## COLOMBIA STAFF REPORT FOR THE 2020 ARTICLE IV CONSULTATION, April 2, 2020. ## Source details **Canonical URL:** [COLOMBIA STAFF REPORT FOR THE 2020 ARTICLE IV CONSULTATION, April 2, 2020.](https://www.imf.org/-/media/files/publications/cr/2020/english/1colea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1colea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1colea2020001.pdf.json) --- ### Key issues and executive summary - Context: - Before the Covid-19 pandemic, Colombia’s economy remained resilient due to "very strong policy frameworks, well-executed policies and immigration from Venezuela." - Real GDP growth: 3.3 percent in 2019; current account deficit: 4.3 percent of GDP in 2019. - Pandemic, lower oil prices, and tightening financial conditions expected to cause Colombia’s first contraction in two decades. - Near-term projection and vulnerabilities: - Recession of -2.4 percent in 2020 is expected due to pandemic-related disruptions. - Current account deficit projected to rise to 4.7 percent of GDP in 2020. - Increased external financing needs and elevated external downside risks amid global uncertainty. - Policy thrust: - Monetary easing and continued accommodation while inflation and inflation expectations remain moderate. - Continued liquidity support and use of available capital buffers in the banking system as needed. - Use all available space under the fiscal rule to meet unforeseen health expenditures and for countercyclical spending. - Medium-term: protect social spending and infrastructure investment; raise structural tax revenues to safeguard finances; public indebtedness expected to eventually decline, anchored by the fiscal rule. - Structural reforms to boost inclusive growth, migrant integration, and external competitiveness remain key. - Effective implementation of recent financial laws to reinforce regulation and preserve financial stability. ### Recent developments and background - Policy framework and reforms: - Flexible exchange rate, inflation targeting, effective financial supervision, and a medium-term fiscal rule in place. - Reserve accumulation program acquired US$2.8bn in reserves but was suspended after the 2019 Article IV and ended in October 2019. - Central government met a more ambitious headline deficit target than mandated by the fiscal rule in 2019. - Implementation of the Conglomerates Law (CL) and Basel III proceeding broadly as planned. - 2018-22 National Development Plan (NDP) passed in 2019. - Colombia will soon join the OECD. - 2019 macro outcomes: - Real GDP growth: 3.3 percent in 2019, led by internal demand. - Private consumption supported by inward remittances, higher real wages, and increased consumer credit supply. - Investment rebounded; consumer credit growth reached 15 percent and now represents 1/3 of all loans (up from around 1/4 in 2015). - Returns on Assets increased to 2.9 percent; NPLs fell after peaking in H1 2018. - Headline inflation approached the upper end of the band around the three-percent target through 2019 but began fading at year-end; core inflation remained slightly below three percent. - Unemployment rose from 9.8 to 10.5 percent in 2019; labor force participation fell from 64.0 to 63.3 percent. - Reserve coverage: 125 percent of the ARA metric (including a commodity buffer). ### Migration impacts (Venezuelan migration) - 2019 migrant stock and projections: - In 2019, migrants from Venezuela (including returning Colombians) surpassed two million—600,000 more than end-2018. - Staff projects the migrant population in Colombia could reach 3½ million by 2024. - Economic and fiscal impacts (2019 assessment and near-term estimates as percent of GDP): - Migration boosted GDP growth by around ¼ percent in 2019. - Net fiscal costs in 2019: ½ percent of GDP. - Widened the current account deficit by ½ percent of GDP in 2019. - Migration support fiscal composition (percent of GDP): - Education and Childcare: 2019 = 0.2; 2020 = 0.3; 2021 = 0.3; 2022 = 0.3; 2023 = 0.3; 2024 = 0.3 - Health and Humanitarian: 2019 = 0.2; 2020 = 0.2; 2021 = 0.2; 2022 = 0.1; 2023 = 0.1; 2024 = 0.1 - Housing, Water/Sanitation: all years = 0.0 - Other: all years = 0.0 - Total Expenditure: 2019 = 0.4; 2020 = 0.5; 2021 = 0.5; 2022 = 0.5; 2023 = 0.5; 2024 = 0.5 - Difference with 2019 AIV: 2019 = 0.0; 2020 = 0.0; 2021 = 0.1; 2022 = 0.1; 2023 = 0.2; 2024 = 0.2 - Migration-related dynamics: - Migration boosts GDP growth by around ¼ percent per year over 10 years (model-based simulations). - Estimated peak net fiscal cost around 0.4 percent of GDP in 2021 (after accounting for migrants’ tax contributions). - Current account deteriorates due to fiscal costs and higher imports from elevated private consumption and investment. ### Outlook and risks - Near-term and medium-term outlook: - 2020: Real GDP projected to contract by -2.4 percent. - Current account deficit expected to rise to -4.7 percent of GDP in 2020. - Global growth rebound anticipated in 2021 as health situation stabilizes; growth above 3½ percent from 2021 driven by prior growth drivers including migration and investment-friendly tax reforms. - Balance of risks: - Skewed to the downside. - Main downside risk: more prolonged spread of Covid-19 and extended shutdowns leading to further economic and financial dislocation. - Other risks: further falls in commodity prices and sharp rises in risk premia; accelerated migration from Venezuela; regional social tensions; deterioration of labor market conditions; deterioration of credit portfolios; tax revenue shortfalls. - Upside risk: higher-than-expected commodity prices. - External financing: - External financing needs: 17 percent of GDP in 2020-21. - Financing expected to be met substantially through FDI, though inflows expected to be more modest than in 2019; portfolio inflows more limited. ### Policy recommendations (operational and structural) - Monetary and financial: - Continue monetary accommodation and consider further easing as long as underlying inflation and inflation expectations remain moderate. - Provide continued liquidity support as required. - Use available capital buffers in the banking system as needed; allow banks to draw down ample capital and liquidity buffers while maintaining strict loan classification and provisioning standards. - Effective implementation of recent financial laws to reinforce the regulatory framework and preserve financial stability. - Deploy countercyclical macroprudential policies to avoid sharp decline in credit supply. - Exchange rate flexibility: allow the flexible exchange rate to weaken in response to lower commodity prices and use it as the first line of defense. - Fiscal and public finances: - Use all available space under the fiscal rule to meet unforeseen health expenditures and for countercyclical spending; staff assumes 1 percent of GDP will be deployed from regional and stabilization funds (e.g., FAE, FONPET) channeled through FOME. - Subnational governments have resources to provide additional support. - Maintain fiscal rule anchoring so public indebtedness is expected to eventually decline; consider invoking a temporary escape clause if necessary while ensuring a medium-term declining path for public debt. - Once pandemic subsides, raise structural tax revenues to safeguard social spending and infrastructure investment. - Strengthen revenue administration, eliminate preferential regimes for businesses, broaden the base for personal income taxes and VAT with targeted transfers for vulnerable groups. - Seek concessional financing and aid where appropriate. - Structural reforms and integration: - Implement structural reforms to boost inclusive growth, migrant integration, and external competitiveness. - Accelerate validation of Venezuelan skills and degrees and adopt active labor policies to ease migrant integration into labor and educational systems. - Continue reforms to improve procurement and the business climate; advance pending reforms (pension, labor market) when feasible. - Speed up structural reforms to enhance external competitiveness and economic diversification. - Reprioritize public investment projects and adhere to the fiscal rule. ### Monetary policy stance and central bank measures - Policy rate and stance: - Policy rate remained at 4.25 percent since April 2018, moderately below staff’s estimate of the neutral real rate, before being cut by 50 bp in response to the Covid-19 shock in March 2020. - Staff estimates for the neutral real rate range from 1-2 percent. - Monetary policy is data dependent and set to produce as smooth an adjustment as possible. - Central Bank liquidity and market operations (selected measures): - USD 2bn auction of Non-Deliverable Forwards with a 30-day maturity. - Extension of access of liquidity overnight and term facilities to managed funds, stock brokerage companies, trusts, and investment companies. - Expansion of liquidity operations (REPOS) allotment to COP 23.5 trillion. - USD 800 million of FX swaps (in US dollars) through which the Central Bank sells reserves and buys them back in 60 days. - COP 10 trillion program to purchase securities issued by credit institutions. - COP 2 trillion in TES purchases. - Central Bank communication improvements: - Prompt publication of minutes after policy decisions and a monetary policy report detailing BanRep staff’s projections welcomed by staff. ### Financial sector resilience and supervisory recommendations - Pre-pandemic conditions: - Financial sector described as profitable, liquid and well capitalized; average CAR of 17.6%. - System-wide LCR currently at around 200%. - Supervisory flexibility and measures: - SFC permitted banks to use their countercyclical provisions. - BanRep launched a COP 10 trillion program to purchase securities with remaining maturity of less than three years issued by credit institutions. - Recommended measures to prevent credit contraction: a. Encourage banks to use flexibility in existing regulations and undertake prudent renegotiation of loan terms for stressed borrowers. b. Encourage banks to draw upon existing capital buffers; supervisors should set timetables for rebuilding capital buffers as the crisis abates. Loan classification and provisioning rules (other than the counter-cyclical ones) should not be eased. c. Use available liquidity buffers if needed and introduce enhanced supervisory reporting to monitor liquidity strains. d. Heighten monitoring of financial soundness and prioritize business continuity planning and operational resilience. e. Step in with additional support measures as needed, including subsidies and tax relief aimed at smaller borrowers as well as credit guarantees and expand asset purchase programs with high-quality assets compatible with monetary policy operations. ### Financial regulatory developments and Basel III implementation - Basel III and capital/ liquidity standards: - Basel III-compliant definitions