## cr18128-colombiabundle

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---

### Outlook and growth projections
- Growth projected to increase to 2.7 percent in 2018, supported by:
  - A slightly expansionary fiscal policy.
  - Lagged effects of monetary policy easing in 2017 (300 bp reduction in policy rates in 2017).
  - Stronger investment driven by 4G infrastructure projects, the 2016 tax reform, and a reviving oil sector.
- Medium-term growth could reach 3.5 percent if strong structural reforms are implemented.
- Investment rebound drivers (increase in investment, in pp of real GDP):
  - 4G: 0.1
  - Oil Sector: 0.4
  - Tax Reform: 0.6
  - CPS Public investment: 0.1
  - Subtotal: 1.2

### Inflation and external balances
- Inflation and projections:
  - Projected to end 2018 at 3.4 percent—within the target band of 2‒4 percent.
  - Authorities project inflation to reach 3.5 percent in 2018.
  - Drivers for declining inflation: (i) the January 2017 VAT increase drops out of y/y rates in spring 2018; (ii) indexed prices reset to December 2017 inflation (lower than December 2016); (iii) stable exchange rate and benign weather.
- Current account and external financing:
  - Current account projected to improve to -2.6 percent of GDP in 2018 and narrow further over the medium term.
  - Nontraditional exports expected to be the main driver of external adjustment over the medium term.
  - Gross external financing needs projected to decline to about 10 percent of GDP over the forecast horizon.
  - Nonresident participation in the local bond market reached 27 percent in 2017.

### Financial sector and credit
- Credit and credit risk:
  - Real credit growth remained broadly stable; the credit gap closed.
  - NPLs increased to 4.2 percent in December 2017 from 3 percent in 2016; well-provisioned banks remain sound.
  - NPLs expected to peak in 2018H2 as the recovery takes hold.
- Financial soundness indicators (selected):
  - Regulatory capital to risk-weighted assets: 2017: 18.6
  - Nonperforming loans to gross loans: 2017: 4.2
  - ROAA: 2017: 2.2
  - Deposit to loan ratio: 2017: 88.4

### Risks (Risk Assessment Matrix summary)
- Overall risks have decreased somewhat but remain tilted to the downside.
- Key external risks:
  - Tighter global financial conditions (High likelihood; Short/Medium term): could cause sudden sharp increases in interest rates and tighter financial conditions.
  - Lower energy prices driven by weakening OPEC/Russia cohesion (Low likelihood; Short/Medium term).
  - Retreat from cross-border integration / protectionism (Medium likelihood; Short/Medium term).
  - Policy uncertainty in major economies and significant China slowdown are additional medium risks.
- Colombia-specific risks:
  - Slower-than-expected recovery due to delays in infrastructure, sluggish exports, NPLs, or political uncertainty (Medium likelihood; Short/Medium term).
  - Spillovers from Venezuela turmoil — gross monthly migration doubled in late 2017, leading to about half a million Venezuelan migrants in Colombia; if the pace continues, migrants could reach 1.0−1.5 million at end-2018 (depending on stays/continues).
- Policy recommendations for shock scenarios:
  - Use the exchange rate as shock absorber and international reserves to tame disorderly market behavior.
  - Speed up structural reforms and pro-diversification measures.
  - Provide monetary policy support only if expectations are anchored.
  - Provide assistance to border regions and seek donor support in case of large-scale migration.

### Policy advice and priorities
- Near-term macro policy:
  - Continue fiscal consolidation.
  - Some room to cut policy rates further if inflation expectations continue to converge to the 3 percent target and growth underperforms.
  - Improve clarity and communication of monetary policy decisions.
- Medium-term agenda:
  - Lift inclusive growth and productivity through structural reforms while preserving macroeconomic stability.
  - Top structural priorities:
    - Promoting infrastructure investment.
    - Lowering barriers to international trade.
    - Tackling labor-market informality.
- Financial safety nets and buffers:
  - Colombia’s flexible exchange rate, reserve buffers and access to the FCL would cushion external shocks.

### Political context and authorities’ views
- Elections and political outlook:
  - Presidential elections scheduled for May-June 2018 are widely expected to ensure policy continuity and strengthen the reform agenda.
  - Center-right parties gained strength in Congressional elections on March 11; leading center candidates Ivan Duque, German Vargas Lleras and Sergio Fajardo were estimated to combine to capture about 2/3 of total votes.
  - Left-leaning candidate Gustavo Petro proposes a larger public sector role financed with higher taxes.
- Authorities’ macro views:
  - Authorities project growth to 2.7 percent in 2018 and expect inflation to converge to target, reaching 3.5 percent in 2018.
  - Authorities estimate the current account norm between -3 and -0.5 percent of GDP.
  - Authorities view the exchange rate as the first line of defense against external shocks.
  - Fiscal costs of Venezuela-related migration assessed so far at 0.1-0.2 percent of GDP.

### Context and recent developments
- 2017 economic performance:
  - Economy grew at 1.9 percent y/y in 2017H2 after a trough in 2017H1.
  - Unemployment increased to 9.7 percent in 2017Q4, up from 8.6 percent in 2015.
  - Inflation peaked at 9 percent y/y in July 2016, then fell below 4 percent in 2017H2 but remained slightly above the target band in December 2017.
  - Current account deficit narrowed to 3.4 percent of GDP in 2017 from 6.4 percent of GDP in 2015.
- Policy stance:
  - Tightening monetary and fiscal policies in 2015‒16 were appropriate in response to the oil price shock.
  - In 2017, policies moved to a more neutral stance.

### Structural reforms and productivity
- Productivity and bottlenecks:
  - Productivity growth has been weak despite improvements in governance and the business environment over the last decade.
  - WEF and Doing Business surveys show poor scores in infrastructure, logistics, trading across borders, and burden of regulation, as well as in hiring and firing costs and labor taxation.
  - Logistics costs account for 15 percent of corporate sales, mostly due to inefficient transportation.
  - Nontraditional exports grew just 7 percent last year, in part due to weak regional growth.
- 4G infrastructure agenda:
  - After delays, 4G projects began in earnest during 2017.
  - 4G capex should increase by about 0.2 percent of GDP per year in 2018‒19.
  - Financing of 4G Agenda (US$ billion / Share; based on 13 Financial closures as of end-2017):
    - Local 5.86 64.7
    - Equity Local Sponsor 2.12 23.3
    - Local Bank Debt 2.62 8.7
    - FDN Debt 0.7 7.3
    - Other local debt 0.5 5.3
    - International 3.23 35.3
    - Equity International Sponsor 0.7 7.7
    - Equity International Fund 0.2 2.3
    - International Bank debt 0.8 9.3
    - Multilateral banks debt 0.4 4.0
    - Capital markets debt 1.0 11.3
    - Pension fund debt 0.1 0.7
    - Total 9.0 100.0
    - Memo items:
      - Total Debt 6.0 66.7
      - Total Equity 3.0 33.3
- Labor informality and education:
  - Informality fell by 3.2−8.2 percentage points between 2007 and 2017, depending on the definition.
  - Payroll tax cuts and increasing education levels contributed to a substantial fall in labor informality.
  - Share of workers not contributing to social security dropped from 70 percent in 2007Q1 to 62.3 percent in 2017Q3.
  - Education and formality:
    - 85 percent of workers with postgraduate education are formal but only 9 percent of those without any education are formal.
    - Formality for uneducated workers rose from 6.7 to 9.3 percent.
    - An increase in the average level of education accounts for 5.2 percentage points of the 7.8 percentage points fall in informality between 2007Q1 and 2017Q2.
  - Staff simulations indicate that permanently cutting entry costs or labor reforms such as reducing payroll taxes lead to a steady state with lower informality, lower unemployment and higher income.
- Trade, tariffs, and non-tariff barriers:
  - Nominal tariffs average 18 percent but are as high as 49 and 70 percent for dairy and beef products, respectively.
  - Average number of nontariff barriers per product category grew from four to 16 in 2001‒14.
  - Their tariff equivalent is estimated at 20 percent.

### Governance and transparency
- Legal and institutional framework:
  - Criminalization of bribery of domestic and foreign public officials (Law 599 of 2000)
  - Anti-Corruption Statute (Law 1474 of 2012)
  - Transnational Corruption Act (Law 1778 of 2016)
  - Recent measures: decree on politically exposed persons, Transparency and Access to Information Law (2014), citizen participation law (2015), public contracting information system (SECOP), creation of the national infrastructure agency (ANI).
- Perception indicators:
  - Corruption has remained in the top 2 of most problematic factors for doing business since 2012.
  - Trust in politicians declined to a score of 1.7 (out of 7) in WEF 2017-18 from 2.3 in 2012‒13.
- Pending priorities: strengthen protection of whistleblowers, regulation on lobbying, focus on subnational/regional/local efforts.

