## COLOMBIA STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION (1colea2022002) ## Source details **Canonical URL:** [COLOMBIA STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION (1colea2022002)](https://www.imf.org/-/media/files/publications/cr/2022/english/1colea2022002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1colea2022002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1colea2022002.pdf.json) --- ### Context, outlook, and short-term findings - 2021 rebound and health context: - GDP growth: 10.6 percent in 2021. - Around 66 percent of the population fully vaccinated as of end-February. - GDP has reached pre-pandemic levels; employment recovery lagging. - With strong demand, supply constraints, and rising commodity prices, inflation exceeded the upper limit of the central bank’s tolerance range in 2021. - Current account deficit widened to 5¾ percent of GDP in 2021 (noted elsewhere as -5.7 percent of GDP). - Short-term outlook: - Above-potential growth expected around 5¾ percent in 2022 (also reported as 5.8 percent in staff projections). - Output gap projected to close by 2022H1 (also cited as 2022H2 in an alternate passage). - Medium-term convergence to potential growth of about 3½ percent. - Inflation outlook and risks: - Inflation projected around 6¾ by end-2022 (table entries show eop: 6.9; average consumer prices: 7.7). - Inflation expected to remain above the upper tolerance limit (4 percent) throughout 2022, with upside risks. ### Monetary policy, exchange rate, and reserves - Rationale and stance: - Accelerated monetary tightening recommended to reduce inflationary pressures and safeguard credibility. - Policy rate increases to date: cumulative increase of 225 basis points; policy rate raised to 4 percent (policy rate actions: 50 bps Oct, 50 bps Dec, 100 bps Jan in narrative). - Monetary policy decisions should remain data-driven and clearly communicated. - Exchange rate and reserves: - Maintain a flexible exchange rate as shock absorber. - Continue international reserve accumulation to maintain reserve adequacy and insure against external liquidity risks. - Gross international reserves: 59.1 (2021), projected 60.2 (2022), 61.5 (2023), 62.9 (2024), 64.2 (2025), 65.1 (2026), 65.9 (2027) (billion U.S. dollars). - Reserve coverage: ARA coverage estimated at 137 percent in 2021 excluding commodity buffer; including commodity buffer 113 percent of the ARA metric for 2021. - Staff advice: - Accelerate normalization, with added steps to raise interest rates in the first half of the year. - Use FCL as additional buffer (Flexible Credit Line provides additional buffers and enhances market confidence). ### Fiscal policy assessment and recommendations - Current posture and SIL: - Public finances weakened by the pandemic; recovery presents an opportunity to strengthen them. - Social Investment Law (SIL) introduces a new debt anchor, raises corporate tax rates, and extends social spending; expected to generate around 1¼ percent of GDP in permanent revenues but 1 percent of GDP net after permanent uses. - Autonomous Fiscal Rules Committee (CARF) established. - Fiscal targets and projections (selected exact figures, percent of GDP): - Central government balance: -8.2 (2021), -6.1 (2022), -3.7 (2023), -3.6 (2024), -2.6 (2025), -2.5 (2026), -2.5 (2027). - Central government structural balance: -7.3 (2021), -5.8 (2022), -3.9 (2023), -3.9 (2024), -2.7 (2025), -2.5 (2026), -2.5 (2027). - Consolidated public sector (CPS) balance: -7.2 (2021), -4.4 (2022), -2.1 (2023), -1.3 (2024), -0.8 (2025), -0.9 (2026), -1.0 (2027). - Public sector gross debt: 64.6 (2021), 60.6 (2022), 59.2 (2023), 57.5 (2024), 56.3 (2025), 54.5 (2026), 52.9 (2027). - Revenue mobilization and spending efficiency: - Staff recommends durably raising revenues by an additional 1 – 1 ½ percent of GDP over the medium term. - Suggested revenue options and expected yields (% GDP): - Green taxes (increase in carbon and vehicle tax rates): 0.1 - Junk food and sugary drinks: 1.0 - Elimination of preferential tax regimes: 0.3 - Wealth and dividend taxes: 0.2 - Total (listed): 0.4 (note: sum in source text presents these items and "Total: 0.4" consistent with that listing). - Complement revenue measures with spending efficiency reforms: better targeting via SISBEN IV and a new social registry; phase out exceptional pandemic measures; energy subsidy reforms; procurement reforms. - MTFF/DIAN context: MTFF envisages about 1½ percent of GDP in revenue gains from DIAN modernization by 2023; administrative efficiency gains from DIAN improvements of ½–1 percent of GDP over the medium term. - Staff guidance: - Save revenue windfalls, control spending, phase out exceptional support measures as conditions allow, and secure new revenue sources to protect social programs and public investment. ### Financial sector