of risk weighted assets and capital will come into force by end-2020, with some banks pre-applying from midyear. - Risk weights expected to fall from around 77% to 67%. - Net result: a moderate increase in average CARs of around 1 p.p. on a consolidated basis (partly offset by introduction of a capital charge for Operational Risk and exclusion of Goodwill from capital). - Capital conservation and systemic risk buffers to be fully operational by end-2023. - NSFR applied in stages: beginning at 80% of target in March 2020 and reaching 100% by March 2022. - A 3% leverage ratio comes into force on January 1, 2021. - Conglomerates and systemic importance: - Financial conglomerates (FC) make up 77% of assets in the Colombian financial system; the 5 largest conglomerates own 62% of the system’s assets. - FCs’ exposures abroad rose from $11bn in 2009 to $93bn in 2019; largest exposures: Panama USD 32bn; other Central American countries total USD 36bn. - Colombian FCs account for 24% of assets in Panama and 50% in Costa Rica. - CL provides SFC with powers to oversee conglomerates including consolidated reporting, risk management, capital, and governance requirements. - Capital requirement summary (consolidated): - CET-T1 / T1 / T1 + T2 - Minimum: 4.5% / 6% / 9% - Conservation buffer: 1.5 / 1.5 / 1.5 - Systemic risk buffer: 1% / 1% / 1% - Total: 7% / 8.5% / 11.5% - Capital markets reform: - Authorities preparing policy document based on the 2018 Capital Markets Mission (64 recommendations, 210 actions). - Key proposals include expanding regulatory agency URF and shifting toward a principles and activities-based regulatory environment. ### Fiscal accounts, recognition of arrears, and debt dynamics - Recognition of accounts payable and central bank dividends: - Previously unrecognized expenditures or accounts payable for the central government over the past decade amounted to 1.9 percent of 2018 GDP. - Recognition of accounts payable increased the 2018 headline deficit by 1.9 percentage points of GDP. - With recognition of arrears and including central bank dividends, the 2018 headline deficit is now estimated to have been 4.8 percent of GDP. - For 2019, authorities project central bank profits of around 0.6 percent of GDP, to be distributed in 2020. - Stock and clearing of accounts payable: - Stock of accounts payable (2018): 18,798 (Billion of Col Pesos); o/w health: 9,637; o/w court rulings: 8,061; Percent of GDP: 1.9. - Many court rulings carry interest rates of around 29 percent, generating interest expenditure costs of around 1.4 percent of GDP between 2020-22; financing payments with TES would save around 1.1 percent of GDP over the same period. - Authorities started liquidation in 2019 and plan to finalize by 2021 using newly issued government bonds (TES) and cash. - Fiscal rule and emergency flexibility: - The fiscal rule includes Article 6 for additional countercyclical spending when projected growth is two percentage points or more below potential; additional spending cannot exceed 20% of the estimated output gap and must be transitory and dismantled after two years. - An escape clause exists under “extraordinary circumstances beyond government control” requiring authorities to state size and duration of deviation and correction mechanisms. - Staff assumes authorities will use all fiscal space granted by the FRCC last year, that is, a deficit of 2.3 percent of GDP. - Staff assumes 1 percent of GDP will be deployed from regional and stabilization funds via FOME. - Debt projections and DSA highlights: - Total public debt (percent of GDP): 2019 52.9; 2020 57.8; 2021 55.3; 2022 53.1; 2023 51.5; 2024 49.5; 2025 47.7 - Public debt excluding Ecopetrol (percent of GDP): 2019 50.7; 2020 55.7; 2021 53.3; 2022 51.1; 2023 49.5; 2024 47.5; 2025 45.7 - Public gross financing needs (percent of GDP): 2019 6.9; 2020 7.0; 2021 3.9; 2022 5.0; 2023 4.6; 2024 5.5; 2025 4.8 - Sovereign spreads (March 30, 2020): EMBIG (bp) 372; 5Y CDS (bp) 238 - Policy implications: - Deploy available fiscal space in 2020 and then pursue structural fiscal consolidation in line with the rule to stabilize and reduce public debt ratios over the medium term. - Implement comprehensive, transparent, credible, and realistic strategy to recognize and clear accounts payable, including public timetable and prioritization criteria and use of TES where cost-saving. ### External sector assessment and reserves - Overall assessment: - External position is moderately weaker than implied by medium-term fundamentals and desirable policies. - Staff point estimate for the current account (CA) gap is -1.7 percent of GDP. - Current account and NIIP: - Actual CA (2019): –4.3 percent of GDP. - Cycl. Adj. CA (2019): –4.8 percent of GDP. - EBA CA Norm: –0.3 percent of GDP. - EBA CA Gap: –4.5 percent of GDP. - Staff Adj.: –2.8 percent of GDP. - Staff CA Gap: –1.7 percent of GDP. - Colombia’s estimated NIIP was -52 percent of GDP in December 2019. - Excluding DI, NIIP stood at -8 percent of GDP; considering only reserve assets and debit liabilities, net position is -34 percent. - Reserves and FX intervention: - Gross international reserves (In billions of US$; IMF definition excluding FLAR contribution): 2019 52.7; 2020 52.9; 2021 53.7; 2022 55.1; 2023 56.7; 2024 58.4; 2025 60.1 - For 2019, coverage is estimated at 125 percent of the ARA metric including a commodity buffer, and 141 percent excluding the commodity buffer. - Colombia’s gross reserves increased by almost US$5 billion in 2019. - Central Bank intervened through NDF and FX Swaps to provide hedging and liquidity; as of March 22, it had not sold reserves outright. Staff recommends resuming reserve accumulation once Covid-19 effects and risks subside and market conditions improve. - External vulnerabilities: - External financing needs and elevated external downside risks increase exposure to commodity price falls, rise in risk premia, and capital outflow risks. - Stability anchored by large share of FDI and flexible exchange rate. ### Key macroeconomic indicators and projections (selected exact figures) - Real GDP: 2015 3.0; 2016 2.1; 2017 1.4; 2018 2.5; 2019 3.3; 2020 -2.4; 2021 3.7; 2022 3.8; 2023 3.9; 2024 3.8; 2025 3.8 - Potential GDP: 2015 3.4; 2016 3.1; 2017 2.9; 2018 3.1; 2019 3.2; 2020 0.3; 2021 3.0; 2022 3.0; 2023 3.1; 2024 3.2; 2025 3.2 - Output Gap: 2015 1.5; 2016 0.5; 2017 -1.1; 2018 -1.7; 2019 -1.5; 2020 -4.1; 2021 -3.5; 2022 -2.7; 2023 -2.0; 2024 -1.4; 2025 -0.9 - Consumer prices (average): 2015 5.0; 2016 7.5; 2017 4.3; 2018 3.2; 2019 3.5; 2020 3.5; 2021 3.2; 2022 3.0; 2023 3.0; 2024 3.0; 2025 3.0 - Current account (percent of GDP): 2015 -6.3; 2016 -4.3; 2017 -3.3; 2018 -3.9; 2019 -4.3; 2020 -4.7; 2021 -4.2; 2022 -3.9; 2023 -3.9; 2024 -3.9; 2025 -3.8 - Nominal exchange rate (Col$/US$, period average): 2019 3,281; 2020 3,806; 2021 3,844; 2022 3,883; 2023 3,922; 2024 3,961; 2025 4,001 - Brent Crude Oil Price (US$/barrel, memorandum): 2019 63; 2020 43; 2021 45; 2022 47; 2023 49 - Total public debt (percent of GDP): 2019 52.9; 2020 57.8; 2021 55.3; 2022 53.1; 2023 51.5; 2024 49.5; 2025 47.7 ### Structural reform priorities and governance - Priorities: - Raise growth, expand employment, and promote inclusion through fundamental structural reforms. - Prioritize programs aimed at tackling regional disparities—including implementation of the Peace Agreement—and boosting inclusive growth. - Consider meaningful pension reform including expansion of the Colombia Mayor social pillar and removing regressive subsidies for higher-income pensions. - Continue 4G infrastructure investments to reduce transportation costs and help boost exports; reduce non-tariff barriers. - Promote formal employment given high structural unemployment and informality. - Productivity and competitiveness constraints: - Constraints include lack of innovation, an inefficient legal system, infrastructure gaps, high internal transport costs, logistics bottlenecks, tariff dispersion, and non-tariff barriers. - Authorities evaluating and streamlining over 250 competitiveness programs to boost scalability and impact. - Governance, anti-corruption, and AML/CFT: - Comprehensive anti-corruption legal framework exists but enforcement and public perceptions remain weak. - RITA system allows anonymous reporting but lacks full whistleblowing protection. - Authorities updated national AML/CFT risk assessment in 2019 and are creating a final beneficiary register after passage of Law 2010 in 2019. ### Staff appraisal — macroeconomic policy and resilience - Policy frameworks and response: - Very strong policy frameworks and well-executed policies since the 2015-16 oil price shock laid foundations for recovery. - In response to Covid-19 and the fall in oil prices, policy flexibility will help Colombia respond to a likely recession. - Monetary policy should remain appropriately accommodative or ease further as long as inflation expectations remain well-anchored. - Central bank liquidity provision and targeted measures are welcome while mindful of central bank balance sheet risks. - Fiscal policy and buffers: - Use resources from the Mitigation of Emergency Fund and all available space under the fiscal rule, including deployment of temporary countercyclical spending, in 2020. - Thereafter, structural fiscal consolidation should proceed in line with the rule. - Available resources from local governments could provide added support. - Migration and medium-term growth: - Venezuelan migration expected to continue being an engine of growth over the medium term; gains depend on speed of migrant integration into the formal economy. - Expansion of the PEP and a newly-established formal employment program for migrants are exemplary measures that should continue. - Reserves and external vulnerabilities: - Reserve accumulation has strengthened capacity to deal with adverse shocks. - Colombia’s external position is assessed as moderately weaker than the level consistent with medium-term fundamentals and desired policy settings. - Once Covid-19 effects and risks recede and market conditions normalize, resuming reserve accumulation should be considered. _Italic: Source — 1colea2020001 (COLOMBIA STAFF REPORT FOR THE 2020 ARTICLE IV CONSULTATION, April 2, 2020)._ ### 4.5 n.a. ### 4.5 n.a. ### Key issues and executive summary - Context: - Before the Covid-19 pandemic, Colombia’s economy remained resilient due to "very strong policy frameworks, well-executed policies and immigration from Venezuela." - Strong internal demand lifted economic growth to 3.3 percent in 2019 and widened the current account deficit to 4.3 percent of GDP. - The pandemic, lower oil prices, and tightening financial conditions are expected to cause Colombia’s first contraction in two decades. - Near-term projection and vulnerabilities: - Recession of -2.4 percent in 2020 is expected due to pandemic-related disruptions. - Current account deficit