## 1. On the Impact of Monetary and Fiscal Measures ## Source details **Canonical URL:** [1. On the Impact of Monetary and Fiscal Measures](https://www.imf.org/-/media/files/publications/cr/2021/english/1colea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1colea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1colea2021001.pdf.json) --- ### Context and the COVID shock - Pre-pandemic frameworks and institutions supported resilience: - Flexible exchange rate; inflation-targeting central bank credibility; effective financial sector supervision and regulation; a medium-term fiscal rule; strong institutions. - Pandemic chronology and health metrics: - Strict nationwide lockdown: March 2020–September 2020; selective restrictions and temporary departmental lockdowns continued thereafter. - As of February 19, total COVID-19 cases exceeded 2.2 million, with new cases per million around 100 per day and about 56 percent occupation of ICU beds. - Vaccine access: enough vaccines to cover about 90 percent of the adult population when vaccinations are completed; nationwide campaign started in February prioritizing healthcare workers and seniors. ### Real economy: impact and recovery - GDP and sectoral dynamics: - GDP fell 6.8 percent in 2020. - Recovery led by manufacturing, retail and wholesale trade, and public services; localized restrictions in January likely dampened 2021Q1 momentum. - Labor market: - About a quarter of employment was affected (primarily informal workers). - Unemployment rate peaked at 20 percent during lockdowns and fell to 13 percent by end-2020. - Labor force participation dropped 11 percentage points at the trough and showed a sharp snapback by end-2020. - Gap of 1.4 million jobs remained relative to pre-COVID levels. - Formal sector job recovery lagged; displaced women were slower to rejoin the labor force. - Inflation and expectations: - Headline and core inflation fell below the central bank’s inflation target. - Short-term inflation expectations fell below 3 percent while medium-term inflation expectations remained well anchored. ### External sector and financing - Current account and financing needs: - Current account deficit narrowed from 4.4 percent of GDP in 2019 to 3.3 percent of GDP in 2020. - External gross financing needs rose from 14¾ to 17½ percent of GDP between 2019 and 2020 due to higher scheduled debt amortization by the private sector. - Capital flows: - Portfolio and other investment flows rose in 2020H2; foreign direct investment declined substantially. - Reserve operations and coverage: - BanRep purchased US$ 2 billion from the central government following liquidation of overseas assets and purchased another US$ 1.5 billion as the CG exchanged part of its purchase under the FCL arrangement for pesos. - Coverage increased to 145 percent of the ARA metric (128 percent after including a commodity buffer). - Gross international reserves and GNFS months: - Gross international reserves (end-2020): 58,500 (millions of US$). - Gross international reserves (in months of prospective GNFS imports) end-2020: 11.6 months; in percent of broad money: 37.8 percent. ### Financial sector resilience and risks - Pre-pandemic and pandemic-era indicators: - Banks entered the pandemic with adequate capitalization and healthy liquidity. - Real credit grew by 2.2 percent by end-2020 with heterogeneous dynamics across credit categories. - NPLs: fell to 3.9 percent at end-July 2020 due to moratoria; edged up to 5.0 percent at end-2020 after moratoria expired and PAD introduced. - Total provisioning rose sharply in 2020 and bank profits fell but remained positive. - Average CARs fell to 17.2 percent at end-2020 (influenced by lower average risk weights under Basel III). - Sector exposures (share of outstanding corporate credit): - Mining: 1.1 percent - Hospitality: 1.5 percent - Transportation: 8.3 percent - Supervisory measures: - SFC released countercyclical bank buffers, allowed grace periods and loan modifications without requiring debtor reclassification as non-performing, and conducted monthly top-down stress tests. - BanRep stress tests through end-2021: expected but not yet realized credit losses do not yet pose a risk to financial stability. ### Monetary policy and liquidity measures - Policy rate and pass-through: - Policy rate eased by 250bp since March 2020 and remained accommodative. - The 250bp reduction resulted in a decline of lending rates of around 200bp, with larger movements in commercial than consumer interest rates. - Liquidity operations and FX management: - Liquidity operations included foreign and domestic currency operations, asset purchases, expansion of admissible collateral and counterparties; operations concentrated in 2020H1. - Authorities allowed a sharp depreciation of the exchange rate and intervened in FX markets only to provide short-term FX liquidity through Swaps and Non-Deliverable Forward (NDF) contracts. - Neutral rate estimate: - Staff estimates of the neutral real rate are between 1 and 2 percent. ### Fiscal response and outlook - Fiscal rule and headline deficits: - Fiscal rule suspended for two years to deploy emergency spending. - 2020 headline deficit widened to 7.7 percent of GDP. - Central Government emergency Covid-19 measures (Percent of 2020 GDP): - Total: 7.5 - 2020: 4.2 - 2021: 3.6 - Expenditure breakdown (Total; 2020; 2021): - Health 2/: Total 1.4; 2020: 0.5; 2021: 0.9 - Household transfers 3/: Total 1.4; 2020: 0.9; 2021: 0.6 - Support for firms 4/: Total 0.9; 2020: 0.4; 2021: 0.5 - Investment 5/: Total 0.5; 2020: 0.0; 2021: 0.5 - Taxes 6/: Total 0.5; 2020: 0.3; 2021: 0.2 - Below the line 7/: Total 2.8; 2020: 1.6; 2021: 1.3 - Notes: 2/ Includes: Bonues for health workers, increased capacity, vaccines; 3/ Includes: additional transfers of standard social programs, VAT refunds, support for informal workers, energy subsidies; 4/ Includes: Payroll support, extraordinary bonus payments for June and December; 5/ Compromiso por Colombia program, not part of FOME; 6/ Includes: VAT and import tax deductions; 7/ Credit lines for firms and capitalization of various guarantee funds. - Use of unspent FOME resources: - Will be used in 2021 to extend some transfer programs during 2021H1, to fund the vaccination program, and for additional infrastructure spending planned to support recovery. - Fiscal risks: - Staff notes monitoring implicit fiscal risks associated with large infrastructure programs and credit guarantees which may necessitate capital injections or loans in the future. - Relaxation of fiscal rules at local government level aligns with staff advice. ### Policy evaluation and priorities - Monetary policy assessment: - Continued accommodative stance and liquidity provision supported financial stability and credit flows. - 250bp policy rate reduction produced about a 200bp decline in lending rates. - Fiscal policy impact (IMF GIMF model estimates): - Discretionary tax and spending measures worth 2.2 percent of GDP in 2020 and announced measures worth 2.5 percent of GDP for 2021 supported activity. - For 2020 the largest support came from transfers to households and health care (0.6 each). - For 2021 infrastructure (1.0) and healthcare (0.7) measures have the largest growth impact. - Social protection: - Payroll subsidies and expanded transfer programs equivalent to 1.3 percent of GDP in 2020 mitigated impacts on vulnerable households. - Examples: subsidies equal to 40 percent of the minimum wage for formal workers at firms with sales declines over 20 percent and a new unconditional transfer program (Ingreso Solidario) for informal workers. - Regulatory/supervisory priorities: - Continue implementation timeline for Basel III, recovery and resolution planning, and the Conglomerates Law. - Maintain selective prudential support measures while ensuring credit flows. ### Financial inclusion and digital payments - Pandemic-related support boosted financial inclusion: - As of September 2020, 87 percent of the adult population had one or more financial products (authorities’ 2022 target: 85 percent). - Recipients’ behavior (of the more than 1 million recipients of support programs): - 62 percent withdrew money from their accounts and made electronic payments. - 45 percent deposited additional funds. - Digitalization: payments system digitalization proceeds apace. ### Structural reforms, public investment, migration, and peace process - Public investment and infrastructure: - Lockdown disrupted the 4G infrastructure agenda. - New 5G infrastructure program announced worth around 5 percent of GDP. - NDP programs to advance innovation, access to export markets, firm formalization, and productivity growth continued. - Peace agreement implementation: - Kroc Institute and UN report continued progress toward territorial development and re-integration of ex-combatants; security challenges remain in outlying areas. - Migration policy: - Venezuelan migrant total slightly decreased to 1.73 million due to temporary outflows and border closure. - New TPS program expected to be signed into law in March (TPS valid for 10 years and allows a path to permanent residence visas after 5 years). ### Procurement transparency and AML/CFT - Procurement reforms and transparency tools: - Adoption of SECOP II; CCE established a public tracking tool for coronavirus procurement purchases. - Audits of emergency spending ongoing; FOME audits to be finalized by June 2021. - Law 2013 of 2019 introduced declaration of assets for public officials and public web access to declarations. - AML/CFT actions: - Updated national AML/CFT policy (CONPES) expected to be adopted in coming months. - Beneficial Owner (BO) Register created under DIAN; regulation defining operability under process. - Draft “Due Diligence Law” (L. 341/2020) pending in Senate. ### Outlook and macrofinancial risks - Growth and output gap: - Under staff assumptions (declining infections, rising vaccinations, limited lockdowns), growth expected to rebound in 2021 to around 5 percent. - Pre-pandemic drivers expected to slowly return; a 4½ percent output gap closing gradually by 2026. - Credit and banking sector: - Credit growth should begin to rebound in 2021; credit quality, NPLs and capital ratios likely to worsen initially then improve as activity recovers. - External sector projections: - Current account deficit projected to widen to 3¾ percent of GDP in 2021. - Medium-term current account deficit expected to be almost 4 percent of GDP. - Gross external financing needs projected to moderate in 2021 to 16¼ percent of GDP and thereafter remain elevated by historical standards. - With moderate reserve accumulation, reserves coverage envisaged to decline alongside rising external liabilities in nominal terms but remain adequate per the ARA metric. - Risks: - Downside external risks have moderated since September but remain tilted to the downside. - Vulnerabilities include lower commodity prices, sharp rise in global risk premia, potential loss of investment grade, and pandemic-induced economic dislocation affecting financial stability. - Colombian financial conglomerates have sizable exposures to Central America; losses there could materially affect profitability. ### Authorities’ view and projections - Authorities’ projection for risky loans: - Risky loans to gross loans ratio expected to peak between 12.2 and 15.3 percent of gross loans in December 2021 (i.e., 6 points above pre-pandemic levels). - PAD expiration and bank balance sheet effects: - Authorities do not envisage major “cliff-edge” effects from PAD expiration, citing tailored borrower solutions by credit institutions. - External sector views: - Authorities broadly agree with staff’s external sector assessment but expect the current account to widen only slightly in the near term, financed increasingly by portfolio and FDI flows in 2021 as public external borrowing recedes. ### Fiscal policy — near-term and medium-term guidance - Near-term stance: - Focus on defeating the pandemic and cementing recovery using available monetary and fiscal policy space. - Targeted fiscal support: maintain pandemic-related spending for a nascent recovery; use unspent FOME resources for vaccination and targeted transfers as recommended. - Staff supports targeted and gradual phasing out of emergency spending and a small narrowing of the fiscal deficit