assessment, FSAP findings, and recommendations - System resilience and indicators: - Banking system largely resilient to solvency and liquidity shocks. - Capital adequacy and liquidity: capital adequacy at 21.9 percent at year end; liquidity coverage above 200 percent; return on assets of 1.9 percent. - Non-performing loans (NPLs): peaked at 5.2 percent in January 2021, declined to 4.0 percent in December 2021. - Consumer credit impairment: just below 7 percent by end-2020; declined to 4¾ percent by end-2021. - Private sector credit grew: private sector credit real growth 4.3 percent (yoy) in 2021; commercial credit growth 2.1 percent; consumer credit 6.8 percent. - 2022 FSAP key findings: - Colombia has considerably strengthened its financial system since 2012. - Data availability and certain institutional arrangements for resolution and macroprudential frameworks need improvement. - Local LCR implementation not fully aligned with Basel III standards. - Recommend strengthening resolution planning for cross-border institutions and creating a macroprudential oversight strategy jointly drafted and signed by all relevant institutions. - Specific data needs: better household indebtedness data and conglomerates’ exposures to foreign subsidiaries. - Macroprudential and supervisory recommendations: - Expand LTV and DSTI tools to cover leasing products and nonbank credit; ensure DSTI includes nonmortgage debt. - Monitor interconnectedness and contagion risks from large and complex financial conglomerates and cross-border exposures, especially in Central America. - Strengthen operational independence of the resolution unit within the SFC; enhance recovery and resolution planning and safeguards for FOGAFIN’s fund. ### External sector assessment and balance-sheet indicators - Overall assessment: - External position moderately weaker than implied by medium-term fundamentals and desirable policies; estimated current account gap of -1.86 percent of GDP (+/-1 percent of GDP). - Current account and external balances (selected exact figures): - Current account: -5.8 (2021, percent of GDP) reported in Annex; current account (deficit - percent of GDP) projections: -5.7 (2021), -3.3 (2022), -3.4 (2023), -3.8 (2024), -3.9 (2025–2027). - Gross Assets / Reserve Assets / Gross Liabilities / Debt Liabilities (2021, % GDP): NIIP -57; Gross Assets 72; Reserve Assets 19; Gross Liab. 128; Debt Liab. 65. - NIIP estimated -57 percent of 2021 GDP in December 2021; excluding direct investment, NIIP stood at -7 percent of GDP. - External financing and reserves: - Gross external financing needs: estimated 17.9 percent of GDP in 2021; Table 11 projections: 55.5 (2021, billions US$) and 53.4 (2022) in baseline (values in billions of US$). - Key balance of payments 2021 (millions of US$): - Current account balance: -18,149. - Exports, f.o.b.: 42,534 (Commodities: 25,418; Fuel: 13,421; Non-fuel: 11,997; Non-traditional exports: 12,507). - Imports, f.o.b.: 56,616 (Consumer goods: 12,334; Intermediate goods: 27,147; Capital goods: 15,794). - Financial account balance (2021): -18,149. - Direct Investment liabilities (2021): 10,152. - Portfolio investment (net, 2021): -4,178. - Change in reserve assets (2021): 624. - Brent Crude Oil Price (US$/barrel) in 2021: 77. - Gross international reserves: 59,124 (2021, millions US$) and projected 60,062 (2022). - Real exchange rate: - REER depreciated by about 2 percent in 2021 (and by 11 percent in 2020); staff judgment REER gap consistent with CAB gap at 19.5 percent (+/- 11 percent). - Annex I conclusions: - Fiscal consolidation and structural policies to improve competitiveness and boost non-commodity exports recommended to aid external adjustment. - Further reserve accumulation advised to insure against elevated external risks; FCL provides additional buffer equivalent to 23 percent of the ARA metric including the commodity buffer. ### Debt dynamics, stress tests, and vulnerabilities - Baseline debt and financing indicators (selected exact figures, percent of GDP where indicated): - Nominal gross public debt: 2020 = 45.1, 2021 = 65.7, 2022 = 64.6, 2023 = 62.1, 2024 = 61.8, 2025 = 60.3, 2026 = 59.4, 2027 = 57.7, 2028 = 56.3. - Public gross financing needs (percent of GDP): 2020 = 5.4, 2021 = 8.7, 2022 = 10.0, 2023 = 6.8, 2024 = 6.8, 2025 = 6.0, 2026 = 5.4, 2027 = 6.6, 2028 = 5.5. - Identified debt-creating flows (cumulative): 2020 = 1.8, 2021 = 13.3, 2022 = 1.1, 2023 = -1.0, 2024 = -2.5, 2025 = -0.3, 2026 = -1.4, 2027 = -0.9, 2028 = -1.7; cumulative = -1.3; total = -8.3 (percent of GDP row entries preserved). - Stress-test findings: - Negative shocks to real GDP growth (one standard deviation) and to the real exchange rate (30 percent depreciation) could push public debt ratio to levels just below 80 percent in the near term. - Real Exchange Rate Shock scenario shows