## EXECUTIVE SUMMARY

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---

### Context
- COVID-19 impact:
  - Over 60,000 deaths.
  - Over 5 million jobs temporarily lost.
  - Colombia experienced its largest recession on record.
- Recovery and outlook:
  - A gradual but uneven recovery led by private domestic demand and manufacturing is underway, but services continue to be weak.
  - Economic activity is not expected to return to pre-pandemic levels until the end of 2022.
- Policy frameworks:
  - Inflation-targeting regime, flexible exchange rate, and sound financial supervision have been maintained.
  - The fiscal rule was temporarily suspended to create space for the pandemic policy response; authorities remain committed to sustainable public finances anchored by their medium-term fiscal framework (MTFF).
  - The current account has been financed by stable sources; reserve coverage ratios remain adequate according to the IMF ARA methodology.

### Risks
- External downside risks:
  - Downside external risks remain substantial and higher than pre-pandemic levels.
  - Elevated financing needs make Colombia vulnerable to external shocks.
  - A pandemic resurgence would induce headwinds for the global economy, reducing Colombia’s commodity exports.
  - Tighter global financial conditions could increase borrowing costs.
  - These external shocks could halt the recovery, increase financing needs, complicate implementation of fiscal reform, and compound financing risks.
- Specific external risk channels:
  - Pandemic resurgence (vaccine-resistant strains, delays in production/distribution) reducing global demand.
  - Tighter financial conditions triggered by reassessment of fundamentals, higher sovereign yields, or re-evaluation of inflation risks, increasing rollover risks and borrowing costs.
  - Other short-term external risks: unexpected rise in immigration from Venezuela; intensification of social unrest (e.g., from rising food prices).
- Domestic risks:
  - Navigating transition from recovery support to safeguarding fiscal sustainability is delicate.
  - New waves of infections could slow domestic activity and increase fiscal spending needs.
  - A delayed or weak fiscal reform would increase sovereign rating downgrade risk and potentially a sharp rise in yields.

### Flexible Credit Line (FCL) — usage, market reaction, and treatment
- Timeline and amounts:
  - New FCL arrangement approved on May 1 (2020) for the same access level as in 2018.
  - Access augmented on September 25, raising access from 384 percent of quota (SDR 7.8496 billion) to 600 percent of quota (SDR 12.267 billion).
  - On December 2, Colombia made a drawing of US$ 5.4 billion (SDR 3.75 billion), the first member to draw under an FCL arrangement.
  - After the drawdown, remaining amount available under the credit line: SDR 8.517 billion (US$ 12.3 billion), equivalent to 417 percent of quota.
- Purpose and treatment:
  - Drawing used to help meet higher financing needs whilst maintaining strong external buffers.
  - Authorities intend to treat the remaining amount under the FCL as precautionary.
  - Authorities converted US$ 1.5 billion to pesos and, as at end-2020, kept the remaining US$ 3.9 billion abroad with the intent to help meet early 2021 budget support needs. These external buffers are separate from central bank reserves.
- Market reaction and communication:
  - Colombian peso appreciated and yields on the 2031 bond fell after the announcement.
  - The day after approval of the augmentation, the Colombian peso appreciated by more than regional peers, with the volume of transactions up 40 percent relative to the previous trading day.
  - A coordinated communication strategy was developed by the authorities and staff to reinforce benefits of the FCL and reaffirm Colombia’s strong policy frameworks.

### Qualification and staff recommendation
- Qualification:
  - Staff assesses that Colombia continues to meet the qualification criteria for access to FCL resources specified under the Executive Board decision on FCL arrangements.
- Recommendation:
  - Staff recommends that the Board completes this review to allow Colombia to make further purchases until the expiration of the existing FCL arrangement on April 30, 2022—although the authorities intend to treat remaining access under the FCL as precautionary.

### Recent developments (macroeconomic and financial)
- 2020 outcomes:
  - Historical output decline of around 6.8 percent in 2020.
  - About a quarter of jobs were affected; unemployment rate momentarily surpassing 20 percent at the height of the shock.
  - 2020 headline fiscal deficit for the central government widened to 7.7 percent of GDP.
  - Current account deficit narrowed from 4.4 percent of GDP in 2019 to 3.3 percent in 2020.
  - Estimated external financing needs rose from 15.1 of GDP in 2019 to 17.4 percent in 2020 reflecting higher debt amortization by the private sector (mostly non-banks).
- Financial sector resilience:
  - At end-2020, banks’ average capital adequacy ratio (CAR) stood at 17.2 percent.
  - Liquidity coverage ratio (LCR) hovered around 200 percent.
  - Nonperforming loans (NPLs) edged up from 4.3 to 5.0 percent between end-2019 and end-2020; expected to continue rising and reach a peak of 9 to 10 percent of gross loans toward the end of 2021.
  - Stress tests by BanRep suggest expected but not yet realized credit losses do not pose a risk to financial stability; risks remain from a larger than expected deterioration in credit quality.

### Outlook and macro-financial projections
- Growth and current account:
  - Under staff’s assumptions for the pandemic—declining infections, rising vaccinations and limited lockdowns—and policy support, growth is expected to rebound in 2021 to around 5 percent.
  - The carry over (base effect) adds 4.8 percent to Annual GDP growth in 2021, leaving aside any sequential growth through the year.
  - The current account deficit is projected to widen to 3¾ percent of GDP in 2021.
- External financing needs:
  - Gross external financing needs are expected to moderate as a share of GDP in 2021 (to 16¼ percent) and thereafter, as private-sector amortization needs soften.
  - Despite moderation, gross external financing needs will remain elevated by historical standards, indicating ongoing vulnerabilities to terms of trade declines and capital flow reversals.
- Commodities and FDI:
  - In 2020, Colombia’s commodity exports fell by one-third (about 3 percent of 2019 GDP); coal exports also declined.
  - Remitted oil profits: more than ½ percent of GDP in 2019 fell to about zero in 2020.
  - Oil-related revenues are expected to decline to ¼ percent of GDP in 2021 from 1¼ percent of GDP in 2019.
  - Oil FDI, which contributed 19 percent to total FDI in 2019, also fell by about ½ percent of GDP in 2020.
- External financing composition:
  - In 2020, FDI declined substantially reflecting lower new investment and lower re-invested profits.
  - Aggregate portfolio and other investment flows rose as the government financed a larger share of its fiscal deficit abroad; sovereign issuances in 2020 were heavily oversubscribed and at more favorable terms than in 2019.
  - Non-residents’ holdings of domestically issued government debt securities (TES) increased substantially in 2020 but participation has declined in 2021 so far.
- Market indicators and risks:
  - High-frequency proxies suggest decreasing portfolio flows to emerging markets in recent months.
  - The External Economic Stress Index (ESI) forecasts stress above pre-pandemic levels.
  - Market Volatility Index and other market-based indices of uncertainty remain elevated.

