## 1colea2019001

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### Key issues and overview
- Context: Supported by very strong policy frameworks and well-executed policies, Colombia’s recovery strengthened, moving the economy toward internal balance but away from external balance.
- Growth outlook:
  - Staff projects growth to increase to 3.6 percent in 2019 and remain at 3.6 percent thereafter, driven by consumption, an investment rebound, and migration from Venezuela.
  - Authorities’ GDP growth projection: "between 3.4−3.6 percent".
- External position:
  - Current account deficit widened to 3.8 percent of GDP in 2018 and is expected to remain wide as domestic demand and imports recover.
  - External assessment: the external position is moderately weaker than implied by fundamentals; staff CA gap estimate: ˗1.8 percent of GDP (staff range ˗0.5 to ˗3.1 percent).
- Fiscal challenge:
  - Without additional tax revenues and increased spending efficiency, the fiscal tightening required by the fiscal rule will exert pressure to cut key public spending.
  - Central government headline deficit narrowed to 3.1 percent of GDP in 2018 from 3.6 percent in 2017.
- Monetary stance: A moderately expansionary monetary policy stance remains appropriate but should move toward neutral if credit and GDP growth recover as expected.
- Structural priorities: Address infrastructure gaps, strengthen governance and the rule of law, reduce informality, and enhance customs and trade practices. The draft National Development Plan identifies key priorities.

### Background and recent developments
- Growth and labor:
  - GDP growth: 2017: 1.4; 2018: 2.7.
  - Real wages grew by 2 percent in 2018.
- Inflation and expectations:
  - Headline inflation eased to 3.1 percent in 2018Q1 and has been stable around target since; core and nontradable inflation both fell close to three percent.
  - Two-year inflation expectations remain anchored near the central bank’s inflation target.
- External and exchange rate developments:
  - Current account deficit: 3.8 percent of GDP in 2018.
  - Peso: depreciated by 7 percent against the U.S. dollar during 2018 and strengthened by 1 percent in real effective terms.
  - Reserves: remained adequate at 118 percent of the ARA metric (130 percent excluding a commodity buffer).
- Fiscal developments and Financing Law (2018):
  - Financing Law expected static revenue impact: tax revenues should increase by 0.7 percent of GDP in 2019 from base and rate changes and improved administration.
  - Planned reductions in corporate income tax (CIT) and allowing VAT credits on capital goods are expected to lower revenues from 2020 onwards.
  - Model-based simulations: the Financing Law could boost medium-term growth by around 0.2 percent of GDP but will reduce tax revenues in the medium term.
- Migration from Venezuela:
  - As of December 2018: 1.5 million migrants from Venezuela (including more than 350,000 returning Colombian nationals).
  - Staff baseline projects 2½ million migrants by end 2020.
  - Near-term net fiscal costs peak at around 0.4 percent of GDP in 2020 and decline to 0.1 percent of GDP by 2024 as migrants integrate.
- Financial sector and credit:
  - Credit growth subdued but expected to pick up with the investment recovery in 2019.
  - NPLs somewhat elevated but well provisioned; banks remain well capitalized.
  - Foreign participation in the local bond market rose to an all-time high of 7.9 percent of GDP in 2018.
  - Implementation of the Conglomerates Law and Basel III capital and liquidity standards is proceeding.

### Outlook and risks
- Growth and output gap:
  - Growth projected at 3.6 percent in 2019 and beyond, expected to close the output gap.
  - Medium-term potential growth slightly below 3½ percent, incorporating migration effects and census updates.
- Inflation risks:
  - Inflation expected to remain near target despite temporary supply-side shocks (Financing Law VAT effects, el Nino).
  - The 2019 minimum wage increase of 2.8 percent in real terms exceeded productivity growth, posing risks of higher inflation and informality.
- Current account and external financing:
  - Current account deficit projected to remain elevated due to strong import growth and flat commodity export volumes.
  - Financing: deficit being comfortably financed by stable FDI and robust portfolio inflows from a diversified investor base.
- Downside risks (tilted to the downside):
  - Global: lower global growth, rising protectionism, retreat from multilateralism could hurt exports and oil prices.
  - Financial: increased exposure to tightening global financial conditions via nonresident participation in local markets.
  - Domestic: heightened uncertainty in Venezuela could increase migration flows, raising fiscal costs; failure to mobilize tax revenues could force large cuts in social and investment spending, harming growth and poverty reduction.
  - Scenario: larger migration flows that double the number of Venezuelan migrants by 2024 could result in additional near-term fiscal costs of around ½ percent of GDP relative to the baseline.

### Policy recommendations and priorities
- Fiscal policy:
  - 2019 stance: A broadly neutral fiscal stance in 2019 is appropriate.
  - Medium term: Fiscal policy will need to turn more restrictive thereafter, ideally via higher structural tax revenues.
  - Use of fiscal rule flexibility: Some flexibility under the fiscal rule to modestly relax the deficit target over the next few years is understandable given the migration shock, subject to strict conditions.
  - Structural strategy: Pursue a broad-based strategy to raise structural tax revenues and enhance spending efficiency to meet the medium-term fiscal framework.
- Monetary policy:
  - Maintain a moderately expansionary stance for now; move toward neutral if credit and GDP growth recover as expected.
  - Policy rate: 4.25 percent; real neutral rate estimate around 1.5 percent.
- Financial sector:
  - Continue implementation of the Conglomerates Law and Basel III to strengthen the regulatory framework.
  - Heightened supervisory vigilance during the transitional period; SFC should monitor modified loans and problem assets.
- Structural reforms:
  - Prioritize addressing infrastructure gaps, strengthening governance and rule of law, reducing informality, and improving customs and other trade practices.
  - Implement the 2018−22 National Development Plan’s reform roadmap to boost inclusive growth and external competitiveness.
  - Annex VI highlights legal system reforms (impartiality, contract enforcement, reducing court congestion) as top priority to raise TFP.

### Fiscal rule, migration shock, and escape clause
- Fiscal rule adherence: Adhering to the fiscal rule remains appropriate to place public debt on a downward path.
- Public debt projection: gross debt projected to steadily decline from about 51 percent in 2018 to around 40 percent of GDP by 2024.
- FRCC approach to migration shock:
  - Allowed headline deficit widening up to "½ percent of GDP in 2019."
  - Deviation will decrease by 0.1 percent each year until 2024.
  - FRCC will "monitor implementation annually" and can reassess the deficit path as needed.
- Staff recommended strict conditions if the escape clause is used:
  - (i) trigger clearly defined as migration-related costs;
  - (ii) temporary deviations commensurate with those costs;
  - (iii) well-defined plan to return to the rule’s deficit path, published in the MTFF.

### Fiscal outlook — selected central government and public sector figures (percent of GDP)
- Central Government — Headline balance:
  - 2016: -4.0; 2017: -3.6; 2018: -3.1; 2019: -3.0; 2020: -2.3; 2021: -1.8; 2022: -1.4; 2023: -1.2; 2024: -1.0
- Central Government — Total revenue:
  - 2016: 15.0; 2017: 15.6; 2018: 15.1; 2019: 15.5; 2020: 15.4; 2021: 15.4; 2022: 15.3; 2023: 15.2; 2024: 15.2
- Central Government — Expenditure:
  - 2016: 19.0; 2017: 19.2; 2018: 18.2; 2019: 18.5; 2020: 17.7; 2021: 17.2; 2022: 16.7; 2023: 16.3; 2024: 16.2
- Public sector gross debt:
  - 2016: 49.8; 2017: 49.5; 2018: 51.8; 2019: 50.6; 2020: 48.5; 2021: 46.2; 2022: 44.2; 2023: 42.2; 2024: 39.9
- Note: For 2019, central government figures exclude projected privatization proceeds (0.3 percent of GDP) in one calculation.

### Reserve accumulation and external buffers
- Central Bank program: announced in September 2018 a program to accumulate reserves to enhance resilience and prepare for possible gradual reduction in FCL access.
- Reserves assessment:
  - End-2018 reserves: US$47.9 billion (14.5 percent of GDP; 8.9 months of prospective imports).
  - Reserve purchases in Q1-2019 to date: $2.1 billion (including a one-off $1 billion purchase).
  - Reserve coverage: 118 percent of the ARA metric including a commodity buffer; 130 percent excluding the commodity buffer.
  - Staff sees scope for a modestly faster pace of reserve accumulation without disrupting the market to keep the IMF’s standard metric at its current level.

### External position and DSA highlights
- Current account actual 2018: -3.8 percent of GDP; staff medium-term CAB projection: -3.8 percent of GDP.
- EBA outputs for 2018:
  - Actual CA: -3.8 percent of GDP
  - Cyclically-adjusted CA: -4.7 percent of GDP
  - EBA CA Norm: -0.1 percent of GDP
  - EBA CA Gap: -4.7 percent of GDP
  - Staff adjustment to norm: -2.9 percent of GDP
  - Staff CA Gap: -1.8 percent of GDP
- Net FDI inflows in 2018: 1.8 percent of GDP.
- NFPS gross debt:
  - End-2018 estimate: 51.8 percent of GDP; projected to decline to around 40 percent of GDP in 2024 under baseline.
- Public sector debt vulnerability notes:
  - Share of NFPS debt held by non-residents is above its risk benchmark.
  - Gross external financing needs about 13 percent of GDP in 2018.