inflation in 2023 as 14.0 (percent) in stress scenario table. - Combined Shock effective interest rates reported: 2023 = 6.7, 2024 = 6.3, 2025 = 7.5, 2026 = 8.2, 2027 = 8.4 (percent). - Market and refinancing risks: - Share of NFPS debt held by non-residents is above its risks benchmark; increased foreign participation in local currency debt since 2013 increases sensitivity. - Authorities' debt management strategy: increase fixed-rate loans, extend maturities, increase local market liquidity, minimize roll-over risk. ### Structural reforms, inclusion, and public investment - Structural priorities: - Reduce labor market informality; address high non-wage labor costs and formalization barriers. - Complete infrastructure agenda (4G and 5G projects) and expedite Compromiso por Colombia to generate jobs and improve logistics. - Strengthen governance, anti-corruption, and AML/CFT frameworks; address trade tariff and non-tariff barriers. - Continue National Policy on Climate Change and pursue a green recovery. - Social inclusion measures: - Social Protection Floor (SPF) grants access to social security benefits for nearly 10 million workers earning less than minimum wage. - Temporary Protection Status (TPS) program to integrate Venezuelan migrants (affecting nearly 2 million people). - New social registry under development; SISBEN IV implementation to better target social transfers. - Public investment: - Compromiso por Colombia aims to generate one million jobs through large infrastructure projects; portfolio financing envelope about 1.5 percent of GDP for green and sustainable projects. - Execution rates for 4G agenda rose from 16 percent (Aug 2018) to about 63 percent (Dec 2021) with 27 out of 29 projects ongoing. ### Risks and policy recommendations (selected, verbatim-style) - Major external risks: intensification of the war in Ukraine; rising and volatile international prices for food and energy; persistent global supply-chain disruptions; global financial market volatility from the conflict or monetary tightening in major economies. - Domestic risks: new Covid-19 variants; political risks associated with upcoming elections; uncertainty around infrastructure agenda and peace accord implementation; potential shortfall in revenue mobilization. - Policy recommendations: - Monetary: accelerate monetary tightening to anchor inflation expectations and limit second-round effects. - Fiscal: save windfalls from higher-than-expected revenues; durably raise revenues by 1 – 1 ½ percent of GDP over the medium term; complement with spending efficiency measures and DIAN modernization. - External: maintain flexible exchange rate; continue reserve accumulation; use FCL as buffer. - Financial sector: normalize pandemic regulatory measures while monitoring PAD loan performance and provisioning; improve household and firm financial data; enhance resolution planning and macroprudential frameworks. - Structural: pursue reforms to boost productivity, competitiveness, inclusion, and green recovery; strengthen AML/CFT and anti-corruption measures; improve procurement and beneficial ownership transparency. ### Key selected medium-term macro projections and indicators (from Table 1, verbatim entries) - Real GDP growth (percent): 10.6 (2021), 5.8 (2022), 3.6 (2023), 3.4 (2024), 3.4 (2025), 3.4 (2026), 3.4 (2027). - Potential GDP (percent): 5.0 (2021), 4.4 (2022), 3.8 (2023), 3.4 (2024), 3.4 (2025), 3.4 (2026), 3.4 (2027). - Output Gap (percent): -1.2 (2021), 0.1 (2022), -0.1 (2023), 0.0 (2024–2027). - Consumer prices (average): 3.5 (2021), 7.7 (2022), 4.2 (2023), 3.5 (2024), 3.0 (2025–2027). - Consumer prices, end of period (eop): 5.6 (2021), 6.9 (2022), 3.8 (2023), 3.0 (2024–2027). - Current account (deficit - percent of GDP): -5.7 (2021), -3.3 (2022), -3.4 (2023), -3.8 (2024), -3.9 (2025–2027). - Exports (f.o.b., U.S. dollars, billions): 42.7 (2021), 62.8 (2022), 64.0 (2023), 61.8 (2024), 61.6 (2025), 63.2 (2026), 64.6 (2027). - Gross international reserves (billion U.S. dollars): 59.1 (2021), 60.2 (2022), 61.5 (2023), 62.9 (2024), 64.2 (2025), 65.1 (2026), 65.9 (2027). *Source: IMF staff report for the 2022 Article IV consultation with Colombia (1colea2022002).