:
  - Continued vigilance of corporate risks and further progress on pending FSAP recommendations.
  - Strengthen financial supervision by the supervisory authority (SFC), including proper bank loan classification and monitoring of restructuring loan practices.
  - Upgrade regulations to best practice guidelines; plans to bring financial sector regulation and supervision closer to Basel III over the coming year.
  - Adoption of Basel’s capital buffers including Tier 1 requirements (6 percent) expected to strengthen resilience.
  - Conglomerates law expected to be adopted during the first half of the year to align group-wide capital with risks.
- Authorities’ measures to limit housing vulnerabilities: LTV limits and housing financing characteristics (full recourse, no prepayment penalties, fixed-rate mortgages).

*Source: IMF staff estimates and analysis as presented in the content unit.*

### 26.      Staff and the authorities broadly agreed that

### 26.      Staff and the authorities broadly agreed that

### Potential GDP growth outlook
- In the last 15 years, high oil investment and large increases in the labor force pushed potential growth above 4 percent.
- Latest data suggest oil investment and labor force increases are unlikely to be growth engines over the medium-term.
- Staff’s central scenario: annual potential GDP growth to slow down to about 3½ percent between 2017 and 2022 and includes the boost from ongoing structural reforms.
- Potential growth is projected to moderate to a range of 2.8 to 4.1 percent, with a central projection of 3.5 percent in 2022.
- Capital contribution to potential growth is projected at 1.5 percentage points in 2017−22 (reflecting positive effects of 4G investment projects and the structural tax reform partially offsetting subdued oil prices).
- Labor contribution capped at 1.4 percentage points in 2017−22, down from 2.3 percentage points in 2001−16, due to falling population growth and limited scope for further participation increases.
- Productivity growth is essential to reach a potential growth rate of 3.5 percent or above:
  - Productivity growth could reach 0.6 to 1.1 percent by 2022 under strong implementation of structural reforms.
  - Potential productivity contributions identified:
    - development plans related to the peace agreement: up to 0.5 percentage points;
    - productivity gains from better infrastructure: up to 0.25 percentage points;
    - improvements in the business environment and removal of barriers to trade: up to 0.1 percentage points.

### Structural reform agenda and growth drivers
- Key items expected to buttress medium-term potential growth:
  - Peace agreement:
    - Staff expects peace to improve medium-term growth up to 0.5 percentage points, and further over the long term.
  - 4G agenda:
    - Reduction in the infrastructure gap to foster private investment and help exporters access markets.
    - Authorities’ agenda to improve tertiary roads will complement yields from the three waves of 4G PPP-based projects.
  - Reduction of tariff and non-tariff barriers:
    - Despite efforts, large barriers to trade remain, including elevated tariffs in some sectors and widespread non-tariff barriers.
    - The government noted recent efforts have removed 75 percent of export barriers identified by the private sector.
    - Pilot projects on innovation and managerial skills have increased the number of products and markets Colombia is exporting to.

### Implementation risks and financing for 4G projects
- Bank lending standards to 4G projects recently tightened amid cancellation of a previous generation PPP-project.
- Government measures to compensate creditor banks and strengthen the PPP legal framework aim to facilitate private financing.
- FDN resources, including proceeds from the sale of ISAGEN, will remain an important source of financing.

### Regional convergence and the peace agreement (Box 5)
- Colombia experienced strong national growth but important regional differences persist:
  - On average, GDP per capita expanded by 50 percent during 2000-2015.
  - Top 5 regions doubled GDP per capita; bottom 5 regions saw GDP per capita decline by about 13 percent.
  - National education attainment improved from 7 to 9 years (among 15 or older population), but a 3-year gap remains between top and bottom region (Bogota and Vichada, respectively).
- Peace agreement focus and measures:
  - Strong focus on rural development and social inclusion: reduce gaps in education, health, infrastructure and other public services; help displaced people return to agriculture including through land reform.
  - Financial incentives to replace illicit drugs with alternative crops and measures to reincorporate guerrilla members into society.
  - Tax incentives for firms investing/relocating to conflict-affected regions.
  - Special courts for conflict-related crimes; guerrilla members allowed to compete for political positions.
  - Extension of victims’ reparations program that started in 2011.
- Implementation priorities:
  - Agreement to be implemented over 15 years.
  - Short-term priorities include municipalities with significant coca production, FARC presence or lacking state presence.
  - Priority also given to municipalities affected by conflict with low income per capita, where private participation is expected to complement government programs.