### Financial sector policies and outlook
- Credit and bank performance:
  - ROA fell to 1.4 percent in mid-2018 (1 percentage point lower than a year earlier).
  - Bank profitability expected to improve as corporate credit portfolio strengthens.
- Capital and provisioning:
  - Provisions stable at approximately 130 percent of NPLs.
  - Core Tier-1 and regulatory capital: 13.2 percent and 18.9 percent of RWAs respectively (source table).
  - Regulatory capital to RWAs (selected): 2018: 18.6 (Table 7).
  - NPLs to gross loans: 2018: 4.8 percent.
- Regulatory reforms and timelines:
  - Compliance with capital adequacy requirements by November 2019.
  - Guidelines for conflicts of interest in conglomerates: February 2020.
  - Redefinition of RWAs and exclusion of intangible assets from technical capital: February 2020.
  - Capital conservation and systemic buffers phased in Feb 2020−Feb 2024.
  - NSFR compliance by June 2020.
  - Intention to introduce a capital requirement for operational risk; decree to be published in Q4 2019.
- Supervisory advice:
  - Redefining RWAs expected to lower RWAs from circa 77 percent to closer to 67 percent of total assets for most banks, raising capital ratios on average; exclusion of intangible assets will partially offset positive effect.
  - Staff recommends heightened supervisory vigilance during transition.

### Structural reforms to boost inclusive growth and competitiveness
- Productivity and poverty:
  - Poverty rate in 2017: 26.9.
  - TFP level remains close to that of 1990; weak productivity growth is a long-standing concern.
- National Development Plan (NDP) measures:
  - Emphasizes entrepreneurship, technology adoption, human capital improvements (national qualification system), access to credit for SMEs and start-ups, digital payment methods, rural financial inclusion.
  - NDP estimated to raise productivity growth by 0.5 percentage points due to reforms and investment programs.
  - 4G infrastructure program expected to make additional progress (around 0.5 percent of GDP) given financial closures and resolution of legal cases.
- Governance, trade, and anti-corruption:
  - Priorities: reduce non-tariff barriers, lower tariff dispersion, improve customs and port procedures, introduce compulsory regulatory impact assessment, strengthen competition authority, anti-corruption measures including whistleblower protection and lobbying regulation.
- Other reforms:
  - Labor market integration and financial inclusion efforts continue; justice and pension reforms remain priorities.

### Annex III — Quantifying the Macroeconomic Effects of Migration (summary)
- Official estimates: 1.2 million Venezuelans permanently residing in Colombia by end-2018; nearly 350,000 returning Colombians from Venezuela.
- Baseline demographic assumptions:
  - 67 percent of arriving Venezuelan migrants were of working age (14-65).
  - Migrant participation rate: 77 percent; Colombians: 64 percent.
  - Migrant employment rate in first year: 82 percent; natives: 91 percent.
  - Number of employed workers will increase by around 1.3 million by 2024 under assumptions.
- Potential growth effects (production-function approach):
  - Near-term potential growth boost: around 0.2−0.3 percentage points in 2018−19.
  - Medium-term potential growth: expected to settle around 3.4 percent, 0.1 percentage points above previous baseline.
  - TFP deterioration partly offsets labor-driven gains due to informality and skills mismatches.
- Fiscal costs (IMF staff estimates, percent of GDP — Net effect):
  - 2019: 0.3
  - 2020: 0.4
  - 2021: 0.2
  - 2022: 0.2
  - 2023: 0.1
  - 2024: 0.1
- Authorities’ expenditure estimates (percent of GDP — Total Expenditure):
  - 2019: 0.4; 2020: 0.5; 2021: 0.5; 2022: 0.4; 2023: 0.3; 2024: 0.3
- Sensitivity scenarios:
  - Higher migration (doubling migrants by 2024 to around 6 million): potential GDP growth could increase by an additional ½ percentage point in the near term; net fiscal costs roughly double throughout the projection period.
  - Lower migration (halved to 700 thousand by 2024): minor near-term deceleration in potential growth; net fiscal costs roughly halved and dissipate by 2024.

### Key projections and summary tables (selected)
- Real GDP growth (selected):
  - 2014: 4.7; 2015: 3.0; 2016: 2.1; 2017: 1.4; 2018: 2.7; 2019 (projection): 3.6; 2020–2024: 3.7, 3.6, 3.7, 3.7, 3.6
- Consumer prices, eop:
  - 2014: 3.7; 2015: 6.8; 2016: 5.8; 2017: 4.1; 2018: 3.2; 2019–2024 projections: 3.2, 3.0, 3.0, 3.0, 3.0, 3.0
- Output gap (percent):
  - 2014: 1.5; 2015: 1.0; 2016: 0.0; 2017: -1.6; 2018: -2.2; 2019–2024 projections: -1.8, -1.4, -1.0, -0.7, -0.3, 0.0
- Current account (percent of GDP):
  - 2018: -3.8; 2019: -3.9; 2020–2024: -3.8, -3.7, -3.7, -3.7, -3.8
- Gross international reserves (US$, billions):
  - 2014: 46.8; 2015: 46.3; 2016: 46.2; 2017: 47.1; 2018: 48.3; 2019–2024 projections: 51.2; 53.2; 55.1; 57.0; 58.9; 60.8
- Public debt (gross, percent of GDP):
  - 2014: 43.3; 2015: 50.4; 2016: 49.8; 2017: 49.5; 2018: 51.8; 2019–2024 projections: 50.6; 48.5; 46.2; 44.2; 42.2; 39.9
- Selected social indicators:
  - Population (million), 2018: 49.8
  - GDP per capita (US$), 2018: 6,684
  - Unemployment rate, 2018 (percent): 9.7
  - Gini coefficient, 2017: 50.8
  - Poverty rate, 2017: 26.9

*Source: COLOMBIA STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION (April 8, 2019) — IMF staff and national authorities (content unit).*

### 4.5   n.a.

### 4.5   n.a.

### Key issues and overview
- Context: Supported by very strong policy frameworks and well-executed policies, Colombia’s recovery strengthened, moving the economy toward internal balance but away from external balance.
- Growth outlook: Staff projects growth to increase to 3.6 percent in 2019 and remain at 3.6 percent thereafter, driven by consumption, an investment rebound, and migration from Venezuela.
- External position: The current account deficit widened to 3.8 percent of GDP in 2018 and is expected to remain wide as domestic demand and imports recover.
- Fiscal challenge: Without additional tax revenues and increased spending efficiency, the fiscal tightening required by the fiscal rule will exert pressure to cut key public spending.
- Monetary stance: A moderately expansionary monetary policy stance remains appropriate but should move toward neutral if credit and GDP growth recover as expected.
- Structural priorities: Address infrastructure gaps, strengthen governance and the rule of law, reduce informality, and enhance customs and trade practices. The draft National Development Plan identifies key priorities.

### Background and recent developments
- Growth and labor:
  - GDP growth strengthened to 2.7 percent in 2018 from 1.4 percent in 2017.
  - Real wages grew by 2 percent in 2018.
- Inflation and expectations:
  - Headline inflation eased to 3.1 percent in 2018Q1 and has been stable around target since; core and nontradable inflation both fell close to three percent.
  - Two-year inflation expectations remain anchored near the central bank’s inflation target.
- External and exchange rate developments:
  - Current account deficit: 3.8 percent of GDP in 2018.
  - Peso: depreciated by 7 percent against the U.S. dollar during 2018 and strengthened by 1 percent in real effective terms.
  - Reserves: remained adequate at 118 percent of the ARA metric (130 percent excluding a commodity buffer).
- Fiscal developments:
  - Central government headline deficit narrowed to 3.1 percent of GDP in 2018 from 3.6 percent of GDP in 2017.
  - Fiscal stance in 2018: slightly negative impulse overall, with strong subnational spending.
- Financing Law (2018):
  - Expected static revenue impact: tax revenues should increase by 0.7 percent of GDP in 2019 from base and rate changes and improved administration.
  - Planned reductions (gradual) in corporate income tax (CIT) and allowing VAT credits on capital goods are expected to lower revenues from 2020 onwards.
  - Model-based simulations: the Financing Law could boost medium-term growth by around 0.2 percent of GDP but will reduce tax revenues in the medium term.
- Migration from Venezuela:
  - As of December 2018: 1.5 million migrants from Venezuela (including more than 350,000 returning Colombian nationals).
  - Staff baseline projects 2½ million migrants by end 2020.
  - Near-term net fiscal costs peak at around 0.4 percent of GDP in 2020 and decline to 0.1 percent of GDP by 2024 as migrants integrate.
- Financial sector and credit:
  - Credit growth: subdued but expected to pick up with the investment recovery in 2019.
  - NPLs: somewhat elevated but well provisioned for; banks remain well capitalized.
  - Foreign participation in the local bond market rose to an all-time high of 7.9 percent of GDP in 2018.
  - Implementation of the Conglomerates Law and Basel III capital and liquidity standards is proceeding.