* ### 2022. Above-potential growth is expected around 5¾ percent this year, led by robust ### COLOMBIA STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION ### Context, outlook and key short-term findings - Colombia’s economy rebounded strongly in 2021 with 10.6 percent growth led by pent-up domestic demand, notably private consumption. - Around 66 percent of the population is fully vaccinated against Covid-19 as of end-February and the economy continues to reopen more fully. - GDP has already reached pre-pandemic levels, but employment has trailed in its recovery and macroeconomic imbalances have emerged. - Amid strong demand, supply constraints, and rising commodity prices, rising inflation exceeded the upper limit of the central bank’s tolerance range in 2021. - With demand-led growth and higher import prices, the current account deficit widened to 5¾ percent of GDP in 2021. ### Outlook and risks - Above-potential growth is expected around 5¾ percent in 2022, led by robust household consumption and continued recovery of investment and exports. - Over the medium term, GDP growth is expected to converge to its potential growth rate of about 3½ percent. - The output gap is projected to close by 2022H1. - Inflation dynamics: - Inflation continues rising led by supply-side shocks in the context of strong demand. - Inflation is projected at around 6¾ by end-2022. - Higher inflation is expected to persist and will likely remain above the upper limit of the central bank’s tolerance band (4 percent) throughout 2022, with upside risks. - External sector projections and drivers: - Projected increase in the price of key commodity exports would lead to a significant reduction in the current account deficit from -5.7 percent of GDP in 2021 to -3.3 and -3.4 percent of GDP in 2022 and 2023, respectively. - Risks to growth remain tilted to the downside: - External risks: intensification of the ongoing war in Ukraine; rising and volatile international prices for food and energy; more persistent disruptions in global supply chains; global financial market volatility from the conflict or monetary tightening in major economies. - Domestic risks: new outbreaks of Covid-19 variants; political risks associated with the upcoming elections; uncertainty about implementation of the infrastructure agenda and peace accords. ### Monetary and financial sector assessment and recommendations - The banking system entered the COVID-19 pandemic from a position of relative strength, and the authorities mounted a strong policy and support response; the financial system has weathered the pandemic relatively well so far. - FSSA findings: - Overall, banks are largely resilient to solvency and liquidity shocks. - It is essential to monitor interconnectedness and contagion given complexity of financial conglomerates and increasing cross-border exposures. - Supervision and macroprudential policy: - Bank supervision has been enhanced, including by introducing a comprehensive framework for conglomerates. - Macroprudential oversight is overall effective, but some macroprudential tools and data collection should be expanded to address leakages and risks from potential rapid household debt growth. - Crisis management and safety net: - The crisis management and safety net framework has been strengthened significantly. - Recovery and resolution planning needs further improvements, including for cross-border institutions. - Policy guidance: - Accelerated monetary tightening is appropriate to reduce inflationary pressures and safeguard the credibility of the monetary policy framework. - Policy decisions should remain data-driven and accompanied by clear communication. - Authorities should maintain a flexible exchange rate to help absorb global shocks, continue international reserve accumulation to help maintain reserve adequacy and insure against external liquidity risks. - The Flexible Credit Line provides additional buffers and enhances market confidence. ### Fiscal policy assessment and recommendations - Public finances were weakened by the pandemic; the strong economic recovery is an opportunity to strengthen them. - Fiscal targets and frameworks: - The Social Investment Law (SIL), including a new debt anchor, is an important step to strengthen the fiscal framework and re-anchor the fiscal path with explicit deficit targets to transition back to a structural balance rule. - The SIL raised tax revenue from corporates and extended social spending to protect vulnerable groups through 2022. - An autonomous fiscal rules committee (CARF) was established with its own staff and operational budget. - Recommendations: - Continue efforts to save revenue windfalls, control spending, and phase out exceptional support measures as conditions allow. - Secure new revenue sources to safeguard key social programs and public investment, and to support faster reduction in the debt level. - Complement revenue measures with spending efficiency reforms. - Selected fiscal and public debt projections from Table 1 (percent of GDP): - Central government balance: -8.2 (2021), -6.1 (2022), -3.7 (2023), -3.6 (2024), -2.6 (2025), -2.5 (2026), -2.5 (2027). - Central government structural balance: -7.3 (2021), -5.8 (2022), -3.9 (2023), -3.9 (2024), -2.7 (2025), -2.5 (2026), -2.5 (2027). - Consolidated public sector (CPS) balance: -7.2 (2021), -4.4 (2022), -2.1 (2023), -1.3 (2024), -0.8 (2025), -0.9 (2026), -1.0 (2027). - Public sector gross debt: 64.6 (2021), 60.6 (2022), 59.2 (2023), 57.5 (2024), 56.3 (2025), 54.5 (2026), 52.9 (2027). ### Structural reforms and broader policy priorities - Structural policies should be deployed to bolster inclusive growth and external competitiveness: - Reduce labor market informality. - Complete the infrastructure agenda. - Strengthen governance and anti-corruption and AML/CFT frameworks. - Further address trade (tariff and non-tariff) barriers. - Continue implementation of the National Policy on Climate Change to pursue a sustainable, green recovery. - Social inclusion measures: - Granting access to social security benefits for nearly 10 million workers earning less than minimum wage through a new social protection floor (SPF). - Continued implementation of the Temporary Protection Status (TPS) program to integrate Venezuelan migrants. - New social protection programs to support economic and financial inclusion (for example, Ingreso Solidario). ### Executive Board assessment and staff appraisal highlights - Executive Directors agreed with the thrust of the staff appraisal and commended authorities for very strong policy frameworks and a comprehensive pandemic response. - Directors’ priorities and guidance: - Recalibrate policies carefully to sustain growth momentum, manage inflation, further strengthen public finances, and reduce external imbalances. - Accelerated monetary tightening supported to reduce inflationary pressures and safeguard monetary policy credibility. - Maintain flexible exchange rate and continue reserve accumulation. - Implement 2022 FSAP recommendations to enhance data availability, crisis management, and bank resolution and macroprudential frameworks. - Pursue deeper fiscal reforms to secure new revenue sources and enhance spending efficiency. - Continue structural reforms to boost productivity, external competitiveness, and greener, inclusive growth; strengthen governance and AML/CFT frameworks; reduce trade barriers; increase labor force participation; integrate Venezuelan migrants. ### Key selected medium-term macro projections and indicators (from Table 1) - Real GDP growth (percent): 10.6 (2021), 5.8 (2022), 3.6 (2023), 3.4 (2024), 3.4 (2025), 3.4 (2026), 3.4 (2027). - Potential GDP (percent): 5.0 (2021), 4.4 (2022), 3.8 (2023), 3.4 (2024), 3.4 (2025), 3.4 (2026), 3.4 (2027). - Output Gap (percent): -1.2 (2021), 0.1 (2022), -0.1 (2023), 0.0 (2024–2027). - Consumer prices (average): 3.5 (2021), 7.7 (2022), 4.2 (2023), 3.5 (2024), 3.0 (2025–2027). - Consumer prices, end of period (eop): 5.6 (2021), 6.9 (2022), 3.8 (2023), 3.0 (2024–2027). - Current account (deficit - percent of GDP): -5.7 (2021), -3.3 (2022), -3.4 (2023), -3.8 (2024), -3.9 (2025–2027). - Exports (f.o.b., U.S. dollars, billions): 42.7 (2021), 62.8 (2022), 64.0 (2023), 61.8 (2024), 61.6 (2025), 63.2 (2026), 64.6 (2027). - Gross international reserves (billion U.S. dollars): 59.1 (2021), 60.2 (2022), 61.5 (2023), 62.9 (2024), 64.2 (2025), 65.1 (2026), 65.9 (2027). *Source: IMF staff report for the 2022 Article IV consultation with Colombia (discussions during February 1−15, 2022; staff report prepared for Executive Board consideration on March 25).* ### 7. Financial Soundness Indicators ________________________________________________________________ 35 ### 7. Financial Soundness Indicators ### Background and pandemic response - Pre-pandemic frameworks: flexible exchange rate; inflation targeting; effective financial sector supervision and regulation; medium-term fiscal rule; strong institutions. - Fiscal pandemic response: worth around 4 percent of GDP; included health spending, FOME crisis relief fund, payroll subsidies, expanded transfer programs. - Monetary and financial measures: asset purchases to support market liquidity; policy rate reduced to historic low levels at 1.75 percent; loan modification program to maintain credit flows. ### Health and mobility - Vaccination: around 66 percent of the population fully vaccinated as of end-February; initial target of 70 percent; new target of 80 percent; an additional 10 million doses secured; Venezuelan migrants included in national vaccination plan. - Mobility and reopening: mobility measures reached pre-pandemic levels in 2021; Omicron wave peaked in mid-January with no confinement measures as ICU capacity was below trigger thresholds. ### Recovery and demand dynamics - GDP growth: 10.6 percent in 2021. - Main drivers: private consumption (reopening, pent-up demand, resumption of consumer credit, strong remittance inflows); higher fiscal deficits and public spending supported domestic demand. - Sectoral laggards: mining (including oil) and construction still below pre-pandemic levels. - External imbalances accompanying growth. ### Inflation and monetary policy - Inflation targets and outcomes: central bank inflation target 3 percent; upper tolerance limit 4 percent. - CPI inflation: 5.6 