---

### Box 1. Updated External Economic Stress Index (ESI)

### Baseline and comparative assessment
- The updated ESI shows baseline stress below that observed during the current arrangement but above pre-pandemic levels.
- Since the approval of the FCL augmentation in September 2020, external stress has been higher than modelled at the time, primarily reflecting U.S. growth dynamics and faster-than-expected increases in Treasury yields.
- Baseline stress is lower than at the time of the approval of the FCL arrangement and its augmentation because of an upward revision in oil price assumptions.
- Baseline stress is higher than that modelled for 2019.

### Methodology and variables
- The external ESI summarizes Colombia’s external shocks and exposures to these shocks.
- Methodology: explained in “Flexible Credit Line—Operational Guidance Note,” IMF Policy Paper, July 2018.
- Variables (unchanged from recent Colombia FCL reports) and weights:
  - level of the oil price
  - U.S. real GDP growth
  - the emerging market volatility index (VXEEM)
  - change in the 10-year U.S. Treasury yield

### Adverse scenario: assumptions and impacts
- The adverse scenario reflects external risks from vaccine rollout disappointments and more resistant virus variants.
- Timing and duration: The shock occurs in the third quarter of this year and lasts four quarters.
- U.S. GDP impact: 1½ percent lower than baseline in 2021 and 2 percent lower in 2022.
- Other adverse scenario parameter assumptions:
  - oil prices are 28 percent below baseline
  - the VXEEM is two standard deviations above baseline
  - yields are 100 bps above baseline
- The ESI in the adverse scenario for this review is similar to that at the time of the May 2020 approval of the FCL request.

### Key statistics and modelled outcomes referenced in text
- Remaining FCL access under the authorities’ view: 417 percent of quota (8.517 SDR billion or about US 12.3 billion).
- Reserve coverage in 2020: 128 percent of the ARA metric including a commodity buffer.
- Proposed reserve accumulation to maintain current ratios in the medium term: in the order of US$ 3 billion per year on average.
- Under staff’s baseline, the deficit would further widen to 9.5 percent of GDP in 2021.
- Public debt would peak in 2022 at 64.3 percent of GDP and gradually decline thereafter.
- The authorities’ headline deficit includes privatization proceeds of about 1.1 percent of GDP; under the GFSM 1986 results in a deficit of 8.4 percent of GDP.
- FDI expected path: 2.8 percent of GDP in 2020 to 3.1 percent of GDP in 2021 and towards 4 percent of GDP over the medium term.
- Reserves rose to US$ 59 billion in 2020.
- Central bank purchases noted: US$ 2 billion purchased from the central government following government liquidation of overseas assets; another US$ 1.5 billion purchased as the central government exchanged part of its FCL purchase for pesos.
- Banking system capital adequacy as of December 2020: capital adequacy ratio 17.2 percent; Common Equity Tier-1 capital at 12.8 percent.
- Nonfinancial public sector gross debt ratio projected to decline from around 64½ percent of GDP in 2022 to around 57 percent in 2026.
- Public liabilities accounted for 25 percent of international investment liability stocks at the end of 2020; FDI accounted for 56 percent.
- Public flows accounted for 28 percent of direct, portfolio, and other asset and liabilities flows on average over the last three years, including a share of 43 percent in 2020. The share of public financing flows is expected to decline to 37 percent in 2021 and to its pre-pandemic average in 2022.
- Cumulative public sector external issuances or disbursements over the last five years: in excess of 500 percent of Colombia’s Fund quota (for the central government).
- Credit ratings: Moody’s assigns a rating of Baa2. Fitch and S&P assign ratings of BBB-. Fitch was the only one to downgrade in 2020, while S&P and Moody’s changed outlook from stable to negative.

### Policy implications and macroeconomic policy assessment
- Fiscal policy:
  - Authorities temporarily suspended the fiscal rule for two years.
  - While the pandemic lingers, authorities plan to maintain social assistance and support larger healthcare needs, including vaccination.
- Monetary policy:
  - Policy rate at 1.75 percent; appropriate accommodation remains in place to support the recovery.
  - Authorities are well-positioned to reduce interest rates further if downside risks materialize or if inflation remains below target, provided inflation expectations remain well-anchored.
  - The flexible exchange rate should continue to be the first line of defense against external shocks.
- Reserve accumulation:
  - Further reserve accumulation would help maintain buffers amid heightened uncertainty and elevated external financing needs.
  - Depending on market conditions, reserve accumulation in the order of US$ 3 billion per year on average would maintain reserve coverage at current ratios in the medium term.
- Financial supervision:
  - Regulatory and supervisory policies have sought to balance prudential standards while ensuring continued credit flows.
  - As pandemic measures are withdrawn, supervisory authorities should continue intensive monitoring and encourage banks to use system-wide capital buffers to recognize expected losses and avoid procyclical tightening.
  - Capital distributions should be kept to a minimum while uncertainty is high.
- Medium-term fiscal framework:
  - Authorities are committed to fiscal reform to strengthen social protection, ensure gradual adjustment in public finances, and reinstate the fiscal rule.
  - Fiscal Rule Consultative Committee (FRCC) signaled that public debt should be placed on a downward trend through gradual fiscal adjustment including comprehensive fiscal reform as soon as 2022.
  - Further changes suggested: creation of an independent fiscal council and upgrades to the fiscal rule such as an improved escape clause.
- Financial sector policy agenda:
  - Implementation of the Conglomerates Law and Basel III capital and liquidity standards is underway and expected to be completed by 2024.
  - An FSAP conducted during 2021 will focus on systemic risk analysis, regulatory and financial stability frameworks, and developmental issues.
- Structural reforms:
  - Compromiso por Colombia strategy aims to create a million jobs by supporting SMEs, accelerating infrastructure projects, and assisting sectors most affected by the pandemic.
  - Progress on Peace Accords and Development Plans with a Territorial Focus (PDET).
  - Integration of Venezuelan migrants, including Temporary Protective Status, expected to boost economic potential.

### FCL access level, exit strategy, and staff considerations
- Authorities are not requesting a change in access at this review.
- Remaining access under the FCL: 417 percent of quota (8.517 SDR billion or about US 12.3 billion); intended to be treated as precautionary.
- Authorities recognize the temporary nature of the FCL and intend to reduce access below 417 percent of quota as soon as exceptional global risks clearly recede.
- Authorities see continued reserve accumulation as an important component for a gradual exit from the FCL instrument.
- Staff view: reduced access and eventual exit should depend on the evolution of key external risks and on policy efforts to strengthen domestic resilience.
  - Exit framework elements:
    - An updated assessment of relevant external risks at the time an FCL renewal is sought.
    - Policy efforts to strengthen domestic resilience, including building more international liquidity buffers and strengthening effectiveness of policy instruments.
  - Staff assessment: uncertainty around the pandemic remains high, external financing conditions have improved since last year, and exceptional risks are expected to continue to recede though new risks could emerge or intensify.