### Outlook and risks
- Growth and output gap:
  - Growth is projected at 3.6 percent in 2019 and beyond, expected to close the output gap.
  - Medium-term potential growth slightly below 3½ percent, incorporating migration effects and census updates.
- Inflation risks:
  - Inflation expected to remain near target despite temporary supply-side shocks (Financing Law VAT effects, el Nino).
  - The 2019 minimum wage increase of 2.8 percent in real terms exceeded productivity growth, posing risks of higher inflation and informality.
- Current account and external financing:
  - Current account deficit projected to remain elevated due to strong import growth and flat commodity export volumes.
  - Financing: deficit being comfortably financed by stable FDI and robust portfolio inflows from a diversified investor base.
- Downside risks (tilted to the downside):
  - Global: lower global growth, rising protectionism, retreat from multilateralism could hurt exports and oil prices.
  - Financial: increased exposure to tightening global financial conditions via nonresident participation in local markets.
  - Domestic: heightened uncertainty in Venezuela could increase migration flows, raising fiscal costs; failure to mobilize tax revenues could force large cuts in social and investment spending, harming growth and poverty reduction.
  - Scenario: larger migration flows that double the number of Venezuelan migrants by 2024 could result in additional near-term fiscal costs of around ½ percent of GDP relative to the baseline.

### Policy recommendations and priorities
- Fiscal policy:
  - 2019 stance: A broadly neutral fiscal stance in 2019 is appropriate.
  - Medium term: Fiscal policy will need to turn more restrictive thereafter, ideally via higher structural tax revenues.
  - Use of fiscal rule flexibility: Given the sizable and persistent migration shock and related fiscal costs, some flexibility under the fiscal rule to modestly relax the deficit target over the next few years is understandable.
  - Structural strategy: Pursue a broad-based strategy to raise structural tax revenues and enhance spending efficiency to meet the medium-term fiscal framework.
- Monetary policy:
  - Maintain a moderately expansionary stance for now; move toward neutral if credit and GDP growth recover as expected.
- Financial sector:
  - Continue implementation of the Conglomerates Law and Basel III to strengthen regulatory framework.
- Structural reforms:
  - Prioritize addressing infrastructure gaps, strengthening governance and rule of law, reducing informality, and improving customs and other trade practices.
  - Implement the 2018−22 National Development Plan’s reform roadmap to boost inclusive growth and external competitiveness.

*Source: COLOMBIA STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION (April 8, 2019).*

### 15.      The authorities expect the recovery to gather momentum in 2019 and inflation to

### 1colea2019001 - 15.      The authorities expect the recovery to gather momentum in 2019 and inflation to

### Authorities' outlook and near-term projections
- GDP growth projection: "between 3.4−3.6 percent", supported by strong private consumption and an investment rebound.
- Inflation: "expect inflation to remain close to target."
- Migration uncertainty: "great uncertainty about the impact of Venezuelan migrants on demand at various horizons given high informality and limited household survey information."
- Authorities' risk emphasis: place more weight on domestic risks (including possibility of further waves of migration that may raise fiscal costs) while agreeing with staff on near-term current account and capital flow prospects and medium-term external risk of a widening deficit.
- External sector view: broadly agreed with staff’s assessment; emphasized investment-driven imports, robust foreign direct investment, and diversified portfolio flows as mitigating factors.

### Global Risk Assessment Matrix — key risks and policy advice
- Rising protectionism and retreat from multilateralism
  - Likelihood/Timing: High; ST, MT
  - Impact: Reduce growth directly and via confidence effects; increase financial market volatility; medium-term economic fragmentation.
  - Policy advice: "Speed up structural reforms and pro-diversification measures."
- Sharp tightening of global financial conditions
  - Likelihood/Timing: Low (market-triggered U.S. monetary tightening) and Medium (risk-premium rises); ST/Medium ST
  - Impact: Higher debt service and refinancing risks; stress on leveraged firms and vulnerable sovereigns; capital account pressures; broad downturn.
  - Policy advice: "Use the flexible exchange rate as the first line of defense against external shocks and international reserves where needed to address disorderly market behavior."
- Weaker-than-expected global growth in key economies (Euro Area, U.S., China)
  - Likelihood/Timing: Euro Area: High ST, MT; U.S.: Medium ST, MT; China: Medium ST, MT
  - Policy advice: Speed up structural reforms and pro-diversification measures; monetary policy support if expectations are anchored; reprioritize public investment projects; any fiscal measure should preserve the declining debt path.
- Large swings in energy prices
  - Likelihood/Timing: Medium ST, MT
  - Impact: Elevated price volatility; uncertainty for energy investment; higher oil prices harm global growth but benefit oil exporters.
  - Policy advice: "Use the flexible exchange rate as the first line of defense against external shocks and international reserves where needed to address disorderly market behavior."
- Colombia-specific risks highlighted
  - Further delays in infrastructure projects, deterioration of credit quality, weakness in exports, softer private consumption: Medium ST, MT
  - Higher-than-expected migration flows from Venezuela and/or greater costs per migrant and/or assimilation challenges → additional net fiscal costs and lower potential output: Medium ST
  - Shortfalls in mobilizing tax revenue leading to large cuts in public investment and social spending: Medium MT
  - Policy advice for Colombia: Speed up structural reforms and diversification measures; delay monetary policy tightening if appropriate; reprioritize public investment projects; consider invoking temporary escape clause in fiscal rule under strict conditions; seek concessional financing and aid; speed-up policies to integrate migrants into the labor force; strengthen revenue administration.

### Macroeconomic policy mix and monetary policy stance
- Policy mix objective: "balance continued support for the recovery against the need to contain external imbalances."
- Fiscal priority: central government should "reduce the fiscal deficit in line with the fiscal rule and rebuild fiscal space."
- Subnational role: "some space at the general government level where local governments at the subnational level can provide stimulus to support the ongoing recovery."
- Policy rate and neutrality:
  - Policy rate: "4.25 percent" — both staff and the Central Bank estimate it is moderately below the nominal neutral rate to support demand and subdued credit.
  - Real neutral rate estimate: "around 1.5 percent."
- Monetary policy guidance:
  - Near term: remain accommodative given inflation close to target, anchored inflation expectations, weak credit growth, and prevailing negative output gap.
  - If recovery materializes: "Central Bank should shift to a tightening bias towards the second half of the year to move monetary policy to neutral territory."

### Fiscal rule, migration shock, and escape clause
- Fiscal rule adherence: "Adhering to the fiscal rule remains appropriate and would place public debt firmly on a downward path over the medium term."
- Public debt projection: gross debt "projected to steadily decline from about 51 percent in 2018 to around 40 percent of GDP by 2024."
- Staff recommendation on escape clause (if used for migration shock): strict conditions
  - (i) "the trigger must be clearly defined as migration-related costs;"
  - (ii) "temporary deviations from the target should be commensurate with those costs;"
  - (iii) "a well-defined plan specifying the fiscal measures to return to the rule’s deficit path in the medium term should be specified." Plan should be well-communicated, include a calendar and prospective revenue and expenditure measures, and be published in the MTFF.
- Authorities' approach (FRCC recommendation and implementation):
  - Instead of invoking the escape clause (which "would suspend the rule altogether"), authorities used "flexibility within the fiscal rule in a well-defined manner starting in 2019."
  - FRCC recommended a modestly relaxed headline deficit path for a fixed period with a pre-specified ceiling on deviation in response to migration shock.
  - Under FRCC proposal:
    - Allowed headline deficit widening up to "½ percent of GDP in 2019."
    - Rationale: authorities’ projections of "around 2½ million migrants residing Colombia by the end of this year."
    - The deviation "will decrease by 0.1 percent each year until 2024."
    - FRCC will "monitor implementation annually" and can reassess the deficit path as needed.
  - Authorities: no changes to the medium-term structural balance objective; welcomed staff advice to define trigger, deviation, and correction mechanism upfront.

### Fiscal outlook — selected central government and public sector figures (percent of GDP)
- Central Government — Headline balance (2016–2024):
  - 2016: -4.0
  - 2017: -3.6
  - 2018: -3.1
  - 2019: -3.0
  - 2020: -2.3
  - 2021: -1.8
  - 2022: -1.4
  - 2023: -1.2
  - 2024: -1.0
- Central Government — Total revenue (2016–2024):
  - 2016: 15.0
  - 2017: 15.6
  - 2018: 15.1
  - 2019: 15.5
  - 2020: 15.4
  - 2021: 15.4
  - 2022: 15.3
  - 2023: 15.2
  - 2024: 15.2
- Central Government — Expenditure (2016–2024):
  - 2016: 19.0
  - 2017: 19.2
  - 2018: 18.2
  - 2019: 18.5
  - 2020: 17.7
  - 2021: 17.2
  - 2022: 16.7
  - 2023: 16.3
  - 2024: 16.2
- Public sector gross debt (2016–2024):
  - 2016: 49.8
  - 2017: 49.5
  - 2018: 51.8
  - 2019: 50.6
  - 2020: 48.5
  - 2021: 46.2
  - 2022: 44.2
  - 2023: 42.2
  - 2024: 39.9
- Notes from table:
  - For 2019, central government figures exclude projected privatization proceeds (0.3 percent of GDP) in one calculation; under GFSM 1986 privatization proceeds may be reported as government revenues.