### Policy recommendations (summarized)
- Push productivity-enhancing reforms as the adjustment to lower oil prices completes and the economy recovers; use 2016 tax reform to spur private investment and complement infrastructure investments, including PPPs and subnational government investment.
- Avoid delays in 4G infrastructure projects and implement planned reforms to road transportation:
  - Ensure permits and environmental assessments are ready promptly and remove other obstacles to infrastructure projects.
  - Connect tertiary roads to the broader transport network in regions affected by conflict.
  - Complete measures to renew the fleet of trucks and further develop fluvial transportation.
- Continue focusing on high-quality education to raise productivity and formality:
  - Build on expansion of higher education coverage from 37 percent in 2010 to 52 percent of the age cohort in 2017.
  - Focus on supply of higher education and programs to support access for low-income students, within fiscal constraints.
- Reduce informality via structural reforms:
  - Consider alternative sources of financing for the four-percent payroll tax that finances Cajas de Compensación Familiar and review bundled services to avoid duplication.
  - Consider a regionally differentiated minimum wage given large regional differences in human capital and bindingness of the national minimum wage.
  - Reduce registration fees for the registro mercantil for small firms and cut red tape through the Ventanilla Unica Empresarial.
- Realign tariffs to lower dispersion across products and continue recent reductions in VAT for capital goods and in tariffs for intermediate inputs not produced domestically.
- Review and rationalize nontariff barriers, focusing on the largest import categories.

### Monetary policy (background and advice)
- Policy actions and indicators:
  - The central bank cut the policy rate by 325 bps from a peak of 7¾ percent, starting December 2016.
  - Medium-term inflation expectations stood at 3.25 percent in January 2018.
  - Non-tradable inflation is sticky at over 4.5 percent but expected to fall.
  - The central bank reduced the number of policy decision meetings to 8 (from 12).
- Policy advice:
  - There is scope to further cut the policy rate as inflation converges to target; the real rate is currently assessed to be marginally expansionary with limited space for more cuts.
  - If lower headline inflation lowers expectations, modest additional easing could be warranted given the negative output gap if growth weakens.
  - Improve clarity and consistency of monetary policy communications and more clearly spell out the Board’s views on policy trade-offs.

### Fiscal outlook and medium-term framework
- Medium-term fiscal framework (MTFF) and consolidation:
  - Primary expenditure will have to decline by about 0.6 percent of GDP between 2018 and 2020 to reach the authorities’ structural-balance targets.
  - Combined with expected revenue gains from improved tax administration, this implies a cumulative negative fiscal impulse of about 1.4 percent of GDP.
  - Public debt will steadily decline to about 40 percent of GDP in 2023.
  - At the consolidated public sector level, stronger expenditure execution at the subnational level will support a mild positive fiscal boost of about 0.2 percent of GDP.
- Key fiscal statistics (selected, percent of GDP):
  - Central Government Headline balance: 2015 -3.0; 2016 -4.0; 2017 -3.6; 2018 -3.1; 2019 -2.2; 2020 -1.6; 2021 -1.3; 2022 -1.1; 2023 -1.1
  - Central Government Expenditure: 2015 19.2; 2016 19.1; 2017 19.2; 2018 18.3; 2019 17.6; 2020 17.7; 2021 17.5; 2022 17.3; 2023 17.2
  - Structural primary non-oil balance (Central Government): 2015 -1.7; 2016 -1.2; 2017 -0.7; 2018 -0.5; 2019 0.0; 2020 0.4; 2021 0.5; 2022 0.6; 2023 0.4
  - Consolidated Public Sector Headline Balance: 2015 -3.4; 2016 -2.8; 2017 -2.9; 2018 -2.5; 2019 -1.7; 2020 -0.6; 2021 -0.5; 2022 -0.4; 2023 -0.6
  - Public sector gross debt: 2015 50.6; 2016 50.4; 2017 50.2; 2018 49.9; 2019 48.7; 2020 46.5; 2021 44.4; 2022 42.3; 2023 40.4
  - Public sector net debt: 2015 42.2; 2016 39.1; 2017 39.3; 2018 39.9; 2019 39.5; 2020 38.1; 2021 36.6; 2022 35.2; 2023 33.9
- Pension system diagnosis and reform options:
  - Structure:
    - Colombia Mayor: non-contributory program.
    - Pillar 1: choice between DB (ColPensiones) and DC (AFPs) for formal workers making the 16 percent contribution.
    - Minimum pension entitlement: one minimum wage.
    - BEPS program: subsidy of 20 percent for low-income workers.
  - Key weaknesses:
    - Only about one third of the pension-age population receive a contributory pension.
    - About one half of pension-age population is below the poverty line.
    - High eligibility threshold: 1350 weeks.
    - ColPensiones’ replacement rate: 70−100 percent and benefits mostly the rich; about half of the implicit subsidy is received by the top income quintile.
  - Parametric reform options:
    - Unify and increase the retirement age (currently 57 for women and 62 for men).
    - Lower ColPensiones replacement rate by increasing the number of years used to compute pension benefits.
    - Remove the tax-free status of pension benefits to improve progressivity.
    - Increase contribution rates and explore re-assigning some existing payroll-related taxes.
  - Deeper reforms to expand coverage while ensuring progressivity and fiscal sustainability include strengthening Colombia Mayor, widening BEPS, lowering the eligibility threshold, downsizing DB system proposals, or closing entry to ColPensiones with a transition plan.
- Policy advice on fiscal policy and subnational capacity:
  - Keep public debt on a downward path to preserve space to react to negative shocks.
  - Continue efforts to improve tax administration and formalization as envisaged in the 2016 tax reform.
  - Fiscal rule legal mandate offers flexibility in the pace of consolidation beyond 2018; the rule allows shifting adjustment planned for 2019/2020 to 2021/22 in case negative shocks materialize.
  - If additional positive oil revenue surprises occur, the rule allows spending the structural component including in public investment and saving the rest.
  - Strengthened capacity in subnational governments would improve public expenditure; subnational governments can fund additional spending from previously unexecuted budgets (gross assets of about 4 percent of GDP at end-2017).
  - Implementation of the peace agreements will strengthen subnational capacity and help relieve constraints.

### Preserving financial stability — developments and recommendations
- NPLs and provisioning:
  - NPLs increased to 4.3 percent in December 2017, from 3.2 percent a year earlier.
  - Provisions fell to 126 percent of NPLs but remain ample.
  - Tier-1 and regulatory capital increased to 12.4 percent and 18.6 percent of RWAs respectively by December 2017.
- Monitoring and regulation:
  - SFC introduced new regulation in October 2017 to standardize loan restructuring and foster early credit risk monitoring via modified loans and improved bank-by-bank monitoring.
  - Modified loans allow adjustments to interest and maturity (but not principal); modified loans do not entail additional provisions or a negative credit mark but lead to more intensive surveillance thereafter.
  - Staff supports incentives to anticipate deterioration and facilitate detection and recoveries; under new regulation modified loans cannot be reclassified to a lower risk category and non-performing modified loans will be downgraded faster, requiring more provisioning.
- Basel convergence and Conglomerates Law:
  - Conglomerates Law passed in September 2017 and will come into effect in 2018.
  - Capital requirements for all banks to be gradually strengthened over a six-year period.
  - Agenda to strengthen capital and liquidity (measures and timelines):
    - I. Capital
      - Modification of the definition of capital and risk-weighted assets to bring them closer to international standards. During 2018
      - Introduce conservation and D-SIB buffers at 2.5 and 1 percent respectively. By 2023
      - Introduce Tier-1 capital minimum of 6 percent. By 2023
    - II. Liquidity
      - Modification of the liquidity-coverage-ratio to differentiate by type of depositor in accordance with Basel III. In progress; to be sent for comments during 2018H1
      - Introduction of a liquidity indicator similar to the net-stable-funding ratio, but taking into account currency mismatches and roll-over risks of derivatives. In progress; to be sent for comments during 2018H1