### Review of qualification for FCL
- Staff assesses that Colombia continues to meet the FCL qualification criteria.
- Supporting elements:
  - Sustainable external position: assessed as moderately weaker than implied by fundamentals and desirable policy settings but sustainable.
  - Capital account dominated by private flows; public liabilities 25 percent of international investment liability stocks at end-2020; FDI 56 percent.
  - Track-record of steady sovereign access to international capital markets at favorable terms; uninterrupted access since the early 2000s.
  - International reserve position: reserves exceeded 100 percent of the ARA metric in each of the last three years; reserves at US$ 59 billion in 2020.
  - Sound public finances: public debt expected to be sustainable in the medium term though gross public debt could surpass 70 percent under various shock scenarios.
    - Under baseline, nonfinancial public sector gross debt ratio projected to gradually decline from around 64½ percent of GDP in 2022 to around 57 percent in 2026.
  - Low and stable inflation with single digit inflation since 2000 and well-anchored inflation expectations.
  - Sound financial system without systemic solvency problems; banking system capital adequacy ratio 17.2 percent and Common Equity Tier-1 capital 12.8 percent as of December 2020.
  - Effective financial sector supervision: recent FSAP and Article IV did not raise substantial supervisory concerns; monthly top-down stress tests in place.
  - Data transparency and integrity: high quality; Colombia subscribed to the Special Data Dissemination Standards (SDSS) since 1996.
  - Track record: sustained track record of implementing very strong policies; all relevant core indicators met in each of the five most recent years.

---

### Medium-Term Fiscal Framework and fiscal policy
- The Medium Term Fiscal Framework (MTFF) — introduced in 2011 — will continue to guide fiscal policy and serve as the anchor for public finances.
- Consistent with this framework and with staff advice, the fiscal rule was appropriately suspended in 2020 to accommodate emergency spending measures and support for vulnerable households and firms during the pandemic.
- The authorities remain committed to the MTFF and plan to undertake comprehensive fiscal reform to reinforce it.
- Specific planned actions:
  - Reinstate the fiscal rule in 2022.
  - Complement the fiscal rule with a debt anchor.
  - Undertake tax reform to mobilize revenues taking into account recommendations from an expert commission.
- Policy objectives for fiscal reform:
  - Strengthen social protection.
  - Restore fiscal space.
  - Reduce government debt.
  - Anchor market confidence.

### Safeguards assessment
- Deloitte Colombia issued an unmodified audit opinion on Banco de la Republica's 2019 financial statements.
- Staff reviewed the 2019 audit results and held discussions with Deloitte; the Audit Committee continues oversight.
- No significant issues emerged from the conduct of these procedures.

### Staff appraisal
- The FCL has served Colombia well as an external buffer against past and prevailing external risks.
- Renewal, augmentation, and purchase of FCL resources in 2020 supported authorities’ policies while preserving existing liquidity buffers.
- As important domestic and external risks remain with the pandemic, the FCL will continue to provide important insurance against external tail risks.

---

### The Colombian government unveiled a comprehensive fiscal reform

### Overview and fiscal impact
- Reform unveiled on April 15; Congress expected to debate it in the coming weeks.
- Aim: durably raise revenues by around 2½ percent of GDP over the medium term.
- Includes expenditure measures worth around 1 percent of GDP.
- Net impact in terms of deficit reduction: around 1½ percent of GDP over the medium term.

### Tax measures and revenue mobilization
- VAT:
  - Broaden the base to raise collections by 0.6 percent of GDP.
  - VAT compensatory transfers expanded from COP 35,000 to COP 50,000 monthly payments at a cost of 0.2 percent of GDP.
  - Eligibility for VAT compensatory transfers expands from 20 to 40 percent of the total population according to authorities’ estimates.
  - Note: "Under the proposed VAT reform, exemptions on basic consumption goods would be preserved."
- Income taxes:
  - Personal Income Tax measures to raise revenues by 1.4 percent of GDP.
  - Make high pensions taxable (Monthly pensions above COP 7.0 million would be taxed).
  - Tax rates on dividend income raised from 10 to 15 percent with an increased minimum threshold.
  - Exemptions and deductions on Corporate Income Taxes (CIT) are reduced.
- Other tax reforms:
  - New environmental taxes: carbon, plastic-packaging, pesticide, vehicle, and gasoline taxes.
  - Temporary transition taxes: a 3 percent CIT surcharge and a temporary net wealth tax of 1-2 percent for 2022-2023.
    - Authorities expect to raise 0.1 percent of GDP per year from net wealth tax.
  - Temporary high-income 10 percent tax proposed for 2021H2 for monthly incomes above COP 10 million.

### Social protection and employment measures
- Ingreso Solidario made permanent with more targeted coverage at a cost of 0.4 percent of GDP.
- Targeting improvements for other transfer programs, including energy subsidies.
- Employment support:
  - Emergency payroll subsidy program (PAEF) extended to June 2021.
  - New employment subsidies proposed for hires of young workers, elder workers without a pension, and women over 40 years old without employment contracts.
  - Additional temporary employment subsidies, up to a global limit established by the Finance Ministry, available for those who hire previously unemployed workers without a demographic target.

### Fiscal rule, governance, and institutional reforms
- Fiscal rule reinstated as anchor; transition path for maximum fiscal deficits outlined for 2022-2024 before a debt-target driven framework is fully installed.
- New fiscal rule targets the net structural primary balance of the general government (shift from current rule focusing on overall structural balance of the central government).
  - Structural target accounts for an oil cycle adjustment based on oil revenue deviations and corrects for one-off transactions; does not include output gaps.
- New debt anchor defined on (non-pension) net public liabilities.
- CONFIS (Council of Fiscal Policy) to determine debt limits and convergence parameters.
- Institutional reforms:
  - Establishes a new “Autonomous Fiscal Rule Committee” with independent operational budget to replace the current FRCC.
  - Grants 6-month extraordinary presidential powers to restructure public entities for fiscal savings, with escape clause rules.

### Macro context, risks, and IMF assessment
- COVID-19 outcomes cited:
  - 2020 contraction: 6.8 percent.
  - Government debt-to-GDP ratio reached 64.8 percent in 2020.
  - Fiscal deficit widened to 7.8 percent of GDP in 2020 and is expected to increase up to 8.6 percent this year (source text).
  - Unemployment rate remains above 14.0 percent.
  - In Q4 2020, GDP growth increased by 6.0 percent vis-à-vis Q3 2020.
- External position and reserves:
  - Central Bank increased foreign liquidity buffers by nearly USD 5 billion in international reserves in 2020, reaching a level close to USD 60 billion.
  - Authorities treat remaining amount under the FCL, SDR 8.517 billion (US$ 12.3 b), as precautionary.
- Role of the FCL:
  - Access increase to 600 percent of quota in September 2020 strengthened international liquidity and helped complement other external financing.
  - Partial disbursement in December 2020 provided balance of payments support and helped preserve policy response capacity.
  - Market response to augmentation and disbursement was positive.
  - IMF staff assessment: Colombia continues to meet qualification criteria for access to IMF resources under the FCL arrangement.
- Monetary and financial context:
  - Inflation in 2020 stood below the Central Bank’s target and should converge to the 3.0 percent target in the next two years.
  - Central Bank used policy space to keep an accommodative monetary policy stance.
  - Financial system maintained adequate liquidity and capital levels; loan portfolio growth remained positive in nominal and real terms.
- Outlook and risks:
  - Gradual economic recovery expected to persist throughout the year, with output estimated to reach pre-pandemic levels in 2022.
  - Downside risks: further outbreaks, challenges in vaccine rollout, possible tightening of global financial conditions, uneven global recovery.
  - Current account deficit expected to increase slightly due to stronger domestic absorption as the economy recovers.