projected to rise to 4.7 percent of GDP in 2020. - Increased external financing needs and elevated external downside risks amid global uncertainty. - Policy thrust: - Monetary easing and continued accommodation while inflation and inflation expectations remain moderate. - Continued liquidity support and use of available capital buffers in the banking system as needed. - Use all available space under the fiscal rule to meet unforeseen health expenditures and for countercyclical spending. - Subnational governments have resources to provide additional support. - Medium-term: protect social spending and infrastructure investment; raise structural tax revenues to safeguard finances; public indebtedness expected to eventually decline, anchored by the fiscal rule. - Structural reforms to boost inclusive growth, migrant integration, and external competitiveness remain key. - Effective implementation of recent financial laws to reinforce regulation and preserve financial stability. ### Background and structural setting - Policy framework and recent reforms: - Flexible exchange rate, inflation targeting, effective financial supervision, a medium-term fiscal rule, and strong institutions helped withstand external shocks. - Reserve accumulation program acquired US$2.8bn in reserves but was suspended after the 2019 Article IV and ended in October 2019. - Central government met a more ambitious headline deficit target than mandated by the fiscal rule in 2019. - Implementation of the Conglomerates Law (CL) and Basel III proceeding broadly as planned. - 2018-22 National Development Plan (NDP) passed in 2019 with policies aimed at raising productivity, tackling informality, and improving governance. - Colombia will soon join the OECD. ### Recent developments (2019 and immediate pre-pandemic) - Growth and demand: - Real GDP growth: 3.3 percent in 2019, led by internal demand. - Private consumption supported by inward remittances, higher real wages, and increased consumer credit supply. - Investment rebounded, reflecting civil works, improving corporate balance sheets, and investment-friendly tax reform. - External sector and reserves: - Current account deficit: 4.3 percent of GDP in 2019. - Capital flows (predominantly FDI) comfortably financed the deficit. - Reserve coverage: 125 percent of the ARA metric (including a commodity buffer). - Inflation and labor market: - Headline inflation approached the upper end of the band around the three-percent target through 2019 but began fading at year-end. - Core inflation remained slightly below three percent; inflation expectations remained well-anchored. - Unemployment rose from 9.8 to 10.5 percent in 2019; labor force participation fell from 64.0 to 63.3 percent. - Financial sector and credit: - Commercial credit recovered in 2019; consumer credit growth reached 15 percent and now represents 1/3 of all loans (up from around 1/4 in 2015). - Returns on Assets increased to 2.9 percent. - NPLs fell after peaking in the first half of 2018. - Migration impacts (Venezuelan migration): - In 2019, migrants from Venezuela (including returning Colombians) surpassed two million—600,000 more than end-2018. - Staff projects the migrant population in Colombia could reach 3½ million by 2024. - For 2019 alone, migration is assessed to have: - boosted GDP growth by around ¼ percent; - resulted in net fiscal costs of ½ percent of GDP; - widened the current account deficit by ½ percent of GDP. - Migration support and fiscal cost composition (percent of GDP, near-term estimates): - Education and Childcare: 2019 = 0.2; 2020 = 0.3; 2021 = 0.3; 2022 = 0.3; 2023 = 0.3; 2024 = 0.3 - Health and Humanitarian: 2019 = 0.2; 2020 = 0.2; 2021 = 0.2; 2022 = 0.1; 2023 = 0.1; 2024 = 0.1 - Housing, Water/Sanitation: all years = 0.0 - Other: all years = 0.0 - Total Expenditure: 2019 = 0.4; 2020 = 0.5; 2021 = 0.5; 2022 = 0.5; 2023 = 0.5; 2024 = 0.5 - Difference with 2019 AIV: 2019 = 0.0; 2020 = 0.0; 2021 = 0.1; 2022 = 0.1; 2023 = 0.2; 2024 = 0.2 - Migration-related dynamics: - Migration boosts GDP growth by around ¼ percent per year over 10 years (model-based simulations). - Estimated peak net fiscal cost around 0.4 percent of GDP in 2021 (after accounting for migrants’ tax contributions). - Current account deteriorates due to fiscal costs and higher imports from elevated private consumption and investment. ### Outlook and risks - Near-term outlook: - 2020: Recession of -2.4 percent expected due to pandemic shutdowns, global contraction, and lower oil prices. - Current account deficit projected to rise to 4.7 percent of GDP in 2020. - Medium-term and recovery assumptions: - Global growth rebound in 2021 as health situation stabilizes. - Prior growth drivers—immigration from Venezuela and investment-friendly tax reforms—should support recovery. - Risks and balance of risks: - Balance of risks remains skewed to the downside. - Main downside risk: more prolonged spread of Covid-19 and extended shutdowns leading to further economic and financial dislocation. - Increased external financing needs heighten vulnerability to global shocks. ### Policy recommendations (operational and structural) - Monetary and financial: - Recent monetary easing is welcome; continue accommodation as long as underlying inflation and inflation expectations remain moderate. - Provide continued liquidity support as required. - Use available capital buffers in the banking system as needed. - Effective implementation of recent financial laws to reinforce the regulatory framework and preserve financial stability. - Fiscal and public finances: - Use all available space under the fiscal rule to meet unforeseen health expenditures and for countercyclical spending to support the economy through recession. - Subnational governments can provide additional support using their available resources. - To safeguard social spending and infrastructure investment over the medium term, raise higher structural tax revenues once the pandemic subsides. - Maintain fiscal rule anchoring so public indebtedness is expected to eventually decline. - Structural reforms and integration: - Implement structural reforms to boost inclusive growth, migrant integration, and external competitiveness. - Accelerate validation of Venezuelan skills and degrees and adopt active labor policies to ease migrant integration into labor and educational systems. - Continue reforms to improve procurement and the business climate; advance pending reforms (pension, labor market) when feasible. *COLOMBIA STAFF REPORT FOR THE 2020 ARTICLE IV CONSULTATION, April 2, 2020.* ### 9. Continued accommodative monetary policy stance together with gradual fiscal ### 9. Continued accommodative monetary policy stance together with gradual fiscal ### Monetary and fiscal stance (findings) - The policy rate remained at 4.25 percent since April 2018, moderately below staff’s estimate of the neutral real rate, before being cut by 50 bp in response to the Covid-19 shock in March 2020. - The central government’s (CG) headline budget deficit narrowed to 2.5 percent of GDP in 2019—more ambitious than the Fiscal Rule Consultative Committee’s (FRCC) recommendation of 2.7 percent of GDP—reflecting: - stronger tax administration performance (from increased staffing and training, more targeted audits, and better IT systems and analytics at the DIAN); - one-off revenues (e.g., high central bank profits and Ecopetrol dividends). - The consolidated public sector (CPS) deficit improved despite subnational governments’ increased expenditure ahead of local elections as public enterprises’ losses fell. - After the Constitutional Court overturned the 2018 Financing Law (FL) in October 2019, a replacement Growth Law (GL) was approved in December 2019; the GL included modest VAT changes to benefit low-income individuals and lower pension contribution requirements for minimum wage earners. - Staff estimates for the neutral real rate range from 1-2 percent. - The GL aims to increase structural tax revenues by improving tax administration through implementation of electronic invoicing, better targeted tax audits, and increased DIAN resources. Staff expects the law to create tax revenue shortfalls starting in 2021. ### Structural measures and Peace Agreement implementation - Structural measures focused on boosting productivity and public investment, as Peace Agreement implementation continues. - The 4G infrastructure agenda accelerated. - Authorities initiated programs aimed at advancing innovation, access to export markets, firm formalization, and productivity growth as part of the NDP. - The Kroc Institute, tasked with monitoring the peace agreement, reports steady progress. - The Special Jurisdiction for Peace’s Statutory Law was ratified by Congress despite last year’s Presidential Objections. ### Covid-19 shock, oil-price decline, and market responses - Colombia’s recovery was interrupted by the Covid-19 pandemic and steep oil price declines. - Oil accounted for 38 percent of goods exports in 2019. - As the outbreak spread globally after January 2020: - economic activity was disrupted on a wide scale, including a mandatory national quarantine; - equity markets fell sharply and financial conditions tightened significantly since early March 2020; - sizeable portfolio outflows from emerging market economies occurred despite policy responses by major central banks; - Colombia’s exchange rate sharply depreciated, with steep asset price falls and sharp rise in spreads. - The current shock is the largest in recent years and comparable to the Global Financial Crisis of 2008-09. ### Government and Central Bank response measures - A national state of emergency was declared and support measures announced, including: - creation of a new National Emergency Mitigation Fund (FOME); - additional health sector budgetary support; - faster direct contracting for response services; - a new credit line to provide liquidity and support for all tourism-related companies; - delayed tax collection and utility payments; - reduction of tariffs for strategic health imports; - credit support for SMEs; - expanded transfers for vulnerable groups. - A mandatory nation-wide quarantine was put in place on March 25 for three weeks; several regions issued curfews; all borders were closed. - The Central Bank eased interest rates and adopted measures to ensure adequate provision of liquidity in domestic financial and foreign exchange markets, including: - a USD 2bn auction of Non-Deliverable Forwards with a 30-day maturity; - extension of access of liquidity overnight and term facilities to managed funds, stock brokerage companies, trusts, and investment companies; - expansion of liquidity operations (REPOS) allotment to COP 23.5 trillion; - USD 800 million of FX swaps (in US dollars) through which the Central Bank sells reserves and buys them back in 60 days; - COP 10 trillion program to purchase securities issued