### Staff appraisal and priorities
- Macroeconomic assessment:
  - Strong policy framework and well-executed policies narrowed external imbalances after the oil price shock of 2015-16 and laid foundations for an economic recovery.
  - Monetary easing has brought the ex-ante real policy rate to slightly expansionary levels; limited further cuts may be feasible in a below-baseline growth scenario with continued convergence of inflation expectations to target.
  - Better communication of policy tradeoffs would complement recent improvements to the policy rate decision process.
- Fiscal assessment:
  - Fiscal policy stance is appropriate and consolidation should continue.
  - Complying with the fiscal rule requires some cuts in central government public investment, to be more than offset by increases in PPP-infrastructure, private sector and subnational government investment.
  - Further strengthening tax administration, including through stronger sanctions, is imperative.
- Structural reform priorities:
  - Lower barriers to international trade.
  - Tackle labor-market informality.
  - Promote infrastructure investment.
  - Lower remaining non-wage labor costs and barriers to entry.
  - Lower transport and other exporting costs.
  - A comprehensive pension reform is needed to increase coverage and progressivity.
- Financial sector assessment:
  - Banks adjusted well to the downturn; regulatory and supervisory agenda is focused on the right issues.
  - Staff supports incentives for detection and recoveries in loan portfolios, subject to increased monitoring and avoiding delayed recognition of asset deterioration.
  - The Conglomerates Law is an important step to preserve financial stability and facilitate convergence to Basel III standards.
- Risks:
  - Risks have decreased somewhat but remain tilted to the downside.
  - Global financial markets remain vulnerable to a sudden, sharp tightening of financial conditions.
  - Regionally, risks related to the crisis in Venezuela are growing and may require international support if immigration continues to increase at the current pace.
  - Domestic risks include weaker-than-expected responses in infrastructure investment or exports that could slow the recovery.
  - Colombia’s strong policies, flexible exchange rate, and reserve buffers would cushion effects of shocks.
- Exchange restrictions:
  - 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.

### Key recommendation
- Staff recommends that the next Article IV takes place on the standard 12-month cycle.

### Recent economic developments and key statistics (selected)
- Real GDP growth:
  - 2013: 4.9; 2014: 4.4; 2015: 3.1; 2016: 2.0; 2017: 1.8; 2018 (projected): 2.7; 2019–2023 (projections): 3.3, 3.6, 3.6, 3.6, 3.5
- Potential GDP and output gap:
  - Potential GDP (2017): 3.0
  - Output gap (2017): -1.5
- Inflation and prices:
  - GDP deflator (2017): 3.3
  - Consumer prices (end of period) 2017: 3.4; projected 2018–2023: 3.0, 3.0, 3.0, 3.0, 3.0
- External sector and trade:
  - Current account balance (percent of GDP): 2013 -3.3; 2014 -5.2; 2015 -6.4; 2016 -4.3; 2017 -3.4; 2018–2023 projections: -2.6, -2.6, -2.5, -2.5, -2.4, -2.3
  - Exports (f.o.b.): 2016: 34,079 (million US$); 2017: 39,474 (million US$); 2018 (projection): 45,114 (million US$)
  - Imports (f.o.b.): 2016: 43,239 (million US$); 2017: 44,241 (million US$); 2018 (projection): 47,228 (million US$)
- Public finances and debt:
  - Central government overall balance (percent of GDP): 2016: -3.6; 2017: -3.1; 2018–2023 projections: -2.2, -1.6, -1.3, -1.1, -1.1
  - Nominal gross public debt (percent of GDP): 2016: 37.8; 2017: 43.7; 2018–2023 (projections): 50.6, 50.4, 49.8, 48.7, 46.5, 44.4, 42.3, 40.4
  - Public gross financing needs (percent of GDP): 2016: 6.2; 2017: 5.0; 2018–2023 projections: 6.0, 4.5, 5.1, 3.4, 3.2, 2.3, 2.6
- Reserves and external liquidity:
  - Gross international reserves (GIR, IMF definition, billion US$): 2016: 46.8; 2017: 46.3; 2018–2023 projections: 46.2, 47.1, 47.9, 48.9, 50.2, 51.5, 52.9, 54.2
  - GIR/(short-term debt at remaining maturity + current account deficit) ratios: 2016: 134.2; 2017: 115.3
- Macro‑financial metrics:
  - Credit to the private sector (percent change): 2016: 7.5; 2017: 8.9; 2018–2023 projections: 9.6, 10.8, 11.6, 11.6
  - Total external debt (percent of GDP): 2016: 138.9; 2017: 146.8; 2018–2023 projections: 152.7, 157.6, 162.5, 168.5, 175.6, 183.1
- Social indicators:
  - Population (million), 2015: 48.2
  - GDP per capita (US$), 2016: 5,808
  - Nominal GDP (billion USD), 2017: 280
  - Life expectancy (2013): 73.8 years
  - Gini coefficient (2016): 0.500; Gini coefficient 2017: 50.8
  - Poverty rate (US$3.2 a day, PPP), 2015: 13.1
  - Extreme poverty rate (US$1.9 a day, PPP), 2015: 5.5
  - Unemployment rate (2017 series): 2017: 9

### Annex I — External Sector Assessment (selected)
- External position and current account:
  - Current account deficit reached 3.4 percent of GDP in 2017, down from a peak of 6.4 percent of GDP in 2015.
  - Trade deficit declined to 1.5 percent of GDP in 2017, down from 3.3 percent of GDP in 2016.
  - Primary income deficit worsened to 2.6 percent of GDP in 2017, up from 1.9 percent of GDP in 2016, mostly due to higher FDI-related payments.
- Exchange rate and exports:
  - Real exchange rate depreciation of 36 percent since 2014.
  - Distributed lag model projects average quarterly real total export growth around 3 percent in Colombia for 2018Q1‒Q4, relative to the average of -1.6 percent observed in 2016Q1−17Q2.
- Financing and NIIP:
  - Gross FDI inflows have been hovering at about 3.8−4 percent of GDP since 2015, projected at around 3.5 percent in the medium term (excluding one-off receipts).
  - NIIP reached -46 percent of GDP at end-2017 from -41 percent of GDP at end-2015.
  - Liabilities increased to 99 percent of GDP, of which slightly more than half represents FDI; portfolio liabilities amount to 26 percent of GDP.
  - Staff projects NIIP to stabilize at about 45 percent of GDP.
- Reserves and buffers:
  - Foreign exchange reserves amounted to about 146 percent of the ARA metric in 2017.
  - Reserves relative to short-term debt and current account deficit are projected to increase to about 135 percent over the medium term.
- EBA adjusted CA analysis:
  - CA norm based on the CA method is +0.1 percent of GDP, implying a CA gap of -3.9 percent of GDP in 2017.
  - Taking terms-of-trade improvements and excluding oil-related repatriated earnings reduces the CA gap to 1.9 percent.
- Prospects for nontraditional exports:
  - Historical evidence suggests increases in nontraditional exports can be significant but may take several years; median cumulative nontraditional export growth in 2015‒20 could reach 30 percent under a typical large depreciation episode.

*International Monetary Fund staff report, April 16, 2018.*

### 2.7 percent in 2018. Inflation will remain within the target band as the effects of past

### cr18128-colombiabundle - 2.7 percent in 2018. Inflation will remain within the target band as the effects of past

### Outlook and growth projections
- Growth is projected to increase to 2.7 percent in 2018, supported by:
  - A slightly expansionary fiscal policy.
  - Lagged effects of monetary policy easing in 2017 (300 bp reduction in policy rates in 2017).
  - Stronger investment driven by 4G infrastructure projects, the 2016 tax reform, and a reviving oil sector.
- Medium-term growth could reach 3.5 percent if strong structural reforms are implemented.
- Investment rebound drivers (increase in investment, in pp of real GDP):
  - 4G: 0.1
  - Oil Sector: 0.4
  - Tax Reform: 0.6
  - CPS Public investment: 0.1
  - Subtotal: 1.2

### Inflation and external balances
- Inflation:
  - Projected to end 2018 at 3.4 percent—within the target band of 2‒4 percent.
  - Inflation is expected to decline as: (i) the January 2017 VAT increase drops out of y/y rates in spring 2018; (ii) indexed prices reset to December 2017 inflation (lower than December 2016); (iii) stable exchange rate and benign weather.
  - Authorities project inflation to reach 3.5 percent in 2018.
- Current account:
  - Projected to improve to -2.6 percent of GDP in 2018 and narrow further over the medium term.
  - Nontraditional exports expected to be the main driver of external adjustment over the medium term.
  - Gross external financing needs projected to decline to about 10 percent of GDP over the forecast horizon.
  - Nonresident participation in the local bond market reached 27 percent in 2017.