### Reserve accumulation and external buffers
- Central Bank program: "announced in September 2018 a program to accumulate reserves to enhance the economy’s resilience to external shocks" and to prepare for possible gradual reduction in FCL access.
- Reserves assessment: "Reserves are currently adequate, in line with standard metrics, but will need to rise over time to maintain a sufficient buffer given external financing needs and risks."
- Staff view: "scope, without disrupting the market, for a modestly faster pace of reserve accumulation that would keep the IMF’s standard metric at its current level."
- Authorities' stance: viewed program as functioning successfully; "thought a faster pace was not necessary under current conditions, but this may change if circumstances do."

### Structural policies — increasing tax revenue and improving spending efficiency
- Fiscal challenge: within MTFF and fiscal rule’s structural deficit goal of "one percent of GDP by 2022," staff estimates that "in the absence of further revenue mobilization, expenditure reductions in excess of 2 percent of GDP between 2020‒24 would be needed."
- Recommendation to avoid cuts to public investment and social spending: undertake structural measures on tax revenues and government spending.
- Tax revenue goal: raise tax revenues by "2−3 percentage points, to 16 percent of GDP."
- Suggested tax measures:
  - Eliminate preferential regimes for businesses.
  - Base broadening for personal income taxes (including reduction in standard exemption and threshold at which tax is levied).
  - Base broadening for the VAT with direct transfers to the most vulnerable to offset adverse poverty impacts.
  - These measures "could resulting in added revenue gains of around 2 percent of GDP."
- Tax administration improvements:
  - Changes to the arrears process, the VAT refunds process, and high-coverage audits.
  - Improvements to DIAN’s IT systems and governance, increased staffing, and training to reduce widespread tax evasion.

*Source: IMF staff and national authorities (chapter content provided).*

### 26.      Spending efficiency should be enhanced. Efficiency improvements in line with the

### Spending efficiency should be enhanced. Efficiency improvements in line with the

### Spending efficiency and public investment
- Efficiency improvements in line with the recommendations made by the expert commission on spending should be pursued.
- Specific measures recommended by the commission include:
  - Energy subsidy reform as many of the wealthiest households receive subsidies.
  - Stronger investment project selection and evaluation to improve outcomes.
  - DIAN improvements to help reduce governance and corruption vulnerabilities.
  - Increasing participation of subnational governments in health and education provision using the central government public procurement system’s guidelines to boost the efficiency and progressivity of social programs.
  - Unifying a fragmented budget process between the central government, royalties’ system, and investment budget merits consideration to improve consistency and to better integrate medium-term programs.

### Tax revenue, administration, and authorities’ stance
- The authorities agreed in principle to raise tax revenues but believe sufficient gains can be attained through higher growth potential and more efficient tax administration.
- Authorities’ objectives and expectations:
  - Share the objective of raising central government tax revenue as a share of GDP toward levels seen in regional peers.
  - Do not see staff’s projected revenue losses from the Financing Law; expect that the lower tax burden on corporates would provide a larger boost to both GDP growth and tax revenues.
- Planned administrative and budgetary measures:
  - Introduce new IT systems and electronic invoicing.
  - Increase staffing and training and create incentives to foster the careers of strong performers at the DIAN.
  - Submitted an NDP proposal to unify the operational and investment budgets and streamline subsidies to make them more progressive.

### Financial sector policies and outlook
- Credit and bank performance:
  - Credit growth is expected to increase and NPLs to gradually decline in line with the economic recovery.
  - Last year, credit portfolio quality and a consequent increase in provisions weighed on bank profitability in the first three quarters of 2018 with ROA falling to 1.4 percent in mid-2018 (1 percentage point lower than a year earlier).
  - Bank profitability and willingness to lend is expected to improve as the corporate credit portfolio strengthens.
- Capital and provisioning:
  - Banks remain well capitalized with provisions stable at approximately 130 percent of NPLs.
  - Core Tier-1 and regulatory capital having been raised to 13.2 percent and 18.9 percent of risk-weighted-assets (RWAs) respectively.
- Regulatory reforms and timelines:
  - SFC implementing the Conglomerates Law and Basel III capital and liquidity standards.
  - Authority to supervise 13 identified financial conglomerates covered by the conglomerates law.
  - Compliance with capital adequacy requirements by November 2019.
  - Guidelines for conflicts of interest within financial conglomerates to be introduced in February 2020.
  - Parameters for calculating RWAs will be redefined and the definition of technical capital modified to exclude intangible assets in February 2020; net effect will raise most banks’ capital ratios.
  - Capital conservation buffers and systemic risk buffers for DSIBs will be gradually introduced over a four-year period (Feb 2020−Feb 2024).
  - LCR modified with assumed run-off rates varying with deposit type.
  - By June 2020, banks will have to comply with the net-stable-funding-ratio (NSFR).
  - Intention to introduce a capital requirement for operational risk for banks; decree outlining details to be published in Q4 2019.
- Supervisory advice and transitional risks:
  - Redefining RWAs is expected to lower them from circa 77 percent to closer to 67 percent of total assets.
  - Redefining RWAs and technical capital in February 2020 will increase capital ratios on average for 14 banks: RWAs currently correspond to 77 percent of total assets; when applying the new weights for RWAs for 14 banks, they currently account for 67 percent of total assets.
  - Exclusion of intangible assets from technical capital will partially offset the positive effect on capital ratios.
  - By February 2024, the conservation buffer of 1.5 percent and the systemic buffer for domestic systemically important banks (DSIBs) will be in effect.
  - This will increase the total capital requirement for DSIBs to 11.5 percent (8.5 for tier 1 capital (T1)) compared to todays’ 9 percent (4.5 percent for T1).
  - The authorities’ stress testing exercise showed an aggregate solvency ratio remaining above the 9 percent regulatory requirement, although for some institutions (less than 10 percent of assets) solvency would fall below the regulatory minimum.
  - Staff recommendation: heightened supervisory vigilance would be appropriate during the transitional period; SFC should remain alert and proactive to ensure problem assets are sufficiently provisioned and monitor modified loans portfolio to avoid build-up of excess credit risk.

### Structural reforms to boost inclusive growth and external competitiveness
- Social and productivity context:
  - The poverty rate in 2017 was roughly half the level of 2002.
  - Colombia’s total factor productivity (TFP) level remains close to that of 1990.
  - Weak productivity growth is a long-standing concern; lack of innovation, infrastructure gaps and an inefficient legal system hold back productivity and competitiveness.
- National Development Plan (NDP) measures and expected effects:
  - NDP emphasizes entrepreneurship and improvements to the business environment.
  - Measures include providing firms with information and incentives for technology adoption, improving human capital and reducing skills mismatches (notably a new national qualification system), and expanding access to credit for SMEs and start-ups.
  - The NDP sets out initiatives to stimulate digital payment methods and focus on rural financial inclusion.
  - NDP is estimated to raise productivity growth by 0.5 percentage points due to a combination of structural reforms and investment programs.
  - Authorities expect the 4G infrastructure program will make additional progress this year (around 0.5 percent of GDP) given further financial closures and higher appetite from financial institutions following resolution of pending legal cases.
  - NDP proposes measures to improve coordination between agencies to address migration flows from Venezuela.
- Governance, trade, and anti-corruption:
  - Continued focus on closing infrastructure gaps; 4G program progress has been slower than expected partly due to Odebrecht-related corruption revelations and environmental permitting red tape.
  - Non-tariff barriers should be reviewed; reduction in tariff dispersion remains important.
  - Enhancing efficiency of export and import procedures—including handling of goods at ports and inspection processes—would reduce trade costs and reduce scope for corruption.
  - NDP includes introduction of a compulsory regulatory impact assessment, strengthened ex post evaluation of standards, cutting red tape, strengthening the competition authority, preventive measures to improve transparency and monitoring, strengthened enforcement, and increased punishments to fight corruption.
  - Pending anti-corruption priorities include legislation to protect whistleblowers and regulation on lobbying activities.
- Other reforms:
  - Authorities’ efforts to facilitate labor market integration and deepen financial inclusion are welcome; account ownership increased significantly, though a strong urban-rural divide remains.
  - Justice and pension reform remain priorities: legal reform would have a large positive effect on productivity, governance, and reducing scope for corruption; pension reform should improve progressivity and coverage while guaranteeing sustainability of pension benefits.