### Staff assessment and alignment with IMF advice
- Reform broadly in line with past IMF staff advice:
  - Staff advocated raising tax revenues by 2-3 percent of GDP over the medium term, led by VAT and PIT reform.
  - If approved by Congress, current reform proposal would be significant progress toward that objective.
- Emphasis on preserving the integrity of the MTFF with a clear path for fiscal consolidation, explicit debt anchor, and strengthened independent oversight.

*Source: 1colea2021003 - EXECUTIVE SUMMARY and supporting sections (April 13, 2021).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- COVID-19 impact:
  - Over 60,000 deaths.
  - Over 5 million jobs temporarily lost.
  - Colombia experienced its largest recession on record.
- Recovery and outlook:
  - A gradual but uneven recovery led by private domestic demand and manufacturing is underway, but services continue to be weak.
  - Economic activity is not expected to return to pre-pandemic levels until the end of 2022.
- Policy frameworks:
  - Inflation-targeting regime, flexible exchange rate, and sound financial supervision have been maintained.
  - The fiscal rule was temporarily suspended to create space for the pandemic policy response; authorities remain committed to sustainable public finances anchored by their medium-term fiscal framework (MTFF).
  - The current account has been financed by stable sources; reserve coverage ratios remain adequate according to the IMF ARA methodology.

### Risks
- External downside risks:
  - Downside external risks remain substantial and higher than pre-pandemic levels.
  - Elevated financing needs make Colombia vulnerable to external shocks.
  - A pandemic resurgence would induce headwinds for the global economy, reducing Colombia’s commodity exports.
  - Tighter global financial conditions could increase borrowing costs.
  - These external shocks could halt the recovery, increase financing needs, complicate implementation of fiscal reform, and compound financing risks.
- Specific external risk channels:
  - Pandemic resurgence (vaccine-resistant strains, delays in production/distribution) reducing global demand.
  - Tighter financial conditions triggered by reassessment of fundamentals, higher sovereign yields, or re-evaluation of inflation risks, increasing rollover risks and borrowing costs.
  - Other short-term external risks: unexpected rise in immigration from Venezuela; intensification of social unrest (e.g., from rising food prices).
- Domestic risks:
  - Navigating transition from recovery support to safeguarding fiscal sustainability is delicate.
  - New waves of infections could slow domestic activity and increase fiscal spending needs.
  - A delayed or weak fiscal reform would increase sovereign rating downgrade risk and potentially a sharp rise in yields.

### Flexible Credit Line (FCL) and usage
- Timeline and amounts:
  - Authorities requested a new FCL arrangement approved on May 1 (2020) for the same access level as in 2018.
  - Access was augmented on September 25, raising access from 384 percent of quota (SDR 7.8496 billion) to 600 percent of quota (SDR 12.267 billion).
  - On December 2nd, Colombia made a drawing of US$ 5.4 billion (SDR 3.75 billion), the first member to draw under an FCL arrangement.
  - After the drawdown, remaining amount available under the credit line: SDR 8.517 billion (US$ 12.3 billion), equivalent to 417 percent of quota.
- Purpose and treatment:
  - The authorities used the drawing to help meet higher financing needs whilst maintaining strong external buffers.
  - The authorities intend to treat the remaining amount under the FCL as precautionary.
  - The authorities converted US$ 1.5 billion to pesos and, as at end-2020, kept the remaining US$ 3.9 billion abroad with the intent to help meet early 2021 budget support needs. These external buffers are separate from central bank reserves.
- Market reaction and communication:
  - Market reactions signaled the value of the FCL as insurance against external risks: Colombian peso appreciated and yields on the 2031 bond fell after the announcement.
  - The day after approval of the augmentation, the Colombian peso appreciated by more than regional peers, with the volume of transactions up 40 percent relative to the previous trading day.
  - A coordinated communication strategy was developed by the authorities and staff to reinforce benefits of the FCL and reaffirm Colombia’s strong policy frameworks.

### Qualification and staff recommendation
- Qualification:
  - Staff assesses that Colombia continues to meet the qualification criteria for access to FCL resources specified under the Executive Board decision on FCL arrangements (Decision No. 14283-(09/29), adopted on March 24, 2009, as amended).
- Recommendation:
  - Staff recommends that the Board completes this review to allow Colombia to make further purchases until the expiration of the existing FCL arrangement on April 30, 2022—although the authorities intend to treat remaining access under the FCL as precautionary.

### Recent developments (macroeconomic and financial)
- 2020 outcomes:
  - Historical output decline of around 6.8 percent in 2020.
  - About a quarter of jobs were affected; unemployment rate momentarily surpassing 20 percent at the height of the shock.
  - 2020 headline fiscal deficit for the central government widened to 7.7 percent of GDP.
  - Current account deficit narrowed from 4.4 percent of GDP in 2019 to 3.3 percent in 2020.
  - Estimated external financing needs rose from 15.1 of GDP in 2019 to 17.4 percent in 2020 reflecting higher debt amortization by the private sector (mostly non-banks).
- Financial sector resilience:
  - At end-2020, banks’ average capital adequacy ratio (CAR) stood at 17.2 percent.
  - Liquidity coverage ratio (LCR) hovered around 200 percent.
  - Nonperforming loans (NPLs) edged up from 4.3 to 5.0 percent between end-2019 and end-2020; expected to continue rising and reach a peak of 9 to 10 percent of gross loans toward the end of 2021.
  - Stress tests by BanRep suggest expected but not yet realized credit losses do not pose a risk to financial stability; risks remain from a larger than expected deterioration in credit quality.