### Financial sector and credit
- Real credit growth remained broadly stable; the credit gap closed.
- NPLs increased to 4.2 percent in December 2017 from 3 percent in 2016; well-provisioned banks remain sound.
- NPLs are expected to peak in 2018H2 as the recovery takes hold.

### Risks (Risk Assessment Matrix summary)
- Overall risks have decreased somewhat but remain tilted to the downside.
- Key external risks:
  - Tighter global financial conditions (High likelihood; Short/Medium term): could cause sudden sharp increases in interest rates and tighter financial conditions.
  - Lower energy prices driven by weakening OPEC/Russia cohesion (Low likelihood; Short/Medium term).
  - Retreat from cross-border integration / protectionism (Medium likelihood; Short/Medium term).
  - Policy uncertainty in major economies and significant China slowdown are additional medium risks.
- Colombia-specific risks:
  - Slower-than-expected recovery due to delays in infrastructure, sluggish exports, NPLs, or political uncertainty (Medium likelihood; Short/Medium term).
  - Spillovers from Venezuela turmoil — gross monthly migration doubled in late 2017, leading to about half a million Venezuelan migrants in Colombia; if the pace continues, migrants could reach 1.0−1.5 million at end-2018 (depending on stays/continues).
- Policy recommendations for shock scenarios:
  - Use the exchange rate as shock absorber and international reserves to tame disorderly market behavior.
  - Speed up structural reforms and pro-diversification measures.
  - Provide monetary policy support only if expectations are anchored.
  - Provide assistance to border regions and seek donor support in case of large-scale migration.

### Policy advice and priorities
- Near-term macro policy:
  - Continue fiscal consolidation.
  - Some room to cut policy rates further if inflation expectations continue to converge to the 3 percent target and growth underperforms.
  - Improve clarity and communication of monetary policy decisions.
- Medium-term agenda:
  - Lift inclusive growth and productivity through structural reforms while preserving macroeconomic stability.
  - Top structural priorities:
    - Promoting infrastructure investment.
    - Lowering barriers to international trade.
    - Tackling labor-market informality.
- Financial safety nets and buffers:
  - Colombia’s flexible exchange rate, reserve buffers and access to the FCL would cushion external shocks.

### Political context and authorities’ views
- Presidential elections scheduled for May-June 2018 are widely expected to ensure policy continuity and strengthen the reform agenda.
  - Center-right parties gained strength in Congressional elections on March 11; this outcome is considered conducive to a continued strong policy framework.
  - Leading center candidates Ivan Duque, German Vargas Lleras and Sergio Fajardo were estimated to combine to capture about 2/3 of total votes.
  - Left-leaning candidate Gustavo Petro proposes a larger public sector role financed with higher taxes.
- Authorities’ macro views:
  - Authorities also project growth to 2.7 percent in 2018 and expect inflation to converge to target, reaching 3.5 percent in 2018.
  - Authorities estimate the current account norm between -3 and -0.5 percent of GDP.
  - Authorities view the exchange rate as the first line of defense against external shocks.
  - Fiscal costs of Venezuela-related migration assessed so far at 0.1-0.2 percent of GDP.

### Context and recent developments
- 2017 performance:
  - Economy grew at 1.9 percent y/y in 2017H2 after a trough in 2017H1.
  - Unemployment increased to 9.7 percent in 2017Q4, up from 8.6 percent in 2015.
  - Inflation peaked at 9 percent y/y in July 2016, then fell below 4 percent in 2017H2 but remained slightly above the target band in December 2017.
  - Current account deficit narrowed to 3.4 percent of GDP in 2017 from 6.4 percent of GDP in 2015.
- Policy stance:
  - Tightening monetary and fiscal policies in 2015‒16 were appropriate in response to the oil price shock.
  - In 2017, policies moved to a more neutral stance.

*International Monetary Fund staff report, April 16, 2018.*

### 15.      As noted in last year’s report, structural reforms to improve the functioning of product

### 15. As noted in last year’s report, structural reforms to improve the functioning of product

### Structural reforms and productivity
- Productivity growth has been weak in recent years despite improvements in governance and the business environment over the last decade.
- WEF and Doing Business surveys show poor scores in infrastructure, logistics, trading across borders, and burden of regulation, as well as in hiring and firing costs and labor taxation.
- Logistics costs account for 15 percent of corporate sales, mostly due to inefficient transportation.
- Nontraditional exports grew just 7 percent last year, in part due to weak regional growth.

### 4G infrastructure agenda (Box 3)
- After delays in execution, 4G infrastructure projects began in earnest during 2017.
- The first wave of projects secured funding but some of the second wave projects are still securing financing.
- Authorities moved to address contractual problems and remove financing constraints.
- 4G capex should increase by about 0.2 percent of GDP per year in 2018‒19.
- Government actions and financing developments described in the source text include:
  - A new infrastructure law (Law 1882, approved January 2018) specifying procedures to deal with corruption and improving transparency, land acquisition, and annulment settlement.
  - A capital injection to the government development bank (FDN) from proceeds of the privatization of an electricity company sold in 2016.
  - Diversification of 4G financing away from local banks with participation from local and international institutional investors, global bonds, foreign equity and bank loans; FDN provided bridge financing and long-term peso loans to foreign lenders.

- Financing of 4G Agenda (as presented in the source)
  - US$ billionShare
  - Local5.864.7
  - Equity Local Sponsor2.123.3
  - Local Bank Debt2.628.7
  - FDN Debt0.77.3
  - Other local debt0.55.3
  - International3.235.3
  - Equity International Sponsor0.77.7
  - Equity International Fund0.22.3
  - International Bank debt0.89.3
  - Multilateral banks debt0.44.0
  - Capital markets debt1.011.3
  - Pension fund debt0.10.7
  - Total9.0100.0
  - Memo items:
  - Total Debt6.066.7
  - Total Equity3.033.3
  - 1/ Based on 13 Financial closures as of end-2017

### Labor informality and education (Box 4 and main text)
- Informality fell by 3.2−8.2 percentage points between 2007 and 2017, depending on the definition.
- Payroll tax cuts and increasing education levels contributed to a substantial fall in labor informality.
  - Labor market and tax reforms in 2010−12, including a reduction in payroll taxes of 13.5 percentage points, played an important role.
- The share of workers not contributing to social security dropped from 70 percent in 2007Q1 to 62.3 percent in 2017Q3.
- Education and formality:
  - 85 percent of workers with postgraduate education are formal but only 9 percent of those without any education are formal.
  - Formality for uneducated workers rose from 6.7 to 9.3 percent.
  - An increase in the average level of education accounts for 5.2 percentage points of the 7.8 percentage points fall in informality between 2007Q1 and 2017Q2.
- Staff simulations (STRESS model) indicate that permanently cutting entry costs in the formal sector or labor reforms such as reducing payroll taxes lead to a steady state with lower informality, lower unemployment and higher income.

### Trade, tariffs, and non-tariff barriers
- Despite a large real depreciation since 2015, nontraditional exports grew just 7 percent last year.
- Tariffs and trade costs:
  - On average, tariffs are low by regional standards and have fallen significantly in recent years, narrowing the gap with the OECD average to 1.5 percentage points.
  - Nominal tariffs average 18 percent but they are as high as 49 and 70 percent for dairy and beef products, respectively.
  - The average number of nontariff barriers per product category grew from four to 16 in 2001‒14.
  - Their tariff equivalent is estimated at 20 percent.
- Trade impediments cited: trade barriers, slow customs, infrastructure gaps, and inefficient road transportation add to the cost of exporting.

### Governance and transparency (Box 2)
- Colombia has a comprehensive anti-corruption legal framework, including:
  - Criminalization of bribery of domestic and foreign public officials (Law 599 of 2000)
  - Anti-Corruption Statute (Law 1474 of 2012)
  - Transnational Corruption Act (Law 1778 of 2016)
- Recent measures: decree establishing list of politically exposed persons, Transparency and Access to Information Law (2014), citizen participation law (2015), public contracting information system (SECOP), creation of the national infrastructure agency (ANI).
- Perception indicators remain weak: corruption has remained in the top 2 of most problematic factors for doing business since 2012; trust in politicians declined to a score of 1.7 (out of 7) in WEF 2017-18 from 2.3 in 2012‒13.
- Pending priorities: strengthen protection of whistleblowers, regulation on lobbying, continued focus on subnational/regional/local level efforts.