in 2021 by limiting low-priority spending. - Return to fiscal rule and medium-term consolidation: - Returning to the fiscal rule in 2022 as currently planned could cause sharp tightening that may jeopardize recovery; staff suggests resetting the adjustment horizon over the next five years while restoring the structural deficit rule/fiscal anchor. - Creation of an independent fiscal council and improvement of the escape clause would enhance fiscal credibility. - Under staff baseline, headline deficit projected to gradually decline to place debt on a firmly downward path from 2022; Colombia’s public debt expected to remain sustainable in the medium term. - Fiscal adjustment and revenue recommendations: - Returning to the fiscal rule’s one percent structural headline deficit in 2026 would necessitate a budgetary adjustment of around 8 percent of GDP between 2021-26 (of which 2½ percent would come from unwinding emergency and recovery expenditures in 2022). - Tax revenues projected to increase by around ½ percent of GDP in 2022 due to recovery and higher oil prices. - Staff estimates a further adjustment worth 5 percent of GDP will be needed. - Recommendation: increase revenues gradually and durably by 2-3 percent of GDP. - Tax policy focus: eliminate preferential regimes for businesses, base-broadening for personal income taxes, removing VAT exemptions; additional revenue options include a carbon tax under consideration. - DIAN IT and governance improvements could yield administrative efficiency gains of ½-1 percent of GDP over the medium term and reduce tax evasion. - Spending-side efficiency gains (SISBEN IV, energy subsidy reforms, procurement reforms, faster payment of arrears) estimated to produce added efficiency gains of over ½ percent of GDP. - IMF technical assistance could support identification, monitoring and management of fiscal risks at all government levels. - Authorities’ planned fiscal reform package: - Will include strengthening social protection programs, improving the fiscal rule and tax reform that will take into account recommendations of an expert commission. ### Key fiscal statistics and projections (central government; percent of GDP) - Headline balance (Staff Baseline): - 2020: -7.7 - 2021: -9.5 - 2022: -4.4 - 2023: -3.5 - 2024: -2.9 - 2025: -2.5 - 2026: -2.4 - Total revenue (central government): - 2017: 15.7; 2018: 15.3; 2019: 16.2; 2020: 15.2; 2021: 14.8; 2022: 15.8; 2023: 16.5; 2024: 16.7; 2025: 16.7; 2026: 16.6 - Expenditure (central government): - 2017: 19.3; 2018: 20.1; 2019: 18.7; 2020: 23.0; 2021: 24.3; 2022: 20.2; 2023: 20.0; 2024: 19.6; 2025: 19.2; 2026: 19.0 - Public sector gross debt: - 2017: 49.4; 2018: 53.6; 2019: 52.3; 2020: 62.8; 2021: 64.2; 2022: 64.3; 2023: 63.5; 2024: 61.4; 2025: 59.3; 2026: 57.2 - Public sector net debt: - 2017: 38.6; 2018: 43.1; 2019: 43.0; 2020: 53.0; 2021: 57.0; 2022: 56.8; 2023: 56.4; 2024: 54.9; 2025: 53.2; 2026: 51.5 - Staff baseline assumes central government tax reform yielding around 1.2 percent of GDP (VAT 1 percent of GDP; higher PIT 0.2 percent of GDP) with around 0.2 percent of GDP rebated back to households to compensate for the VAT increase. - Authorities’ financing plan for 2021 envisages 2/3 of all debt issuance to be domestic. - Headline deficit for 2021 assumes privatization proceeds from sale of ISA worth 1.1 percent of GDP; under GFSM 1986 used by authorities this produces a headline deficit of 8.4 percent of GDP. - Authorities announced in November that the headline fiscal deficit for 2021 would be wider than anticipated at the time of the fiscal rule suspension in June: 7.6 percent of GDP vs 5.1 percent. ### Monetary policy accommodation and reserve accumulation (recommendations) - Monetary policy: - Accommodation should continue to support recovery; further easing can be considered if subdued inflation remains below target or downside growth risks materialize. - Central bank remains data-dependent and ready to ensure adequate liquidity provision to preserve credit supply and market functioning. - Reserve accumulation: - Given elevated external financing needs and external risks, reserve accumulation should continue. - Example: continued reserve accumulation of approximately US$ 3 billion per year would maintain reserve coverage at current ratios over the medium term and move them close to covering external financing needs in an adverse scenario without supplementary international liquidity. - Past reserve accumulation increased reserve adequacy and positions the country well to manage external risks. ### Financial sector policy recommendations - Encourage banks to make full use of system-wide capital buffers and ensure recognition of expected credit losses. - Avoid extending the PAD beyond its current timeline to prevent future bank balance sheet problems. - Report and provision transparently for loans under pandemic-related measures to regain informativeness of FSIs and credit scores as relief programs expire. - Keep all capital distributions (including dividends) to a minimum amid high uncertainty. - Continue recovery and resolution planning for systemic financial institutions. - Joint IMF-WB FSAP recently commenced (previous FSAP: 2012). ### Structural policies, inclusion, and governance priorities - Vaccination program: effective and inclusive rollout to enable prompt reopening. - Social programs: continue transfers with increased targeting (progressive and focalized pension subsidies; implement SISBEN IV). - Labor market: facilitate recovery of formal sector jobs by addressing non-wage labor costs, high minimum-to-median wage ratios, and formalization barriers. - Migrant integration: implement TPS to integrate migrants into formal markets. - Competitiveness: advance NDP and Peace Accords implementation; address logistics bottlenecks and trade-restricting barriers. - Transparency and anti-corruption: - Expand electronic procurement coverage, verify data quality, include beneficial ownership in procurement data, and enhance whistleblower protection and enforcement. - Fund technical assistance for audits on emergency spending. - Make declarations of assets easily accessible and verifiable and impose effective sanctions for non-compliance or false declarations. - AML/CFT: - Swift implementation of MER recommendations, operationalize Beneficial Ownership Register, ensure proper implementation of revised CDD framework, and continue investigations and prosecutions of money laundering. ### Staff appraisal — summary judgments - Very strong policy frameworks and coordinated policies enabled an effective response and foundation for recovery. - Temporary suspension of the fiscal rule was appropriate to accommodate pandemic-related spending needs. - Monetary easing and liquidity provision ensured transmission to market rates and preserved credit supply. - SFC measures and PAD supported borrowers and banks; near-term focus should be eradicating the pandemic and securing recovery using available policy space. - Medium-term focus: restore the structural deficit goal as the anchor and reset the adjustment horizon beyond 2022. - Structural reforms and migrant integration expected to boost medium-term productivity growth; continued progress on AML/CFT and governance recommended. _Italic: Source: IMF staff compilation from 1colea2021001 - 1. On the Impact of Monetary and Fiscal Measures_ ### 1. On the Impact of Monetary and Fiscal Measures ________________________________________________9 ### 1. On the Impact of Monetary and Fiscal Measures ### Context and the COVID shock - Before the pandemic, Colombia had: a flexible exchange rate; central bank credibility under inflation targeting; effective financial sector supervision and regulation; a medium-term fiscal rule; and strong institutions—these supported resilience. - A strict nationwide lockdown began in March 2020 and ended in September 2020; selective restrictions and temporary departmental lockdowns continued thereafter. - As of February 19, total COVID-19 cases exceeded 2.2 million, with new cases per million around 100 per day and with about 56 percent occupation of ICU beds. - Colombia secured access to enough vaccines to cover about 90 percent of the adult population when vaccinations are completed; a nationwide campaign started in February prioritizing healthcare workers and seniors. ### Real economy impact and recovery - GDP fell 6.8 percent in 2020 due to lockdowns, lower oil prices and the collapse of global growth. - Recovery was led by manufacturing, retail and wholesale trade and public services; localized restrictions in January likely dampened 2021Q1 momentum. - Employment: about a quarter of employment was affected (primarily informal workers). - Unemployment rate peaked at 20 percent during lockdowns and fell to 13 percent by end-2020. - Labor force participation dropped 11 percentage points at the trough and showed a sharp snapback by end-2020. - A gap of 1.4 million jobs remained relative to pre-COVID levels. - Formal sector job recovery lagged; displaced women were slower to rejoin the labor force. - Inflation: headline and core inflation fell below the central bank’s inflation target; short-term inflation expectations fell below 3 percent while medium-term inflation expectations remained well anchored. ### External sector and financing - Current account deficit narrowed from 4.4 percent of GDP in 2019 to 3.3 percent of GDP in 2020. - External gross financing needs rose from 14¾ to 17½ percent of GDP between 2019 and 2020 due to higher scheduled debt amortization by the private sector. - Portfolio and other investment flows rose in 2020H2; foreign direct investment declined substantially (lower new investment and lower re-invested profits). - The central bank (BanRep) purchased US$ 2 billion from the central government following liquidation of overseas assets and purchased another US$ 1.5 billion as the CG exchanged part of its purchase under the FCL arrangement for pesos. - Coverage increased to 145 percent of the ARA metric (128 percent after including a commodity buffer). ### Financial sector resilience and risks - Banks entered the pandemic with adequate capitalization and healthy liquidity. - Real credit grew by 2.2 percent by end 2020 with heterogeneous dynamics across credit categories. - Non-Performing Loans (NPLs): - Fell to a low of 3.9 percent at end-July 2020 due to broad-based payment moratoria. - Edged up to 5.0 percent at end-2020 after moratoria expired and the more targeted PAD was introduced. - Total provisioning rose sharply in 2020 and bank profits fell but remained positive. - Average CARs fell to 17.2 percent at end-2020, influenced by lower average risk weights under Basel III. - Banks have relatively low exposure to the hardest-hit sectors: corporate credit to mining, hospitality and transportation account for 1.1, 1.5 and 8.3 percent of all outstanding corporate credit respectively. - Supervisory response: - SFC released countercyclical bank buffers, allowed grace periods and loan modifications without requiring debtor reclassification as non-performing, and conducted monthly top-down stress tests. - BanRep stress tests through end-2021 suggest expected but not yet realized credit losses do not yet pose a risk to financial stability. ### Monetary policy and liquidity measures - Policy rate eased by 250bp since March 2020 and remained accommodative. - The 250bp reduction in the policy rate resulted in a decline of lending rates of around 200bp, with larger movements in commercial than consumer interest rates (consistent with historical passthrough). - Liquidity operations included foreign and domestic currency operations, asset purchases, and expansion of admissible collateral and counterparties; operations concentrated in 2020H1. - Authorities allowed a sharp depreciation of the exchange rate and intervened in FX markets only to provide short-term FX liquidity through Swaps and Non-Deliverable Forward (NDF) contracts that do not imply permanent use of reserves. - Staff estimates of the neutral real rate are between 1 and 2 percent. ### Fiscal response and outlook - The fiscal rule was suspended for two years to deploy emergency spending. - 2020 headline deficit widened to 7.7 percent of GDP due to emergency spending and deteriorating tax revenues; the deficit was smaller than anticipated because discretionary