### Staff appraisal: macroeconomic performance and policy stance
- Colombia achieved relatively strong GDP growth in 2016 with declining poverty and modestly reduced income inequality despite multiple domestic and external shocks.
- Policy responses:
  - Decisive monetary policy response helped anchor inflation expectations.
  - Fiscal restraint protected key social and infrastructure spending despite lower oil revenue.
- Outlook and recommended adjustments:
  - Further adjustment is needed but policy stance could be eased somewhat to set the stage for a gradual recovery.
  - Growth to rebound toward the second part of 2017 as exports recover and investment improves underpinned by the 4G infrastructure agenda, the peace agreement and the structural tax reform.
  - Conditional on preserving well-anchored inflation expectations, withdrawing some of the monetary tightening that took place last year will support the recovery while further bringing the current account deficit towards its medium-term equilibrium.
  - The mild negative fiscal impulse expected this year is adequate to help place the public debt-to-GDP ratio on a downward path and help external adjustment.
  - Credit growth will remain subdued with banks’ lending standards tightening in response to some corporate balance-sheet weakness; consumer credit growth will also moderate.

### Risks and buffers
- Balance of risks remains to the downside:
  - Gross external financing needs remain relatively large, leaving Colombia exposed to global financial volatility.
  - U.S. tax policy decisions could negatively affect Colombia’s exports and capital inflows.
  - Delays in the structural reform agenda could hinder recovery in private investment and potential growth.
- Policy buffers:
  - Flexible exchange rate regime is the first line of defense against global shocks and volatility.
  - Reserves are adequate for precautionary purposes.
  - The FCL represents an additional buffer.

### Financial sector resilience and regulatory priorities
- Financial system is well capitalized, liquid, and profitable.
- Recommended actions to enhance resilience:
  - Continued progress on financial supervision and regulation by adopting best international standards.
  - Attention to proper bank loan classification and restructuring practices.
  - Additional staff at the Financial Superintendency to help manage credit risks from the slowdown.
  - Timely introduction of Basel III capital standards and the conglomerates law to expand regulatory tools for corporate and overseas risks.

### Exchange restriction on the hydrocarbon sector
- Staff does not recommend approval of retention of the exchange restriction arising from the special regime for the hydrocarbon sector, since the authorities have no plans for its removal.
- Colombia has a floating exchange rate regime (de jure: free floating; de facto: floating) and maintains an exchange restriction subject to Fund approval under Article VIII arising from the special regime for the hydrocarbon sector.

*Source: IMF staff calculations.*

### 35.      Staff recommends that the next Article IV consultation takes place on the standard

### 35.      Staff recommends that the next Article IV consultation takes place on the standard 12‒month cycle.

### I. Social and Demographic Indicators
- Population (million), 2015: 48.2
- Urban population (percent of total), 2014: 76.2
- GDP per capita (US$), 2015: 6,048
- Life expectancy at birth (years), 2013: 73.8
- Mortality rate (under 5, per 1,000 live births), 2015: 15.9
- Gini coefficient, 2015: 52.2
- Poverty rate (US$3.1 a day, PPP), 2013: 5.3
- Extreme poverty rate (US$1.9 a day, PPP), 2013: 2.5
- Physicians (per 1,000 people), 2010: 1.5
- Adult illiteracy rate (ages 15 and older), 2011: 6.4
- Net secondary school enrollment rate, 2013: 73.8
- Access to water (percent of population), 2015: 91.4

### II. Recent Macroeconomic Performance and Outlook
- Real GDP (percent change): 2013: 4.9; 2014: 4.4; 2015: 3.1; 2016: 2.0; 2017 (proj): 2.3; 2018–2022 (proj): 3.0, 3.5, 3.6, 3.6, 3.6
- Potential GDP (percent change): 2013: 4.2; 2014: 4.3; 2015: 3.3; 2016: 3.0; 2017–2022 (proj): 3.1, 3.2, 3.3, 3.4, 3.5, 3.5
- Output Gap (percent of potential GDP): 2013: 0.6; 2014: 1.1; 2015: 0.5; 2016: -0.1; 2017–2022 (proj): -0.9, -1.0, -0.6, -0.4, -0.2, 0.0
- Consumer prices (average, percent): 2013: 2.0; 2014: 2.9; 2015: 5.0; 2016: 7.5; 2017–2022 (proj): 4.5, 3.2, 3.0, 3.0, 3.0, 3.0
- Consumer prices (end of period, percent): 2013: 1.9; 2014: 3.7; 2015: 6.8; 2016: 5.7; 2017–2022 (proj): 4.1, 3.0, 3.0, 3.0, 3.0, 3.0
- Policy rate (end of period): 2013: 3.25; 2014: 4.5; 2015: 5.75; 2016: 7.5