### Staff appraisal and policy recommendations
- Macroeconomic outlook and policy stance:
  - Supported by very strong policy frameworks and well-executed policies, Colombia’s recovery is gaining momentum amid heightened risks.
  - Last interest rate cuts by the Central Bank in 2018 reduced the ex-ante real policy rate to moderately accommodative levels.
  - If the recovery in credit and GDP materializes as expected, monetary policy should shift to a tightening bias towards the second half of the year.
  - Fiscal consolidation should continue to reduce headline deficits in line with those mandated by the fiscal rule, which have been modestly relaxed to accommodate persistent spending pressures associated with the migration shock.
- External and monetary policy:
  - Monetary policy and a flexible currency are the best instruments to guard against downside risks if they were to materialize.
  - The Central Bank’s reserve accumulation program is a proactive step to maintain external buffers and has been well-executed—staff sees scope, without disrupting the market, for a modestly faster pace of reserve accumulation that would keep the IMF’s standard metric at its current level.
- Fiscal policy recommendations:
  - Structural fiscal policy efforts are needed to rebuild policy space and reduce public debt.
  - Authorities should raise structural tax revenues through tax reforms, including the elimination of preferential regimes for businesses and base broadening for personal income taxes and VAT, and improved tax administration.
  - Further spending efficiency gains should be made in line with the expert commission’s findings, including energy subsidy reform and stronger investment project selection and evaluation.
  - Further strengthening tax administration, including through stronger sanctions, would complement structural fiscal adjustment while safeguarding future spending priorities.

*International Monetary Fund — COLOMBIA, Article IV staff report excerpts (content unit).*

### 45.      The authorities’ use of flexibility within the fiscal rule is understandable given the

### The authorities’ use of flexibility within the fiscal rule is understandable given the sizeable and persistent nature of the migration shock

### Fiscal policy, fiscal rule flexibility, and migration shock
- The authorities used flexibility within the fiscal rule in response to a sizeable and persistent migration shock.
- Risks:
  - Uncertainty around accelerating migration flows and their effects poses risks of higher-than-expected fiscal costs that could crowd out key public investment and social spending programs.
- Staff position and recommendations:
  - Staff supports adjusting the deficit targets under the strict conditions outlined by the FRCC.
  - Revising the fiscal rule’s contingency framework is recommended to handle exceptional shocks in the future without having to modify the existing fiscal rule after the shock has occurred.
  - Staff welcomes the FRCC’s recommendations to revise the fiscal rule’s law along these lines.
  - To reinforce confidence in the fiscal anchor, the plan should also include prospective revenue raising and expenditure tightening measures to be published in the MTFF.
  - International support for Colombia’s policy responses and relief measures to assist the Venezuela crisis would reinforce its efforts.

### Banking sector, regulation, and supervision
- Assessment:
  - Banks have adjusted well to the previous economic downturn and the transition to a new regulatory framework and supervisory agenda appears on track.
- Staff support and measures:
  - Staff supports the implementation of the Conglomerates Law as an important step towards preserving financial stability.
  - The gradual convergence of capital and liquidity requirements towards Basel III standards will further strengthen the financial regulatory framework and improve its transparency, without unduly dampening of credit supply.
  - The SFC’s monitoring of modified loans will help avoid delayed recognition of asset deterioration.

### Structural reforms to foster inclusive growth and external competitiveness
- Context and achievements:
  - Colombia has made impressive progress in reducing poverty and inequality over the past fifteen years.
- Recommended reform areas:
  - Better targeted subsidies.
  - Closing infrastructure gaps.
  - Reducing skills mismatches.
  - Emphasis on entrepreneurship and improving the business environment to strengthen external competitiveness.
  - Strengthening the rule of law and reducing corruption.
  - Legal reform that receives wide popular support and is growth friendly (Annex VI).
  - Fighting informality, improving efficiency, and enhancing productivity as identified in the national development plan.
  - Pension reform that improves progressivity and coverage while guaranteeing sustainability of pension benefits remains crucial.

### Exchange regime and Article VIII restriction
- Staff recommendation:
  - Staff does not recommend approval of the retention of the exchange restriction arising from the special regime for the hydrocarbon sector, since the authorities have no plans for its removal.
- Status:
  - 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 (see IMF Country Report No. 13/35 for details).

*Source: 1colea2019001 - IMF country report excerpt.*

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

### 1colea2019001 - 49. Staff recommends that the next Article IV takes place on the standard 12-month cycle.

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

### Recent economic developments and outlook
- Real GDP growth
  - 2014: 4.7
  - 2015: 3.0
  - 2016: 2.1
  - 2017: 1.4
  - 2018: 2.7
  - 2019 (projection): 3.6
  - 2020–2024 (projections): 3.7, 3.6, 3.7, 3.7, 3.6
- Consumer prices, end of period (eop)
  - 2014: 3.7
  - 2015: 6.8
  - 2016: 5.8
  - 2017: 4.1
  - 2018: 3.2
  - 2019–2024 (projections): 3.2, 3.0, 3.0, 3.0, 3.0, 3.0
- Output gap (percent)
  - 2014: 1.5
  - 2015: 1.0
  - 2016: 0.0
  - 2017: -1.6
  - 2018: -2.2
  - 2019–2024 (projections): -1.8, -1.4, -1.0, -0.7, -0.3, 0.0
- Crude oil, spot price (US$)
  - 2014: 96.2
  - 2015: 50.8
  - 2016: 42.8
  - 2017: 52.8
  - 2018: 68.3
  - 2019–2024 (projections): 59.2, 59.0, 58.1, 57.6, 57.6, 58.0

### Real sector and domestic demand
- Sectoral recovery
  - Services, manufacturing and construction recovered in 2018.
  - Domestic demand accelerated in 2018; private consumption rose and consumer confidence increased after the election (temporarily fell as VAT increases were discussed in Congress).
  - Investment recovery gained traction at end-2018: public construction picked up and residential construction showed signs of life.
- Private consumption and investment indicators (selected)
  - Private consumption: consumer confidence and consumption growth increased in 2018 (charts show positive y/y changes).
  - Real investment growth components showed gains in dwellings, other buildings, machinery & equipment, and intellectual property (2018Q4 positive contributions).

### External sector and current account
- Current account and trade
  - The current account deficit widened in 2018 after two years of adjustment.
  - Exports (f.o.b., in US$ billions):
    - 2014: 56,899
    - 2015: 38,572
    - 2016: 34,090
    - 2017: 39,676
    - 2018: 44,316
    - 2019–2024 (projections): 43,150; 46,344; 46,364; 48,041; 50,210; 52,333
  - Imports (f.o.b., in US$ billions):
    - 2014: 61,539
    - 2015: 52,050
    - 2016: 43,239
    - 2017: 44,248
    - 2018: 49,633
    - 2019–2024 (projections): 51,603; 54,854; 56,934; 59,819; 62,940; 66,264
  - Commodities and fuel
    - Fuel exports (US$ billions): 2014: 28,988; 2015: 14,566; 2016: 10,796; 2017: 13,167; 2018: 16,769
    - Non-fuel exports (US$ billions): 2018: 12,304
  - Non-traditional exports (US$ billions): 2018: 10,715; projected 2019: 11,391; 2024: 17,046
- Exchange rate and prices
  - The peso weakened against the dollar as oil prices declined in late 2018.
  - REER and terms-of-trade changes were milder compared with the nominal exchange rate move.
- External balances (percent of GDP, projections)
  - Current account (deficit): 2018: -3.8; 2019: -3.9; 2020–2024 (projections): -3.8, -3.7, -3.7, -3.7, -3.8
  - Goods trade deficit (percent of GDP): 2018: -1.6; 2019: -2.5; 2020–2024 (projections): -2.4, -2.8, -3.0, -3.1, -3.2

### Financial account, reserves and financing
- Financial account and financing composition
  - The current account was financed by a combination of FDI, government bond issuance, and private borrowing.
  - Financial account (percent of GDP): 2018: -3.6; 2019: -3.9; 2020–2024 (projections): -3.8, -3.7, -3.7, -3.7, -3.8
  - Direct investment (percent of GDP): 2018: -1.8; 2019: -2.4; 2020–2024 (projections): -2.7, -2.7, -2.7, -2.7, -2.7
  - Portfolio investment (percent of GDP): 2018: 0.4; 2019: -1.6; 2020–2024 (projections): -1.0, -1.0, -0.9, -0.8, -0.7
- Reserves and adequacy
  - Gross international reserves (in billions of US$):
    - 2014: 46.8
    - 2015: 46.3
    - 2016: 46.2
    - 2017: 47.1
    - 2018: 48.3
    - 2019–2024 (projections): 51.2; 53.2; 55.1; 57.0; 58.9; 60.8
  - Reserve coverage: reserves have declined slightly relative to traditional indicators, but coverage remains adequate relative to the ARA metric and peers (end-2018 coverage cited).
  - Change in reserve assets (US$ millions): 2018: 1,188; projections 2019–2024: 2,920; 1,920; 1,920; 1,920; 1,920; 1,920