by credit institutions; - COP 2 trillion in TES purchases. - The net lender position of the Central Bank is expected to increase substantially with these transactions. ### Outlook and projections - Real GDP is projected to contract by 2.4 percent in 2020; this would be Colombia’s first recession since 1999. - Under the assumption that the Covid-19 pandemic recedes, growth is expected to rebound in 2021 in line with an anticipated strong bounce back in global growth. - Inflation is expected to moderate as past supply shocks recede; the path will depend on exchange rate pass-through and economic slack. - Last year’s growth drivers are expected to gradually return and remain in place over the medium term—including the boost from migration flows. These factors are projected to lift growth above 3½ percent from 2021. - Corporate credit and NPLs had improved with the economic recovery, but recent financial market turbulence—including the oil price collapse—are expected to temporarily halt or reverse these trends. ### External position and financing needs - The current account deficit is expected to rise to 4.7 percent of GDP. - External financing needs are high by regional standards: 17 percent of GDP in 2020-21. - Financing needs are expected to be met substantially through FDI given Colombia’s FDI track record and attractiveness, though FDI inflows are expected to be more modest than in 2019. - Expected portfolio inflows include market financing already secured by the authorities in January 2020, but private flows are not expected to contribute to financing needs. ### Risks (summary from Risk Assessment Matrix) - Elevated external downside risks and higher financing needs increase exposure to: - further falls in commodity prices and sharp rises in risk premia; - a more widespread and prolonged Covid-19 pandemic leading to prolonged shutdowns globally and domestically; - accelerated migration from Venezuela raising short-term fiscal costs and external deficits; - regional social tensions reducing capital inflows to Latin America. - Internal risks include: - deterioration of labor market conditions; - deterioration of credit portfolios affecting credit supply; - tax revenue shortfalls prompting cuts in social and infrastructure spending. - Upside risk: higher-than-expected commodity prices. ### Policy advice and recommended response - Appropriate policy mix in the exceptional circumstances includes: - monetary accommodation; - using all available fiscal space, including under the fiscal rule, to accommodate urgent temporary spending needs and bolster recovery; - countercyclical macroprudential policies; - exchange rate flexibility, allowing the flexible exchange rate to weaken in response to lower commodity prices and using it as the first line of defense against external shocks. - Additional recommended measures: - targeted liquidity interventions to address disorderly market conditions and use of international reserves if needed; - allow banks to draw down ample capital and liquidity buffers while maintaining strict loan classification and provisioning standards; - reserve accumulation and controlled build-up of short-term external debt to reduce likelihood and impact of capital outflows; - speed up structural reforms to enhance external competitiveness and economic diversification; - reprioritize public investment projects and adhere to the fiscal rule; consider invoking a temporary escape clause in the fiscal rule if necessary while ensuring a medium-term declining path for public debt; - seek concessional financing and aid where appropriate; - strengthen revenue administration, eliminate preferential regimes for businesses, and broaden the base for personal income taxes and VAT with targeted transfers for vulnerable groups; - speed up policies to integrate migrants into the labor force and maximize economic benefits. *IMF staff analysis as presented in the source content.* ### 17. Monetary policy accommodation should continue and further easing should be ### 17. Monetary policy accommodation should continue and further easing should be considered as long as underlying inflation pressures do not rise. ### Monetary policy stance and immediate response - Flexible exchange rate remains an effective first line of defense against external shocks, especially given balance sheet effects are seen as relatively modest. - Monetary policy is well placed to further reduce policy rates in the near term as needed, provided inflation expectations do not increase as the currency depreciates. - In the medium term, policy accommodation can be gradually withdrawn as recessionary forces recede and growth resumes a strong trajectory to close output and credit gaps, or if underlying inflation pressures rise. - Central bank actions and communication: - Central bank emphasized continued close monitoring of inflation and output risks. - COVID-19 dramatically changed the macroeconomic outlook, with a substantial downgrade of expected growth and a sharp drop in oil prices heightening pressures on the exchange rate. - Initial central bank responses aimed at lowering interest rates and ensuring adequate provision of liquidity to financial markets to preserve credit supply and market functioning. - Staff welcomes liquidity measures and communication improvements including prompter publication of minutes after policy decisions and the monetary policy report detailing BanRep staff’s projections. - Monetary policy will be data dependent and set to produce as smooth an adjustment as possible to the shocks. ### Regulatory and supervisory response to financial turmoil - Supervisory flexibility and principles: - Financial supervisor (SFC) has permitted banks to use their countercyclical provisions. - BanRep launched a COP 10 trillion program to purchase securities with remaining maturity of less than three years issued by credit institutions. - Recommended measures to prevent credit contraction (to be considered depending on developments): a. Encourage banks to use flexibility in existing regulations and undertake prudent renegotiation of loan terms for stressed borrowers. b. Encourage banks, which are well capitalized with an average CAR of 17.6%, to draw upon existing capital buffers to absorb costs of loan restructuring; banks should maintain credible capital plans and supervisors should set timetables for rebuilding capital buffers as the crisis abates. Loan classification and provisioning rules (other than the counter-cyclical ones) should not be eased. c. Use available liquidity buffers if needed and introduce enhanced supervisory reporting to monitor liquidity strains. The system-wide LCR stands currently at around 200%. d. Heighten monitoring of financial soundness, enhance frequency of dialogue between the SFC and regulated entities, and prioritize discussions on business continuity planning and operational resilience. e. Step in with additional support measures as needed, including subsidies and tax relief aimed at smaller borrowers as well as credit guarantees and expand asset purchase programs to support banks; assets should be of high quality and the program should be compatible with monetary policy operations with respect to managing inflation. ### Fiscal rule, emergency fiscal flexibility, and fiscal stance - The fiscal rule provides sufficient flexibility to respond to the substantial weakening of private demand; deploying all available fiscal space is important. - Authorities issued an emergency decree allowing the central government to make use of regional and stabilization funds (e.g., FAE, FONPET, worth up to 1.4 percent of GDP) to be channeled through FOME to cover emergency spending. - Staff assumes that 1 percent of GDP will be deployed from these resources. - Staff further assumes authorities will use all fiscal space granted by the FRCC last year, that is, a deficit of 2.3 percent of GDP. - The fiscal rule includes: - Article 6 allowing additional countercyclical spending when projected growth is two percentage points or more below potential and a negative output gap is projected; additional spending cannot exceed 20% of the estimated output gap and must be transitory and dismantled after two years. - An escape clause under “extraordinary circumstances beyond government control” which, if triggered, requires authorities to state size and duration of deviation and correction mechanisms. - If the fiscal rule is met, public debt projections: - Public debt will decline from around 58 percent of GDP in 2020 to about 48 percent by 2025. ### Fiscal transparency and arrears - Previously unrecognized expenditures or accounts payable for the central government over the past decade amounted to 1.9 percent of 2018 GDP. - Authorities have mechanisms for clearing arrears and avoiding future build-up, including managing legal claims, improved provisioning and use of contingency funds, and auditing of health expenditures. - Authorities stress recognition of arrears and adherence to the fiscal rule anchor their commitment to fiscal responsibility and medium-term targets. ### Reserve position and external resilience - Colombia’s reserve accumulation has helped maintain reserve adequacy based on IMF ARA metrics and enhances capacity to intervene in disorderly market conditions. - Staff recommends resuming reserve accumulation once Covid-19 effects and risks subside and market conditions improve to continue meeting authorities’ objective to sufficiently cover financing needs in their adverse scenario. - Without further reserve accumulation, Colombia’s reserve coverage would eventually decline towards ARA metric thresholds over the medium term. - Authorities view current reserve buffers (including FCL access) as sufficient to cover baseline external financing needs and a stress scenario; after reserve build-up in 2018-19 they are mindful of market perceptions about reduced upward COP flexibility. - Following recent volatility, the central bank intervened in the FX market through derivative instruments (NDF and FX Swaps) to provide hedging and liquidity; as of March 22, it had not sold reserves outright. No plans to restart accumulation while current conditions prevail. ### Structural policies: raising inclusive growth and external competitiveness - Fiscal policies and revenue mobilization: - Colombia faces rising fiscal challenges: a tightening fiscal envelope, near-term spending rigidities, and potential revenue losses from recent tax reforms and recession. - Revenue mobilization and spending efficiency post-recovery: - Raising tax revenues gradually by 2-3 percent of GDP would safeguard public investment and social spending, rebuild fiscal space, and offset lower oil revenues. - Tax policy focus: eliminate preferential regimes for businesses, base-broaden personal income taxes (including reducing the standard exemption and threshold), and broaden VAT with targeted transfers for