### III. External Sector and Balance of Payments
- Current account balance (US$ millions): 2013: -12,347; 2014: -19,435; 2015: -18,780; 2016: -12,541; 2017–2022 (proj): -11,634; -10,665; -10,723; -10,479; -11,029; -11,003
- Current account (percent of GDP): 2013: -3.2; 2014: -5.1; 2015: -6.4; 2016: -4.4; 2017–2022 (proj): -3.8, -3.3, -3.1, -2.9, -2.9, -2.7
- Exports, f.o.b. (US$ millions): 2013: 60,282; 2014: 56,899; 2015: 38,080; 2016: 32,965; 2017–2022 (proj): 37,535; 39,426; 41,676; 44,495; 47,278; 50,425
  - Fuel exports (US$ millions): 2013: 32,011; 2014: 28,885; 2015: 14,239; 2016: 10,101; 2017–2022 (proj): 12,902; 12,656; 12,250; 12,014; 11,920; 11,911
  - Non-fuel exports (US$ millions): 2013: 11,350; 2014: 12,134; 2015: 9,614; 2016: 9,612; 2017–2022 (proj): 10,396; 10,269; 10,526; 10,796; 11,127; 11,477
- Imports, f.o.b. (US$ millions): 2013: 57,101; 2014: 61,539; 2015: 52,050; 2016: 43,226; 2017–2022 (proj): 45,966; 46,931; 48,872; 51,482; 54,384; 57,146
- Financial account balance (US$ millions): mirrors current account balance figures for 2013–2022
- Gross international reserves (GIR, US$ billions): 2013: 43.2; 2014: 46.8; 2015: 46.3; 2016: 46.2; 2017–2022 (proj): 46.2; 46.5; 46.5; 46.7; 46.4; 46.6
- GIR/(short-term debt at remaining maturity + CA deficit) (percent): 2013: 105; 2014: 110; 2015: 134; 2016: 127; 2017: 138; 2018: 130; 2019: 128; 2020: 119; 2021: 124; 2022: n.a.

### IV. Fiscal Accounts (Central Government and Combined Public Sector)
- Central government overall balance (percent of GDP): 2013: -2.3; 2014: -2.4; 2015: -3.0; 2016: -4.0; 2017–2022 (proj): -3.6; -2.7; -2.2; -1.6; -1.2; -1.0
- Central government structural balance (percent of GDP): 2013: -3.5; 2014: -3.4; 2015: -3.7; 2016: -2.9; 2017–2022 (proj): -2.5; -2.3; -2.0; -1.5; -1.2; -1.0
- Combined public sector (CPS) balance (percent of GDP): 2013: -0.9; 2014: -1.8; 2015: -3.4; 2016: -3.1; 2017–2022 (proj): -2.9; -2.0; -1.6; -0.9; -0.5; -0.3
- CPS non-oil structural primary balance (percent of GDP): 2013: -2.8; 2014: -3.4; 2015: -2.4; 2016: -0.2; 2017–2022 (proj): -0.1; 0.6; 0.8; 1.3; 1.4; 1.5
- Total revenue (central government, percent of GDP): 2013: 16.9; 2014: 16.6; 2015: 16.2; 2016: 15.1; 2017–2022 (proj): 15.2; 15.3; 15.9; 16.7; 17.0; 17.2
- Total expenditure and net lending (central government, percent of GDP): 2013: 19.2; 2014: 19.1; 2015: 19.2; 2016: 19.1; 2017–2022 (proj): 18.9; 18.0; 18.2; 18.4; 18.2; 18.2
- Oil-related revenues (central government, percent of GDP): 2013: 3.3; 2014: 2.6; 2015: 1.1; 2016: 0.2; 2017–2022 (proj): 0.2; 0.3; 0.4; 0.4; 0.6; 0.7
- Gross public sector debt (percent of GDP): 2013: 37.8; 2014: 43.7; 2015: 50.6; 2016: 50.2; 2017–2022 (proj): 48.5; 47.9; 46.7; 44.9; 42.9; 40.6
- Gross public sector debt, excluding Ecopetrol (percent of GDP): 2013: 36.1; 2014: 40.9; 2015: 45.9; 2016: 45.8; 2017–2022 (proj): 44.1; 43.7; 43.0; 41.2; 39.5; 37.3