### Monetary policy, inflation, and labor market
- Inflation and expectations
  - Headline and core inflation ended 2018 very close to target.
  - Inflation (y/y change) eop: 2018: 3.2; 2019–2024 (projections): 3.2, 3.0, 3.0, 3.0, 3.0, 3.0
- Monetary policy stance
  - Monetary policy has been moderately loose since early 2018, contributing to an easing of financial conditions overall.
  - Policy rate, eop (historical table): 2014: 4.5; 2015: 5.8; 2016: 7.5; 2017: 4.8; 2018: 4.3 (policy rate projections for later years shown as NAN in some monetary tables).
- Labor market
  - Labor market characterized as relatively weak despite falling inflation and broadly constant nominal wage growth leading to real wage gains.
  - Unemployment rate, 2018 (percent): 9.7 (Table 1)

### Fiscal developments and public debt
- Central and consolidated fiscal balances
  - Central government overall balance (percent of GDP):
    - 2014: -2.4
    - 2015: -2.9
    - 2016: -4.0
    - 2017: -3.6
    - 2018: -3.1
    - 2019–2024 (projections): -3.0; -2.3; -1.8; -1.4; -1.2; -1.0
  - Consolidated public sector (CPS) balance (percent of GDP):
    - 2014: -1.8
    - 2015: -3.4
    - 2016: -2.3
    - 2017: -2.4
    - 2018: -2.0
    - 2019–2024 (projections): -2.1; -0.6; -0.3; -0.4; -0.4; 0.0
- Drivers of fiscal performance
  - Government deficits declined at consolidated and central levels, driven primarily by the cyclical recovery; fiscal impulse neutral at consolidated level.
  - Central government's deficit reduction driven primarily by lower expenditures; tax revenues remained stable; oil revenues increased slightly.
- Central government operations (percent of GDP, selected)
  - Total revenue: 2018: 15.5; 2019–2024 (projections): 15.5, 15.4, 15.4, 15.3, 15.2, 15.2
  - Total expenditure and net lending: 2018: 18.2; 2019–2024 (projections): 18.5, 17.7, 17.2, 16.7, 16.3, 16.2
  - Structural balance (percent of potential GDP): 2018: -2.2; 2019–2024 (projections): -2.4, -2.0, -1.6, -1.2, -1.0, -1.0
- Public debt
  - Gross public sector debt (percent of GDP):
    - 2014: 43.3
    - 2015: 50.4
    - 2016: 49.8
    - 2017: 49.5
    - 2018: 51.8
    - 2019–2024 (projections): 50.6; 48.5; 46.2; 44.2; 42.2; 39.9
  - Public debt excluding Ecopetrol (percent of GDP): 2018: 49.3; 2019–2024 (projections): 48.5; 46.5; 44.5; 42.8; 41.2; 39.3

### Macro-financial and structural indicators
- Financial markets and credit
  - Government bond yields increased during the year; sovereign bond spreads remained stable despite strains in some emerging markets.
  - Real credit growth: commercial and consumer credit improved but credit gaps remain large.
  - Mortgage credit growth remains strong while real house prices have declined.
  - Corporate and household debt (percent of GDP): corporate and household series show deleveraging reduced corporate debt ratios in recent years (chart-level information).
- Financial soundness (selected indicators, end-of-period)
  - Regulatory capital to risk-weighted assets (percent): 2018: 18.6 (Table 7)
  - Nonperforming loans to gross loans (percent): 2018: 4.8
  - ROAA (percent): 2018: 2.5
- Structural indicators and financial inclusion
  - Global Competitiveness Index (overall score, World Economic Forum, 0-100): Colombia: 61.6 (compared to LA6 Average 62.5, LAC Average 56.4, Advanced Economies 76.0).
  - Ease of Doing Business Index (World Bank, 0-100): Colombia: 69.2 (LA6 Average 66.8).
  - Financial inclusion: account ownership has risen markedly between 2011 and 2017; rural accounts drove gains; gender disparities narrowed; potential to increase mobile money accounts and channel government payments to financial accounts.

### External vulnerability and debt sustainability
- External vulnerabilities (selected)
  - Current account balance (US$ millions): 2018: -12,660; 2019–2024 (projections): -13,264; -13,356; -13,941; -14,717; -15,569; -16,543 (Table 2a).
  - External debt (percent of GDP): 2018: 46.7; 2019–2024 (projections): 48.7; 48.7; 48.1; 47.9; 47.2; 46.2 (Table 8).
  - Gross external financing need (US$ billions) and percent of GDP:
    - 2018: 44.5 (13.4 percent of GDP)
    - 2019–2024 (projections): 44.8; 48.0; 50.6; 51.0; 54.9; 57.6 (percent of GDP for these years also provided in Table 9).
- External Debt Sustainability Framework highlights (Table 9)
  - Baseline external debt (percent of GDP): 2018: 46.7; 2019: 48.7; 2020–2024 (projections): 48.7; 48.1; 47.9; 47.2; 46.2
  - Identified external debt-creating flows (percent of GDP): 2018: -0.7; 2019: -0.1; 2020–2024 (projections): -0.6, -0.6, -0.6, -0.6, -0.5
  - Automatic debt dynamics contribution (percent of GDP): 2018: -1.3; 2019: 0.7; 2020–2024 (projections): 0.7, 0.7, 0.6, 0.6, 0.6
  - Debt-stabilizing non-interest current account: -2.9 (Table 9)
- External assessment summary (excerpt)
  - Colombia’s NIIP was -46 percent of GDP at end-2018, a decline of 19 percent of GDP compared to end-2013. Cumulative net inflows of financial liabilities contributed 22 percent of GDP to this decline, partially offset by valuation gains of 4 percent of GDP from peso depreciation versus reserve currencies.
  - Gross external financing needs are moderate at about 13 percent of GDP annually; the external stability (ES) approach suggests a need for eventual external adjustment given the projected medium-term current account balance.

### Key statistics (selected, from summary tables)
- Population (million), 2018: 49.8
- GDP per capita (US$), 2018: 6,684
- Nominal GDP (in billion US$), 2018: 333
- Unemployment rate, 2018 (percent): 9.7
- Gini coefficient, 2017: 50.8
- Poverty rate, 2017: 26.9
- Gross international reserves (in billions of US$), 2018: 48.3
- Public debt, 2018 (percent of GDP): 51.8

### Projections and scenarios (medium-term)
- Medium-term outlook (selected)
  - Real GDP: 2019: 3.6; 2020: 3.7; 2021: 3.6; 2022: 3.7; 2023: 3.7; 2024: 3.6
  - Consumer prices (eop): 2019: 3.2; 2020–2024: 3.0 each year (Table 6)
  - Gross public sector debt (percent of GDP): 2019: 50.6; 2020: 48.5; 2021: 46.2; 2022: 44.2; 2023: 42.2; 2024: 39.9

*Source: IMF staff report (1colea2019001).*

### 1.5 percent of GDP lower than that required to stabilize the NIIP at its end-2018 level.

### 1.5 percent of GDP lower than that required to stabilize the NIIP at its end-2018 level.

### Overall assessment
- The external position is moderately weaker than implied by medium-term fundamentals and desirable policies.
- Assessment driven by estimated current account gap of ˗1.8 percent of GDP (point estimate), with a staff range of ˗0.5 to ˗3.1 percent of GDP given the EBA model’s wide standard error for Colombia.
- Mitigating factors: composition and stability of capital flows, adequate reserve coverage, and a flexible exchange rate that has long served as the primary mechanism of adjustment to external shocks.

### Current account — background, estimates, and policy implications
- Actual current account balance (CAB) in 2018: -3.8 percent of GDP.
- 2017 CAB: -3.3 percent of GDP; 2013–17 average CAB: -4.5 percent of GDP.
- Drivers in 2018: imports increased as domestic demand recovered; oil exports rose; non-oil exports were sluggish due to soft regional growth and one-off factors (e.g., weak harvests).
- Investment growth in 2018: 3.5 percent (strongest since 2014–15 oil price decline).
- Medium-term CAB projection: -3.8 percent of GDP.
- EBA model outputs for 2018:
  - Actual CA: -3.8 percent of GDP
  - Cyclically-adjusted CA (Cycl. Adj. CA): -4.7 percent of GDP
  - EBA CA Norm: -0.1 percent of GDP
  - EBA CA Gap: -4.7 percent of GDP
  - Staff adjustment to norm (Staff Adj.): -2.9 percent of GDP
  - Staff CA Gap: -1.8 percent of GDP
- Adjustments applied to the CAB norm:
  1. Contribution of oil exports to the norm reduced by 1.8 percent of GDP to account for Colombia’s investment needs and channeling of government oil revenue to infrastructure investment projects expected to boost competitiveness.
  2. Contribution of demographic variables reduced by 0.6 percent of GDP to reflect a large recent jump in migration from Venezuela not captured in EBA population statistics.
  3. Cyclically-adjusted CAB adjusted up by 0.5 percent of GDP to account for highly depressed demand in markets for Colombia’s non-traditional exports.
- Potential policy responses:
  - Ongoing fiscal consolidation according to the fiscal rule to raise national saving over the medium term.
  - Structural policies to improve competitiveness and boost non-oil exports are essential but will only improve the external position over the medium term.
  - Key priorities: lowering non-tariff trade barriers that raise input costs for exporters; enhancing customs procedures; reducing transportation costs; improving infrastructure.