the most vulnerable. - Tax administration improvements: DIAN’s IT system and governance (including electronic invoicing); changes to arrears and VAT refunds processes; high-coverage audits; increased staffing and training to reduce tax evasion. - Spending efficiency and subsidy reform: - SISBEN IV rollout planned to better target social programs and subsidies. - Energy subsidy reform includes changes to the price smoothing mechanism formula of the fuel stabilization fund (FEPC) to better align fuel prices with international ones. - These measures are estimated to produce efficiency gains of up to 0.6 percent of GDP. - Subnational reforms: - Royalties’ System (SGR) reforms approved include more funds for resource-extracting municipalities, regional investment, poorest regions, and the peace process; less earmarked for saving and stabilization fund. - Procurement improvements: standardized public bidding (Pliegos tipo) and use of Colombia Compra Eficiente expected to improve efficiency and reduce corruption. ### Financial sector policies and regulatory developments (Box 3) - Basel III implementation: - Basel III-compliant definitions of risk weighted assets and capital will come into force by end-2020, with some banks pre-applying from midyear. - Bringing risk weights in line with Basel will reduce average risk weights from around 77% to 67%. - Net result: a moderate increase in average CARs of around 1 p.p. when calculated on a consolidated basis (partly offset by introduction of a capital charge for Operational Risk and exclusion of Goodwill from capital). - Capital conservation and systemic risk buffers to be fully operational by end-2023. - NSFR applied in stages, beginning at 80% of target in March 2020 and reaching 100% by March 2022. - A 3% leverage ratio comes into force on January 1, 2021. - Conglomerates Law and systemic importance: - Financial conglomerates (FC) make up 77% of assets in the Colombian financial system; the 5 largest conglomerates own 62% of the system’s assets. - FCs’ exposures abroad rose from $11bn in 2009 to $93bn in 2019, including financial and non-financial entities. - Largest exposures: Panama USD 32bn; other Central American countries total USD 36bn. - Colombian FCs account for 24% of assets in Panama and 50% in Costa Rica. - The CL provides SFC with powers and resources to oversee conglomerates, including reshaping legal structures and enforcing consolidated reporting, risk management, capital, and governance requirements. - Capital requirement summary (consolidated table values): - CET-T1 / T1 / T1 + T2 - Minimum: 4.5% / 6% / 9% - Conservation buffer: 1.5 / 1.5 / 1.5 - Systemic risk buffer: 1% / 1% / 1% - Total: 7% / 8.5% / 11.5% - Transition and supervisory vigilance: - Remaining decrees of the CL go into effect in early 2020; SFC is adding resources to meet new supervisory role over conglomerates. - Basel III changes raise CARs while conservation and systemic buffers are phased in; maintaining heightened supervisory vigilance is appropriate during the transition, especially given high consumer credit growth. - Authorities expect to submit a law to parliament implementing the Capital Markets Mission recommendations. - A Financial Sector Assessment Program (FSAP) will be undertaken during 2020-21. - Authorities note growth in consumer loans is concentrated in two large banks; SFC is conducting focalized supervision. *Source: IMF staff and national authorities (content unit: 1colea2020001).* ### Box 3. Financial Regulatory Developments in Colombia (concluded) ### Box 3. Financial Regulatory Developments in Colombia (concluded) ### Capital markets reform - Based on recommendations from the 2018 Capital Markets Mission, the authorities are preparing a policy document to form the basis of legislative and regulatory action. - The Mission published 64 recommendations and proposed 210 actions in October 2019. - Key proposals include: - Expanding the regulatory agency URF—financed, at least in part, by a levy on the financial industry. - A broad-based switch from a rules-based toward a principles and activities-based regulatory environment. ### Structural reforms to boost inclusive growth and improve external competitiveness - Priorities and context: - Elements of the NDP and the Peace Agreement aimed at reducing inequality and raising growth should be prioritized. - Both poverty and inequality have decreased over the past decade, but levels remain high. - Coverage of basic health and education services has improved, but remaining gaps in quality and access, particularly in rural regions, should be addressed in accordance with the Peace Agreement. - A pension reform that addresses inequality and sustainability concerns should be considered, including expanding the non-contributory Colombia Mayor program and pension coverage for workers earning less than the minimum wage, while removing regressive subsidies for higher-income pensions. - Productivity and competitiveness constraints: - Multiple factors drag TFP and external competitiveness—including lack of innovation, an inefficient legal system, and infrastructure gaps. - High internal transport costs, logistics bottlenecks, tariff dispersion, and non-tariff barriers increase trade costs and limit export growth. - The implementation of the 4G infrastructure agenda should move ahead as scheduled. - Authorities are evaluating, streamlining, and consolidating over 250 competitiveness programs spread over multiple agencies to boost scalability and impact. - Authorities are about to conduct a comprehensive revision of disperse tariff and non-tariff barriers. - Formal employment and informality: - Structural unemployment and informality remain high relative to regional peers. - Around 44 percent of workers still work in mostly informal self-employment. - Around 33 percent of wage earners do not have access to social security. - Informality persistence is partly due to comparatively high non-wage labor costs, minimum-to-median wage ratios, and formal business start-up costs that hamper formal employment creation. - Recent measures to reduce formalization costs include reduced business registration fees, simplified reporting requirements for small firms, and implementation of one-stop shops for business and social security registration. - Adoption of the SIMPLE small-business regime and expanded coverage of the one-stop shop business registry service (Ventanilla Unica) are expected by authorities to significantly increase firm formalization. - To integrate migrants into the formal sector, authorities have expanded work and residence permit programs. ### Governance, anti-corruption, and AML/CFT - Progress and remaining gaps: - Colombia has a largely comprehensive anti-corruption legal framework (Country Report 18/128), but public perceptions remain weak and corruption featured prominently in social protests. - Detection and enforcement capabilities against corruption are not fully effective. - Recent measures and needs: - The RITA system allows the public to report unlawful activities anonymously, but lacks full whistleblowing protection. - A recent law requires public servants to publicly declare income and assets, with ministries starting to report this information through the SIGEP portal accessible by the public; full implementation is still needed. - Authorities should continue bolstering enforcement efforts and improving court efficiency, including reducing backlog of criminal court cases and collecting detailed statistics. - AML/CFT developments: - Authorities updated the national risk assessment in 2019 in line with international best practice. - Big data, network and AI analysis have improved identification, assessment and understanding of ML/TF risks. - Coordination between supervisory entities has improved (though not beyond these), and work is underway on creating a final beneficiary register with access to all financial information according to international best practice after the passage of Law 2010 in 2019. ### Removal of exchange restriction - With the approval of Article 95 of RE. 1/18, Colombia is no longer deemed to maintain an exchange restriction subject to Fund approval under Article VIII arising from the special regime for the hydrocarbon sector. - Colombia has a floating exchange rate regime (de jure: free floating; de facto: floating). ### Staff appraisal — macroeconomic policy and resilience - Policy frameworks and response to shocks: - Very strong policy frameworks and well-executed policies since the 2015-16 oil price shock laid foundations for the subsequent recovery. - In response to Covid-19 and the fall in oil prices, policy flexibility will help Colombia respond to a likely recession. - Monetary policy should remain appropriately accommodative or ease further as long as inflation expectations remain well-anchored. - Central bank liquidity provision and targeted measures are welcome while being mindful of central bank balance sheet risks. - Fiscal policy and buffers: - Use resources from the Mitigation of Emergency Fund and all available space under the fiscal rule, including deployment of temporary countercyclical spending, in 2020 to accommodate additional short-term spending needs. - Thereafter, structural fiscal consolidation should proceed in line with the rule. - Available resources from local governments, which also have fiscal space, could provide added support, including for health care spending. - Staff welcomes recent tax collection improvements and the authorities’ focus on spending efficiency. - Financial stability and regulation: - Macroprudential policies should be deployed to avoid a sharp decline in credit supply; authorities should continue to provide ample liquidity to market participants. - Vigilant and proactive supervision is needed in light of rapid consumer credit growth prior to the pandemic-related downturn. - The gradual convergence of capital and liquidity requirements towards Basel III standards will further strengthen the regulatory framework. - Migration and medium-term growth: - The authorities’ sustained efforts to integrate Venezuelan migrants are commendable. - Venezuelan migration is expected to continue to be an engine of growth over the medium term, with potential gains depending on the speed of migrant integration into the formal economy. - Expansion of the PEP and a newly-established formal employment program for migrants are exemplary measures that should continue. - If migration flows accelerate, fiscal space under the rule could be used to meet higher demand for public services and to support vulnerable groups through a pandemic-related recession. - Reserves and external vulnerabilities: - Colombia’s reserve accumulation has strengthened capacity to deal with adverse shocks. - Colombia’s external position is assessed as moderately weaker than the level consistent with medium-term fundamentals and desired