### V. Public Debt Dynamics and Debt Sustainability (DSA)
- Baseline nominal gross public debt (percent of GDP): 2015: 35.9; 2016: 50.6; 2017–2022 (proj): 50.2; 48.5; 47.9; 46.7; 44.9; 42.9; 40.6
- Public gross financing needs (percent of GDP): 2015: 6.7; 2016: 6.4; 2017–2022 (proj): 5.5; 5.3; 3.7; 4.7; 3.4; 2.9; 1.8; 1.8
- Change in gross public sector debt (percent of GDP): 2015: 0.6; 2016: 6.9; 2017–2022 (proj): -0.3; -1.7; -0.6; -1.2; -1.8; -2.0; -2.2; cumulative through 2022: -9.6
- Identified debt-creating flows (percent of GDP): 2015: -3.7; 2016: 3.6; 2017–2022 (proj): -4.5; 0.2; -0.2; -0.7; -1.3; -1.6; -1.7; cumulative: -5.2
- Primary deficit (percent of GDP): 2015: -0.6; 2016: 0.7; 2017–2022 (proj): 0.3; 0.1; -0.6; -0.9; -1.5; -1.7; -1.9; cumulative: -6.4
- Effective interest rate (percent): projections ~6.9–7.2; 2022: 7.0
- Sovereign spreads: EMBIG (bp): 211; 5-year CDS (bp): 151 (table entries)

### VI. Monetary and Financial Sector Indicators
- Broad money growth (percent): 2013: 13.4; 2014: 10.0; 2015: 11.7; 2016: 13.2; 2017–2022 (proj): 12.8; 12.5; 12.7; 12.8; 12.7; 12.6
- Credit to the private sector (percent change / percent of GDP indicators appear in multiple series):
  - Credit to the private sector (annual percent change): 2013: 12.1; 2014: 14.7; 2015: 16.8; 2016: 7.9; 2017–2022 (proj): 6.7; 7.4; 8.3; 9.5; 10.7; 11.6
  - Credit to private sector (level, Col$ billion series present in Table 5; see source)
- Central Bank: Net foreign assets (US$ millions): 2013: 83,092; 2014: 112,111; 2015: 145,917; 2016: 143,409; 2017–2022 (proj): 145,151; 148,198; 150,679; 154,805; 159,563; 165,714
- Monetary base (Col$): 2013: 65,099; 2014: 69,682; 2015: 82,522; 2016: 88,482; 2017–2022 (proj): 94,557; 100,754; 107,512; 114,889; 122,654; 130,817
- Central bank inflation target (percent): 2.0-4.0 (repeated across years)
- Financial soundness indicators (end-of-period values, selected):
  - Regulatory capital to risk-weighted assets (percent): 2009: 17.2; 2010: 17.3; 2011: 16.9; 2012: 18.1; 2013: 17.0; 2014: 17.0; 2015: 16.9; 2016: 17.5
  - Nonperforming loans to gross loans (percent): 2009: 4.0; 2010: 2.9; 2011: 2.5; 2012: 2.8; 2013: 2.8; 2014: 2.9; 2015: 2.8; 2016: 3.1
  - Liquid assets to total assets (percent): 2009: 24.6; 2010: 22.1; 2011: 21.5; 2012: 21.6; 2013: 21.4; 2014: 19.8; 2015: 18.9; 2016: 18.0