emergency spending—particularly healthcare and payroll support—was lower than expected and tax revenues were more resilient. - Central Government announced emergency Covid-19 measures (Percent of 2020 GDP): - Total: 7.5 - 2020: 4.2 - 2021: 3.6 - Expenditure breakdown: - Health 2/: Total 1.4; 2020: 0.5; 2021: 0.9 - Household transfers 3/: Total 1.4; 2020: 0.9; 2021: 0.6 - Support for firms 4/: Total 0.9; 2020: 0.4; 2021: 0.5 - Investment 5/: Total 0.5; 2020: 0.0; 2021: 0.5 - Taxes 6/: Total 0.5; 2020: 0.3; 2021: 0.2 - Below the line 7/: Total 2.8; 2020: 1.6; 2021: 1.3 - Notes in table: - 2/ Includes: Bonues for health workers, increased capacity, vaccines - 3/ Includes: additional transfers of standard social programs, VAT refunds, support for informal workers, energy subsidies - 4/ Includes: Payroll support, extraordinary bonus payments for June and December - 5/ Compromiso por Colombia program, not part of FOME - 6/ Includes: VAT and import tax deductions - 7/ Credit lines for firms and capitalization of various guarantee funds - Unspent resources from the emergency mitigation fund (FOME) will be used in 2021 to extend some transfer programs during 2021H1, to fund the vaccination program, and additional infrastructure spending is planned to support the recovery. - Staff notes it will be important to closely monitor implicit fiscal risks associated with large infrastructure programs and credit guarantees which may necessitate capital injections or loans in the future. - Relaxation of fiscal rules at local government level aligns with staff advice. ### Policy evaluation and priorities - Monetary: continued accommodative stance and liquidity provision have supported financial stability and credit flows; policy transmission from a 250bp policy rate reduction produced about a 200bp decline in lending rates. - Fiscal: discretionary tax and spending measures worth 2.2 percent of GDP in 2020 and announced measures worth 2.5 percent of GDP for 2021 were estimated (using IMF’s GIMF model) to have supported activity; for 2020 the largest support came from transfers to households and health care (0.6 each); for 2021 infrastructure (1.0) and healthcare (0.7) measures have the largest growth impact. - Social protection: payroll subsidies and expanded transfer programs equivalent to 1.3 percent of GDP in 2020 mitigated impacts on vulnerable households, including subsidies equal to 40 percent of the minimum wage for formal workers at firms with sales declines over 20 percent and a new unconditional transfer program (Ingreso Solidario) for informal workers. - Regulatory/supervisory: continue implementation timeline for Basel III, recovery and resolution planning, and the Conglomerates Law; maintain selective prudential support measures while ensuring credit flows. _Italic: Source: IMF staff compilation from 1colea2021001 - 1. On the Impact of Monetary and Fiscal Measures_ ### 11. Financial inclusion improved considerably through electronic payment of pandemic- ### 11. Financial inclusion improved considerably through electronic payment of pandemic- ### Financial inclusion and digital payments - Pandemic-related government support programs boosted financial inclusion metrics. - As of September 2020, 87 percent of the adult population had one or more financial products, exceeding the authorities’ 2022 target of 85 percent. - Of the more than 1 million recipients of support programs: - 62 percent withdrew money from their accounts and made electronic payments. - 45 percent deposited additional funds. - Digitalization of the payments system proceeds apace. ### Structural reforms, public investment, migration, and peace process - Public investment: - The lockdown disrupted the 4G infrastructure agenda. - A new 5G infrastructure program worth around 5 percent of GDP was announced. - Programs to advance innovation, access to export markets, firm formalization, and productivity growth as part of the NDP continued. - Peace agreement: - The Kroc Institute and the UN reported continued progress as the agreement moved from short-term commitments toward territorial development and re-integration of ex-combatants. - Security challenges remain in outlying areas with minimal state presence. - Migration policy: - Temporary migrant outflows and border closure with Venezuela slightly decreased the total of Venezuelan migrants to 1.73 million. - A new TPS program was announced to integrate Venezuelan migrants; it is expected to be signed into law in March. The TPS will be valid for 10 years and allows a path to permanent residence visas after 5 years. ### Procurement transparency and AML/CFT - Procurement transparency: - Adoption of the second phase of the Electronic Government Procurement System (SECOP II). - Colombia Compra Eficiente (CCE) established a tracking tool for the public to view coronavirus procurement purchases. - Audits of emergency spending are ongoing, including of FOME resources that will be finalized by June 2021. - Law 2013 of 2019 introduced declaration of assets for public officials and made the information available to the public via a web platform managed by the Departamento Administrativo de Función Pública. - AML/CFT: - An updated national AML/CFT policy (CONPES) in line with the 2019 ML/TF national risk assessment is expected to be adopted in the coming months. - A Beneficial Owner (BO) Register was created under the Directorate of Taxes and Customs; a regulation defining the operability of the Register is under process. - A draft “Due Diligence Law” (L. 341/2020) intended to reinforce customer due diligence requirements is pending in Senate. ### Outlook and macrofinancial risks - Growth and output gap: - Under staff’s assumptions for declining infections, rising vaccinations and limited lockdowns, growth is expected to rebound in 2021 to around 5 percent. - Pre-pandemic economic drivers are expected to slowly return, with a 4½ percent output gap closing gradually by 2026. - Credit and banking sector: - Credit growth should begin to rebound in 2021 in response to policy support and recovery. - Credit quality, NPLs and capital ratios are likely to worsen further initially due to lagged recession effects and expiry of grace periods under the PAD, then subsequently improve as activity recovers. - External sector: - Current account deficit projected to widen to 3¾ percent of GDP in 2021. - Over the medium-term, current account deficit expected to be almost 4 percent of GDP. - Gross external financing needs projected to moderate in 2021 to 16¼ percent of GDP and thereafter remain elevated by historical standards. - With moderate reserve accumulation, reserves coverage is envisaged to decline alongside rising external liabilities in nominal terms but would still be adequate according to the ARA metric. - Risks: - Downside external risks have moderated since September but remain tilted to the downside. - Vulnerabilities include lower commodity prices, sharp rise in global risk premia, potential loss of investment grade, and pandemic-induced economic dislocation affecting financial stability. - Colombian financial conglomerates have sizable exposures to Central America; losses there could materially affect profitability. ### Authorities’ view and projections - Authorities expect risky loans to total gross loans ratio to peak between 12.2 and 15.3 percent of gross loans in December 2021—i.e., 6 points above pre-pandemic levels. - Authorities do not envisage major “cliff-edge” effects from the PAD program’s expiration, citing tailored borrower solutions by credit institutions. - Authorities broadly agree with staff’s external sector assessment but expect the current account to widen only slightly in the near term, financed increasingly by portfolio and FDI flows in 2021 as public external borrowing recedes. ### Policy response — Near-term and medium-term fiscal policy - Near-term fiscal stance: - Near-term policies should focus on defeating the pandemic and cementing the recovery using available monetary and fiscal policy space. - Targeted fiscal support includes maintaining pandemic-related spending to protect a nascent recovery. - Authorities’ latest fiscal plans point to a deficit for 2021 that is wider than 2020 and larger than anticipated in November. - Staff supports critical spending for vaccination, other healthcare, and targeted support for the most vulnerable households, making some use of unspent FOME resources. - Staff supports targeted and gradual phasing out of emergency spending as the pandemic subsides and recommends a small narrowing of the fiscal deficit in 2021 by limiting low-priority spending. - Return to fiscal rule and medium-term consolidation: - Returning to the fiscal rule in 2022 as currently planned would result in a sharp fiscal tightening that could jeopardize the recovery; the 2021 MTFF should consider restoring the structural deficit rule/fiscal anchor but resetting the adjustment horizon over the next five years. - Creating an independent fiscal council and improving the existing escape clause would enhance fiscal credibility. - Under staff’s baseline, the headline deficit is projected to gradually decline to place debt on a firmly downward path from 2022; Colombia’s public debt is expected to remain sustainable in the medium term. - Fiscal adjustment needs and revenue recommendations: - Returning to the fiscal rule’s one percent structural headline deficit in 2026 would necessitate a budgetary adjustment of around 8 percent of GDP between 2021-26 (of which 2½ percent would come from unwinding emergency and recovery expenditures in 2022). - Tax revenues projected to increase by around ½ percent of GDP in 2022 due to recovery and higher oil prices. - Staff estimates a further adjustment worth 5 percent of GDP will be needed. - To safeguard key public spending, revenues should be increased gradually and durably by 2-3 percent of GDP. - Tax policy measures should focus on eliminating preferential regimes for businesses, base-broadening for personal income taxes and removing VAT exemptions. - Additional revenue options include a carbon tax under consideration. - Continued improvements to DIAN’s IT system and governance could produce administrative efficiency gains of ½-1 percent of GDP over the medium term and reduce tax evasion. - Spending-side efficiency gains (SISBEN IV, energy subsidy reforms, procurement reforms, faster payment of arrears) are estimated to produce added efficiency gains of over ½ percent of GDP. - IMF technical assistance could support improved identification, monitoring and management of fiscal risks at all levels of government. - Authorities’ planned fiscal reform package: - The authorities will propose an ambitious fiscal reform package that will include strengthening social protection programs, improving the fiscal rule and tax reform that will take into account recommendations of an expert commission. - Specific fiscal statistics and projections (central government; percent of GDP unless otherwise indicated): - Headline: Staff Baseline and MTFF 2020 comparisons show sizable deficits in 2020 and 2021 with gradual improvement thereafter. - Central Government Fiscal Stance table highlights: - Headline balance: -7.7 (2020), -9.5 (2021), -4.4 (2022), -3.5 (2023), -2.9 (2024), -2.5 (2025), -2.4 (2026) as per Staff Baseline series. - Fiscal Outlook table key values: - Total revenue (central government): 15.7 (2017), 15.3 (2018), 16.2 (2019), 15.2 (2020), 14.8 (2021), 15.8 (2022), 16.5 (2023), 16.7 (2024), 16.7 (2025), 16.6 (2026). - Expenditure (central government): 19.3 (2017), 20.1 (2018), 18.7 (2019), 23.0 (2020), 24.3 (2021), 20.2 (2022), 20.0 (2023), 19.6 (2024), 19.2 (2025), 19.0 (2026). - Public sector gross debt: 49.4 (2017), 53.6 (2018), 52.3 (2019), 62.8 (2020), 64.2 (2021), 64.3 (2022), 63.5 (2023), 61.4 (2024), 59.3 (2025), 57.2 (2026). - Public sector net debt: 38.6 (2017), 43.1 (2018), 43.0 (2019), 53.0 (2020), 57.0 (2021), 56.8 (2022), 56.4 (2023), 54.9 (2024), 53.2 (2025), 51.5 (2026). - Staff’s baseline projections assume a central government tax reform yielding around 1.2 percent of GDP (VAT 1 percent of GDP; higher PIT 0.2 percent of GDP) with around 0.2 percent of GDP rebated back to households to compensate for the VAT increase. - Authorities’ financing plans for 2021 envisage 2/3 of all debt issuance to be domestic. - Headline deficit for 2021 assumes privatization proceeds from the sale of ISA worth 1.1 percent of GDP; under GFSM 1986 the authorities use, this produces a headline deficit of 8.4 percent of GDP. - The authorities announced in November that the headline fiscal deficit for 2021 would be wider than anticipated at the time of the fiscal rule suspension in June: 7.6 percent of GDP vs 5.1 percent. - The authorities’ specific recovery measures amount to around ½ percent of GDP in 2021 and were not part of the 2020 fiscal deficit. - Fiscal measures and expected growth impact chart and other visual data referenced cover health, households, firms, tax measures and infrastructure (staff calculations using GIMF). *Source: IMF staff report (Content unit: 1colea2021001 - 11. Financial inclusion improved considerably through electronic payment of pandemic-).