policy settings (Annex I). - Amid heightened global uncertainty, increased external financing needs raise exposure to external risks in a downside scenario. - Once Covid-19 effects and risks recede and market conditions normalize, resuming reserve accumulation should be considered, market conditions permitting. - Fiscal transparency and arrears: - Authorities’ recognition of previously unrecognized public expenditures enhances fiscal transparency. - Authorities have a well-defined strategy for clearing these arrears, including timing and sources of funding. - Staff welcomes plans to strengthen provisioning and spending mechanisms to address accumulation of future arrears. - Further improvements to the assessment of fiscal risks (e.g., creation of a fiscal risk monitoring committee and the introduction of regular reports on fiscal risks) should be pursued. - Structural reform priorities over the medium term: - Raise growth, expand employment, and promote inclusion through fundamental structural reforms. - Prioritize programs aimed at tackling regional disparities—including implementation of the Peace Agreement—and boosting inclusive growth. - Consider meaningful pension reform including expansion of the Colombia Mayor social pillar and removing regressive subsidies for higher-income pensions. - Continue 4G infrastructure investments to reduce transportation costs and help boost exports, especially if complemented with a reduction in non-tariff barriers. - Given high structural unemployment, informality, and migration inflows, promoting formal employment remains a priority. *Source: Box 3. Financial Regulatory Developments in Colombia (concluded), IMF country chapter content provided.* ### 43. Staff recommends that the next Article IV takes place on the standard 12-month cycle. ### 1colea2020001 - 43. Staff recommends that the next Article IV takes place on the standard 12-month cycle. ### Staff recommendation - Staff recommends that the next Article IV takes place on the standard 12-month cycle. ### Recent economic developments (high-level findings from figures and text) - Domestic demand accelerated in 2019. - Business and industrial confidence rose in 2019. - Investment recovery gained traction in 2019, further supported by public works, while residential construction remained weak. - Export commodity prices declined (Terms of Trade and commodity price indices shown with 2013=100). - Import growth moderated following frontloaded investment in capital goods in late 2018. - Oil and non-oil export values declined in 2019. - Non-traditional export volumes were held back by contracting trading partner demand. - Income balance improvements were outweighed by a deteriorating goods trade balance. - The peso weakened substantially in 2015, stabilized, and weakened again since 2018. - The current account was financed by more FDI in 2019; government external borrowing moderated. - Gross international reserves rose back towards pre-2015 levels in 2019; coverage remained adequate relative to the ARA metric and peers. - Sovereign bond spreads spiked in March in Colombia and other emerging markets. - The Covid-19 outbreak reversed falls in bond yields and stock market gains in recent years. - Total bank credit continued to increase in 2019; mortgage credit growth remained dynamic but real house price growth remains soft. - Deleveraging reduced corporate debt ratios in recent years. ### Key macroeconomic indicators and projections (selected figures preserved exactly as reported) - Real GDP: 2015 3.0; 2016 2.1; 2017 1.4; 2018 2.5; 2019 3.3; 2020 -2.4; 2021 3.7; 2022 3.8; 2023 3.9; 2024 3.8; 2025 3.8 - Potential GDP: 2015 3.4; 2016 3.1; 2017 2.9; 2018 3.1; 2019 3.2; 2020 0.3; 2021 3.0; 2022 3.0; 2023 3.1; 2024 3.2; 2025 3.2 - Output Gap: 2015 1.5; 2016 0.5; 2017 -1.1; 2018 -1.7; 2019 -1.5; 2020 -4.1; 2021 -3.5; 2022 -2.7; 2023 -2.0; 2024 -1.4; 2025 -0.9 - GDP deflator: 2015 2.4; 2016 5.1; 2017 5.1; 2018 4.5; 2019 4.3; 2020 4.2; 2021 3.4; 2022 3.0; 2023 3.0; 2024 3.0; 2025 3.0 - Consumer prices (average): 2015 5.0; 2016 7.5; 2017 4.3; 2018 3.2; 2019 3.5; 2020 3.5; 2021 3.2; 2022 3.0; 2023 3.0; 2024 3.0; 2025 3.0 - Consumer prices, end of period (eop): 2015 6.8; 2016 5.8; 2017 4.1; 2018 3.2; 2019 3.8; 2020 3.2; 2021 3.0; 2022 3.0; 2023 3.0; 2024 3.0; 2025 3.0 ### External sector highlights and balances - Current account (percent of GDP): 2015 -6.3; 2016 -4.3; 2017 -3.3; 2018 -3.9; 2019 -4.3; 2020 -4.7; 2021 -4.2; 2022 -3.9; 2023 -3.9; 2024 -3.9; 2025 -3.8 - Exports (f.o.b., billions US$): 2015 38,572; 2016 34,063; 2017 39,777; 2018 44,440; 2019 42,374; 2020 34,269; 2021 37,103; 2022 39,750; 2023 42,028; 2024 44,025; 2025 46,138 - Imports (f.o.b., billions US$): 2015 52,051; 2016 43,239; 2017 44,247; 2018 49,584; 2019 50,821; 2020 44,620; 2021 47,395; 2022 49,695; 2023 52,107; 2024 54,570; 2025 56,899 - Goods balance (millions US$): 2015 -13,479; 2016 -9,176; 2017 -4,470; 2018 -5,144; 2019 -8,447; 2020 -10,351; 2021 -10,292; 2022 -9,946; 2023 -10,079; 2024 -10,545; 2025 -10,761 - Gross international reserves (In billions of US$; IMF definition excluding FLAR contribution): 2015 46.3; 2016 46.2; 2017 47.2; 2018 47.9; 2019 52.7; 2020 52.9; 2021 53.7; 2022 55.1; 2023 56.7; 2024 58.4; 2025 60.1 - Nominal exchange rate (Col$/US$, period average): 2015 2,742; 2016 3,055; 2017 2,951; 2018 2,956; 2019 3,281; 2020 3,806; 2021 3,844; 2022 3,883; 2023 3,922; 2024 3,961; 2025 4,001 - Brent Crude Oil Price (US$/barrel, memorandum): 2015 52; 2016 44; 2017 54; 2018 71; 2019 63; 2020 43; 2021 45; 2022 47; 2023 49 ### Financial account and external financing - Financial account balance (millions US$): 2015 -18,244; 2016 -12,273; 2017 -9,558; 2018 -12,415; 2019 -13,102; 2020 -13,269; 2021 -12,560; 2022 -12,523; 2023 -13,135; 2024 -13,882; 2025 -14,387 - Direct Investment (millions US$): 2015 -7,506; 2016 -9,330; 2017 -10,147; 2018 -6,409; 2019 -11,279; 2020 -9,604; 2021 -11,761; 2022 -12,437; 2023 -13,135; 2024 -13,741; 2025 -14,378 - Portfolio Investment (millions US$): 2015 -9,166; 2016 -4,839; 2017 -1,617; 2018 1,297; 2019 506; 2020 -1,639; 2021 -2,386; 2022 -2,980; 2023 -2,421; 2024 -2,300; 2025 -3,161 ### Fiscal sector and public debt (selected tables) - Central government overall balance (percent of GDP): 2015 -3.1; 2016 -4.0; 2017 -3.6; 2018 -4.8; 2019 -2.5; 2020 -2.3; 2021 -1.8; 2022 -1.4; 2023 -1.2; 2024 -1.0; 2025 -1.0 - Central government structural balance (percent of potential GDP): 2015 -3.9; 2016 -3.3; 2017 -2.6; 2018 -2.2; 2019 -2.2; 2020 -1.7; 2021 -0.6; 2022 -0.4; 2023 -0.6; 2024 -0.7; 2025 -0.8 - Combined public sector (CPS) balance (percent of GDP): 2015 -3.4; 2016 -2.2; 2017 -2.4; 2018 -4.5; 2019 -2.1; 2020 -2.3; 2021 -1.1; 2022 -1.1; 2023 -1.3; 2024 -1.0; 2025 -1.0 - Total public debt (percent of GDP): 2015 50.4; 2016 49.8; 2017 49.4; 2018 53.8; 2019 52.9; 2020 57.8; 2021 55.3; 2022 53.1; 2023 51.5; 2024 49.5; 2025 47.7 - Public debt excluding Ecopetrol (percent of GDP): 2015 45.7; 2016 45.4; 2017 46.1; 2018 51.2; 2019 50.7; 2020 55.7; 2021 53.3; 2022 51.1; 2023 49.5; 2024 47.5; 2025 45.7 ### Financial sector indicators and vulnerabilities - Regulatory capital to risk-weighted assets (Total Banking System): 2010 17.3; 2011 16.9; 2012 18.1; 2013 17.0; 2014 17.0; 2015 16.9; 2016 17.5; 2017 18.6; 2018 18.5; 2019 17.6 - Nonperforming loans to gross loans (30-day): 2015 2.9; 2016 3.2; 2017 4.3; 2018 4.6; 2019 4.3 - Provisions to nonperforming loans: 2010 175.0; 2011 182.0; 2012 163.9; 2013 160.7; 2014 151.3; 2015 155.5; 2016 153.5; 2017 134.7; 2018 137.5; 2019 142.4 - Liquid assets to total assets: 2010 22.1; 2011 21.5; 2012 21.6; 2013 21.4; 2014 19.8; 2015 18.9; 2016 18.0; 2017 18.6; 2018 19.2; 2019 17.7 ### Medium-term outlook and stress tests (selected projections and DSA summaries) - Gross public sector debt (percent of GDP, projections): 2020 57.8; 2021 55.3; 2022 53.1; 2023 51.5; 2024 49.5; 2025 47.7 - External debt (percent of GDP): 2015 42.1; 2016 49.4; 2017 47.2; 2018 46.6; 2019 49.8; 2020 59.2; 2021 57.6; 2022 56.5; 2023 55.1; 2024 53.7; 2025 52.5 - Gross external financing need (in billions of US$): 2015 43.1; 2016 35.8; 2017 40.5; 2018 44.9; 2019 45.0; 2020 46.7; 2021 49.5; 2022 47.3; 2023 52.4; 2024 52.6; 2025 52.1 - DSA scenarios and bound tests show vulnerability to interest rate, growth, current account, and real depreciation shocks (figures and scenario labels provided in the source). ### Policy implications and priorities (implied by data and staff commentary) - Maintain standard 12-month Article IV cycle (staff recommendation). - Monitor external vulnerabilities given elevated external debt and gross external financing needs. - Continue to support reserve adequacy and monitor coverage relative to the ARA metric. - Monitor fiscal consolidation path to stabilize and reduce public debt ratios over the medium term. - Preserve financial sector resilience given rising nonperforming loans and provisioning trends. - Watch commodity price and export developments given their impact on the current account and terms of trade. _Italic: Source — 1colea2020001 - 43. 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 ### Overall Assessment - The external position is moderately weaker than implied by medium-term fundamentals and desirable policies. - Assessment is driven by the estimated current account gap of -1.7 percent of GDP together with a wider range of uncertainty surrounding this estimate. - Mitigating factors: composition and stability of capital flows, adequate reserve coverage, and a flexible exchange rate that has continued as a long serving primary mechanism of adjustment to external shocks. ### Potential Policy Responses - Fiscal consolidation according to the fiscal rule is likely to raise national saving over the medium term. - Structural policies to improve competitiveness and boost noncommodity exports remain essential but will only improve the external position over the medium term. - Key priorities: - Lowering nontariff trade barriers that raise input costs for exporters. - Enhancing customs procedures. - Reducing transportation costs. - Improving infrastructure. ### Foreign Asset and Liability Position and Trajectory - Background: - Colombia’s estimated NIIP was -52 percent of GDP in December 2019, a decline of 23 percent of GDP compared to end-2014 (but a decline of 11 percent since 2015). - Cumulative net inflows of financial liabilities contributed 20 percent of 2019 GDP to this decline. - Valuation gains of 3 percent of 2019 GDP arose from the depreciation of the peso versus reserve currencies. - Direct investment (DI) contributes a substantial portion to the NIIP; excluding DI, the NIIP stood at -8 percent of GDP, compared to -4 percent at end-2014. - Considering only reserve assets and debit liabilities, the net position is -34 percent. - Assessment: - Gross external financing rose to about 14 percent of GDP in 2019. - The external