### Outlook and macro-financial projections
- Growth and current account:
  - Under staff’s assumptions for the pandemic—declining infections, rising vaccinations and limited lockdowns—and policy support, growth is expected to rebound in 2021 to around 5 percent.
  - The carry over (base effect) adds 4.8 percent to Annual GDP growth in 2021, leaving aside any sequential growth through the year.
  - The current account deficit is projected to widen to 3¾ percent of GDP in 2021.
- External financing needs:
  - Gross external financing needs are expected to moderate as a share of GDP in 2021 (to 16¼ percent) and thereafter, as private-sector amortization needs soften.
  - Despite moderation, gross external financing needs will remain elevated by historical standards, indicating ongoing vulnerabilities to terms of trade declines and capital flow reversals.
- Commodities and FDI:
  - In 2020, Colombia’s commodity exports fell by one-third (about 3 percent of 2019 GDP); coal exports also declined.
  - A large decrease in profits remitted abroad from the mining/oil sector was a main driver for an improving income balance and narrower current account deficit, but contributed to lower FDI as some profits are typically reinvested.
  - Remitted oil profits: more than ½ percent of GDP in 2019 fell to about zero in 2020.
  - Oil-related revenues are expected to decline to ¼ percent of GDP in 2021 from 1¼ percent of GDP in 2019.
  - Oil FDI, which contributed 19 percent to total FDI in 2019, also fell by about ½ percent of GDP in 2020.
- External financing composition:
  - External deficits in the last decade financed primarily by private capital inflows through FDI and portfolio debt.
  - In 2020, FDI declined substantially reflecting lower new investment and lower re-invested profits.
  - Aggregate portfolio and other investment flows rose as the government financed a larger share of its fiscal deficit abroad; sovereign issuances in 2020 were heavily oversubscribed and at more favorable terms than in 2019.
  - Non-residents’ holdings of domestically issued government debt securities (TES) increased substantially in 2020 but participation has declined in 2021 so far.
- Market indicators and risks:
  - High-frequency proxies suggest decreasing portfolio flows to emerging markets in recent months.
  - The External Economic Stress Index (ESI) forecasts stress above pre-pandemic levels.
  - Market Volatility Index and other market-based indices of uncertainty remain elevated.

*Source: 1colea2021003 - EXECUTIVE SUMMARY (April 13, 2021).*

### Box 1. Updated  External Economic Stress Index

### Box 1. Updated  External Economic Stress Index

### Updated ESI baseline and comparative assessment
- The updated ESI shows baseline stress below that observed during the current arrangement but above pre-pandemic levels.
- Since the approval of the FCL augmentation in September 2020, external stress has been higher than modelled at the time, primarily reflecting U.S. growth dynamics and faster-than-expected increases in Treasury yields.
- In the coming year, baseline assumptions of negligible rises in yields and sustained U.S. growth are expected to drive stress levels lower than in recent quarters.
- Baseline stress is lower than at the time of the approval of the FCL arrangement and its augmentation because of an upward revision in oil price assumptions.
- Baseline stress is higher than that modelled for 2019.

### Methodology and variables
- The external ESI summarizes Colombia’s external shocks and exposures to these shocks.
- Methodology: explained in “Flexible Credit Line—Operational Guidance Note,” IMF Policy Paper, July 2018.
- Variables (unchanged from recent Colombia FCL reports) and weights:
  - level of the oil price
  - U.S. real GDP growth
  - the emerging market volatility index (VXEEM)
  - change in the 10-year U.S. Treasury yield

### Adverse scenario: assumptions and impacts
- The adverse scenario reflects external risks from vaccine rollout disappointments and more resistant virus variants.
- Timing and duration: The shock occurs in the third quarter of this year and lasts four quarters.
- U.S. GDP impact: 1½ percent lower than baseline in 2021 and 2 percent lower in 2022.
- Other adverse scenario parameter assumptions (as assumed for approval and augmentation of the FCL arrangement):
  - oil prices are 28 percent below baseline
  - the VXEEM is two standard deviations above baseline
  - yields are 100 bps above baseline
- The U.S. shock in this adverse scenario is smaller than assumed for the FCL augmentation request but in line with that assumed for the request; this contributes to lower external economic stress than in the adverse scenario at the time of the September 2020 augmentation.
- The ESI in the adverse scenario for this review is similar to that at the time of the May 2020 approval of the FCL request.

### Key statistics and modelled outcomes referenced in text
- Remaining FCL access under the authorities’ view: 417 percent of quota (8.517 SDR billion or about US 12.3 billion).
- Reserve coverage in 2020: 128 percent of the ARA metric including a commodity buffer.
- Proposed reserve accumulation to maintain current ratios in the medium term: in the order of US$ 3 billion per year on average.
- Under staff’s baseline, the deficit would further widen to 9.5 percent of GDP in 2021.
- Public debt would peak in 2022 at 64.3 percent of GDP and gradually decline thereafter.
- The authorities’ headline deficit includes privatization proceeds of about 1.1 percent of GDP; under the GFSM 1986 results in a deficit of 8.4 percent of GDP.
- FDI expected path: 2.8 percent of GDP in 2020 to 3.1 percent of GDP in 2021 and towards 4 percent of GDP over the medium term.
- Reserves rose to US$ 59 billion in 2020.
- Central bank purchases noted: US$ 2 billion purchased from the central government following government liquidation of overseas assets; another US$ 1.5 billion purchased as the central government exchanged part of its FCL purchase for pesos.
- Banking system capital adequacy as of December 2020: capital adequacy ratio 17.2 percent; Common Equity Tier-1 capital at 12.8 percent.
- Nonfinancial public sector gross debt ratio projected to decline from around 64½ percent of GDP in 2022 to around 57 percent in 2026.
- Public liabilities accounted for 25 percent of international investment liability stocks at the end of 2020; FDI accounted for 56 percent.
- Public flows accounted for 28 percent of direct, portfolio, and other asset and liabilities flows on average over the last three years, including a share of 43 percent in 2020. The share of public financing flows is expected to decline to 37 percent in 2021 and to its pre-pandemic average in 2022.
- Cumulative public sector external issuances or disbursements over the last five years: in excess of 500 percent of Colombia’s Fund quota (for the central government).
- Credit ratings: Moody’s assigns a rating of Baa2. Fitch and S&P assign ratings of BBB-. Fitch was the only one to downgrade in 2020, while S&P and Moody’s changed outlook from stable to negative.

### Policy implications and macroeconomic policy assessment
- Macroeconomic policies have appropriately focused on defeating the pandemic and supporting the nascent recovery.
  - Fiscal policy:
    - Authorities temporarily suspended the fiscal rule for two years.
    - While the pandemic lingers, authorities plan to maintain social assistance and support larger healthcare needs, including vaccination.
  - Monetary policy:
    - Policy rate at 1.75 percent; appropriate accommodation remains in place to support the recovery.
    - Authorities are well-positioned to reduce interest rates further if downside risks materialize or if inflation remains below target, provided inflation expectations remain well-anchored.
    - The flexible exchange rate should continue to be the first line of defense against external shocks.
  - Reserve accumulation:
    - Further reserve accumulation would help maintain buffers amid heightened uncertainty and elevated external financing needs.
    - Depending on market conditions, reserve accumulation in the order of US$ 3 billion per year on average would maintain reserve coverage at current ratios in the medium term.
  - Financial supervision:
    - Regulatory and supervisory policies have sought to balance prudential standards while ensuring continued credit flows.
    - As pandemic measures are withdrawn, supervisory authorities should continue intensive monitoring and encourage banks to use system-wide capital buffers to recognize expected losses and avoid procyclical tightening.
    - Capital distributions should be kept to a minimum while uncertainty is high.
- Medium-term fiscal framework:
  - Authorities are committed to fiscal reform to strengthen social protection, ensure gradual adjustment in public finances, and reinstate the fiscal rule.
  - Fiscal Rule Consultative Committee (FRCC) signaled that public debt should be placed on a downward trend through gradual fiscal adjustment including comprehensive fiscal reform as soon as 2022.
  - Further changes suggested: creation of an independent fiscal council and upgrades to the fiscal rule such as an improved escape clause.
- Financial sector policy agenda:
  - Implementation of the Conglomerates Law and Basel III capital and liquidity standards is underway and expected to be completed by 2024.
  - An FSAP conducted during 2021 will focus on systemic risk analysis, regulatory and financial stability frameworks, and developmental issues.
- Structural reforms:
  - Compromiso por Colombia strategy aims to create a million jobs by supporting SMEs, accelerating infrastructure projects, and assisting sectors most affected by the pandemic.
  - Progress on Peace Accords and Development Plans with a Territorial Focus (PDET).
  - Integration of Venezuelan migrants, including Temporary Protective Status, expected to boost economic potential.