* ### 23. Monetary policy accommodation should continue to support economic recovery. Given ### 1colea2021001 - 23. Monetary policy accommodation should continue to support economic recovery. Given ### Monetary policy and liquidity - Monetary policy accommodation should continue to support economic recovery. - Given central bank credibility and available policy space, further monetary policy easing can be considered if subdued inflation remains below target or downside risks to growth materialize. - The central bank emphasized that it continues to monitor inflation and output risks closely and that monetary policy decisions remain data-dependent to produce as smooth an adjustment as possible to pandemic or other shocks. - The central bank stands ready to ensure adequate liquidity provision to preserve credit supply and the adequate functioning of markets. - Colombia’s flexible exchange rate should continue to be an effective first line of defense against external shocks. - Staff recommendation: Given central bank credibility, further monetary policy easing should be considered if subdued inflation remains well below target or downside risks to growth materialize. ### Reserve accumulation and external liquidity - Given elevated external financing needs and external risks, reserve accumulation should continue. - Continued reserve accumulation of approximately US$ 3 billion per year, for example, would maintain reserve coverage at current ratios over the medium term and, within the authorities’ risk-based approach to reserve adequacy, move them close to covering external financing needs sufficiently in their adverse scenario without supplementary sources of international liquidity. - Authorities remain committed to maintaining adequate international liquidity cushions based on the outlook for the balance of payments and risks to capital flows. - Staff appraisal: Past reserve accumulation has increased reserve adequacy and helps position the country well to manage external risks. Market conditions permitting, reserve accumulation should continue over time to preserve its coverage of external liquidity risks. ### Financial sector policies and supervision - Supervisory authorities should continue to encourage banks to make full use of system-wide capital buffers. - With borrowers under pressure and a need to avoid procyclical tightening of credit conditions to support credit supply, authorities should continue to ensure recognition of expected credit losses and encourage banks to dip into their system-wide capital buffers if needed to safeguard stability risks. - Due to grace periods and other temporary measures in support of debtors and banks, FSIs and credit scores have temporarily lost some of their information content. - To regain the full informativeness of indicators as relief programs expire, any loans subject to pandemic-related measures should continue to be transparently reported and provisioned for. - The PAD should not be extended further to avoid future bank balance sheet problems. - Under a severely adverse scenario, prolonged pandemic-induced economic dislocation could pose a risk to financial stability, through its effect on credit quality. - Amid high uncertainty about the economic outlook, for now, all capital distributions (including dividend payouts) should be kept to a minimum to preserve adequate capital buffers. - Authorities should continue to implement recovery and resolution planning for systemic financial institutions. - A joint IMF-WB Financial Sector Assessment Program (FSAP) has recently commenced; the previous FSAP for Colombia took place in 2012. - Staff appraisal: Colombian banks entered the pandemic with adequate capital and liquidity buffers. These have allowed the financial system to weather the crisis—and it is expected to continue to do so under the baseline as well as mildly adverse scenarios. High uncertainty justifies keeping bank capital distributions to a minimum. ### Fiscal policy, consolidation, and fiscal governance - Near-term policies should focus on effectively eradicating the pandemic and securing the recovery. - Available monetary and fiscal policy space should be deployed in the near term to support domestic demand as high uncertainty continues. - On fiscal policy, the use of undisbursed FOME resources to fund vaccinations, healthcare, and successful transfer programs targeted to poorer households is necessary. - Certain emergency measures—such as payroll subsidies and credit guarantee programs—and other fiscal support should also continue but can be gradually phased out as the pandemic subsides and the economy recovers. - Even with emergency support continuing, a modest narrowing of the deficit relative to GDP appears achievable this year with recovering tax revenues and by limiting new spending, which will help avoid a larger medium-term fiscal adjustment. - Gradual but steady fiscal consolidation led by fiscal reform should ensure a return to the fiscal anchor over the next five years. - Fiscal reform will require durable and growth-friendly revenue mobilization of at least 2 percent of GDP focusing on tax efficiency, progressivity, sustainability, and fairness—including base broadening for personal income taxes and reducing VAT exemptions (with compensation mechanisms to protect the poorest households) and elimination of preferential special regimes for businesses. - Further efforts to improve tax administration and spending efficiency will complement these measures and strengthen governance. - To enhance fiscal credibility, the MTFF’s robustness and oversight should be reinforced. - Enhancements should be considered to its contingency framework and through the creation of an independent fiscal council (with its own staff and resources). - The escape clause could be further defined to better specify the duration of any temporary suspension and the correction mechanism in the future. - Over the longer term, the existing structural deficit rule could be complemented with mechanisms to contain public debt through a longer-term debt ceiling or other stabilizing mechanisms. ### Structural policies, inclusion, and governance - Structural reforms can support the recovery and would set the foundation for sustainable, inclusive growth. - Priorities include: - An effective and inclusive vaccination program that allows a prompt re-opening of the economy. - Continued transfer programs with increased targeting—including more progressive and focalized pension subsidies and the implementation of SISBEN IV. - Measures that facilitate the recovery of formal sector jobs—including addressing structurally high non-wage labor costs, high minimum-to-median wage ratios and formalization barriers. - Continued integration of migrants into formal markets through the implementation of TPS. - Effective implementation of the NDP and Peace Accords to support regional, social, and economic inclusion. - Continued implementation of the national and regional infrastructure agenda. - Measures to boost competitiveness while addressing logistics bottlenecks and trade-restricting tariff and non-tariff barriers—including handling of goods at ports and inspection processes. - Further efforts are needed to enhance transparency in procurement and to ensure the effectiveness of the anti-corruption framework. - Increase implementation of the electronic government procurement system to cover all emergency-related contracts and roll out at the subnational level. - Verify data quality, enable big data analysis, and include beneficial ownership information of companies awarded procurement contracts. - Enhance whistleblower protection by adopting an appropriate legal framework and strengthen enforcement against corruption offenses. - Fund technical assistance for audits on emergency spending to support prompt and efficient conduct. - Make declaration of assets easily accessible and verifiable and impose effective sanctions for failure or false declarations. - Continued efforts are needed to strengthen contract enforcement; the courts backlog remains a challenge despite Decree 560 having sped-up insolvency proceedings. - Efforts should continue to enhance the effectiveness of the AML/CFT regime. - Authorities should continue working towards achieving a swift and effective implementation of the 2018 Fund-led AML/CFT assessment (MER) recommendations, in particular in the area of preventive measures, supervision and ML investigation and enforcement. - The revised CONPES should serve as a roadmap for the prioritization of actions and a swift adoption and communication is encouraged. - Speeding-up the adoption of the regulation and operationalizing the Beneficial Ownership Register will be critical to ensure accurate, verified, and up-to-date basic beneficial ownership information. - Ensure that all financial and non-financial institutions properly implement the revised CDD framework and proper risk management systems. - Efforts to investigate and prosecute money laundering should continue to achieve more meaningful results. - Authorities report progress on the structural reform agenda and transparency, including expectations that the TPS, affecting nearly 2 million Venezuela migrants, will raise Colombia’s economic potential. - The Compromiso por Colombia strategy was launched aiming to generate one million jobs through the acceleration of large infrastructure projects. ### Staff appraisal — summary judgments - Very strong policy frameworks and well-executed, coordinated policies have allowed Colombia to effectively respond to the pandemic and lay the foundations for the recovery. - The temporary suspension of the fiscal rule was appropriate and allowed the authorities to accommodate pandemic-related spending needs while maintaining other spending plans. - Monetary policy was appropriately eased, and swift central bank actions to provide liquidity amid heightened volatility and dislocation in financial markets ensured that lower policy rates were transmitted to key market rates. - To support banks during the crisis and avoid a tightening of credit supply, the SFC appropriately released countercyclical bank buffers, and through the PAD allowed banks to modify loans on a case-by-case basis to grant relief to banks and borrowers. - Near-term focus: effectively eradicating the pandemic and securing the recovery using available monetary and fiscal policy space. - Medium-term focus: restore the structural deficit goal as the anchor and reset the adjustment horizon beyond 2022 as currently planned (under the MTFF). - Structural reforms and migrant integration should continue to boost productivity growth in the medium term, with emphasis on formal employment, firm formalization, Peace Agreement implementation, NDP progress, governance, whistleblowing protection, and court efficiency. - On AML/CFT, continued progress in preventive measures, supervision and ML investigation and enforcement would help achieve a swift and effective implementation of the MER’s recommendations. *IMF staff appraisal and recommendations as presented in the source content.