stability (ES) approach suggests a need for eventual external adjustment, as the projected medium-term current account balance is 1.4 percent of GDP lower than that required to stabilize the NIIP at its end-2018 level. - The large share of FDI, whose risk-sharing properties can mitigate the risks of a falling NIIP, may permit a smaller or slower adjustment. - end-2019 (% GDP) key positions: - NIIP: -52 - Gross Assets: 57 - Reserve Assets: 16 - Gross Liab.: 109 - Debt Liab.: 50 ### Current Account - Background: - Estimated current account balance (CAB) of -4.3 percent of GDP in 2019 (larger deficit than 3.9 percent in 2018 but slightly smaller than the -4.6 percent of GDP 2014-18 average). - Imports increased as domestic demand recovered (propelled by migrant inflows from Venezuela) and owing to one-off factors such as favorable tax treatment in the financing law. - Exports sluggish due to unfavorable coal markets, softer oil prices, and negative trading partner import growth; tourism has grown briskly. - Inward remittances have been buoyant. - Increase in public saving (excluding arrears) from fiscal consolidation was offset by lower private saving. - Medium-term CAB projected at –3.8 percent of GDP, with expected declines in oil exports-GDP, modestly higher non-traditional exports as regional growth recovers, and buoyant tourism exports. - Assessment: - Model estimates and preliminary 2019 data indicate a cyclically-adjusted CAB norm of -0.3 percent of GDP and a cyclically-adjusted CAB gap of -4.5 percent of GDP for 2019. - Identified policy gaps including from reserve accumulation were assessed to be improving the CAB by 0.7 percent of GDP. - Staff point estimate for the CAB gap is -1.7 percent of GDP after adjustments specific to Colombia: - Adjustment 1: Contribution of oil exports to the norm reduced by 1.6 percent of GDP given Colombia’s investment needs and channeling of government oil revenue to infrastructure investment projects. - Adjustment 2: Large jump in migration from Venezuela justifies a downward adjustment of 0.5 percent to the norm. - Adjustment 3: Cyclically-adjusted CAB is adjusted up by 0.7 percent of GDP to account for highly depressed demand in Venezuela and other markets for Colombia’s non-traditional exports. - Range of the gap: -0.4 to -3 percent of GDP given the EBA model’s wide standard error for Colombia. - Recent uncertainties: rising and unrecorded illicit exports likely underestimate exports; increasing value of goods crossing the border into Venezuela possibly recorded as consumption. - 2019 (% GDP) summary figures: - Actual CA: –4.3 - Cycl. Adj. CA: –4.8 - EBA CA Norm: –0.3 - EBA CA Gap: –4.5 - Staff Adj.: –2.8 - Staff CA Gap: –1.7 ### Real Exchange Rate - Background: - Period average real effective exchange rate (REER) index depreciated by 9 percent in 2019 and was 27 percent weaker than in 2014 owing to lower oil prices. - Assessment: - EBA REER approaches estimate an undervaluation of 16 percent (index method) and 17 percent (level method) percent in 2019. - Applying a semi-elasticity of -0.13 to the gap from the CAB approach suggests a REER overvaluation of between 3 and 23 percent; application to the external sustainability approach implied a gap of 11 percent. - Overall staff judgment: REER gap consistent with the CAB gap at 13 percent, with wide uncertainty (+/- 10 percent) given: - Poor fit of the EBA CAB model for Colombia with large unexplained residuals amplified by arithmetic of a low semi-elasticity. - Substantial differences in results across REER and CA approaches. - Delayed recovery in non-oil exports despite flexible exchange rate that has been permitted to adjust in response to external shocks. - Structural distortions holding back exports. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Current account deficits in the last decade financed primarily by capital inflows (FDI and portfolio debt securities). - Net DI inflows in 2019 were 3.5 percent of GDP, rising to be back in line with the historical average. - FDI diversified across petroleum, mining, financial, and other sectors. - Sovereign issuance on the international market in January 2020 was heavily oversubscribed and at more favorable terms than in 2019. - Non-residents’ holdings of domestically issued debt securities have stabilized and become more diverse; proportion of shorter maturities (less than 3 years) increased from 8 to 17 percent. - Private short-term debt increasing, typically in the form of trade credits, denominated in domestic currency, and/or intermediated by banks. - Assessment: - Stability of FDI flows, very strong macroeconomic policies, and a track record of uninterrupted market access have underpinned capital inflows, including during periods of stress. - Colombia’s attractiveness as an investment destination should allow temporarily withheld investments to resume once the acute phase of the pandemic has passed. ### FX Intervention and Reserves Level - Background: - Colombia’s gross reserves increased by almost US$5 billion in 2019, including through purchases under a program to accumulate reserves (terminated in October) and a one-off purchase from the Treasury from the proceeds of a recently issued Eurobond. - This was the first FX intervention since 2014. - Assessment: - Flexible exchange rate long served as primary mechanism of adjustment to external shocks, boosting export receipts mainly through local-currency prices. - Reserve coverage has declined since 2015 as higher liabilities increased the ARA metric, but reserves increased since 2018. - For 2019, coverage is estimated at 125 percent of the ARA metric including a commodity buffer, and 141 percent excluding the commodity buffer. - Access to resources under Colombia’s 2018 FCL provides an additional liquidity buffer equivalent to about 25 percent of the ARA metric. *Source: Annex I. External Sector Assessment, 1colea2020001 - Annex I. External Sector Assessment* ### 2013. This largely reflects the reduction of the capital gains tax as part of the tax reform in 2013 and ### 1colea2020001 - 2013. This largely reflects the reduction of the capital gains tax as part of the tax reform in 2013 and ### Debt dynamics and market vulnerabilities - Reduction of capital gains tax in 2013 and inclusion of Colombian bonds in JP Morgan’s EM-GBI in 2014 increased foreign participation. - Refinancing risks mitigated by: - a more diversified foreign investor base, - cash on hand, - pre-financing secured in January, - further financing from multilateral institutions. - Authorities’ actions to reduce rollover and interest-rate risk: - increase proportion of loans carrying fixed interest rates, - extend maturities (including through swaps), - increase liquidity in the local market (e.g., decrease in bid-ask spreads to levels below those of regional peers). - Developments in 2019: - turbulence in some Emerging Markets resulted in volatile portfolio flows in Colombia, - slight decline in the value of domestic bonds held by foreign investors: 1.3 percent in 2019, - highlights risk that non-residents sell and exit for a sustained period. ### DSA baseline projections and key indicators (As of March 30, 2020) - Nominal gross public debt: - 2018: 41.4 - 2019: 53.8 - 2020: 52.9 - 2021: 57.8 - 2022: 55.3 - 2023: 53.1 - 2024: 51.5 - 2025: 49.5 - (units: in percent of GDP) - Public gross financing needs (in percent of GDP): - 2018: 5.4 - 2019: 6.9 - 2020: 7.0 - 2021: 3.9 - 2022: 5.0 - 2023: 4.6 - 2024: 5.5 - 2025: 4.8 - Sovereign spreads: - EMBIG (bp): 372 - 5Y CDS (bp): 238 - Real GDP growth (in percent): - 2018: 3.6 - 2019: 2.5 - 2020: 3.3 - 2021: -2.4 - 2022: 3.7 - 2023: 3.8 - 2024: 3.9 - 2025: 3.8 - Inflation (GDP deflator, in percent): - 2018: 3.9 - 2019: 4.5 - 2020: 4.3 - 2021: 4.2 - 2022: 3.4 - 2023: 3.0 - 2024: 3.0 - 2025: 3.0 - Nominal GDP growth (in percent): - 2018: 7.6 - 2019: 7.1 - 2020: 7.8 - 2021: 1.8 - 2022: 7.3 - 2023: 7.0 - 2024: 7.1 - 2025: 7.0 - Effective interest rate (in percent): - 2018: 8.2 - 2019: 6.5 - 2020: 6.6 - 2021: 8.4 - 2022: 5.9 - 2023: 5.7 - 2024: 6.6 - 2025: 6.5 - Change in gross public sector debt (percent of GDP): - 2018: 1.9 - 2019: 4.3 - 2020: -0.9 - 2021: 4.9 - 2022: -2.5 - 2023: -2.1 - 2024: -1.6 - 2025: -2.0 - cumulative (through projection horizon): -5.2 - Identified debt-creating flows (percent of GDP): - 2018: 1.0 - 2019: 4.2 - 2020: -1.3 - 2021: 1.9 - 2022: -2.4 - 2023: -2.0 - 2024: -1.5 - 2025: -1.7 - cumulative: -1.5? (table shows -7.3 under identified flows cumulative; see next bullets for components) - Primary deficit (percent of GDP): - 2018: 0.2 - 2019: 0.6 - 2020: -0.7 - 2021: -0.6 - 2022: -1.6 - 2023: -1.4 - 2024: -1.3 - 2025: -1.5 - cumulative: -1.3? (table shows -7.7 under primary deficit cumulative) - Primary (noninterest) revenue and grants (percent of GDP): - 2018: 27.1 - 2019: 29.2 - 2020: 31.2 - 2021: 28.0 - 2022: 28.9 - 2023: 29.1 - 2024: 29.1 - 2025: 29.0 - cumulative: 28.8? (table shows 172.8 under cumulative) - Primary (noninterest) expenditure (percent of GDP): - 2018: 27.3 - 2019: 29.8 - 2020: 30.5 - 2021: 27.4 - 2022: 27.3 - 2023: 27.7 - 2024: 27.8 - 2025: 27.5 - cumulative: 27.5? (table shows 165.1 under cumulative) - Automatic debt dynamics (percent of GDP): - 2018: 0.8 - 2019: 1.7 - 2020: -0.4 - 2021: 3.5 - 2022: -0.8 - 2023: -0.6 - 2024: -0.2 - 2025: -0.2 - cumulative: 1.4 - Interest rate/growth differential (percent of GDP): - 2018: 0.2 - 2019: -0.3 - 2020: -0.6 - 2021: 3.5 - 2022: -0.8 - 2023: -0.6 - 2024: -0.2 - 2025: -0.2 - cumulative: 1.4 - Real interest rate contribution: - 2018: 1.5 - 2019: 0.9 - 2020: 1.1 - 2021: 2.2 - 2022: 1.3 - 2023: 1.3 - 2024: 1.7 - 2025: 1.6 - cumulative: 9.7 - Real GDP growth contribution: - 2018: -1.3 - 2019: -1.2 - 2020: -1.7 - 2021: 1.2 - 2022: -2.0 - 2023: -2.0 - 2024: -1.8 - 2025: -1.8 - cumulative: -8.3 - Exchange rate depreciation contribution (percent of GDP): - 2018: 0.6 - 2019: 2.0 - 2020: 0.2 - subsequent years: "..." (not projected further in table) - Other identified debt-creating flows and contingent liabilities: - 2018: 0.0 - 2019: 1.9 - 2020: -0.3 - 2021: -1.0 - 2022–2025: 0.0 - cumulative: -1.0 - Residual, including asset changes (percent of GDP): - 2018: 0.9 - 2019: 0.2 - 2020: 0.5 - 2021: 3.0 - 2022: -0.1 - 2023: -0.1 - 2024: -0.1 - 2025: -0.4 - cumulative: -0.2? (table shows 2.1 under cumulative) Note: Public sector defined as non-financial public sector. ### Alternative scenarios and stress tests - Baseline underlying assumptions (excerpted): - Real GDP growth: 2020: -2.4; 2021: 3.7; 2022–2025: 3.8/3.9/3.8/3.8 - Inflation: 2020: 4.2; 2021: 3.4; 2022–2025: 3.0/3.0/3.0/3.0 - Primary Balance: 2020: 0.6; 2021: 1.6; 2022–2025: 1.4/1.3/1.5/1.3 - Effective interest rate: 2020: 8.4; 2021: 5.9; 2022–2025: 5.7/6.6/5.6/6.5 - Historical Scenario: - Primary Balance: 2020: 0.6; 2021: -0.3; 2022–2025: -0.3/-0.3/-0.3/-0.3 - Effective interest rate and other variables adjusted accordingly