percent in December; climbed to almost 7 percent in January. - Contributors: higher food and energy prices (about 20 percent and 12 percent, respectively); supply chain disruptions; higher transport costs. - Core inflation (ex. food and regulated prices): 3.5 percent in January. - Wage and indexation effects: minimum wage settlements in December of 10 percent; potential indexation channels (e.g., rents) for persistence. - Monetary policy normalization: central bank began in September; consecutive increases of 50 bps in October and December and an increase of 100 bps in January, raising the policy rate to 4 percent; monetary stance still described as accommodative. ### External sector and financing - Current account deficit: widened from 3.5 in 2020 to 5.8 percent of GDP in 2021. - Trade dynamics: imports up 38 percent; exports up about 32 percent; oil and coal production dampened in 2021Q2. - External Financing Needs (EFN): increased and remain elevated at about 18 percent of GDP. - External position assessment: moderately weaker than level consistent with medium-term fundamentals and desired policy settings. - Portfolio and FDI flows: private portfolio flows moderated; net FDI increased by an estimated 33 percent y-o-y in 2021. - Reserves and ARA metric: with modest reserve accumulation as in 2021, reserve coverage would remain adequate per the ARA metric though gradually declining given rising EFN. ### Labor market and inclusion - Job losses and recovery: about a quarter of jobs were lost at height of lockdowns; as of December about 80 percent of job losses have been recovered. - Labor force participation: 59.3 percent (below pre-pandemic about 63.0 percent in December 2019). - Unemployment: 12.3 percent (seasonally adjusted) in December 2021; higher in major cities and for women. - Formal vs informal: informal employment approaching pre-pandemic levels; recovery in formal jobs more sluggish. - Financial inclusion: as of June 2021, 89 percent of the adult population had one or more financial products, exceeding the 2022 target of 85 percent; gender and urban-rural gaps remain; Open Finance decree issued in 2022Q2 expected to boost competition and digital finance. ### Fiscal outcomes and the Social Investment Law (SIL) - Central government fiscal deficit: estimated -8.2 percent of GDP in 2021 (about 1½ percent of GDP lower than expected in the MTFF). - Gross public debt-to-GDP: declined from 64.7 percent in 2020 to 63.8 percent in 2021. - Liquidity buffer: government boosted liquidity buffer with resources related to the SDR allocation. - SIL objectives: re-anchor fiscal framework toward a structural balance rule with new debt anchor; aims for a net improvement in the central government primary balance by 1.1 percent of GDP on average starting in 2023. - SIL revenue and uses: expected to generate around 1¼ percent of GDP in permanent revenues but only 1 percent of GDP in net terms after accounting for permanent uses. - Components: raises medium-term revenues through hikes in corporate tax rates; introduces strengthened fiscal rule oversight committee; extends pandemic support spending through the end of the year. ### Financial sector soundness indicators - Capital and liquidity: capital adequacy at 21.9 percent at year end; liquidity coverage above 200 percent; return on assets of 1.9 percent. - Non-performing loans (NPLs): peaked at 5.2 percent in January 2021 and declined to 4.0 percent in December 2021. - Consumer credit impairment: just below 7 percent by end-2020; declined to 4¾ percent by end-2021. - COVID-related regulatory measures: PAD closed in August; as of December 2021, credit under PAD at 5.0 percent of gross loans; NPL ratio of PAD loans at 15.2 percent. - Credit growth: private sector credit grew 4.3 percent in real terms (yoy) in 2021; commercial credit growth 2.1 percent; consumer credit 6.8 percent. - Interest-rate exposure: loan portfolios dominated by variable-rate commercial credit; fixed-rate consumer loans sizable. - FSAP note: 2022 FSAP found local LCR implementation is not fully aligned with Basel III standards. ### Outlook and projections - 2022 growth: above-potential growth around 5½ percent in 2022 under staff assumptions (e.g., no major lockdowns); output gap projected to close by 2022H2. - Medium-term growth: converge to potential growth rate of about 3½ percent. - Drivers of medium-term growth: migration from Venezuela; 4G and 5G infrastructure projects; implementation of National Development Plan; Compromiso por Colombia and peace process investments and reforms. - Inflation baseline: expected to peak in 2022Q1 at about 8 percent and decline to 5.7 percent by end-2022; expected to be close to target by end-2023 as shocks dissipate. - Fiscal outlook 2022: government Financial Plan indicates a lower fiscal deficit (6.2 percent of GDP) than in