### Policy recommendations (summarized from paragraphs 19–24)
- Push productivity-enhancing reforms as the adjustment to lower oil prices completes and the economy recovers; use 2016 tax reform to spur private investment and complement infrastructure investments, including PPPs and subnational government investment.
- Avoid delays in 4G infrastructure projects and implement planned reforms to road transportation:
  - Ensure permits and environmental assessments are ready promptly and remove other obstacles to infrastructure projects.
  - Connect tertiary roads to the broader transport network in regions affected by conflict.
  - Complete measures to renew the fleet of trucks and further develop fluvial transportation.
- Continue focusing on high-quality education to raise productivity and formality:
  - Build on expansion of higher education coverage from 37 percent in 2010 to 52 percent of the age cohort in 2017.
  - Focus on supply of higher education and programs to support access for low-income students, within fiscal constraints.
- Reduce informality via structural reforms:
  - Consider alternative sources of financing for the four-percent payroll tax that finances Cajas de Compensación Familiar and review bundled services to avoid duplication.
  - Consider a regionally differentiated minimum wage given large regional differences in human capital and bindingness of the national minimum wage.
  - Reduce registration fees for the registro mercantil for small firms and cut red tape through the Ventanilla Unica Empresarial.
- Realign tariffs to lower dispersion across products and continue recent reductions in VAT for capital goods and in tariffs for intermediate inputs not produced domestically.
- Review and rationalize nontariff barriers, focusing on the largest import categories to reduce the cost of producing tradable goods.

### Authorities’ views (summary)
- Authorities agreed higher productivity is critical to boost growth and are confident the 4G agenda will take off, noting the new infrastructure law helped reignite investor appetite.
- They stressed the positive role of the 2012 tax reform in reducing informality and sustaining relatively low unemployment after the commodity shock.
- Authorities concurred that further structural reforms and improvements in higher education would help but emphasized careful study of instruments to stimulate broad-based access.
- Authorities reported measures to facilitate international trade and make customs procedures faster by reducing duplications in port inspections.

### Monetary policy (Background and Policy Advice)
- The central bank cut the policy rate by 325 bps from a peak of 7¾ percent, starting December 2016.
- Medium-term inflation expectations stood at 3.25 percent in January 2018.
- Non-tradable inflation is sticky at over 4.5 percent but expected to fall.
- The central bank reduced the number of policy decision meetings to 8 (from 12).
- Policy advice:
  - There is scope to further cut the policy rate as inflation converges to target; the real rate is currently assessed to be marginally expansionary with limited space for more cuts.
  - If lower headline inflation lowers expectations, modest additional easing could be warranted given the negative output gap if growth weakens.
  - Improve clarity and consistency of monetary policy communications and more clearly spell out the Board’s views on policy trade-offs.

### Near-term fiscal context (brief)
- A better than expected oil revenue outlook will help achieve the 2018 deficit target.
- Oil revenue will increase to about 0.6 percent of GDP due in part to improved profitability in Ecopetrol, limiting expenditure cuts required to achieve the structural-balance target.
- The central government fiscal stance will imply a mild contraction (negative fiscal impulse) of about [text truncated in source].

*Source: IMF staff.*

### 0.2 percent of GDP. At the consolidated public sector level, stronger expenditure execution at the

### cr18128-colombiabundle - 0.2 percent of GDP. At the consolidated public sector level, stronger expenditure execution at the

### Fiscal outlook and medium-term framework
- The medium-term fiscal framework (MTFF) implies a significant fiscal contraction in 2019‒20.
- To reach the authorities’ structural-balance targets, primary expenditure will have to decline by about 0.6 percent of GDP between 2018 and 2020.
- Combined with expected revenue gains from improved tax administration, this implies a cumulative negative fiscal impulse of about 1.4 percent of GDP.
- Public debt will steadily decline to about 40 percent of GDP in 2023.
- Efforts at the tax authority (DIAN) have focused on improving human and technological resources.
- The authorities’ agenda to improve the profile of public debt amortizations has included swap and buy-back operations of some bonds due in 2018 and the recent issuance of a 30-year bond.
- At the consolidated public sector level, stronger expenditure execution at the subnational level will support a mild positive fiscal boost of about 0.2 percent of GDP. Public debt will decline slightly.

Key fiscal statistics (selected from the staff table; in percent of GDP unless otherwise indicated)
- Central Government Headline balance: 2015 -3.0; 2016 -4.0; 2017 -3.6; 2018 -3.1; 2019 -2.2; 2020 -1.6; 2021 -1.3; 2022 -1.1; 2023 -1.1
- Central Government Expenditure: 2015 19.2; 2016 19.1; 2017 19.2; 2018 18.3; 2019 17.6; 2020 17.7; 2021 17.5; 2022 17.3; 2023 17.2
- Structural primary non-oil balance (Central Government): 2015 -1.7; 2016 -1.2; 2017 -0.7; 2018 -0.5; 2019 0.0; 2020 0.4; 2021 0.5; 2022 0.6; 2023 0.4
- CG Fiscal Impulse: 2015 -1.2; 2016 -0.5; 2017 -0.5; 2018 -0.2; 2019 -0.5; 2020 -0.5; 2021 -0.1; 2022 -0.1; 2023 0.2
- Consolidated Public Sector Headline Balance: 2015 -3.4; 2016 -2.8; 2017 -2.9; 2018 -2.5; 2019 -1.7; 2020 -0.6; 2021 -0.5; 2022 -0.4; 2023 -0.6
- Public sector gross debt: 2015 50.6; 2016 50.4; 2017 50.2; 2018 49.9; 2019 48.7; 2020 46.5; 2021 44.4; 2022 42.3; 2023 40.4
- Public sector net debt: 2015 42.2; 2016 39.1; 2017 39.3; 2018 39.9; 2019 39.5; 2020 38.1; 2021 36.6; 2022 35.2; 2023 33.9

### Pension system diagnosis and reform options (Box 6)
- Structure of the system:
  - Colombia Mayor: a non-contributory program aimed to provide subsistence support to elderly poor.
  - Pillar 1: Formal workers earning at least a minimum wage can choose to make their 16 percent contribution to a defined benefit (DB) program (government-run; ColPensiones) or to a defined contribution (DC) program (individual accounts managed by private pension funds, AFPs).
  - All retirees are entitled to a minimum pension (one minimum wage) and most retire under ColPensiones’ benefits.
  - Voluntary savings and a recently-created BEPs program are available for workers who make less than a minimum wage and don’t qualify for a pension (and receive a government subsidy of 20 percent).
- Key weaknesses:
  - Only about one third of the pension-age population receive a contributory pension.
  - About one half of pension-age population is below the poverty line.
  - High eligibility threshold: 1350 weeks.
  - ColPensiones’ replacement rate is relatively generous (70−100 percent) and benefits mostly the rich; about half of the implicit subsidy is received by the top income quintile.
- Parametric reform options (consensus that these could improve progressivity and generate savings):
  - Unify and increase the retirement age (currently 57 for women and 62 for men).
  - Lower ColPensiones replacement rate by increasing the number of years used to compute pension benefits.
  - Remove the tax-free status of pension benefits to improve progressivity.
  - Increase contribution rates and explore re-assigning some existing payroll-related taxes.
- Deeper structural reforms to expand coverage while ensuring progressivity and fiscal sustainability:
  - Strengthen Colombia Mayor and widen eligibility-targeted subsidies for BEPS to increase coverage and progressivity.
  - Lower the eligibility threshold (number of weeks) and improve labor market formality to increase coverage.
  - Downsizing DB system proposals: e.g., ColPensiones to receive contributions on the first minimum wage and pay only the minimum pension; existing DC system to provide pensions beyond the minimum.
  - Alternative: close entry of new members to ColPensiones and extend privately-managed minimum pension insurance to cover all contributors.
  - Ensure a properly timed and fiscally sustainable transition of existing contributors.
  - Increase competition among AFPs to achieve higher pension benefits and contribute to capital market development.
- Recent diagnostic and analytical references include: FMI (2012, 2017), IADB (2015), OECD (2015), Expert Commission (2017), ANIF (2017), Fedesarrollo (2018).