* ### 40. Staff recommends that the next Article IV takes place on the standard 12-month cycle. ### Staff recommends that the next Article IV takes place on the standard 12-month cycle. ### COVID-19 and public-health / mobility developments - Colombia managed cases and deaths at the start of the pandemic in March 2020 through a strict lockdown with gradual easing of mobility (figures and mobility series shown). - Total cases per million: COL 43,752 (Percent 81.4; World: Total Cases per Million Population, cumulative distribution as of Feb 2021). - Total deaths per million: COL 1,156 (Percent 85.7; World: Total Deaths per Million Population, cumulative distribution as of Feb 2021). - Sources cited: John Hopkins University; Haver; Google Covid-19 Community Mobility Reports; Our World in Data; and IMF staff estimates. - Note on stringency index: "Higher stringency index indicates stricter COVID containment measures." ### Financial conditions and market response - Equities hit hard due to oil reliance; sharp depreciation in early 2020 and increases in EMBI, CDS spreads, and domestic yields in March 2020, which have since largely reverted to pre-pandemic levels. - Selected sample of emerging markets for comparisons include Brazil, Chile, Colombia, Mexico, Peru, Uruguay, Czech Republic, Croatia, Hungary, Poland, Russia, Turkey, India, Indonesia, Malaysia, Philippines, Thailand and Vietnam. - Reserve coverage and adequacy: - Reserve Coverage, Oct 2020: shown relative to ARA Metric and FCL as percent of ARA Metric — coverage remains adequate relative to the ARA metric and peers. - Sources: Haver Analytics and Bloomberg LLP. ### Real sector: contraction and recovery patterns - Record GDP contraction in 2020 followed by rebound; recovery began in May with rebounds in durable and semidurable consumption and machinery investment. - Selected high-frequency indicators (2019M12=100): electricity demand, manufacturing IP, economic activity indicator show recovery trend through Dec-20. - Gross value added and GDP contributions show largest falls in sectors affected by mandatory lockdown and subsequent rebounds. - Investment components: machinery & equipment recovery contributed to the recovery; investment growth and composition series shown. - Labor market: - Unemployment rate, 2020 (percent): 16.1. - Unemployment has started to come down, though labor informality remains high (Informality rate series shown). ### External sector and current account - Terms of trade and commodity price link: terms of trade (2013=100) and oil/coal price indices mirrored export commodity prices. - Imports plunged due to contracting activity; both oil and non-oil export values declined as trading partner demand contracted. - Current account: - Current account deficit (2020): -3.3 percent of GDP (Table 2B and Table 6). - Income balance improvements outweighed a deteriorating trade balance. - Exchange rate: - Peso weakened substantially early in 2020 but recouped much of its losses; nominal exchange rate (Col$/US$, period average) 2020: 3,693. ### Financial account, reserves and external financing - Financial account (percent of GDP) 2020: -3.0 (Table 2B / Table 6 show -3.0 for 2020). - Direct investment declined in 2020 while net portfolio and other investment flows rose; external borrowing increased. - Gross international reserves: - Gross international reserves (end-2020): 58,500 (Table 2A, in millions of US$). - Gross international reserves (in months of prospective GNFS imports) end-2020: 11.6 months; in percent of broad money: 37.8 percent. - Gross external financing needs and sources (2020 preliminary vs 2021 projection, in millions of US$): - Gross external financing needs: -45,270 (2020 preliminary), -47,188 (2021 projection). - Change in international reserves: 4,328 (2020), 2,214 (2021). - Use of IMF credit: 5,370 (2020), 0 (2021). - Gross international reserves memo: 58,500 (2020), 60,714 (2021 projection). ### Inflation, monetary policy, and labor-market dynamics - Inflation developments: - Headline inflation fell below the lower-bound of its target range due to increased slack and temporary fiscal measures. - CPI inflation, eop: 2020 = 1.6; projections: 2021 = 2.5, 2022 = 2.6, 2023 = 2.7, 2024 = 2.8, 2025 = 2.9, 2026 = 3.0 (Table 6 / Table 5 memorandum). - Monetary policy responded swiftly to the pandemic; policy rate eop 2020: 1.8 (Table 1 / Table 5 show policy rate series with "NAN" entries for some years in projections). - Labor market indicators show weakening with employment growth and participation series; informality remains high (labor informality series shown). ### Fiscal developments and public debt - Central government and consolidated public sector deficits widened substantially in 2020. - Central government headline balance excluding arrears (percent of GDP): - Overall balance 2020: -7.7 (Table 3). - Central government structural balance 2020: -6.4 (Table 3). - Consolidated public sector (CPS) balance 2020: -6.8 (Table 4). - Expenditure and revenue changes in 2020: - Total revenue (central government) 2020: 15.2 percent of GDP (Table 3). - Total expenditure and net lending (central government) 2020: 23.0 percent of GDP (Table 3). - Public sector gross debt: - Public sector gross debt 2020: 62.8 percent of GDP (Table 6). - Gross public sector debt, excluding Ecopetrol 2020: 60.4 percent of GDP (Table 6). - Fiscal impulse widened structural deficit but supported the economy (Fiscal Impulse series shown; CG Fiscal Impulse 2020: 3.6 percent of GDP in Table 3). ### Macro-financial conditions and banking system health - Real credit growth and credit gaps: - Credit to the private sector growth and composition show resilience; credit gaps temporarily improved at the onset of the pandemic. - Banking system soundness (selected indicators, end-of-period where indicated): - Regulatory capital to risk-weighted assets (CAR) 2020: 19.2 (Table 7). - Regulatory Tier 1 capital to risk-weighted assets 2020: 13.2. - Nonperforming loans to gross loans (30-day) 2020: 4.3. - Provisions to nonperforming loans 2020: 148.5 (percent). - Liquidity: Liquid assets to total assets 2020: 19.5 (percent). - Corporate and household debt increased (Corporate and Household Debt percent of GDP series shown). ### Medium-term outlook and projections (selected key figures) - Real GDP growth (percent change): - 2020: -6.8 - 2021: 5.1 - 2022: 3.6 - 2023: 4.0 - 2024: 3.8 - 2025: 3.8 - 2026: 3.6 - Consumer prices (eop): 2020 = 1.6; 2021 = 2.5; 2022 = 2.6; 2026 = 3.0. - Gross national savings (percent of GDP): - 2020: 15.5 - 2021: 15.4 - 2026: 16.9 - Current account balance (percent of GDP): - 2020: -3.3 - 2021: -3.8 - Projected steady around -3.9 for 2022–2026. - Gross public sector debt (percent of GDP): - 2020: 62.8 - 2021: 64.2 - Projected decline to 57.2 by 2026. ### External vulnerability and capacity to repay (selected indicators) - Total external debt (percent of GDP): - 2020: 64.4 - Projected 2021 (adverse scenario with assumed FCL drawing): 87.3 (Table 10 adverse-scenario staff projections). - Gross international reserves: - In billions of US$: 2020 = 58.5; 2021 projection = 60.7 (Table 8). - In percent of broad money: 2020 = 37.8. - Short-term external debt (percent of GDP) 2020: 7.5; in percent of short-term debt on residual maturity plus current account deficit (residual+CA) 2020: 124.0 (Table 8). - Memorandum—Brent crude oil price (US$/barrel) series used in projections: 2020 = 42; 2021 projection = 60 (Table 2A / Table 10). ### Policy implications and recommendations implied by the analysis - Continue monitoring pandemic developments and mobility/stringency indicators, given substantial health and economic impacts shown by case/death ranks and mobility measures. - Maintain prudent macroeconomic policy stance to support recovery while safeguarding debt sustainability: - Fiscal support was critical in 2020 (fiscal impulse and emergency spending), and projected fiscal consolidation is implied by declining deficits and debt ratios through 2026. - Preserve reserve adequacy and manage external financing needs, noting gross external financing needs and the composition of financing sources (FDI, debt disbursements, short-term debt). - Support financial sector resilience given elevated nonperforming loan ratios and high provisions, while monitoring credit gaps and housing/ mortgage dynamics. - Monitor inflation and labor-market dynamics; accommodative monetary policy in 2020 helped stabilize inflation below the target lower bound, with gradual normalization expected as recovery strengthens. *International Monetary Fund staff report for Colombia (figures, tables and projections as provided in the source content).* ### 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. - This assessment is driven by the estimated current account gap of -1.1 percent of GDP. - Mitigating factors: - Diversity and relative stability of capital flows. - Negative correlation between the income balance and the trade balance. - Adequate reserve coverage. - A flexible exchange rate that has continued as a long serving primary mechanism of adjustment to external shocks. ### Potential Policy Responses - Fiscal consolidation once the recovery is underway is expected to raise national saving. - Structural policies to improve competitiveness and boost non-commodity exports remain essential but will only aid the external position over the medium term. - Priorities include: - Lowering nontariff barriers. - Enhancing customs procedures. - Reducing transportation costs. - Improving infrastructure. ### Foreign Asset and Liability Position and Trajectory - Background: - Colombia’s preliminary NIIP was -65 percent of 2020 GDP in December 2020, a decline of 12 percent of GDP compared to end-2019. - NIIP decreased by only US$ 5.6 billion (about 2 percent of 2020 GDP) during 2020. - Longer-term: decline of 21 percent of 2020 GDP relative to end-2015, matching cumulative net inflows of financial liabilities. - Direct investment (DI) contributes substantially; excluding DI, NIIP stood at -10 percent of GDP compared to -6 percent at end-2015. - Considering only reserve assets and debit liabilities, the net position was -48 percent. - Assessment: - Gross external financing needs rose to an estimated 17.4 percent of GDP in 2020. - The external stability (ES) approach suggests a need for eventual external adjustment once the recovery is fully underway. - Estimated medium-term current account balance required to stabilize NIIP at its end-2019 level is -3.4 percent of GDP. - Large share of FDI and a net long foreign currency position may permit a smaller or slower adjustment. - End-2020 aggregate positions (% GDP): - NIIP: -65 - Gross Assets: 77 - Reserve Assets: 22 - Gross Liab.: 141 - Debt Liab.: 70 ### Current Account - Background: - Current account balance (CAB) of -3.3 percent of GDP in 2020 (smaller deficit than -4.4 percent in 2019 and the -4.6 percent of GDP 2015-19 average). - Refinements to services trade data released in March 2021 increased historical deficits averaging 0.1 percent of GDP. - Sharp contraction in domestic demand and depreciation reduced imports and primary income outflows; remittances were resilient. - Exports declined due to unfavorable prices and production declines for some commodities (e.g., oil, coal). - Substantial declines in services exports and imports (including tourism) had broadly offsetting effects. - Medium-term CAB projected to widen to about –4 percent of GDP. - Assessment: - Model estimates: cyclically-adjusted CAB norm of -0.6 percent of GDP and a CAB gap of -3.1 percent of GDP for 2020. - Identified policy gaps include reserve accumulation and fiscal policy (Colombia’s domestic fiscal policy gap from the pandemic is smaller than for the rest of the EBA sample). - Staff adjustments to the norm: 1. Reduce contribution of oil exports to the norm by 1.5 percent of GDP. 2. Downward adjustment of 0.5 percent of GDP for large stock of migrants from Venezuela. 3. Upward cyclically-adjusted CAB adjustment of 0.7 percent of GDP to account for highly depressed demand in Venezuela and other markets for non-traditional exports. 