### FCL access level, exit strategy, and staff considerations
- Authorities are not requesting a change in access at this review.
- Remaining access under the FCL: 417 percent of quota (8.517 SDR billion or about US 12.3 billion); intended to be treated as precautionary.
- After the augmentation and subsequent purchase at end-2020, remaining FCL access viewed as providing sufficient buffers along with international reserves.
- Authorities recognize the temporary nature of the FCL and intend to reduce access below 417 percent of quota as soon as exceptional global risks clearly recede.
- Authorities see continued reserve accumulation as an important component for a gradual exit from the FCL instrument.
- From staff’s perspective, reduced access and eventual exit should depend on the evolution of key external risks and on policy efforts to strengthen domestic resilience.
  - Exit framework elements:
    - An updated assessment of relevant external risks at the time an FCL renewal is sought (including pandemic-related external financing risks, resumption of migration flows from Venezuela, volatility in commodity prices or global risk premia).
    - Policy efforts to strengthen domestic resilience, including building more international liquidity buffers and strengthening effectiveness of policy instruments.
  - Staff assessment: uncertainty around the pandemic remains high, external financing conditions have improved since last year, and exceptional risks are expected to continue to recede though new risks could emerge or intensify.

### Review of qualification for FCL
- Staff assesses that Colombia continues to meet the FCL qualification criteria.
- Elements cited supporting qualification:
  - Sustainable external position: assessed as moderately weaker than implied by fundamentals and desirable policy settings but sustainable.
  - Capital account dominated by private flows; public liabilities 25 percent of international investment liability stocks at end-2020; FDI 56 percent.
  - Track-record of steady sovereign access to international capital markets at favorable terms; uninterrupted access since the early 2000s.
  - International reserve position: reserves exceeded 100 percent of the ARA metric in each of the last three years; reserves at US$ 59 billion in 2020.
  - Sound public finances: public debt expected to be sustainable in the medium term though gross public debt could surpass 70 percent under various shock scenarios.
    - Under baseline, nonfinancial public sector gross debt ratio projected to gradually decline from around 64½ percent of GDP in 2022 to around 57 percent in 2026.
  - Low and stable inflation with single digit inflation since 2000 and well-anchored inflation expectations.
  - Sound financial system without systemic solvency problems; banking system capital adequacy ratio 17.2 percent and Common Equity Tier-1 capital 12.8 percent as of December 2020.
  - Effective financial sector supervision: recent FSAP and Article IV did not raise substantial supervisory concerns; monthly top-down stress tests in place.
  - Data transparency and integrity: high quality; Colombia subscribed to the Special Data Dissemination Standards (SDSS) since 1996.
  - Track record: sustained track record of implementing very strong policies; all relevant core indicators met in each of the five most recent years.

*Source: IMF staff calculations and IMF staff assessment as presented in the Box titled "Updated External Economic Stress Index" in the Colombia staff report excerpt.*

### 22.      The authorities remain committed to maintaining very strong policies going forward,

### 22.      The authorities remain committed to maintaining very strong policies going forward,

### Medium Term Fiscal Framework and fiscal policy
- The Medium Term Fiscal Framework (MTFF) - introduced in 2011- will  continue  to guide fiscal policy and serve as the anchor for public finances.
- Consistent with  this framework and with  staff advice, the fiscal rule was appropriately suspended in 2020 to accommodate emergency spending measures and support for vulnerable households and firms during the pandemic.17
- The authorities remain committed to the MTFF and plan to undertake comprehensive fiscal reform to reinforce it.
- Specific planned actions:
  - Reinstate the fiscal rule in 2022.
  - Complement the fiscal rule with a debt anchor.
  - Undertake tax reform to mobilize revenues taking into account recommendations from an expert commission.
- Policy objectives for fiscal reform:
  - Strengthen social protection.
  - Restore fiscal space.
  - Reduce government debt.
  - Anchor market confidence.

### Safeguards assessment
- Staff has completed the safeguards procedures for Colombia's 2020 FCL arrangement.
- Deloitte Colombia (the external auditor) issued an unmodified audit opinion on Banco de la Republica's 2019 financial statements.
- Staff reviewed the 2019 audit results and held discussions with Deloitte.
- The Audit Committee continues to conduct oversight on the external audit process.
- Staff also noted the timely publication of the FY 2019 financial statements on the BRC's website.
- No significant issues emerged from the conduct of these procedures.

### Staff appraisal
- The FCL has served Colombia well as an external buffer against past and prevailing external risks.
- The flexible instrument with strong qualification criteria has boosted market confidence in Colombia’s very strong policy framework throughout periods of high volatility, including recent commodity price declines and the ongoing pandemic.
- The renewal, augmentation, and purchase of FCL resources in 2020 supported authorities’ policies while preserving existing liquidity buffers.
- As important domestic and external risks remain with the pandemic, the FCL will continue to provide important insurance against external tail risks.16

*COLOMBIA — INTERNATIONAL MONETARY FUND*

### 25.      Staff's assessment is that Colombia continues to meet the qualification criteria for

### 25.      Staff's assessment is that Colombia continues to meet the qualification criteria for access to FCL resources.

### FCL qualification and staff recommendation
- Staff assesses that Colombia continues to meet the qualification criteria for access to FCL resources.
- Key anchors of Colombia's very strong policy frameworks preserved during the pandemic:
  - credible inflation-targeting regime;
  - flexible exchange rate;
  - guiding fiscal framework;
  - effective financial system regulation and supervision.
- Authorities have a successful track record of prudent policy management and remain committed to restoring the fiscal framework and continuing very strong policies consistent with frameworks in place.
- Staff recommendation: completion of the review under the FCL arrangement for Colombia.