### Policy advice on fiscal policy and subnational capacity
- Keep public debt on a downward path to preserve space to react to negative shocks.
- Continue efforts to improve tax administration and formalization as envisaged in the 2016 tax reform.
- The fiscal rule legal mandate offers some flexibility in the pace of consolidation beyond 2018; in case negative shocks materialize the rule allows shifting adjustment planned for 2019/2020 to 2021/22 (illustrative scenario: central government structural deficit unchanged during 2019 and 2020).
- If additional positive oil revenue surprises occur, the rule allows spending the structural component including in public investment and saving the rest.
- Strengthened capacity in subnational governments would improve public expenditure:
  - Increasing subnational participation in health and education spending would boost efficiency and progressivity of social programs.
  - Subnational governments can fund additional spending from previously unexecuted budgets (gross assets of about 4 percent of GDP at end-2017).
  - Implementation of the peace agreements will strengthen subnational capacity and help relieve constraints.
- Authorities broadly agreed with staff advice, including on the importance of keeping public debt on a downward path and that a pension reform should be a priority of the next government.

### Preserving financial stability — developments and policy recommendations
- Non-performing loans (NPLs):
  - NPLs increased to 4.3 percent in December 2017, from 3.2 percent a year earlier, partly due to the economic slowdown and idiosyncratic increases in electricity and transportation sectors.
  - Provisions fell to 126 percent of NPLs but remain ample.
  - Tier-1 and regulatory capital increased to 12.4 percent and 18.6 percent of RWAs respectively by December 2017, almost a one percent increase from the beginning of the year.
- Forecast and monitoring:
  - Using a VAR, main drivers of NPLs are the credit gap, the nominal exchange rate and real GDP growth; forecast suggests NPLs should start falling in tandem with the economic recovery in 2018, stabilizing by mid-2018 and gradually falling in 2018H2.
  - Given high levels and continued rise of risky loans in 2017, NPLs were unlikely to fall in the first half of 2018; risky loans in the corporate sector have lagged NPLs by approximately one year.
- Regulatory and supervisory actions:
  - The financial supervisor (SFC) introduced new regulation in October 2017 to standardize loan restructuring practices and foster early credit risk monitoring through modified loans and improved bank-by-bank monitoring.
  - Modified loans allow adjustments to interest and maturity (but not principal); a modified loan does not entail additional provisions or a negative credit mark but leads to more intensive surveillance thereafter.
  - SFC closely monitors and will soon make public information about modified loans.
  - Staff supports improved incentives to anticipate deterioration in loan portfolios and facilitate detection and recoveries; under new regulation, modified loans cannot be reclassified to a lower risk category and non-performing modified loans will be downgraded faster, requiring more provisioning.
  - Careful monitoring of modified loans is essential to avoid evergreening.
- Conglomerates Law and Basel convergence:
  - The Conglomerates Law passed in September 2017 and will come into effect in 2018; draft regulation specifying capital adequacy and related-party exposures circulated for comments, with a final version expected by September 2018.
  - Capital requirements for all banks to be gradually strengthened over a six-year period.
- Agenda to strengthen capital and liquidity (measures and timelines):
  - I. Capital
    - Modification of the definition of capital and risk-weighted assets to bring them closer to international standards. During 2018
    - Introduce conservation and D-SIB buffers at 2.5 and 1 percent respectively. By 2023
    - Introduce Tier-1 capital minimum of 6 percent. By 2023
  - II. Liquidity
    - Modification of the liquidity-coverage-ratio to differentiate by type of depositor in accordance with Basel III. In progress; to be sent for comments during 2018H1
    - Introduction of a liquidity indicator similar to the net-stable-funding ratio, but taking into account currency mismatches and roll-over risks of derivatives. In progress; to be sent for comments during 2018H1
- Authorities agree with staff on enhanced credit risk monitoring, continued reforms towards Basel III following implementation of the Conglomerates Law, and banks’ resilience as indicated by official stress tests (scenario: slowdown over six quarters would nearly double NPLs but aggregate solvency ratio would remain above the 9 percent regulatory minimum).

### Staff appraisal and priorities
- Macroeconomic assessment:
  - A very strong policy framework and well-executed policies narrowed external imbalances after the oil price shock of 2015-16 and laid foundations for an economic recovery.
  - Monetary easing has brought the ex-ante real policy rate to slightly expansionary levels; limited further cuts may be feasible in a below-baseline growth scenario with continued convergence of inflation expectations to target.
  - Better communication of policy tradeoffs would complement recent improvements to the policy rate decision process.
- Fiscal assessment:
  - Fiscal policy stance is appropriate and consolidation should continue.
  - Complying with the fiscal rule requires some cuts in central government public investment, which will be more than offset by increases in PPP-infrastructure, private sector and subnational government investment.
  - Further strengthening tax administration, including through stronger sanctions, is imperative.
- Structural reform priorities to lift productivity and inclusive growth:
  - Lower barriers to international trade.
  - Tackle labor-market informality.
  - Promote infrastructure investment.
  - Lower remaining non-wage labor costs and barriers to entry to further decrease informality.
  - Lower transport and other exporting costs to increase productivity and competitiveness.
  - A comprehensive pension reform is needed to increase coverage and progressivity.
- Financial sector assessment:
  - Banks adjusted well to the downturn; regulatory and supervisory agenda is focused on the right issues.
  - Staff supports incentives for detection and recoveries in loan portfolios, subject to increased monitoring and avoiding delayed recognition of asset deterioration.
  - The Conglomerates Law is an important step to preserve financial stability and facilitate convergence to Basel III standards.
- Risks:
  - Risks have decreased somewhat but remain tilted to the downside.
  - Global financial markets remain vulnerable to a sudden, sharp tightening of financial conditions, possibly triggered by unexpected U.S. inflation or escalation of trade or geopolitical tensions.
  - Regionally, risks related to the crisis in Venezuela are growing and may require international support if immigration continues to increase at the current pace.
  - Domestic risks include weaker-than-expected responses in infrastructure investment or exports that could slow the recovery.
  - Colombia’s strong policies, flexible exchange rate, and reserve buffers would cushion effects of shocks.
- Exchange restrictions:
  - 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: National authorities and Fund staff estimates.*

### 48.      Staff recommends that the next Article IV takes place on the standard 12-month cycle.

### cr18128-colombiabundle - 48.      Staff recommends that the next Article IV takes place on the standard 12-month cycle.

### Key recommendation
- Staff recommends that the next Article IV takes place on the standard 12-month cycle.

### Recent economic developments and outlook
- Real GDP growth:
  - 2013: 4.9
  - 2014: 4.4
  - 2015: 3.1
  - 2016: 2.0
  - 2017: 1.8
  - 2018 (projected): 2.7
  - 2019–2023 (projections): 3.3, 3.6, 3.6, 3.6, 3.5
- Potential GDP and output gap:
  - Potential GDP (2017): 3.0
  - Output gap (2017): -1.5 (Table 1: Output Gap series shows negative gap)
- Inflation and prices:
  - GDP deflator (2017): 3.3
  - Consumer prices (end of period) 2017: 3.4; projected 2018–2023: 3.0, 3.0, 3.0, 3.0, 3.0
  - Contribution to headline inflation broken down by tradable, nontradable, regulated, food (Figure 1 caption: “... while inflation moderated as food prices normalized.”)
- External sector and trade:
  - Current account balance (percent of GDP):
    - 2013: -3.3
    - 2014: -5.2
    - 2015: -6.4
    - 2016: -4.3
    - 2017: -3.4
    - 2018–2023 (projections): -2.6, -2.6, -2.5, -2.5, -2.4, -2.3
  - Exports (f.o.b.) levels (selected):
    - 2016: 34,079 (million US$)
    - 2017: 39,474 (million US$)
    - 2018 (projection): 45,114 (million US$)
  - Imports (f.o.b.) levels (selected):
    - 2016: 43,239 (million US$)
    - 2017: 44,241 (million US$)
    - 2018 (projection): 47,228 (million US$)
  - Goods balance and trade balance improvement noted: “A more rapid pick up in exports compared to imports has sustained the improvement in the trade balance...” (Figure 2)
- Exchange rate and oil:
  - After strong depreciation, the peso “appreciated recently with oil prices...” (Figure 1)
  - Crude oil spot price (Table 6 memorandum): series including 2013–2023 shown (e.g., 2017: 52.8; 2018: 62.3; projections through 2023 listed)