### Real exchange rate (REER)
- Period-average REER appreciated by 1 percent in 2018 and was 33 percent weaker than in 2013 (driven by lower oil prices).
- EBA REER level and index approaches estimated an undervaluation of 12-13 percent in 2018.
- Applying a semi-elasticity of -0.14 to the gap from the CAB approach suggests a REER overvaluation between 4 and 22 percent.
- Staff judgment: REER gap consistent with the CAB gap at 13 percent, with wide uncertainty of +/- 9 percent.
- Sources of uncertainty: poor fit of the EBA CAB model for Colombia (large unexplained residuals), differences across REER and CA approaches, delayed recovery in non-oil exports despite a flexible exchange rate, and structural distortions holding back exports.

### Capital and financial accounts: flows and policy measures
- Current account deficits in the last decade financed primarily by capital inflows to FDI and portfolio debt securities.
- Net FDI inflows in 2018: 1.8 percent of GDP (below historical average but within normal variation; diversified across petroleum, mining, financial, and other sectors).
- Net inflows into domestically-issued government debt in 2018: 1.1 percent of GDP.
- Sovereign issuance on international markets in October 2018 and January 2019 was heavily oversubscribed.
- Assessment: Stability of FDI flows, sound macroeconomic policies, and uninterrupted market access have underpinned capital inflows, including during periods of stress.

### FX intervention and reserves
- Gross reserves increased by US$750 million in 2018, including purchases of US$400 million in December under a program to accumulate reserves (first FX intervention since 2014).
- End-2018 reserves: US$47.9 billion, equivalent to 14.5 percent of GDP and 8.9 months of prospective imports.
- Reserve purchases in Q1-2019 to date: $2.1 billion (an increase of over 4 percent), including a one-off $1 billion purchase from the Treasury from Eurobond proceeds.
- Reserve coverage estimates for 2018:
  - 118 percent of the ARA metric including a commodity buffer.
  - 130 percent excluding the commodity buffer.
- Access to resources under Colombia’s FCL provides an additional liquidity buffer equivalent to about 27 percent of the ARA metric.
- Assessment: Flexible exchange rate remains primary adjustment mechanism; reserve coverage has declined since 2015 but remains adequate.

### Public Sector Debt Sustainability Analysis (DSA) — baseline and risks
- Public debt coverage: non-financial public sector (NFPS).
- NFPS gross debt:
  - End-2018 estimate: 51.8 percent of GDP (up from 49.5 percent in 2017).
  - Projected to gradually decline to around 40 percent of GDP in 2024 under the baseline scenario.
- Increase in 2018 primarily driven by an increase in externally denominated debt following exchange rate depreciation.
- Debt composition:
  - Around 91 percent of NFPS debt corresponds to central government debt.
  - Of central government debt, around 2/3 is denominated in local currency, remainder primarily in U.S. dollars.
  - Ecopetrol’s debt (~3.0 percent of GDP) is included in NFPS.
- Underlying drivers of projected debt decline: expected primary surpluses at general government level and favorable growth dynamics.
- Debt-stabilizing primary balance (if real GDP growth, real interest rates, and other debt-creating flows remain at projected levels for 2024): ˗0.1 percent of GDP.
- Projected primary balances exceed the debt-stabilizing primary balance, placing NFPS on a declining path.
- Risks:
  - Share of NFPS debt held by non-residents is above its risk benchmark, reflecting a rapid increase in foreign investor participation in local currency public debt since 2013.
  - Refinancing risks mitigated by a more diversified foreign investor base and continued robustness of portfolio inflows, including during periods of stress.
  - Authorities emphasize extending maturities and minimizing roll-over risk.

### DSA projections, indicators, and stress tests (selected figures)
- NFPS gross debt: 51.8 percent of GDP in 2018; projected around 40 percent of GDP by 2024.
- Debt dynamics contributions (selected):
  - Change in gross public sector debt (cumulative through 2024): -11.9 (table cumulative change).
  - Identified debt-creating flows cumulative: -8.9.
  - Primary deficit (2018): -0.3 (percent of GDP) and projected primary deficits/contributions detailed in DSA tables.
- Public gross financing needs (selected projection): series shows values declining from mid-2019 onward in the DSA charts (see DSA figures).
- Stress tests: scenarios include Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock — results shown in DSA figures for gross nominal public debt and financing needs across 2019–2024.

*Source: IMF staff estimates.*

### Annex III. Quantifying the Macroeconomic Effects of Migration

### Annex III. Quantifying the Macroeconomic Effects of Migration

### Context and size of shock
- Official estimates: 1.2 million Venezuelans were permanently residing in Colombia by end-2018.
- Nearly 350,000 Colombians that were residing in Venezuela have returned to their home country.
- The influx accelerated in 2018, increasing almost threefold compared to 2017.
- Baseline scenario: similar migrant inflows are expected for 2019 and 2020 but net inflow are projected to be zero thereafter.
- Demographic/profile assumptions:
  - 67 percent of arriving Venezuelan migrants were of working age (working age defined as ages 14-65).
  - This implies Colombia’s working age population will rise by around 2 million by the end of the forecast horizon.
  - Venezuelan migrants participation rate: 77 percent versus Colombians 64 percent.
  - Migrant employment rate in the first year after arrival: 82 percent versus natives 91 percent.
  - Participation and employment rates are assumed to gradually converge to natives over the medium term.
- Labor market impact under assumptions: the number of employed workers will increase by around 1.3 million by 2024.

### Effects on potential growth (production-function approach)
- Production function used: Y = A K^α L^(1−α); potential growth = ∆ln(A) + α∆ln(K) + (1−α)∆ln(L).
- Methodological assumptions:
  - Labor share set at 66 percent.
  - Labor adjusted by human capital using the index in the Penn World Tables.
  - Capital is utilization adjusted.
  - Migrants and natives are assumed to have the same human capital levels (broadly borne out in data for end-2018).
- Main findings:
  - Migration flows from Venezuela raise Colombia’s potential GDP growth sizably in the near term, but this is partly offset by an important reduction in TFP.
  - TFP deterioration explained by (i) many migrants joining the informal sector, and (ii) evidence of significant skills mismatches.
  - Frictions expected to ease over the medium term, particularly after 2020, as migrants get absorbed into the labor market and migrant flows recede.
  - Potential growth is expected to settle around 3.4 percent, 0.1 percentage points above the previous baseline in the medium term.
  - Near-term impact on potential growth is more sizeable at around 0.2−0.3 in 2018−19.

- Comparative estimates:
  - World Bank: potential output increases around 0.2 percent of GDP if 500,000 migrants are able to enter the labor market.
  - National Planning Department (DNP, 2018): gains between 0.2−0.9 percent in GDP growth between 2018 and 2021; main channel through generation of between 500,000 and 2 million informal jobs boosting consumption by 0.3 to 1.1 percent and investment by 0.2 to 0.6 percent.
  - Reina and others (2018): migration could boost potential output between 0.1 and 0.5 percent depending on number of migrants that integrate into the labor market.

### Fiscal costs
- Colombia providing substantial humanitarian support; initial responses included emergency health care access and flexible documentation requirements for access to education for children.
- Staff’s fiscal-cost quantification starts from authorities’ observed expenditure outcomes and assumes fiscal costs per migrant equal to authorities’ estimates.
- Authorities’ key cost assumptions:
  - Education: per capita certified cost for preschool, primary and secondary education; includes school feeding program and school transportation.
  - Healthcare: subsidized capitation payments (UPC), average emergency costs per-patient without public insurance, vaccination and public health costs.
  - Early childhood care: per capita costs for early childhood care.
  - Humanitarian help: average cost of providing immediate humanitarian help for displaced persons.
- Revenue-side assumptions:
  - Per capita revenues from VAT and consumption taxes computed for 2017, scaled by relative wage of migrants in 2017 relative to Colombians and adjusted for lower productivity effects in 2018; multiplied by stock of Venezuelan migrants.
  - Personal and corporate income tax revenues per employed worker obtained by dividing total revenues by stock of employment in 2017, scaled by same relative wage rate for Venezuelans; multiplied by stock of employed workers.
- Estimated near-term net fiscal costs (IMF staff estimates — percent of GDP; Net effect):
  - 2019: 0.3
  - 2020: 0.4
  - 2021: 0.2
  - 2022: 0.2
  - 2023: 0.1
  - 2024: 0.1
- Authorities’ expenditure estimates (percent of GDP — Total Expenditure):
  - 2019: 0.4
  - 2020: 0.5
  - 2021: 0.5
  - 2022: 0.4
  - 2023: 0.3
  - 2024: 0.3
- Components of costs (authorities’ table, percent of GDP examples):
  - Education: 0.2 in 2019 and 2020; declines to 0.1 by 2023–24.
  - Health: 0.1 in 2019, 0.2 in 2020–22, 0.1 in 2023–24.
  - Childhood: 0.1 in 2019–22, 0.0 by 2023–24.
  - Humanitarian, Housing, Water/Sanitation, Institutional Strengthening, Security, Labor: 0.0 in the table.
- Larger picture: overall net fiscal costs are significant over the near term but fade over the medium term as migrants are gradually integrated into the labor force.