4. For this Article IV, cyclically-adjusted CAB adjusted back down by 0.7 percent of GDP to account for Colombia’s temporary sharp reduction in primary income outflows. - Combined adjustments reduce the CAB gap by 2 percent to –1.1 percent of GDP. - Range of the gap: 0.2 to -2.4 percent of GDP given the EBA model’s wide standard error for Colombia. - Staff assesses the CAB to be moderately weaker than justified by medium-term fundamentals and desirable policies. - 2020 (% GDP) summary: - Estimated CA: –3.3 - Cycl. Adj. CA: -3.7 - EBA Cycl. Adj. CA Norm: –0.6 - EBA CA Gap: –3.1 - Staff Adj.: –2.0 - Staff CA Gap: –1.1 ### Real Exchange Rate - Background: - Period average real effective exchange rate (REER) index depreciated by 11 percent in 2020 and was 35 percent weaker than in 2014 owing to lower oil prices. - Assessment: - EBA REER approaches estimate an undervaluation of 26 percent (index method) and 23 percent (level method) in 2020. - Applying a semi-elasticity of -0.12 to the gap from the CAB approach suggests a REER overvaluation of between -2 and 20 percent. - Application to the external sustainability approach implies an overvaluation of 2 percent in 2020. - Overall staff judgment: REER gap consistent with the CAB gap at 9 percent, with wide uncertainty (+/- 11 percent). - Sources of uncertainty: poor fit of the EBA CAB model for Colombia, large unexplained residuals, low semi-elasticity arithmetic, and substantial differences across REER and CA approaches. - Policy implications: - Fiscal consolidation once the recovery is firmly underway would support CAB adjustment. - Additional improvements possible if key non-commodity export markets perform strongly and structural distortions holding back exports are alleviated. - Priorities reiterated: lowering nontariff trade barriers, enhancing customs procedures, reducing transportation costs, and improving infrastructure. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Current account deficits have been financed primarily by capital inflows (FDI and portfolio debt securities). - Net DI inflows in 2020 were an estimated 2.1 percent of GDP, lower than historical average (FDI into Colombia fell from 4.4 to 2.8 percent of GDP). - FDI is diversified across sectors; the decline was broad-based. - Private sector (including SOEs) received portfolio inflows but this was exceeded by acquisitions of assets abroad by financial institutions. - Sovereign issuances on international market in January and June 2020 were heavily oversubscribed and on more favorable terms than in 2019; trend continued in 2021. - Non-residents’ holdings of domestically issued government debt increased substantially in response to higher financing needs and Colombia’s inclusion in global bond indices. - Proportion of shorter maturities (less than 3 years) decreased from 17 to 7 percent. - Government diversified foreign funding sources by borrowing from multilateral institutions. - Assessment: - Relative stability of FDI flows, diversification of creditors, very strong macroeconomic policies, and a track record of uninterrupted market access have underpinned capital inflows. - Colombia’s attractiveness as an investment destination and favorable global monetary conditions should allow temporarily withheld investments to resume once acute pandemic phase has passed and fiscal reform uncertainties have abated. ### FX Intervention and Reserves Level - Background: - Gross reserves increased by about US$6 billion in 2020 owing to realized valuation gains and two purchases from the Treasury coinciding with the latter’s sale of overseas assets and FCL purchase. - Similar FX intervention occurred in 2019. - With the 2018-9 reserve accumulation program, reserves have increased by a quarter since 2017. - Assessment: - Flexible exchange rate has served as primary mechanism of adjustment to external shocks. - Depreciations have cushioned export receipts (mostly through local-currency prices owing to dollar-pricing of exports) and aided import compression. - Reserve coverage (ARA metric): - 2020 coverage estimated at 128 percent of the ARA metric including a commodity buffer. - 2020 coverage estimated at 145 percent excluding the commodity buffer. - Access to unused resources under Colombia’s FCL provides an additional liquidity buffer equivalent to 27 percent of the ARA metric including the commodity buffer. *Source: Annex I. External Sector Assessment (Article IV) — Colombia* ### 2013. This largely reflects the reduction of the capital gains tax as part of the tax reform in 2013 and ### 1colea2021001 - 2013. This largely reflects the reduction of the capital gains tax as part of the tax reform in 2013 and ### Market developments and investor base - Reduction of the capital gains tax as part of the tax reform in 2013 and the inclusion of Colombian bonds in JP Morgan’s EM-GBI in 2014. - Refinancing risks mitigated by: - a more diversified foreign investor base, - cash on hand, - pre-financing secured in 2020. - Authorities' strategy progress: - increase the proportion of loans carrying fixed interest rates, - extend maturities (including through swaps and the successful launch of a 30 year bond last year), - increase liquidity in the local market (evidenced by a decrease in bid-ask spreads to levels below those of regional peers), - minimize roll-over risk. - Market turbulence in some Emerging Markets in 2019 and in the first half of 2020 resulted in volatile portfolio flows in Colombia relative to peers and a slight decline in the value of domestic bonds held by foreign investors (1.3 percent in 2019). - External financing requirement risks rose notably in 2020 due to the pandemic, as short-term external debt rose while nominal growth contracted. ### Debt profile vulnerabilities and indicators (indicators vis-à-vis risk assessment benchmarks, in 2020) - EMBIG (average over the last 3 months, 21-Nov-19 through 19-Feb-20): shown in heat map and risk assessment. - Benchmarks used in risk assessment (as reported): - 200 and 600 basis points for bond spreads; - 5 and 15 percent of GDP for external financing requirement; - 0.5 and 1 percent for change in the share of short-term debt; - 15 and 45 percent for the public debt held by non-residents; - 20 and 60 percent for the share of foreign-currency denominated debt. - External financing requirement defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period. ### Public Sector DSA — Baseline scenario (selected figures, in percent of GDP unless otherwise indicated) - As of February 19, 2020 projections for Gross Nominal Public Debt: - 2019: 43.4 - 2020: 52.3 - 2021: 62.8 - 2022: 64.2 - 2023: 64.3 - 2024: 63.5 - 2025: 61.4 - 2026: 59.3 - 2026 (another row): 57.2 - EMBIG (bp): 210 - Public gross financing needs (in percent of GDP): 2019: 5.3; 2020: 7.3; 2021: 8.7; 2022: 9.7; 2023: 7.0; 2024: 7.0; 2025: 6.6; 2026: 6.1; 2026 (another row): 5.7 - Y CDS (bp): 103 - Real GDP growth (in percent): 2019: 3.8; 2020: 3.3; 2021: -6.8; 2022: 5.1; 2023: 3.6; 2024: 4.0; 2025: 3.8; 2026: 3.8; 2026 (another row): 3.6 - Inflation (GDP deflator, in percent): 2019: 3.9; 2020: 4.0; 2021: 1.4; 2022: 3.0; 2023: 3.1; 2024: 3.2; 2025: 3.3; 2026: 3.4; 2026 (another row): 3.5 - Nominal GDP growth (in percent): 2019: 7.8; 2020: 7.4; 2021: -5.5; 2022: 8.4; 2023: 6.9; 2024: 7.3; 2025: 7.3; 2026: 7.4; 2026 (another row): 7.3 - Effective interest rate (in percent): 2019: 7.7; 2020: 6.3; 2021: 5.4; 2022: 5.8; 2023: 5.6; 2024: 6.2; 2025: 5.9; 2026: 5.9; 2026 (another row): 5.8 ### Contribution to changes in public debt (selected flows, in percent of GDP) - Change in gross public sector debt: - 2019: 2.0 - 2020: -1.3 - 2021: 10.5 - 2022: 1.4 - 2023: 0.1 - 2024: -0.8 - 2025: -2.1 - 2026: -2.1 - cumulative: -5.5 - Identified debt-creating flows: - 2019: 1.3 - 2020: -0.4 - 2021: 11.1 - 2022: 3.2 - 2023: -0.3 - 2024: -0.7 - 2025: -1.9 - 2026: -1.9 - cumulative: -3.5 - Primary deficit: - 2019: 0.4 - 2020: 0.3 - 2021: 4.3 - 2022: 5.5 - 2023: 0.5 - 2024: 0.0 - 2025: -1.0 - 2026: -1.1 - cumulative: 2.8 - Primary (noninterest) revenue and grants: - 2019: 27.4 - 2020: 28.7 - 2021: 26.1 - 2022: 26.5 - 2023: 28.6 - 2024: 28.9 - 2025: 29.1 - 2026: 28.8 - cumulative (to 2026): 170.5 - Primary (noninterest) expenditure: - 2019: 27.8 - 2020: 29.0 - 2021: 30.4 - 2022: 32.0 - 2023: 29.1 - 2024: 28.9 - 2025: 28.0 - 2026: 27.7 - cumulative (to 2026): 173.3 - Automatic debt dynamics: - 2019: 0.9 - 2020: -0.4 - 2021: 7.2 - 2022: -1.5 - 2023: -0.8 - 2024: -0.7 - 2025: -0.8 - 2026: -0.8 - cumulative: -5.5 - Real interest rate contribution (part of automatic dynamics): 2019: 1.3; 2020: 1.1; 2021: 2.3; 2022: 1.5; 2023: 1.4; 2024: 1.7; 2025: 1.4; 2026: 1.3; cumulative: 1.28.6 (as printed) - Real GDP growth contribution: 2019: -1.4; 2020: -1.6; 2021: 3.8; 2022: -3.0; 2023: -2.2; 2024: -2.4; 2025: -2.3; 2026: -2.2; cumulative: -2.0-14.0 (as printed) - Exchange rate depreciation contribution: 2019: 1.0; 2020: 0.2; 2021: 1.2 ### Alternative scenarios and composition of public debt - Baseline underlying assumptions (selected): - Real GDP growth (Baseline): 2021: 5.1; 2022: 3.6; 2023: 4.0; 2024: 3.8; 2025: 3.8; 2026: 3.6 - Inflation: 2021: 3.0; 2022: 3.1; 2023: 3.2; 2024: 3.3; 2025: 3.4; 2026: 3.5 - Primary Balance (Baseline): 2021: -5.5; 2022: -0.5; 2023: 0.0; 2024: 1.0; 2025: 1.1; 2026: 1.1 - Effective interest rate: 2021: 5.8; 2022: 5.6; 2023: 6.2; 2024: 5.9; 2025: 5.9; 2026: 5.8 - Historical scenario assumptions (selected): - Real GDP growth: 2021: 5.1; 2022: 2.6; 2023: 2.6; 2024: 2.6; 2025: 2.6; 2026: 2.6 - Primary Balance (Historical): 2021: -5.5; 2022: -0.7; 2023: -0.7; 2024: -0.7; 2025: -0.7; 2026: -0.7 - Effective interest rate (Historical): 2021: 5.8; 2022: 5.6; 2023: 6.3; 2024: 6.1; 2025: 6.2; 2026: 6.2 - Constant Primary Balance Scenario: - Primary Balance set at -5.5 for 2021–2026. - Effective interest rate series provided: 2021: 5.8; 2022: 5.6; 2023: 6.0; 2024: 5.7; 2025: 5.7; 2026: 5.6 ### Stress tests (selected outcomes and assumptions) - Stress test types shown: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock; Real Exchange Rate Shock (explicit 30 percent depreciation); Combined Macro-Fiscal Shock. - Selected underlying assumptions and outcomes: - Primary Balance Shock scenario effective interest rates: 2021: 5.8; 2022: 5.6; 2023: 6.2; 2024: 5.9; 2025: 5.9; 2026: 5.8 - Real GDP Growth Shock example: Real GDP growth 2021: 5.1; 2022: -0.1; 2023: 0.3; 2024–2026: 3.8/3.8/3.6 - Real Interest Rate Shock effective interest rate increases (example): 2021: 5.8; 2022: 5.6; 2023: 6.6; 2024: 6.7; 2025: 7.1; 2026: 7.3 - Combined Shock effective interest rate: 2021: 5.8; 2022: 7.1; 2023: 6.6; 2024: 6.7; 2025: 7.1; 2026: 7.3 - Real Exchange Rate Shock baseline includes a 30 percent depreciation in additional stress tests. - Graphical outcomes reported: - Gross Nominal Public Debt and Public Gross Financing Needs trajectories under baseline and stress scenarios across 2021–2026 (figures provided). ### External Debt Sustainability (Table 1 highlights, 2016–2026, in percent of GDP unless otherwise indicated) - Baseline: External debt (selected years): - 2016: 49.4 - 2017: 47.2 - 2018: 46.6 - 2019: 49.9 - 2020: 64.4 - 2021: 62.4 - 2022: 61.9 - 2023: 61.1 - 2024: 60.2 - 2025: 59.2 - 2026: 58.3 - Change in external debt: - 2016: 7.3 - 2017: -2.1 - 2018: -0.6 - 2019: 3.3 - 2020: 14.5 - 2021: -2.1 - 2022: -0.5 - 2023: -0.8 - 2024: -0.9 - 2025: -1.0 - 2026: -0.9 - Identified external debt-creating flows (4+8+9): - 2016: 4.3 - 2017: -3.9 - 2018: -0.7 - 2019: 2.9 - 2020: 11.3 - 2021: -0.5 - 2022: 0.3 - 2023: 0.0 - 2024: 0.0 - 2025: -0.1 - 2026: -0.1 - Current account deficit, excluding interest payments: - 2016: 2.8 - 2017: 1.8 - 2018: 2.4 - 2019: 2.1 - 2020: 0.9 - 2021: 1.3 - 2022: 1.3 - 2023: 1.4 - 2024: 1.5 - 2025: 1.5 - 2026: 1.4 - Deficit in balance of goods and services (selected): - 2016: 4.8 - 2017: 2.9 - 2018: 2.8 - 2019: 4.0 - 2020: 4.6 - 2021: 3.9 - 2022: 3.8 - 2023: 4.0 - 2024: 4.0 - 2025: 4.1 - 2026: 4.1 - Exports (in percent of GDP): - 2016: 15.1 - 2017: 15.8 - 2018: 16.5 - 2019: 16.4 - 2020: 14.4 - 2021: 16.6 - 2022: 16.7 - 2023: 16.7 - 2024: 16.6 - 2025: 16.3 - 2026: 16.0 - Imports (in percent of GDP): - 2016: 19.9 - 2017: 18.7 - 2018: 19.3 - 2019: 20.4 - 2020: 19.0 - 2021: 20.5 - 2022: 20.6 - 2023: 20.6 - 2024: 20.7 - 2025: 20.4 - 2026: 20.1 - Net non-debt creating capital inflows (negative): - 2016: -1.4 - 2017: -2.9 - 2018: -1.6 - 2019: -2.3 - 2020: -0.6 - 2021: -1.2 - 2022: -1.5 - 2023: -1.6 - 2024: -1.7 - 2025: -1.8 - 2026: -1.9 - Automatic debt dynamics (selected): - 2016: 2.8 - 2017: -2.7 - 2018: -1.4 - 2019: 3.1 - 2020: 11.0 - 2021: -0.6 - 2022: 0.4 - 2023: 0.2 - 2024: 0.3 - 2025: 0.3 - 2026: 0.4 - Contribution from nominal interest rate: - 2016: 1.7 - 2017: 1.7 - 2018: 1.7 - 2019: 2.3 - 2020: 2.4 - 2021: 2.5 - 2022: 2.6 - 2023: 2.5 - 2024: 2.5 - 2025: 2.5 - 2026: 2.4 - Contribution from real GDP growth: - 2016: -0.9 - 2017: -0.6 - 2018: -1.1 - 2019: -1.6 - 2020: 4.1 - 2021: -3.0 - 2022: -2.1 - 2023: -2.3 - 2024: -2.2 - 2025: -2.2 - 2026: -2.0 - Residual, including change in gross foreign assets (2-3): - 2016: 3.0 - 2017: 1.8 - 2018: 0.1 - 2019: 0.3 - 2020: 3.2 - 2021: -1.6 - 2022: -0.8 - 2023: -0.9 - 2024: -0.9 - 2025: -0.9 - 2026: -0.8 - External debt-to-exports ratio (in percent): - 2016: 326.3 - 2017: 298.8 - 2018: 283.0 - 2019: 304.8 - 2020: 446.8 - 2021: 375.4 - 2022: 369.8 - 2023: 366.8 - 2024: 362.2 - 2025: 363.3 - 2026: 364.0 - Gross external financing need (in billions of US dollars) and as percent of GDP: - 2016: $36.5; 12.9 percent of GDP - 2017: $41.0; 13.1 percent of GDP - 2018: $45.8; 13.7 percent of GDP - 2019: $47.8; 14.8 percent of GDP - 2020: $45.3; 16.7 percent of GDP - 2021: $47.2; 16.0 percent of GDP - 2022: $46.2; 14.7 percent of GDP - 2023: $49.8; 15.0 percent of GDP - 2024: $55.3; 15.6 percent of GDP - 2025: $57.0; 15.1 percent of GDP - 2026: $59.9; 15.0 percent of GDP ### External debt sustainability bound tests and shocks (summary) - Shocks analyzed include: - Permanent one-half standard deviation shocks (individual shocks). - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - One-time real depreciation of 30 percent occurs in 2022. - Reported example outcomes (baseline vs scenarios, external debt in percent of GDP): - Interest rate shock: Baseline 58; Historical 81; Scenario values presented across 2016–2026. - Non-Interest Current Account Shock: Baseline 58; Scenario values presented. - Growth Shock: Baseline 58; Historical 63; Scenario values presented. - Combined shock examples and Real Depreciation Shock examples show higher debt-to-GDP paths (e.g., Real Depreciation Shock average projection 83 vs baseline 58 in box). *Source: IMF staff.