the fiscal rule (7.9 percent of GDP) appears within reach; gross central government debt-to-GDP likely to decline from 63.8 percent to 62.7 percent. - External outlook: current account projected to decline to about 5¼ percent of GDP in 2022; medium-term current account deficit expected to narrow to 4 percent of GDP. ### Risks - External risks: intensification of the conflict in Ukraine; higher and volatile international prices for food and energy; more persistent global supply chain disruptions; tightening external financial conditions; faster-than-expected policy tightening in advanced economies. - Domestic risks: new COVID-19 outbreaks; political risks around policy direction after 2022 elections; slower implementation of infrastructure agenda, peace accord, or SIL fiscal plans; resurgence of migration flows from Venezuela. - Balance of risks: tilted to the downside; inflation risks on the upside from commodity price shocks, persistent supply disruptions, tighter external conditions, and second-round effects. ### Policy recommendations and recalibration - Monetary policy: accelerated monetary tightening by the central bank is appropriate to control rising inflation and anchor expectations; aim to limit second-round effects from supply-side factors. - Fiscal policy: medium-term fiscal consolidation should progress in accordance with the MTFF; stronger-than-expected tax revenues should be saved to achieve a lower fiscal deficit. - Financial sector: continue normalizing pandemic-related regulatory support measures while monitoring PAD loan performance and provisioning; leverage healthy capital and liquidity positions to support expanding lending. - Structural and inclusion policies: advance digital finance initiatives (Open Finance) to boost competition and inclusion; continue social protections and targeted supports as SIL implements revenue and spending measures. *COLOMBIA — INTERNATIONAL MONETARY FUND* ### 2022. To ensure debt sustainability, safeguard key social programs, and support public investment, ### 2022. To ensure debt sustainability, safeguard key social programs, and support public investment, additional durable tax revenues need to be complemented by spending efficiency measures. Financial sector policies should enhance household and firm financial data and certain institutional arrangements for the resolution and macroprudential frameworks. Structural policies should be deployed to improve inclusive growth and external competitiveness. ### A. Monetary Policy, Exchange Rate and Reserves: Recalibrating The Pace of Monetary Normalization - Rising inflation pressures warrant accelerated monetary normalization to control consumer prices and anchor inflation expectations. - Rationale for tightening: - Low excess capacity, negative real interest rates, and lags in monetary transmission argue for acceleration. - Added steps to raise interest rates in the first half of the year should guide inflation lower. - Objectives of tightening: - Safeguard central bank credibility; anchor inflation expectations; insure against upside inflation risks; moderate demand. - Monetary policy decisions and the balance of risks should be clearly communicated to guide market expectations. - Reserves: - Given elevated external vulnerabilities and risks, reserve accumulation should continue. - Continued reserve accumulation would maintain adequate reserve coverage over the medium term under the ARA metric and can raise reserves toward authorities’ target of covering short-term external financing needs in their adverse scenario. - Central bank actions and stance: - The central bank concurs that normalization needs to continue, with the pace data dependent. - The policy rate has been raised by 225 basis points. - Supply shocks are the major driver of current inflation but the central bank focuses on price stability and preventing persistent shocks from becoming entrenched. - Acknowledged trade-off: higher interest rates will damp short-term growth but are intended to avoid welfare implications from unanchored inflation expectations. - Government complementary actions: - Temporarily cut import tariffs and facilitated access to credit and insurance for agricultural producers to mitigate food price pressures. - Authorities remain committed to maintaining adequate international liquidity cushions and a flexible exchange rate as an external shock absorber. ### B. Fiscal Policy: Reducing Twin Deficits and Ensuring Fiscal Sustainability - Near-term opportunity: - Stronger-than-expected GDP growth, higher oil prices and related fiscal revenues, and faster closing of the output gap make consolidation attainable after two years of pandemic support. - Saving windfalls from higher-than-projected revenues and/or higher GDP would help achieve an expected fiscal deficit of 6.2 percent of GDP or reduce