### VII. External Vulnerability and Financing
- Total external debt (US$ billions): 2013: 97.9; 2014: 113.9; 2015: 123.8; 2016: 138.8; 2017–2022 (proj): 148.6; 156.8; 164.6; 172.2; 179.2; 186.4
  - Of which public sector (US$ billions): 2013: 58.0; 2014: 72.3; 2015: 79.5; 2016: 90.1; 2017–2022 (proj): 95.7; 99.3; 102.0; 104.7; 106.9; 109.3
- Short-term external debt (US$ billions): 2013: 12.0; 2014: 14.2; 2015: 14.6; 2016: 14.5; 2017–2022 (proj): 14.1; 14.0; 13.9; 13.9; 13.9; 13.9
- Amortization of MLT external debt (percent of GNFS exports): 2013: 9.3; 2014: 15.0; 2015: 21.1; 2016: 18.2; 2017–2022 (proj): 24.4; 18.3; 21.9; 21.9; 25.2; 20.3
- Gross external financing need (US$ billions, memorandum): 2012–2016 and projections show large gross financing needs; example 2016: 42.6 (US$ billions) and in percent of GDP 14.6 (see table)
- GIR/GDP (percent): 2013: 11.4; 2014: 12.4; 2015: 15.9; 2016: 16.4; 2017–2021 (proj): 15.1; 14.4; 13.6; 13.0; 12.2; 11.6

### VIII. Medium-Term Outlook and Risks
- Medium-term projections (selected):
  - Real GDP (percent change) 2017–2022: 2.3; 3.0; 3.5; 3.6; 3.6; 3.6
  - Consumer prices (end of period, percent) 2017–2022: 4.1; 3.0; 3.0; 3.0; 3.0; 3.0
  - Gross national savings (percent of GDP) 2017–2022: 21.7; 22.3; 22.5; 22.8; 22.7; 22.7
  - Gross domestic investment (percent of GDP) 2017–2022: 25.5; 25.6; 25.7; 25.7; 25.6; 25.4
- External current account balance projected to narrow gradually to -2.7 percent of GDP by 2022
- Public debt trajectory under baseline projects decline from 2016 peak (50.6 percent of GDP) to 40.6 percent of GDP by 2022

### IX. Structural and Financial Sector Notes
- Structural issues highlighted: limited scope for more labor, need for productivity-enhancing reforms, trade barriers, infrastructure weaknesses (4G projects identified), logistics performance concerns
- Financial sector: corporate debt increased in recent years but remains modest by international standards; housing price and mortgage credit growth remains strong
- Financial soundness: capital adequacy and liquidity metrics remain supportive; nonperforming loans increased to 3.1 percent in 2016

### X. Staff Recommendation and Policy Implication
- Staff recommends that the next Article IV consultation takes place on the standard 12‒month cycle.

*Source: IMF staff report and tables for Colombia (cr17138).*

### Appendix I. External Sector Assessment

### Appendix I. External Sector Assessment

### Overview of recent adjustment
- Colombia faced a faster and larger deterioration in the terms of trade (TOT) than Chile and Peru and has narrowed its current account deficit at a faster pace, although further adjustment is still required.
- Drivers of adjustment:
  - Larger real exchange rate depreciation than in Chile and Peru.
  - Sharper slowdown in domestic demand.
  - Significant contraction of real imports.
- Initial conditions and outcome:
  - Colombia’s current account balance was already below its peers’ and its norm before the shock, and the drop in oil prices initially caused a further decline.
  - The adjustment in trade quantities observed until now was barely enough to revert this initial deterioration and bring Colombia’s current account in line with its peers’ two years after the TOT shock.
  - A further narrowing of the current account deficit will be required to bring it back to the norm and in line with that of its peers.

### Assessment of the external position and exchange rate
- Staff view on norms and gaps:
  - The external current account has adjusted much faster than expected at the last Article IV consultation, reducing but not yet eliminating the current account (CA) gap.
  - Staff considers the ES estimate of current account norm "(-2.6)" to better reflect the underlying external position because:
    - The EBA_CA methodology does not account for substantial repatriation of profits.
    - The EBA REER is driven in part by delayed response of exports to the recent depreciation.
  - The associated current account gap is "-1 percent of GDP" which corresponds to a "5 percent exchange rate overvaluation."