* ### Annex III. Risk Assessment Matrix ### Annex III. Risk Assessment Matrix ### Global risks: likelihoods, impacts, and policy advice - Unexpected shifts in the Covid-19 pandemic - Medium probability: Asynchronous progress. Limited access to, and longer-than-expected deployment of, vaccines in some countries—combined with dwindling policy space—prompt a reassessment of their growth prospects (for some Emerging and Frontier Markets triggering capital outflows, depreciation and inflation pressures, and debt defaults). - Medium probability: Prolonged pandemic. Disease proves harder to eradicate (e.g., due to new virus strains, short effectiveness of vaccines, or widespread unwillingness to take them), requiring costly containment efforts and prompting persistent behavioral changes rendering many activities unviable. For countries with policy space, prolonged support—while needed to cushion the economy—exacerbates stretched asset valuations, fueling financial vulnerabilities. For those with limited space, especially EMs, policy support is insufficient. - Medium probability: Faster containment. Pandemic is contained faster than expected due to the rapid production and distribution of vaccines, boosting confidence and economic activity. - Impact: High. - Policy advice for Colombia: - Continue to allow the flexible exchange rate to weaken in response to lower commodity prices. - Fiscal policy should accommodate extended urgent temporary spending needs and support the recovery, including extending the suspension of the fiscal rule. - Monetary policy should offset demand reductions absent inflationary pressures and supply-side shocks. - Faster recovery and a more favorable external environment provide opportunities for quicker reduction in debt. - Sharp rise in global risk premia exposes financial and fiscal vulnerabilities - Medium probability. Reassessment of market fundamentals (e.g., in response to adverse Covid-19 developments) triggers a widespread risk-off event. Risk asset prices fall sharply and volatility spikes, leading to significant losses in major non-bank financial institutions. Higher risk premia generate financing difficulties for leveraged firms and households, and a wave of bankruptcies erode banks’ capital buffers. Financing difficulties extend to sovereigns with excessive public debt, leading to cascading debt defaults. - Impact: High. - Policy advice for Colombia: - Use the flexible exchange rate as the first line of defense against external shocks. - Targeted liquidity interventions can address disorderly market conditions, as can use of international reserves, if needed. - Reserve accumulation, and controlled build-up of short-term external debt would reduce likelihood and impact of subsequent capital outflows. - Allow banks to draw down their capital and liquidity buffers, while updating contingency plans for recovery and, in extremis, resolution of banks. - Widespread social discontent and political instability - High probability; impact: Low. - Policy advice for Colombia: - Speed up implementation of NDP and Peace Agreement, with a focus on inequality. - If growth slows, further monetary policy accommodation is appropriate. - If tax revenue measures are delayed, reprioritize public investment. - To reduce the risk or impact of capital flight owing regional contagion, proceed with fiscal consolidation, structural reforms to enhance external competitiveness. - Oversupply and volatility in the oil market - Medium probability; impact: High. - Policy advice for Colombia: - Use the flexible exchange rate as the first line of defense against external shocks. - If needed, deploy reserves to mitigate the impact of potentially weaker capital outflows. - Reduce reliance on oil-related tax revenues. - Accelerating de-globalization - Medium probability; impact: Medium. - Policy advice for Colombia: - Speed up structural reforms to enhance external competitiveness and economic diversification. - Diversify export destinations. ### Colombia-specific risks: likelihoods, impacts, and policy advice - Renewed delays in infrastructure projects, continued weakness in exports and softer private consumption - Probability: Low. - Higher than expected migration flows from Venezuela, greater than anticipated costs per migrant, and/or challenges in assimilating migrants results in additional net fiscal costs and lower potential output - Probability: Low. - Policy advice: - Speed-up policies to integrate migrants into the labor force and maximize economic benefits. - Seek concessional financing and aid. - Double dip recession or a very sluggish recovery raises risks of deteriorating credit portfolios, while exposures to Central American banks could be a drag on profitability and the balance sheets of Colombian conglomerates - Probability: Medium. - Policy advice: - Allow banks to draw down their available capital and liquidity buffers, while maintaining strict loan classification and provisioning standards. - Step in with additional measures if needed, including subsidies and tax relief aimed at smaller borrowers as well as credit guarantees and (further) asset purchase programs to support banks. - Lack of confidence about tax reform and/or fiscal sustainability leads to a loss of investment grade and higher financing costs - Probability: High. - Policy advice: - Eliminate preferential regimes for businesses and broaden the base for personal income taxes and VAT (with targeted transfers for vulnerable groups affected) and strengthen revenue administration. - Reprioritize public investment projects. Speed up structural reforms and economic diversification measures. - Shortfalls in mobilizing tax revenue leads to large cuts in public investment and social spending, adversely affecting growth and poverty reduction or lead to relaxation of the fiscal rule and higher public debt - Probability: Medium to High. - Policy advice: - Consider extending the suspension of the fiscal rule but ensure medium-term declining path for public debt. - Seek concessional financing and aid. Reprioritize public investment projects. ### Annex IV. Supervisory Response to the Pandemic: A Balancing Act - SFC two-phase response to pandemic stress on borrowers and banks: - First phase (March until end-July): emergency measures (circulars 7 and 14) - Allowed banks to provide payment relief to all debtors in good standing, through reductions in interest rates and grace periods of up to 6 months. - Countercyclical provisions were released; only about a quarter of banks chose to use them. - Uptake: very high. Banks could grant or refuse payment relief case-by-case, but most banks granted relief due to high application volumes. - By July-end (when these circulars expired), 43 percent of loans by value had obtained some kind of assistance. - None of the debtors were reported to credit bureaus as delinquent, and loan classifications remained frozen. - Since maximum grace period was 6 months, the last first-phase grace periods expired at end-Jan 2021. - By December 2020, 92.7 percent of loans by value had resumed normal repayment, while 7.3 percent were more than 30 days past due. - Second phase (starting August, expected to last until end-June 2021): rollout of PAD under circular 22 - PAD allowed loan restructuring without penalty in terms of loan classification or credit rating. - Qualification criteria under the PAD are more stringent; banks must provide “objective reasons” for why loan repayments are likely. - Uptake: lower. By end-2020, 6.1 percent of loans in terms of value had entered the PAD, of which 88 percent had also been covered by the first wave of measures. - Average relief metrics under PAD: - Maturity extensions: 37 months on average. - Average grace periods: 6 months. - Size of installments: fell by 28 percent. - Average interest rate charged: reduced by 1.6 percentage points. - Under the PAD, loans may retain their existing loan classification, at least initially; ratings must be reviewed and updated at least twice a year according to the normal process. - As long as borrowers comply with the new payment conditions, they are not reported to the credit bureau. - While penalty-less restructuring will come to an end with the PAD’s expected expiration at the end of June, all then-existing loan modifications will remain in force. - During the PAD, banks are required to normally provision for expected losses, as well as for accrued interest. ### Annex V. Colombia’s Fiscal Rule: Evaluation and Design A. Background and rule design - Structural deficit rule for the central government (CG) introduced in 2011 (Law 1473 of 2011). - The fiscal rule sets a limit of 1 percent of GDP for the CG structural deficit starting in 2022. - Law mandated: (i) structural deficits should be declining every year until the limit was reached, and (ii) specific limits for 2014 and 2018 be met. - Structural deficit corrects the overall deficit for the output gap and for the difference between actual and long-term oil prices. - Independent Consultative Committee on the Fiscal Rule (CCFR) assesses compliance ex post and proposes the headline deficit consistent with the rule ex-ante. - Technical Group on Potential Output and Technical Group on Mining and Energy elaborate 10-year ahead projections to support the CCFR. - Rule permits countercyclical policy and contains a suspension clause if severe events threaten macroeconomic stability. B. Performance before the pandemic - The rule has always been met before it was suspended; operational since 2012. - Ex-ante and ex-post compliance achieved since 2012; neither additional countercyclical spending nor the escape clause had been triggered before 2020. - In response to COVID-19, the CCFR first allowed additional countercyclical spending and then agreed to temporarily suspend the rule given the exceptional shock. Key fiscal outcomes and decompositions (2012–19) - Despite compliance with the rule, public debt rose: - Gross CG debt increased by about 14 percent of GDP between 2012–19, reaching 50 percent of GDP. - Oil price shock impacts: - Cumulative loss of about 5½ percent of GDP over 2015-2018 in oil revenues. - Of the debt increase, around 6 ½ percent of the increase was driven by the cyclical components (oil and output). - Another 6 ½ percent of GDP increase was driven by the sharp depreciation of the exchange in response to the drop in oil prices. - These estimates do not include recognition of other accounts payable worth 1.9 percent of 2018 GDP. Counterfactuals on fiscal stance and debt accumulation - More conservative estimates of oil revenues would have been most effective at containing debt rise: - Conservative approach example: subtracting one standard deviation from estimates of long-term oil prices would have led to 3.5 percent of GDP less debt accumulation. - Different output gap estimates would have had an impact on debt accumulation but less so. - A faster reduction of the structural deficit (e.g., limiting structural deficit to 1 percent of GDP starting in 2016) would have led to lower debt accumulation at end-2018 by only 2.5 percent of GDP. - Current updated estimates of past structural deficits point to a cumulative deviation of only 2 percent of GDP. C. Strengthening the fiscal rule: escape clause, one-offs, independent fiscal council, and debt controls - Identified weaknesses: - Suspension clause for exceptional shocks is unspecified and there are no provisions for treatment of one-offs. - Article 6 defines conditions for countercyclical spending (when growth is 2 percentage points below its long-run level and the output gap is negative) and requires unwinding countercyclical spending in two years in equal parts if the output gap is positive. - Article 11 allows suspension of the fiscal rule with prior consent by the FRCC in case severe events threaten macroeconomic stability, but does not clarify the duration of suspension nor the required adjustment once the rule is re-instated. - International best-practice recommendations for credible and effective escape clauses: - Specify the nature and the size of the triggers. Events commonly include severe recessions, large natural disasters, and states of emergency; when well defined and measurable, rules specify minimum size required to trigger clause and cap on size of deviation. - Specify the authority to activate and monitor the escape clause. Activation typically requires a body independent of the government such as independent fiscal councils or sometimes parliamentary approval. - Predefine mechanisms and timeframe for returning to the rule, e.g., re-instating rule compliance and/or correcting cumulative deviation during suspension, typically varying between 3 to 6 years. *International Monetary Fund — Annex III. Risk Assessment Matrix (content as provided).* ### 8. One-off revenues and spending should be excluded from the calculation of the ### 8. One-off revenues and spending should be excluded from the calculation of the structural balance given their non-recurrent nature. ### Definition and indicative list of one-offs - One-off revenues and expenditures are non-recurrent and should be excluded from structural balance calculations. - An indicative list (drawn from fiscal surveillance by the OECD, EU, and IMF) includes: - Revenue one-offs: - i) sales of nonfinancial assets, concessions, licenses, real estate and other immovables - ii) proceeds from tax amnesties - iii) exceptional revenues from public and private companies, and transfers of pension contributions to the government - Expenditure one-offs: - exceptional interventions such as emergency relief after a natural disaster - financial assistance to the banking/private sector under exceptional circumstances - expenditures related to deposit insurance - Changes in revenues and expenditures resulting from a court ruling, or a temporary change in the timing of collection or payments, or a short implementation period also qualify as one-offs. ### Items explicitly not classified as one-offs - Exceptional dividends from and repeated financial support to SOEs - Large scale military operations - Infrastructure projects ### Oversight and institutional arrangements - International experience suggests compliance oversight is best conducted by an independent fiscal institution. - Such an institution would require: - operational independence - technical capacity - budget resources to undertake its remit - Fiscal councils typically have a statutory mandate to assess publicly and independently the government’s fiscal policies, plans, and performance against macroeconomic objectives related to fiscal and macroeconomic stability. - For Colombia, the FRCC could form the basis of an independent fiscal council with a clear remit: - the council and its members should be selected by a political body such as the Executive, Congress, or the congressional budget and finance committee - the council should have its own staff and resources and timely access to all pertinent data and information *Excerpt from the supplied PDF chapter text.* ### 10. The existing rule lacks an explicit debt anchor. About three-quarters of countries with a ### 10. The existing rule lacks an explicit debt anchor. About three-quarters of countries with a fiscal rule combine limits on debt or stock variable with limits on a flow variable (spending or the balance). ### Debt anchor and fiscal rule design - About three-quarters of countries with a fiscal rule combine limits on debt or stock variables with limits on a flow variable (spending or the balance). - Benefits of a debt limit: - By considering accumulated flows, a debt limit (generally expressed as a ceiling on gross debt-to-GDP ratio) anchors fiscal policy over the long term. - Limits on a flow variable under direct government influence that directly affect debt provide guidance over the shorter run. - Colombia’s stance: - Since 2011, the Fiscal Responsibility Law and a fiscal rule complemented a medium-term framework to anchor fiscal policy. - The authorities plan to reinstate the fiscal rule, strengthen the fiscal committee, and reestablish the debt anchor once the economy is stabilized in 2022. ### Fiscal developments, response to COVID-19, and fiscal reform - Economic and fiscal shock: - The Colombian economy contracted by 6.8 percent in 2020. - GDP performance in 2020Q4 grew by 6 percent with respect to 2020Q3. - Fiscal measures and outlook: - The government created the National Emergency Mitigation Fund (FOME) to support healthcare, vaccine negotiation, acquisition and logistics, create new credit lines for businesses, and provide social transfers. - The financial plan projects higher levels of fiscal deficit in 2021 compared to 2020 due to: - carry-over of health care spending from 2020; - the vaccination process that will cost around 0,5 percent of GDP; - social spending and subsidies for the poorest, including Venezuelan immigrants; - recognition that the pandemic is a two-year shock for some sectors. - The government will present a fiscal reform to promote inclusive growth and ensure sound public finances by raising revenues equitably and efficiently while safeguarding key social spending and public investment. Proposals include: - modifications to the Value Added Tax structure, reducing VAT exceptions and fostering VAT refunds to vulnerable populations; - expansion of the tax base for individuals’ income tax; - rules to strengthen Tax Administration and its modernization. ### Macroeconomic outlook, inflation, and external position - Recovery and risks: - The gradual recovery underway is expected to continue; a second outbreak in January could transitorily dampen recovery. - Output is estimated to reach pre-pandemic levels in the second half of 2022. - Inflation: - Inflation stood at 1.56 percent as of February (no year specified in excerpt). - The Central Bank’s inflation target is 3 percent. - Inflation is expected to rise throughout the year as pandemic-related price relief measures vanish and economic activity picks up. - Current account: - The current account deficit fell in 2020 due to contraction in domestic absorption and is expected to widen marginally with recovery and local spending. - Global and commodity factors: - Changing external economic and financial conditions (e.g., steepening of the US yield curve) may affect the foreign exchange market and local financial conditions. - Higher commodity prices, especially oil, are improving Colombia’s terms of trade, supporting external and fiscal revenues, FDI, and local activity. ### Monetary policy, foreign reserves, and the FCL - Monetary policy response: - Colombia follows a fully-fledged inflation-targeting regime. - The policy interest rate was reduced by 250 bps since March 2020, standing at 1.75 percent. - Temporary liquidity facilities were enlarged by expanding allotment, maturity, admissible collateral, and admissible counterparts for repo operations. - The Central Bank auctioned USD through NDFs and FX swaps to provide FX market liquidity. - International reserves and FCL: - The Central Bank accumulated nearly 5 billion dollars in international reserves during 2020. - International reserves are within the adequacy range suggested by the Fund’s ARA metric. - Partial disbursement of the FCL arrangement: SDR 3.75 billion (about US$5.3 billion, or 183 percent of quota, or about 2 percent of GDP). - The Central Bank purchased part of these FCL funds from the Government to maintain international liquidity. ### Financial sector resilience and supervision - System soundness: - The financial sector remains liquid, solvent and well capitalized, though profitability and loan quality were hurt by the pandemic. - The financial system supported countercyclical monetary policy transmission, preserved credit supply, and channeled government subsidies to vulnerable groups. - Implementation of Basel III standards remains on track. - Surveillance and support: - Stress tests by the Central Bank highlight sector robustness. - Continued supervision by the Office of the Financial Superintendent is planned. - The authorities value the Fund’s current FSAP to strengthen regulatory framework and address COVID-19-related vulnerabilities. ### Statistical, institutional, and technical assistance support - Statistical capacity and reporting: - Colombia subscribes to the SDDS since 1996. - DANE compiles national accounts; BdR compiles financial accounts and stocks per 2008 SNA. - Quarterly financial and non-financial accounts estimates available for Q1 2016 – Q2 2020; not expected to be officially published until end-2021 when fully integrated. - DANE compiles monthly CPI and PPI; CPI basket updated in 2019 based on 2016/17 household expenditures. - MFPC is responsible for public revenue, expenditure and financing data and committed to adopt GFSM 2014. - BdR compiles quarterly balance of payments and IIP on BPM6 basis; Colombia has not reported data to the CDIS yet. - Technical assistance (selected entries and timing): - FAD Aug. 2016: Discussion of the 2017 structural tax reform - STA Dec. 2016: National Accounts - FAD Feb. 2017: Revenue Administration - FAD Mar. 2019: Fiscal Rule and Fiscal Risks - FAD Aug. 2019: Establishing a debt anchor and updating the fiscal rule - FAD Oct. 2020: BRP Treasury Reporting ### Key numeric indicators and dates (as reported in the document) - Economic growth and inflation: - 6.8 percent: contraction in 2020. - 6 percent: growth in 2020Q4 vs 2020Q3. - 1.56 percent: inflation as of February. - 3 percent: Central Bank inflation target. - Monetary policy and reserves: - 250 bps: policy rate reduction since March 2020. - 1.75 percent: policy interest rate level. - nearly 5 billion dollars: international reserves accumulated during 2020. - FCL and Fund data: - SDR 3.75 billion: partial disbursement of FCL. - about US$5.3 billion: equivalent of SDR 3.75 billion as reported. - 183 percent of quota: FCL disbursement equivalence. - about 2 percent of GDP: FCL disbursement equivalence. - IMF membership and quota figures (as reported): - Joined: December 27, 1945; Article VIII. - Quota: 2,044.50 (SDR million) and Percent Quota: 100.00 (as shown in table). - IMF-arranged FCLs (dates and amounts shown): - May 1, 2020 – Apr 30, 2022: Amount Approved 12,267.00; Amount Drawn 3,750.00. - May 25, 2018 – May 24, 2020: Amount Approved 7,848.00; Amount Drawn 0.00. - Jun 13, 2016 – May 24, 2018: Amount Approved 8,180.00; Amount Drawn 0.00. - Jun 17, 2015 – Jun 12, 2016: Amount Approved 3,870.00; Amount Drawn 0.00. - Projected payments to the Fund (in SDR million) reported for 2021–2025: - Charges/interest: 36.58 (2021), 39.83 (2022), 39.83 (2023), 33.62 (2024), 14.13 (2025). - Principal: 0.00 (2021), 0.00 (2022), 0.00 (2023), 1,875.00 (2024), 1,875.00 (2025). - Total: 36.58 (2021), 39.83 (2022), 39.83 (2023), 1,908.62 (2024), 1,889.13 (2025). *COLOMBIA STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (March 9, 2021).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1colea2021001.pdf_