### Sensitivity analysis (alternative migration scenarios)
- Higher migration scenario:
  - If the number of Venezuelan migrants in Colombia doubles by the end of the forecast horizon to around 6 million:
    - Potential GDP growth could increase by an additional ½ percentage point in the near term relative to the baseline with migration.
    - No effect on potential growth in the medium term.
    - Net fiscal costs would be roughly double throughout the projection period relative to the baseline.
- Lower migration / return scenario:
  - If the number of Venezuelan migrants in Colombia is halved by 2024 to 700 thousand:
    - Minor deceleration in potential growth in the near term, with no effect in the medium term.
    - Net fiscal costs would be roughly halved in the near term and dissipate by 2024.

_Annex III. Quantifying the Macroeconomic Effects of Migration — Authorities and IMF staff estimates._

### Annex VI. Reform Priorities for Colombia

### Annex VI. Reform Priorities for Colombia

### Methodology and scope
- Staff followed the approach described in Biljanovska and Sandri (2018) which combines information on public support for reform areas with estimates of their TFP impact.
- The analysis only considers individual reforms, thus potentially overlooking interaction effects of reform packages.
- Given the complexity of the link between structural reforms and TFP gains, the analysis in this Annex should be taken as indicative rather than definite.
- Other measures, such as closing infrastructure gaps, which are not considered as part of this annex, also remain key priorities and are discussed in the main body of the staff report.
- Footnote definition preserved: The TFP impact refers to the estimated increase in the one-year ahead TFP growth rate from closing the structural gap with the advanced country average. Latinobarometro data refers to the question “What is the most important for the development of Colombia?”. Responses are averaged for 2016 and 2017 and mapped into structural reforms as explained in Biljanovska and Sandri (2018).

### Major reform areas considered
- Product Market
- Legal System
- Labor Market
- Trade Openness
- Banking sector reform is noted as not shown in the matrix figure given that Colombia is estimated to have a strong framework already.

### Key findings on priorities and impacts
- The analysis suggests that reforms to the legal system should be a priority.
- Improvements to the legal system are estimated to have the strongest economic impact and according to the Latinobarometro survey data also have relatively high public support.
- Economic Impact and Public Support for Reforms: figure axes and ticks shown in source: 0.2, 0.25, 0.3, 0.35, 0.4, 0.45 (vertical) and 0.00, 0.20, 0.40, 0.60, 0.80, 1.00 (horizontal).

### Specific legal-system constraints identified
- Survey data indicates that within the legal system, impartiality of courts and legal enforcement of contracts are two areas of concern for economic agents.
- Congestion of courts appears to be a major constraint on legal efficiency in practice.
- Reported delay magnitudes in legal process:
  - It is not uncommon for delays of around 8 years from the start of an investigation to the final judgement.
  - In a typical commercial litigation case, it is likely that due to court congestion a first-instance ruling might be rendered three years from the date of admission, even though in theory judges are bound to produce their decision on commercial disputes within one year.

### Policy implications and reform focus
- Prioritize structural reforms to the legal system, with emphasis on:
  - Enhancing impartiality of courts.
  - Strengthening legal enforcement of contracts.
  - Reducing court congestion and procedural delays to meet existing legal time bounds for commercial dispute resolution.
- Continue to consider reforms in banking, trade openness, labor markets, and product markets, recognizing that the legal system improvements are estimated to yield the strongest TFP gains per the staff analysis.

*Source: Annex VI. Reform Priorities for Colombia (IMF staff report).*

### 2018. The target for 2019 is to reduce it further, to 2.7 percent. Compliance with a

### 1colea2019001 - 2018. The target for 2019 is to reduce it further, to 2.7 percent. Compliance with a

### Fiscal Policy: deficits, tax reform, and medium‑term path
- Government and FRCC target: central government deficit of 2.7 percent of GDP in 2019, down from 3.1 percent in 2018.
- IMF staff forecast: fiscal deficit of 3 percent of GDP in 2019 (difference due to accounting of expected privatization revenues used to pay non‑recorded liabilities).
- Fiscal rule objective: structural steady state deficit of 1 percent of GDP expected to be attained by 2023.
- Financing law (approved December 2018) measures:
  - Additional revenues in 2019 from expansion of VAT and higher rates on dividend and personal income taxes.
  - Reduced corporate tax burden: lower CIT rates, input credit for VAT on capital goods, crediting municipal taxes.
  - Staff models estimate direct impact on investment and economic activity will boost GDP growth by 0.2 pp over ten years.
- Policy mix to meet fiscal path:
  - Public expenditure austerity to adhere to the fiscal rule.
  - FRCC may adjust yearly deficit target for output gap and exported commodity prices (mainly oil).
  - Temporary allowance for fiscal costs of Venezuelan migration consistent with IMF staff criteria; path to recover original deficit path in medium run.
- Revenue and efficiency actions:
  - Authorities agree on need to increase tax revenues; original financing law contained many staff‑recommended measures but not all were approved by Congress.
  - Tax administration reforms underway, expected to yield results soon.
  - Stricter cost and investment discipline at Ecopetrol and incentives for private oil activity to improve public revenues.
  - Technical assistance from the Fund to enhance public spending efficiency, budgetary process, and subsidy focalization.
- Authorities’ commitment: maintain structural deficit path per fiscal rule; rely on tax administration gains, recovery in economic activity, and expenditure efficiency to ensure public debt indicators follow projected downward path.

### Monetary policy, exchange rate, and international reserves
- Monetary framework:
  - Central bank follows an inflation targeting regime.
  - Policy interest rate kept at 4.25 percent since mid‑2018 after reductions in 2017 and first half of 2018.
  - With inflation close to target and well‑anchored expectations, policy has been moderately accommodative.
  - Authorities agree with staff that future adjustment toward a more neutral stance should be data dependent and carefully calibrated.
- Exchange rate and reserves:
  - Exchange rate flexibility is significant; peso showed remarkable stability after a depreciation of more than 50 percent following the 2014 collapse in international oil prices.
  - In September 2018, the central bank announced a program to accumulate international reserves through a market‑based mechanism and small monthly amounts.
  - Level of international reserves is well above the ARA metric used by the Fund.
  - Central bank view: accumulating additional reserves provides a more comfortable level and room to gradually reduce reliance on the FCL with the IMF.
  - Authorities do not necessarily share staff recommendation for “a modestly faster pace of reserve accumulation,” citing potential effects on expectations and market functioning; pace will depend on periodic international liquidity risk assessment.
  - Monetary effect of each dollar accumulated is automatically sterilized under the short‑term interest rate framework via sales/purchases of domestic securities to keep the short‑term interest rate at the board‑set level.

### Financial policy and supervision
- Recent trends and outlook:
  - After credit growth deceleration and deterioration in credit quality (especially commercial credit), credit growth is expected to increase and NPL to gradually decline.
- Regulatory progress:
  - Financial sector is strong; supervision implementing important reforms consistent with IMF recommendations.
  - Conglomerates Law (approved 2017) is being implemented.
  - Supervisor (SFC) advancing regulatory reform towards Basel III capital and liquidity standards.
- Authorities’ stance:
  - Committed to continue strengthening regulation and supervision.
  - Requested a new FSAP mission from the IMF as particularly relevant.

### Structural policies and OECD accession
- Social and structural objectives:
  - Colombia has made impressive progress in reducing poverty and inequality over the past fifteen years.
  - Authorities committed to continue progress via the national development plan (under Congress consideration) focusing on: reducing regional disparities, strengthening the rule of law, closing infrastructure gaps, promoting entrepreneurship, fighting informality, and improving targeting of public subsidies.
- Pension reform:
  - Authorities recognize large fiscal costs, poor coverage, and lack of progressivity in the current pension system; an integral reform will be presented to Congress no later than 2020.
- OECD accession:
  - In May 2018 Colombia was invited to become a full member of the OECD; accession expected to reinforce institutional framework and enhance policy quality aligned with the National Development Plan.

### Exchange restriction and the hydrocarbon and mining sectors
- Current regime:
  - Colombia requires all exporters to sell export proceeds in the exchange market or register them if held abroad.
  - Exemption exists for hydrocarbon and mining sectors: foreign companies can pay some domestic operations in foreign currency and are not required to transfer abroad amounts derived from domestic sales of oil, gas or services in local currency.
- Authorities’ view:
  - Consider the special regime is not an exchange restriction and does not significantly affect exchange rate market functioning.
  - Removing the regime could create unnecessary difficulties for foreign companies operating in Colombia.

*Source: IMF staff and Colombian authorities text from the provided content unit.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1colea2019001.pdf_