### Recent macroeconomic performance and projections
- Real GDP growth (percent): 2019 3.3; 2020 -6.8; 2021 5.1; 2022 3.6; 2023 4.0; 2024 3.8; 2025 3.8; 2026 3.6.
- Potential GDP (percent): 2019 3.1; 2020 -2.0; 2021 2.7; 2022 2.8; 2023 2.9; 2024 3.0; 2025 3.1; 2026 3.2.
- Output gap (percent): 2020 -5.9; 2021 -3.7; 2022 -2.9; 2023 -1.9; 2024 -1.1; 2025 -0.4; 2026 0.0.
- GDP deflator (percent): 2019 4.0; 2020 1.4; 2021 3.0; 2022 3.1; 2023 3.2; 2024 3.3; 2025 3.4; 2026 3.5.
- Consumer prices (average, percent): 2019 3.5; 2020 2.5; 2021 2.1; 2022 2.6; 2023 2.7; 2024 2.8; 2025 2.9; 2026 2.9.
- Consumer prices (end of period, percent): 2019 3.8; 2020 1.6; 2021 2.5; 2022 2.6; 2023 2.7; 2024 2.8; 2025 2.9; 2026 3.0.

### External sector, reserves, and vulnerabilities
- Current account (deficit - percent of GDP): 2019 -4.4; 2020 -3.3; 2021 -3.8; 2022 -3.9; 2023 -3.9; 2024 -3.9; 2025 -3.9; 2026 -3.9.
- Exports (f.o.b., percent of GDP): 2019 13.1; 2020 12.3; 2021 14.2; 2022 13.9; 2023 13.6; 2024 13.2; 2025 12.9; 2026 12.7.
- Imports (f.o.b., percent of GDP): 2019 15.7; 2020 15.3; 2021 16.3; 2022 16.0; 2023 15.9; 2024 15.7; 2025 15.5; 2026 15.3.
- Gross international reserves (end-2020): 58,500 (US$ million); projections: 2021 60,714; 2022 61,662; 2023 62,463; 2024 63,364; 2025 64,465; 2026 65,525.
- Reserve adequacy: GIR to ARA Metric (end-2020) — coverage including commodity buffer reported; without the buffer, reserves coverage excluding the FCL is 145 percent.
- External debt (percent of GDP): 2019 49.9; 2020 64.4; 2021 62.4; 2022 61.9; 2023 61.1; 2024 60.2; 2025 59.2; 2026 58.3.
- Short-term external debt (percent of GDP): 2019 6.9; 2020 7.5; 2021 7.0; 2022 6.8; 2023 6.5; 2024 6.3; 2025 6.1; 2026 5.9.
- Gross external financing needs (in percent of GDP): 2020 16.7; 2021 16.0; 2022 14.7; 2023 15.0; 2024 15.6; 2025 15.1; 2026 15.0.

### Public debt, fiscal balances, and DSA highlights
- Public gross debt (percent of GDP, combined public sector): 2019 52.3; 2020 62.8; 2021 64.2; 2022 64.3; 2023 63.5; 2024 61.4; 2025 59.3; 2026 57.2.
- Central government overall balance (percent of GDP): 2019 -2.5; 2020 -7.7; 2021 -9.5; projections: 2022 -4.4; 2023 -3.5; 2024 -2.9; 2025 -2.5; 2026 -2.4.
- Primary balance (percent of GDP, combined public sector): 2019 1.2; 2020 -4.9; 2021 -6.3; projections: 2022 -0.8; 2023 0.0; 2024 0.4; 2025 0.7; 2026 0.8.
- Debt dynamics drivers (public DSA, baseline):
  - Nominal gross public debt path (percent of GDP): 2019 43.4; 2020 52.3; 2021 62.8; 2022 64.2; 2023 64.3; 2024 61.4; 2025 59.3; 2026 57.2.
  - Identified debt-creating flows and automatic debt dynamics are quantified in the DSA tables and figures, including contributions from primary deficits, real interest rate, and real GDP growth differentials.
- DSA scenarios and stress tests considered:
  - Baseline, Historical scenario, Constant Primary Balance scenario.
  - Stress tests: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock (including a 30 percent depreciation scenario); Combined Macro-Fiscal Shock.
- Alternative DSA outcomes show higher gross nominal public debt under adverse shocks (stress-test charts and tables).

### Balance of payments and financing (selected figures)
- Summary balance of payments (US$ million) — Current account balance: 2019 -14,285; 2020 -9,083; 2021 -11,125; 2022 -12,107; 2023 -13,094; 2024 -13,917; 2025 -14,738; 2026 -15,501.
- Exports, f.o.b. (US$ million): 2019 42,368; 2020 33,481; 2021 41,832; 2022 43,706; 2023 45,315; 2024 46,884; 2025 48,763; 2026 50,778.
- Imports, f.o.b. (US$ million): 2019 50,818; 2020 41,400; 2021 48,206; 2022 50,248; 2023 52,968; 2024 55,641; 2025 58,465; 2026 61,141.
- Financial account balance (US$ million): 2019 -13,240; 2020 -8,092; 2021 -11,125; 2022 -12,107; 2023 -13,094; 2024 -13,917; 2025 -14,738; 2026 -15,501.
- Gross external financing needs (US$ million): 2020 -45,270; 2021 -47,188 (Table 3).
- Gross international reserves (US$ million): end-2020 58,500; change in reserve assets 2020 4,328; 2021 2,214 (Table 3).

### Financial sector and indicators
- Credit to private sector growth (percent): 2019 11.6; 2020 2.8; 2021 9.4; 2022 10.9; 2023 11.3; 2024 11.3; 2025 11.4; 2026 11.3.
- Nonperforming loans (end-period, percent) increased: Nonperforming loans to gross loans (30-day) 2019 4.3; 2020 5.0.
- Capital Adequacy (Regulatory capital to risk-weighted assets, percent): 2019 17.6; 2020 19.9.
- Key financial soundness indicators are provided in Table 8 (capital adequacy, asset quality, profitability, liquidity).

### Policy implications and staff views reflected in the report
- Staff emphasizes continuity of very strong policies and the preservation of core policy frameworks through the pandemic.
- Reserve coverage and access to capital markets are assessed as comfortable; international reserve buffers and nonresident claims concentrated in FDI support resilience.
- DSA and external sustainability analyses indicate sustainable external debt and public debt dynamics under the baseline, with identified vulnerabilities under specified stress scenarios.
- The review supports completion of the FCL review given strong policy frameworks, reserve coverage, market access, and DSA outcomes.

*Source: IMF staff report and supporting figures and tables from the Colombia — Review under the Flexible Credit Line Arrangement supplementary information.*

### 1.      The Colombian government unveiled a comprehensive fiscal reform

### 1.      The Colombian government unveiled a comprehensive fiscal reform

### Overview and fiscal impact
- Reform unveiled on April 15; Congress expected to debate it in the coming weeks.
- Aim: durably raise revenues by around 2½ percent of GDP over the medium term.
- Includes expenditure measures worth around 1 percent of GDP.
- Net impact in terms of deficit reduction: around 1½ percent of GDP over the medium term.
- Major elements: mobilize revenue through direct and indirect taxes (including new environmental taxes), strengthen targeted social protection measures, and reinforce the fiscal framework.