- Exchange Rate Assessment table entries (as shown):
  - ES-3.6 -2.6 -1.0 5.0
  - CA-3.6 0.8 -4.4 22.0
  - REER-3.6 -25.4

### External liabilities and financing
- Net position in portfolio and other investment:
  - Continued to decline in 2016, albeit at a slower pace than in 2015.
  - Reflects a narrowing but still substantial current account deficit that is only partially financed by FDI.
  - Also reflects recovering but still tepid GDP growth.
  - More than two thirds of the 2016 increase in external debt corresponds to public sector long-term debt, mainly the Central Government, Ecopetrol, and Medellin’s public companies.
- Charted values shown (Net Position in Portfolio and Other Investment; Percent of GDP):
  - -2.7
  - -3.6
  - -4.8
  - -9.1
  - -11.4
  - -13.0
  - -11.0
  - -9.0
  - -7.0
  - -5.0
  - -3.0
  - -1.0

### Outlook and policy implications for export growth
- Non-traditional exports will play an important role in supporting economic growth.
- Market dynamics:
  - The U.S. has become the most important market for non-traditional exports as sales to the neighboring countries have declined sharply over the last few years.
- Policy and structural supports:
  - The existing comprehensive set of free trade agreements (FTAs) together with the 4G infrastructure projects and the government’s export promotion efforts should help strengthen exports.

*Source: Appendix I. External Sector Assessment (cr17138).*

### 5.      As the current account deficit narrows,

### 5.      As the current account deficit narrows,

### Capital inflows and net FDI
- Net FDI saw a significant increase in 2016 mainly as a result of the sale of ISAGEN, a state-owned electricity company.
- Net FDI is expected to return to levels similar to those observed in 2015, as still-low oil prices continue to impact investment in that sector.
- As the current account deficit narrows, capital inflows are expected to decline too.

### Fund relations — membership, facilities, and reserves (selected facts)
- Membership status: Joined: December 27, 1945; Article VIII.
- SDR net cumulative allocation: 738.32 (SDR million).
- Holdings: 694.00 (SDR million) — 94.00 percent of quota.
- Quota: 2,044.50 (SDR million) — 100.00 percent.
- Fund holding of currency (Exchange rate): 2,005.40 (SDR million) — 98.09 percent.
- Reserve position: 39.11 (SDR million) — 1.91 percent.
- Latest financial arrangements (FCL):
  - Type: FCL; Date of Arrangement: Jun 13, 2016; Expiration Date: Jun 12, 2018; Amount Approved: 8,180.00 (SDR million); Amount Drawn: 0.00 (SDR million).
  - Type: FCL; Date of Arrangement: Jun 17, 2015; Expiration Date: Jun 12, 2016; Amount Approved: 3,870.00 (SDR million); Amount Drawn: 0.00 (SDR million).
  - Type: FCL; Date of Arrangement: Jun 24, 2013; Expiration Date: Jun 16, 2015; Amount Approved: 3,870.00 (SDR million); Amount Drawn: 0.00 (SDR million).
- Outstanding Purchases and Loans: None.

### World Bank relations — engagement and financial figures (selected)
- Country Partnership Framework (CPF) for FY 16‒21 focuses on: (i) fostering balanced territorial development; (ii) enhancing social inclusion and mobility through improved service delivery; and (iii) supporting fiscal sustainability and productivity.
- As of March 2016, Colombia is IBRD’s 7th largest Bank borrower with US$9.6 billion in outstanding debt.
- Active portfolio: 11 IBRD and 2 stand-alone GEF projects totaling US$3.6 billion in net commitments.
- Trust Fund portfolio (excluding GEF): US$36 million.
- FY 16 DPF operations approved: two operations of US$700 million each.
- FY 17 lending (approved): two DPF operations — Territorial Development (US$800 million) and Fiscal and Growth (US$600 million); two IPFs with combined total of US$287 million.
- FY 18 pipeline total: US$1.5 billion (includes 2 DPFs for US$500 million each, 3 IPFs totaling US$340 million, and 2 guarantees with total IBRD portion US$162 million).
- Multi-Donor Trust Fund contributions (current): US$6.5 million.

### IFC and MIGA engagement (selected)
- IFC committed portfolio in Colombia: US$1,087.2 million in 65 projects.
  - Sectoral composition: finance and insurance (58 percent), collective investment vehicles (12 percent), transportation and warehousing (8 percent), extractives (6 percent).
  - Product composition: 52 percent in loans, 40 percent in equity, remainder in guarantees/risk management/mix-type products.
  - FY 17 commitments so far: 5 projects for US$363.7 million (including US$214.1 million in mobilization).
- MIGA current portfolio in Colombia: close to US$100 million, entirely in the financial service sector across two projects:
  - Findeter: US$95 million (tenor 10 years).
  - ProCredit Holding: US$2 million (tenor 10 years).