### Macroeconomic policies
- Monetary policy:
  - Policy interest rate (end of period, series): e.g., 2016: 7.5; 2017: 4.8 (Table 1 / Figure 3: “The central bank continued its easing cycle.”)
  - Central bank inflation target: 2.0-4.0 (Table 5 memorandum)
  - Financial conditions index: eased in parallel with monetary policy (Figure 3)
- Fiscal policy and public finances:
  - Central government overall balance (percent of GDP):
    - 2016: -3.6
    - 2017: -3.1
    - 2018–2023 (projections): -2.2, -1.6, -1.3, -1.1, -1.1
  - Combined public sector (CPS) balance (percent of GDP):
    - 2016: -2.8
    - 2017: -2.9
    - 2018–2023 (projections): -2.5, -1.7, -0.6, -0.5, -0.4, -0.6
  - Structural and primary balances:
    - Central government structural balance (Table 1): 2017: -2.3
    - CPS non-oil structural primary balance (Table 1): 2017: -0.4; projected path through 2023: 0.0, 0.9, 0.8, 0.7, 0.4
    - Primary balance (Table 3, central government): 2017: -0.2; projected 2018–2023: 0.7, 1.2, 1.4, 1.5, 1.4
  - Public debt:
    - Nominal gross public debt (percent of GDP):
      - 2016: 37.8
      - 2017: 43.7
      - 2018–2023 (projections): 50.6, 50.4, 49.8, 48.7, 46.5, 44.4, 42.3, 40.4 (Table 9 and Table 6)
    - Public debt excluding Ecopetrol (Table 6): 2016: 36.1; 2017: 40.8; 2018–2023 projections listed (e.g., 2018: 45.8; 2023: 38.1)
  - Gross public financing needs (Table 9):
    - 2016: 6.2 (percent of GDP)
    - 2017: 5.0
    - 2018–2023 projections: 6.0, 4.5, 5.1, 3.4, 3.2, 2.3, 2.6
- Reserves and external liquidity:
  - Gross international reserves (GIR, IMF definition, billion US$):
    - 2016: 46.8
    - 2017: 46.3
    - 2018–2023 (projections): 46.2, 47.1, 47.9, 48.9, 50.2, 51.5, 52.9, 54.2 (Table 2a and Table 2b)
  - GIR/(short-term debt at remaining maturity + current account deficit) ratios shown with series (e.g., 2016: 134.2; 2017: 115.3; subsequent projections)

### Macro‑financial sector and vulnerabilities
- Credit and financial conditions:
  - Credit to the private sector (percent change, Table 1 / Table 5):
    - 2016: 7.5 (Table 1 entry for Credit to the private sector annual percent change)
    - 2017: 8.9
    - 2018–2023 projections: 9.6, 10.8, 11.6, 11.6
  - Consumption and commercial credit gaps (Figure 4): charts show weak employment growth and that consumption credit gap and commercial credit gap series are tracked (caption: “... employment growth has been weak” and “Total bank credit growth has declined....”)
- Corporate sector metrics (Figure 5):
  - Debt metrics and risk indicators shown:
    - Total Debt to Total Equity (median multiples) and sectoral breakdowns
    - Interest coverage ratios (ICR) (EBIT/Interest Expense) median series
    - Expected Default Frequency (EDF) percentiles and Debt at Risk (% of total corporate debt where ICR < 2) time series
- Financial soundness indicators (Table 7, selected):
  - Regulatory capital to risk-weighted assets: 2017: 18.6
  - Nonperforming loans to gross loans: 2017: 4.2
  - ROAA: 2017: 2.2
  - Deposit to loan ratio: 2017: 88.4
- External vulnerability indicators (Table 8):
  - Total external debt (percent of GDP):
    - 2016: 138.9
    - 2017: 146.8
    - 2018–2023 projections: 152.7, 157.6, 162.5, 168.5, 175.6, 183.1 (Table 8)
  - Short-term external debt (percent of GDP): 2016: 14.6; 2017: 17.3; later projections shown
  - Gross external financing needs (Table 11): series reported in billions of US$ and percent of GDP (e.g., 2017 gross external financing need US$40.1 billion; 2017 in percent of GDP: 13.0)

### Fiscal sustainability and DSA findings
- Public DSA baseline (Table 9 and Table 10):
  - Nominal gross public debt:
    - 2016: 37.6
    - 2017: 50.4
    - 2018–2023 projections: 50.2, 49.9, 48.7, 46.5, 44.4, 42.3, 40.4
  - Public gross financing needs (percent of GDP):
    - 2016: 6.2
    - 2017: 5.0
    - 2018–2023 projections: 6.0, 4.5, 5.1, 3.4, 3.2, 2.3, 2.6
  - Identified debt-creating flows and contribution decomposition (Table 9):
    - Primary deficit and automatic debt dynamics contributions are explicitly quantified (e.g., automatic debt dynamics row: -2.1 for 2016; -4.4 for 2017; -3.3 for 2018; then small positive contributions in later years)
  - Sovereign spreads and market indicators:
    - EMBIG (bp) noted as 157 (Table 9)
    - 5Y CDS (bp) listed as 91 (Table 9)
- Alternative scenarios and sensitivity analysis (Table 10 and Table 12):
  - DSA includes historical and constant primary balance alternative scenarios with baseline assumptions for real GDP growth, inflation, primary balance, and effective interest rate (e.g., Baseline: Real GDP growth 2018: 2.7; 2019: 3.3; 2020–2023: 3.6, 3.6, 3.6, 3.5)
  - External DSA bound tests include interest rate shocks, current account shocks, growth shocks, combined shocks, and a 30 percent real depreciation test (Table 12 shows scenario charts and values)

### Social indicators and structural bottlenecks
- Social outcomes (Figure 7 and Table 1 summary):
  - Life expectancy (2013): 73.8 years
  - Gini coefficient (2016): 0.500; Gini coefficient 2017 reported as 50.8 (Table 1)
  - Poverty and extreme poverty (2015):
    - Poverty rate (US$3.2 a day, PPP), 2015: 13.1
    - Extreme poverty rate (US$1.9 a day, PPP), 2015: 5.5
  - Unemployment rate (2017 series): 2017: 9 (Figure 7 shows unemployment series; Table 1 notes unemployment rate 2015: 8.9)
- Structural constraints:
  - Figure 6 labeled “Colombia: Structural Bottlenecks” signals structural bottlenecks are identified (figure provided without numeric details in the excerpt)

### Selected key statistics (from tables and figures)
- Population (million), 2015: 48.2
- GDP per capita (US$), 2016: 5,808
- Nominal GDP (billion USD), 2017: 280 (Table 1 memorandum shows GDP in billion US$)
- Gross international reserves (IMF definition, billion US$), 2017: 46.3; GIR (months of imports) 2017: 10.2 (Table 2a / Table 2b)
- Current account balance (2017): -10,359 (million US$) / -3.4 percent of GDP (Table 2a and Table 2b)
- Exports (f.o.b.) 2017: 39,474 (million US$); Imports (f.o.b.) 2017: 44,241 (million US$) (Table 2a)

*Source: cr18128-colombiabundle - 48.      Staff recommends that the next Article IV takes place on the standard 12-month cycle.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overview
- The external sector position of Colombia in 2017 was moderately weaker than implied by fundamentals and desirable policy settings.
- The current account deficit reached 3.4 percent of GDP in 2017, down from a peak of 6.4 percent of GDP in 2015.
- The deficit is expected to further narrow over the medium term, reflecting the lagged effects of the large real exchange rate depreciation and a further tightening of fiscal policy.

### Current account and trade balance
- Current account deficit narrowed to 3.4 percent of GDP in 2017, down from 4.3 percent of GDP in 2016.
- Trade deficit declined to 1.5 percent of GDP in 2017, down from 3.3 percent of GDP in 2016.
- Primary income deficit worsened to 2.6 percent of GDP in 2017, up from 1.9 percent of GDP in 2016, mostly due to higher FDI-related payments (dividends and repatriated earnings).

### Exchange rate, exports, and model findings
- Real exchange rate depreciation of 36 percent since 2014.
- Despite the depreciation, the increase in exports has so far been moderate.
- Staff estimated a distributed lag model for total export volume growth and found that weak trading partner growth largely offset the positive effects of the real depreciation.
- The distributed lag total export volume growth model projects average quarterly real total export growth around 3 percent in Colombia for 2018Q1‒Q4, relative to the average of -1.6 percent growth rate observed in 2016Q1−17Q2.