### Tax measures and revenue mobilization
- VAT (Value-Added Taxes):
  - Exempt or reduced-rate categories consolidated to broaden the base and raise collections by 0.6 percent of GDP.
  - VAT compensatory transfers expanded from COP 35,000 to COP 50,000 monthly payments at a cost of 0.2 percent of GDP.
  - Eligibility for VAT compensatory transfers expands from 20 to 40 percent of the total population according to authorities’ estimates.
  - Note in source: "Under the proposed VAT reform, exemptions on basic consumption goods would be preserved."
- Income taxes:
  - Personal Income Tax (PIT) thresholds, rates and definitions modified to broaden the tax base and raise revenues by 1.4 percent of GDP.
  - Progressivity measures include making high pensions taxable (Monthly pensions above COP 7.0 million would be taxed).
  - Tax rates on dividend income raised from 10 to 15 percent with an increased minimum threshold.
  - Exemptions and deductions on Corporate Income Taxes (CIT) are reduced.
- Other tax reforms:
  - New environmental taxes: carbon, plastic-packaging, pesticide, vehicle, and gasoline taxes established.
  - Temporary transition taxes: a 3 percent CIT surcharge and a temporary net wealth tax of 1-2 percent for 2022-2023.
    - Authorities expect to raise 0.1 percent of GDP per year from net wealth tax.
  - Temporary high-income 10 percent tax proposed for 2021H2 for monthly incomes above COP 10 million.

### Social protection and employment measures
- Ingreso Solidario (unconditional transfer program) made permanent with more targeted coverage at a cost of 0.4 percent of GDP.
- Targeting improvements for other transfer programs, including energy subsidies.
- Employment support:
  - Emergency payroll subsidy program (PAEF) extended to June 2021.
  - New employment subsidies proposed for those who hire young workers, elder workers without a pension, and women over 40 years old without employment contracts.
  - Additional temporary employment subsidies, up to a global limit established by the Finance Ministry, available for those who hire previously unemployed workers without a demographic target.
- Table 1 (as presented in source):
  - Source: MHCP
  - Sources COP  trillion Percent  of GDP  Uses COP  trillion Percent  of GDP
  - Total28.12.4Total28.12.4
  - VAT7.30.6Ingreso Solidario4.60.4
  - Persons (including PIT)171.4Employment and other subsidies0.80.1
  - Companies (including CIT)3.70.3VAT compensatory transfers1.80.2
  - Revenue sharing with regions4.60.4
  - Net tax reform balance effect16.41.4

### Fiscal rule, governance, and institutional reforms
- Fiscal rule reinstated as anchor; transition path for maximum fiscal deficits outlined for 2022-2024 before a debt-target driven framework is fully installed.
- New fiscal rule targets the net structural primary balance of the general government (shift from current rule focusing on overall structural balance of the central government).
  - Structural target would account for an oil cycle adjustment based on oil revenue deviations from past data and correct for one-off transactions.
  - The new method does not include output gaps and projections and focuses only on observable measures mainly related to the oil cycle in adjusting the structural target.
  - After the debt target becomes operational, there will be a mechanism to account for other macroeconomic shocks.
- New debt anchor defined on (non-pension) net public liabilities.
  - These are defined as general government total non-pension liabilities, net of financial assets belonging to subsectors of the general government. The CONFIS would be in charge of final determinations on definitional details.
- CONFIS (Council of Fiscal Policy) led by the Finance Ministry would determine debt limits and convergence parameters to establish yearly structural primary balance targets.
  - The Council’s composition described in source text (Finance Minister presides, director of the National Planning Department, economic counselor of the President, Vice Ministers of Finance, director of the National Treasury and Public Credit, and director of Taxes and Customs).
- Institutional reforms:
  - Establishes a new “Autonomous Fiscal Rule Committee” with its own staff and independent operational budget to oversee adherence to the rule.
    - This new independent technical body would replace the current Fiscal Rules Consultative Committee (FRCC) that lacked these resources.
    - New committee members would be appointed by the Finance minister and elected for rotational four-year terms. Two members would be initially appointed for a two-year term.
  - Grants 6-month extraordinary presidential powers to restructure public entities for fiscal savings, with escape clause rules: once activated, cannot be active for more than three consecutive years and both the magnitude of the deviation and the expected return path must be established.

### Macro context, risks, and IMF Flexible Credit Line (FCL) assessment
- COVID-19 impact and macro outcomes:
  - 2020 contraction: 6.8 percent (deepest contraction in history).
  - Government debt-to-GDP ratio reached 64.8 percent in 2020.
  - Fiscal deficit widened to 7.8 percent of GDP in 2020 and is expected to increase up to 8.6 percent this year (source text).
  - Unemployment rate remains above 14.0 percent.
  - In Q4 2020, GDP growth increased by 6.0 percent vis-à-vis Q3 2020.
- External position and reserves:
  - Central Bank increased foreign liquidity buffers by nearly USD 5 billion in international reserves in 2020, reaching a level close to USD 60 billion.
  - Authorities treat remaining amount under the FCL, SDR 8.517 billion (US$ 12.3 b), as precautionary.
- Role of the FCL:
  - Access increase to 600 percent of quota in September 2020 strengthened international liquidity and helped complement other external financing.
  - Partial disbursement in December 2020 provided balance of payments support and helped preserve policy response capacity.
  - Market response to augmentation and disbursement was positive.
  - IMF staff assessment: Colombia continues to meet qualification criteria for access to IMF resources under the FCL arrangement.
- Monetary and financial context:
  - Inflation in 2020 stood below the Central Bank’s target and should converge to the 3.0 percent target in the next two years.
  - Central Bank used policy space to keep an accommodative monetary policy stance.
  - Financial system maintained adequate liquidity and capital levels; loan portfolio growth remained positive in nominal and real terms.
- Outlook and risks:
  - Gradual economic recovery expected to persist throughout the year, with output estimated to reach pre-pandemic levels in 2022.
  - Downside risks: further outbreaks, challenges in vaccine rollout, possible tightening of global financial conditions, uneven global recovery.
  - Current account deficit expected to increase slightly due to stronger domestic absorption as the economy recovers.

### Staff assessment and alignment with IMF advice
- Reform broadly in line with past IMF staff advice:
  - Staff advocated raising tax revenues by 2-3 percent of GDP over the medium term, led by VAT and PIT reform, to bring Colombia in line with regional peers and help stabilize public debt.
  - If approved by Congress, current reform proposal would be significant progress toward that objective.
- Emphasis on preserving the integrity of the Medium-term Fiscal Framework (MTFF) with a clear path for fiscal consolidation, explicit debt anchor, and strengthened independent oversight.

*Source: 1colea2021003 - 1.      The Colombian government unveiled a comprehensive fiscal reform*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1colea2021003.pdf_