### Inter-American Development Bank (IADB) relations (selected)
- Current Country Strategy period: 2015–18; policy dialogue areas: productivity, effectiveness of public management, social mobility.
- Sovereign guarantee lending envelope: estimated US$890 million in 2015 and US$800 million per year during 2016‒18; total US$3.3 billion for 2015–2018.
- 2016 approvals: 5 operations for US$970 million in sovereign guarantee operations (US$800 million in Policy Based Loans).
- As of January 2017 portfolio: 27 sovereign guarantee operations totaling US$2.1 billion, disbursed percentage 38 percent.
- Sector concentration: infrastructure (58 percent), governance (17 percent), Climate Change and Sustainable Development (22 percent), social development and integration (20 percent).
- IADB is the second multilateral creditor with total debt owed of US$7.3 billion (41 percent of Colombia’s total multilateral debt).
- Private sector (non-sovereign) portfolio: US$577 million; Inter-American Investment Corporation portfolio: US$367 million.

### Statistical issues — data adequacy and reporting (highlights)
- Overall assessment: Data provision is adequate for surveillance.
- National accounts:
  - DANE compiles national accounts; BdR compiles financial accounts.
  - Reference year for annually chained volume measures: 2005.
  - Compilation conforms to 1993 SNA and some recommendations of 2008 SNA.
  - Quarterly accounts for institutional sectors under development; expected completion by mid-2018.
  - DANE publishes monthly indicator IMACO.
- Price statistics:
  - CPI basket and weights not updated since 2008; based on Income-Expenditure Survey (2006–07).
  - PPI updated and revised in 2015; need to expand PPI coverage.
- Government finance statistics:
  - MFPC responsible for public revenue, expenditure, and financing data.
  - Authorities committed to adopt GFSM 2001, improve coordination, and increase resources for compiling GFS.
  - GAO developed single accounting framework based on IPSAS and maintains a financial management information system covering all public sector units.
  - MFPC’s Macroeconomic Policy Unit and GAO developed a bridge table converting national accounting classification to GFSM 2001 to compile GFS on accrual and cash bases.
- Monetary and financial statistics:
  - BdR reports SRFs 1SR (BdR), 2SR (ODCs), and 5SR (monetary aggregates) monthly to IFS with lag of two to 5 months.
  - SFC compiles 4SR for OFC; last reported OFC data are for December 2014 due to SFC review and IFRS mapping.
  - Colombia reports some core Financial Soundness Indicators (FSI).
- External sector statistics:
  - BdR compiles quarterly balance of payments and IIP on BPM6 basis.
  - Improved surveys in services sector enhanced coverage.
  - Recording of securities transactions between residents and nonresidents in secondary markets could be improved.
  - BdR compiles monthly Data Template on International Reserves and Foreign Currency Liquidity; reports semi-annual CPIS data and quarterly external debt statistics to QEDS.
  - Colombia has not reported data to the Coordinated Direct Investment Survey (CDIS) yet.
- Colombia subscribes to the Special Data Dissemination Standard (SDDS); a data ROSC was published in October 2006.

### Table of common indicators — select dated entries (as of March/April 2017)
- Exchange Rates: Mar. 24, 2017 — Date Received: Mar. 24, 2017 — Frequency: D — Frequency of Reporting: D — Frequency of Publication: D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Feb. 2017 — Date Received: Mar. 2017 — Frequency: M — Frequency of Reporting: M — Frequency of Publication: M.
- Reserve/Base Money: Mar. 2017 — Date Received: Mar. 2017 — Frequency: W — Frequency of Reporting: W — Frequency of Publication: W.
- Broad Money: Mar. 2017 — Date Received: Mar. 2017 — Frequency: W — Frequency of Reporting: W — Frequency of Publication: W.
- Central Bank Balance Sheet: Jan. 2017 — Date Received: Mar. 2017 — Frequency: W — Frequency of Reporting: W — Frequency of Publication: W.
- Consolidated Balance Sheet of the Banking System: Nov. 2016 — Date Received: Mar. 2017 — Frequency: M — Frequency of Reporting: M — Frequency of Publication: M.
- Consumer Price Index: Feb. 2017 — Date Received: Mar. 2017 — Frequency: M — Frequency of Reporting: M — Frequency of Publication: M.
- Revenue, Expenditure, Balance and Financing Composition — General Government: Q4 2016 — Date Received: Mar. 2017 — Frequency: Q — Frequency of Reporting: Q — Frequency of Publication: Q.
- External Current Account Balance: Q4 2016 — Date Received: Mar. 2017 — Frequency: Q — Frequency of Reporting: Q — Frequency of Publication: Q.
- GDP/GNP: Q4 2016 — Date Received: Mar. 2017 — Frequency: Q — Frequency of Reporting: Q — Frequency of Publication: Q.
- International Investment Position: Q4 2016 — Date Received: Mar. 2017 — Frequency: Q — Frequency of Reporting: Q — Frequency of Publication: Q.