### Financing of the current account
- The current account deficit continues to be financed mainly by FDI and government bonds.
- Gross FDI inflows have been hovering at about 3.8−4 percent of GDP since 2015, and are projected at around 3.5 percent in the medium term. (These figures exclude the one-off receipts from the sale of ISAGEN in 2016 and fines charged to two foreign telecom companies in 2017.)
- The bulk of FDI inflows continue to originate in the EU, U.S., Mexico, and Panama.
- Portfolio inflows declined in 2017, reflecting lower government debt financing, but foreign investor participation in local current government bonds reached an all-time high 27 percent.

### NIIP and vulnerabilities
- Colombia’s NIIP reached -46 percent of GDP at end-2017 from -41 percent of GDP at end-2015.
- Liabilities increased to 99 percent of GDP, of which slightly more than half represents FDI.
- Portfolio liabilities amount to 26 percent of GDP.
- Staff projects NIIP to stabilize at about 45 percent of GDP.
- Increased portfolio liabilities could lead to heightened vulnerability to global financial volatility.

### Reserve buffers
- Foreign exchange reserves amounted to about 146 percent of the ARA metric in 2017.
- Reserve buffers measured relative to the ARA metric are projected to decline somewhat over the medium term but remain comfortably within the 100-150 percent range.
- Reserves relative to short-term debt and current account deficit are projected to increase to about 135 percent over the medium term.
- Colombia is committed to a floating exchange rate, with past significant peso depreciation in response to commodity shocks; the FCL represents an additional buffer.

### EBA adjusted current account (CA) analysis
- The CA norm based on the CA method is +0.1 percent of GDP, implying a CA gap of -3.9 percent of GDP in 2017.
- The estimate reflects a very large unexplained residual (-4.6 percent).
- The standard deviation of the estimated norm is 1.3 percent.
- Staff attributes the poor fit of the CA method to:
  - Failure to capture Colombia’s ongoing export diversification and large oil-related outflows from earning repatriation.
  - Colombia’s large infrastructure gap and other investment needs.
- Taking recent improvements in the terms of trade into account (estimated to have improved the cyclically adjusted CA by about 0.4 percentage points), and using the medium-term ratio of net oil exports to GDP, and excluding oil-related repatriated earnings (estimated to reduce the CA norm by about 1.6 percentage points) reduces the CA gap to 1.9 percent.

### Policy assessment and staff view
- Staff’s assessment: policies are on their desirable course, and there is no need for additional tightening beyond what is already planned.
- The identified CA gap reflects that the large depreciation and strong policy response take time to lead to a stronger external position.
- Policies are expected to contribute to a further narrowing of the current account deficit over the medium term.

### Prospects for nontraditional exports and historical evidence
- Evidence from a sample of 61 large depreciations (17 in LA) in 53 commodity exporters in 1985‒2015 suggests increases in nontraditional exports can be significant but may take several years to fully materialize.
- If Colombia tracks the median commodity exporter experiencing a large depreciation, cumulative nontraditional export growth in 2015‒20 would reach 30 percent.
- Growth would be much higher if Colombia performs in line with the top quarter of episodes.
- The effects of large depreciations on non-traditional exports take several years to materialize in full.

*Source: Annex I. External Sector Assessment.*

### 10.      Reducing nontariff costs, which are a major constraint to trade in Colombia, could

### 10.      Reducing nontariff costs, which are a major constraint to trade in Colombia, could

### Nontariff costs and trade competitiveness
- Nontariff costs account for three quarters of the cost of imports, acting as a barrier to exports since exporters often use imported inputs.
- Direct non-tariff barriers per product category grew from four in 2001 to 16 in 2014.
- Infrastructure and transportation as well as customs procedures stand out as nontariff costs.

### Infrastructure, transportation, and customs performance
- The infrastructure gap in Colombia is significant, adding to the cost of transporting goods from/to the border.
- Inefficient service providers also add to road transportation costs.
- World Bank data show that Colombian customs are relatively slow, especially when it comes to exporting.

### External sector assessment: REER and ES methodologies
- The REER approach suggests a CA gap of +3.8 percent of GDP.
- The estimated 27.4 percent REER undervaluation is due mainly to the unexplained residual (25 percent), as the model does not capture the delayed response of the trade balance to the real depreciation and the large structural changes experienced by Colombia in recent years.
- The ES method estimates the CA balance needed to stabilize the net external position at the 2016 level (-44.9 percent of GDP) at -2.4 percent, implying a CA gap of 0.5 percent of GDP.

### Policy-related findings and context from broader report excerpts
- Colombia has a floating exchange rate regime (de jure: free floating; de facto: floating).
- The government faced a loss in revenue of 3pp of GDP following the rapid decline in oil prices in the second half of 2014.
- The current account deficit widened to 6.5 percent of GDP during the shock period.
- The policy response emphasized: allowing the exchange rate to act as the primary shock absorber; cautious monetary and financial policy; and commitment to a medium-term fiscal rule.
- Headline inflation was three times the target in mid-2016 due to supply shocks and a sharp nominal depreciation of the peso (over 80 percent in terms of the price of the US dollar in pesos).
- The policy rate was cut by 325 basis points to 4.5 percent over the past year (from the report date).
- The fiscal reform increased the general VAT rate by 3 percentage points and made changes to personal and corporate income tax provisions.
- Government oil revenue fell “almost to zero” after the oil price shock; later developments improved Ecopetrol profitability and oil revenue.
- Growth reached 1.8 percent last year (as of the report).

_Colombia — IMF Staff Report excerpts (April 16, 2018)._

### 2.7 percent this year—with leading indicators in line with forecasts—and to continue

### cr18128-colombiabundle - 2.7 percent this year—with leading indicators in line with forecasts—and to continue

### Economic outlook and key indicators
- Real GDP growth projected at 2.7 percent this year, with leading indicators in line with forecasts, and expected to continue increasing to 3.5 percent by the end of the decade.
- Inflation: very close to target with expectations firmly anchored below 4 percent.
- Current account: estimated to fall to the 2-3 percent of GDP deemed sustainable by authorities.
- Labor market: unemployment maintained at 9 percent levels despite the slowdown; formality rates now larger than informality rates, with an upward trend attributed to education gains and tax reform.
- Investment and capital flows:
  - Investment rates are at pre-crisis levels.
  - FDI has substantially increased due to recovery in oil and mining and historic highs in other sectors.

### Structural reforms and public investment priorities
- Priority reforms to raise productivity and potential growth:
  - Completing the 4G road-building program (the biggest in the country’s history).
  - Implementing the negotiated peace agreement.
- 4G program status and impact:
  - Reached preliminary financial closures in a third of the projects.
  - Expenditure is set to increase by 40 percent this year.
  - Expected to reduce time and cost of travel among the country’s main centers of production, consumption and trade.
- Peace agreement expected impacts:
  - Agreed investments will cover more than half of the nation’s territory and a third of its towns with infrastructure and social spending.
  - Implementation expected to gain momentum throughout 2018 as institutional capacities are strengthened.
- Emphasis: consolidating these structural reforms is essential to lift productivity and potential growth.

### External vulnerabilities and financial stability risks
- The economy has received substantial capital inflows aiding adjustment to external shocks, but:
  - Large increase in participation of foreign investors in local debt markets poses challenges to stability.
  - Evidence indicates depth and composition of international investors can expand the impact of external shocks.
  - Large institutional investors can react more strongly and persistently to economic shocks.
- Major identified global risks that could trigger disorderly adjustment:
  - Possibility of a sharp correction in financial markets.
  - Buildup of vulnerabilities if financial conditions remain loose.
  - Choke on growth via an escalation in trade restrictions.
  - Debt reaching concerning levels in many advanced economies.

### Policy framework and defense against external shocks
- Main line of defense: maintaining strong fundamentals and a strong institutional policy framework.
- Authorities’ commitments:
  - Inflation targeting framework and flexible exchange rate regime.
  - Public finances anchored in a fiscal rule based on sustainability.
  - Strong financial regulation and supervision.
- Supporting instruments and outcomes:
  - Adequate reserves position and access to the Flexible Credit Line have helped maintain confidence and balance adjustment and reform in the face of very large negative shocks.

### Policy implications and forward-looking stance
- Continue to build policy space as recovery gains pace to reduce vulnerability to external shocks.
- Consolidate and implement structural reforms (4G program and peace agreement) to foster inclusive growth and close regional disparities.
- Maintain macroeconomic framework and institutional commitments to preserve stability and support growth.
- Continue productive relationship with the IMF to help build better policies toward stability and growth.

*Source: cr18128-colombiabundle - 2.7 percent this year—with leading indicators in line with forecasts—and to continue*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18128-colombiabundle.pdf_