in scenario tables. - Constant Primary Balance Scenario: - Primary Balance held at 0.6 for 2020–2025. - Stress tests conducted: - Primary Balance Shock, - Real GDP Growth Shock, - Real Interest Rate Shock, - Real Exchange Rate Shock (30 percent depreciation), - Combined Macro-Fiscal Shock, - Additional stress tests shown for Gross Nominal Public Debt (in percent of GDP and in percent of Revenue) and Public Gross Financing Needs (in percent of GDP) across 2020–2025. - Stress test outcomes presented as time series charts for gross nominal public debt and public gross financing needs under shocks (figures not transcribed here). ### Central Bank dividends and recognition of accounts payable (Annex III) A. Central Bank Dividends - Authorities changed reporting of transfers of central bank (CB) profits to central government (CG) to ensure consistency with GFSM 1986 and GFSM 2014. - GFSM guidance: CB current profits (losses) should be reported as revenues (expenditure) when there are profit distributions (or losses to cover) and accounted when distributed, affecting the headline budget deficit. - CB profit distributions historically around 0.1 percent of GDP on average. - Sources of CB revenues: monetary policy operations, returns from international reserves, commissions for various financial services. - Expenditures: personnel and interest costs. - Losses in 2013-2015 due to lower revenues and higher interest costs. - For 2019, authorities project central bank profits of around 0.6 percent of GDP, to be distributed in 2020. - Table excerpt (Profit Distribution from Central Bank to Central Government, Billion of Col Pesos unless specified): - Revenue (Dividends received): 2013: 0; 2014: 0; 2015: 0; 2016: 4; 2017: 0?; 2018: 77?; 2019: 61?; 2020: 2015? (table content partially truncated in source excerpt) - Expenditure (Losses): 1198 1244 040.00.00.00.00.0 (table shows values but formatting truncated) - Fiscal Balance entries and Percent of GDP line shows: -0.2 0.0 -0.1 0.0 0.1 0.2 0.2 0.6 - Source: National Authorities and Staff Estimates. B. Recognition of Other Accounts Payable - 2018-2022 NDP authorizes CG to issue debt to liquidate past accounts payable and cover social security shortfalls; CG can recognize accounts payable from: - past court rulings, arbitration and conciliations; - shortfalls in social security and energy subsidies; - liabilities arising from pension bonds and FOMAG liabilities; - arrears from provision of health services by local authorities. - CG permitted to issue local currency debt (TES) to pay these contingent liabilities. - Importance of recognition: - improves fiscal transparency and credibility, - avoids disguising true size of government deficit, - payment should have positive macroeconomic implications: private sector receives payments and government reduces interest expenditure. - Strategy for clearing accounts payable should be: - comprehensive, - transparent (public timetable and prioritization criteria), - credible (measures to avoid accumulation of new arrears), - realistic (budget and medium-term projections should make provisions). - Stock of accounts payable (2018): - Stock total: 18,798 (Billion of Col Pesos unless specified) - o/w health: 9,637 - o/w court rulings: 8,061 - o/w FOMAG: 1,100 - Percent of GDP: 1.9 - Largest components: - health expenditures from underreported local government expenditure: 1.0 percent of GDP, - court rulings: 0.8 percent of GDP. - Authorities started liquidation in 2019 and plan to finalize by 2021 using newly issued government bonds (TES) and cash. - Many accounts payable, especially court rulings, carry interest rates of around 29 percent, which would result in interest expenditure costs of around 1.4 percent of GDP between 2020-22. - Financing payments of accounts payable with TES would save around 1.1 percent of GDP over the same period. - Strengthening measures to prevent future arrears: - for legal claims: additional resources to manage legal claims, improved provisioning and use of contingency fund (FCEE) ahead of final sentencing, to be incorporated in the 2021 annual budget, - for health expenditures: improved auditing and control, administrative control from subnational governments where majority of arrears arose, and pre-established expenditure limits for health care providers. - Accounting system constraints: - Under cash-based or modified cash-based system, expenditures and related obligations recorded only when paid, preventing precise determination of when accounts payable were incurred. - Staff recorded these accounts payable as expenditure in 2018 based on stock information at that time. - Payment plan and funding sources: - Authorities paid around 0.3 percent of GDP worth of arrears in 2019, by issuing debt (worth 0.1 percent of GDP) and remaining payments using cash resources (0.3 percent of GDP). - Remaining payments scheduled for 2020 and 2021: - Most remaining payments scheduled for 2020, using cash: 70 percent of all remaining arrears, or 1.1 percent of GDP. - Around 0.2 percent of GDP of remaining arrears will be paid in 2021. - Overall, additional increase in government bonds associated with these arrears will be around (table truncates here). ### Policy implications and recommendations (implied from source text) - Continue to diversify the investor base and maintain cash buffers and pre-financing to mitigate refinancing risk. - Maintain strategy to increase fixed-rate lending, extend maturities, and enhance local market liquidity to minimize roll-over and interest-rate risks. - Fully implement GFSM 2014 reporting practices for central bank profit distributions to ensure headline fiscal transparency. - Implement a comprehensive, transparent, credible, and realistic strategy to recognize and clear accounts payable, including: - public timetable and prioritization criteria, - budget and medium-term provisions for clearance strategy, - use of TES where cost-saving relative to high-interest arrears. - Strengthen public financial management, accounting, and reporting; transition to GFSM 2014 at subnational and state-owned enterprise level to prevent future accumulation of arrears. - Adopt preventive measures for legal claims and improved auditing and controls for health expenditures; incorporate provisioning in the 2021 annual budget. *Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1colea2020001.pdf* ### 0.3 percent of GDP. ### 1colea2020001 - 0.3 percent of GDP. ### Fiscal accounts, recognition of arrears, and debt impact - Recognition of accounts payable increased the 2018 headline deficit by 1.9 percentage points of GDP. - Authorities’ proposed headline deficit target for 2018: 3.1 percent of GDP (originally met). - With recognition of arrears and including central bank dividends, the 2018 headline deficit is now estimated to have been 4.8 percent of GDP. - Associated increase in gross public debt due to recognition of accounts payable: - 1.9 percent of GDP in 2018 (equal to the stock of accounts payable) - 1.5 percent of GDP in 2019 (accounts payable plus issued TES) - 0.4 percent of GDP in 2020 - Colombia has budget contingency measures, including the FCEE, to deal with unexpected fiscal costs, including those associated with legal claims against the government. ### Fiscal rule and structural adjustment - Under Law 1473 of 2011 (Fiscal Responsibility Law), all expenditure is deemed structural except cyclical expenditure meeting a specific output-gap criterion. - The fiscal rule law does not adjust for one-offs and/or temporary measures; the one-off recognition of past years arrears should not affect the structural deficit rule under current law. - Staff notes this is not best practice compared with other frameworks that adjust for one-offs (examples cited: Stability and Growth Pact in Europe, Swiss debt-Brake rule). ### Macro outlook and COVID-19 shock - Growth in 2019: 3.3 percent. - Inflation target: 3 percent. - Central government deficit in 2019: 2.5 percent (lower than fiscal rule limit of 2.7 percent). - Migration from Venezuela added expenditures of around 0.5 percent of GDP. - COVID-19 pandemic and quarantine measures prompted a sharp deceleration of economic activity and uncertainty for growth, inflation, external balance, and fiscal accounts. - Government response included creation of a National Emergency Mitigation Fund, additional healthcare support, new credit lines, and transfers for vulnerable groups. - Authorities expect the fiscal rule will ensure public debt declines again over the medium term despite pandemic-related increases. ### Monetary policy, exchange rate, and external buffers - Monetary policy framework: fully-fledged inflation targeting regime. - Monetary policy interest rate after a 50 bp reduction in March 2020: 3.75 percent. - Central Bank actions to support markets and liquidity: - Increased provision of liquidity through repo operations and expanded counterparties. - Injected permanent liquidity via purchases of private and public bonds. - Sold USD Non-Delivery Forward contracts and auctioned FX swaps to provide dollar liquidity and hedging. - Reserve accumulation program between 2018 and 2019: purchases of USD 2.8 billion, added by US$2.3bn through accumulated returns; overall increase in international reserves by more than US$5 billion. - Colombian peso depreciation in 2020: close to 22 percent. - Flexible Credit Line (FCL) with the Fund complements external buffers. ### Financial sector resilience - Financial sector described as profitable, liquid and well capitalized. - Implementation of Basel III standards is underway. - Prior to COVID-19, loan portfolio growth was strong, especially consumer loans. - Central Bank stress tests highlight sector robustness; Central Bank will ensure supply of liquidity in local and foreign currency as needed. - Upcoming FSAP noted as useful for strengthening regulatory framework. ### Statistical, institutional, and Fund relations notes - Colombia subscribes to the SDDS since 1996. - National accounts: DANE compiles national accounts; BdR compiles financial accounts; reference year 2015 for chained volume measures. - Government Finance Statistics: MFPC committed to adopt GFSM 2014 framework and improve consolidation and dissemination. - Monetary and financial statistics: BdR reports SRFs 1SR, 2SR, and 5SR monthly; SFC compiles SRF 4SR for OFC but last OFC data reported for December 2014 due to ongoing review. - External sector statistics: BdR compiles BPM6-based balance of payments and IIP; Colombia has not reported to the Coordinated Direct Investment Survey (CDIS) yet. - Fund engagement: Article IV Consultation concluded April 29, 2019; Flexible Credit Line arrangements listed with approved amounts (FCL May 25, 2018 Amount Approved 7,848.00; earlier FCLs also noted). *Source: 1colea2020001 - 0.3 percent of GDP.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1colea2020001.pdf_