### Statement by Carlos Hurtado, Executive Director for Colombia and Tomas Gonzalez, Senior Advisor — key points
Background and policy framework
- Authorities set an ambitious reform agenda in 2010 aimed at reducing poverty (above 30 percent per multidimensional measures), lowering inequality, reducing structural unemployment (persistently above 12 percent), and removing barriers to growth (notably infrastructure).
- Chosen macroeconomic pillars: exchange rate flexibility; cautious monetary and financial policy to keep low and stable inflation, contain credit growth, and avoid currency mismatches; commitment to a medium-term fiscal rule.
- From 2010 to 2014, sustained increase in oil prices and doubled production led to higher government revenue and large peso appreciation; authorities recognized temporary nature of the shock and preserved space to adjust when the boom ended.

Fall in oil prices and policy response
- Starting mid-2014, rapid decline in oil prices led to exports falling 46 percent.
- Government’s oil revenue dropped 3 pp of GDP.
- Current account deficit widened to 6.5 percent of GDP.
- Growth slowed to 2 percent.
- Monetary policy: Central Bank hiked policy rate by 325 bp between September 2015 and July 2016 to confront shocks including El Niño drought and a truck drivers’ strike; headline inflation increased to 8.97 percent in July.
- Inflation declined to 5.75 percent in December; Central Bank eased policy with 25 bp cuts in December, February, and March.
- Central Bank cautious stance to consider: (i) increased inflation inertia after two years exceeding the 3 percent target and imperfect anchoring of expectations; (ii) uncertainty about potential growth and natural interest rates, with lower terms of trade and smaller labor force growth versus productivity gains; (iii) consolidation of external adjustment with current account deficit expected to fall to 3.5 percent this year.
- Financial sector: slowdown in credit growth, capital adequacy ratios above regulatory requirements, stress tests indicate provisions would help banks withstand large shocks.
- Authorities ready to expand prudential tools: additional provisions in consumer loans, speedier convergence to Basel III capital standards, further regulation to limit currency mismatches and FX liquidity risk.
- Regulatory consolidation via measures such as the conglomerates bill under discussion in Congress.

Fiscal policy and tax reform
- Structural deficit reduction occurred in the prior year despite an increase in central government headline deficit due to lower oil revenue and higher interest payments.
- Negative fiscal impulse of more than 2 percent, followed by approval of a comprehensive tax reform in December.
- Tax reform measures included: increase in general VAT rate by 3 percentage points; limited exemptions in personal income tax; reduced corporate tax rates and simplified procedures for small businesses; modernization of non-profits taxation; penalties to tackle evasion; creation of a new carbon tax; strengthened tax administration.
- Expected revenue impact: 0.67 percent of GDP in 2017, gradually increasing to over 3 percent of GDP in the next five years.
- Estimated medium-term growth effect of lower corporate tax rates: around 0.3pp.

Outlook and risks
- Recent outcomes and near-term outlook: growth expected to rise to 2.5 percent and continue increasing to 3.5 percent by the end of the decade; inflation falling and set to reach target in the second half of next year; unemployment maintained at the 9 percent level; investment rates highest among large Latin American economies; commodity and non-commodity exports have started to grow and expected to help lower the current account deficit to sustainable levels.
- Policy space being rebuilt: strong reserves position and continued access to the Flexible Credit Line support confidence as reflected in capital flows, credit default swap prices and credit rating stability.
- Medium-term focus: increasing potential growth and completing the structural reform agenda, notably a major road-building program and implementation of the peace agreement.
- Social achievements: universal healthcare, free basic education and training, access to sanitation, drinking water and electricity; almost halving poverty and reducing inequality despite the crisis.
- Authorities committed to a firm and balanced adjustment that accounts for risks and continued productive engagement with the IMF.

*Prepared by The Western Hemisphere Department (In collaboration with other Departments); April 17, 2017.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17138.pdf_