it. - This would support external adjustment, reduce twin-deficits, help achieve 2023 targets, contain debt costs, and respect MTFF deficit limits over time. - Additional consolidation would lessen the need for monetary tightening to address inflation. - Institutional oversight: - Strong, independent oversight by the new Autonomous Fiscal Rule Committee (CARF) is important for guiding deficit reduction goals and meeting targets, including in 2022. - Revenue mobilization: - Staff recommends durably raising revenues by an additional 1 – 1 ½ percent of GDP over the medium term to safeguard key social protection spending and public investment while meeting MTFF deficit targets and generating faster public debt reduction. - Revenue mobilization goals should reduce tax distortions and loopholes, increase progressivity, improve fairness, and protect poorer households using compensating measures where needed. - Initial menu of options could include raising wealth and dividend taxes, which could generate a revenue increase of ¼ percent of GDP in the medium-term. - Other options cited: various environmental taxes (especially for corporates) and progressive taxes targeting high-income earners. - Complementary spending measures and efficiency gains: - Further strengthen the social benefit system (SISBEN IV) by building a new social registry to better target recipients of social transfers. - Phase out exceptional pandemic measures (including employment/wage subsidies such as the PAEF and public loan guarantees) as recovery moves into expansion. - Energy subsidy reforms: gradual phasing out of subsidies for fuel products and improved targeting for electricity over the medium-term. - Continued reforms in public procurement (normative and management) to promote competition and produce efficiency gains, following the Report of the Committee on Expenditure and Public Investment. - Estimates and context: - MTFF envisages about 1½ percent of GDP in revenue gains coming from DIAN modernization by 2023. - Staff estimated continued improvements to DIAN’s IT system and governance should produce administrative efficiency gains of ½-1 percent of GDP over the medium term. - The estimated fiscal cost of energy subsidies (fuel and electricity) was estimated at about 0.7 percent of GDP. - Possible revenue options (Expected yield, % GDP): - Green taxes (increase in carbon and vehicle tax rates): 0.1 - Junk food and sugary drinks: 1.0 - Elimination of preferential tax regimes: 0.3 - Wealth and dividend taxes: 0.2 - Total: 0.4 - Authorities’ stance: - Authorities committed to maintain fiscal credibility and place debt on a sustained declining trajectory consistent with the new fiscal rule. - After a better-than-expected fiscal outcome in 2021, authorities expected the central government’s fiscal deficit in 2022 to be significantly narrower than required to comply with the new fiscal rule (-6.2 percent vs. -7.9 percent of GDP). - Authorities agreed tax collection windfalls should be saved to accelerate fiscal consolidation and, combined with maintaining spending plans, generate lower primary and overall fiscal deficits if growth remains strong. - Over the medium term, authorities believe revenue mobilization from tax reform in the SIL, plus DIAN modernization and spending normalization, suffice to keep public debt on a sustained downward path consistent with the new fiscal rule. - On spending efficiency, authorities broadly agreed with staff on enhancing targeting of social benefits via SISBEN IV and a new social registry to improve means testing and beneficiary identification. ### C. Financial Sector Policies: Reinforcing Financial Stability and Its Contribution to Growth and Development - Macro-financial risks and vulnerabilities: - Renewed credit growth supports recovery but requires monitoring of credit quantity and quality. - Household debt ratio to GDP is slightly below pre-pandemic levels, but debt-service-to-income data is not readily available. - Non-financial private sector indebtedness reached a historical high of around 54 percent of GDP as of June 2021. - About 40 percent of non-financial private corporate debt is denominated in FX, of which just above 30 percent consist of unhedged FX debt. - Given legacy effects and debt vulnerabilities from past credit cycles, monitoring household and corporate indebtedness remains important. - If consumer debt maturities lengthen, provisioning requirements should be raised accordingly. - 2022 FSAP findings and recommendations: - Colombia has considerably strengthened its financial system since 2012, but data availability and certain institutional arrangements for resolution and macroprudential frameworks could be improved. - Specific data needs: better data on household indebtedness and on conglomerates’ exposures to foreign subsidiaries for surveillance and policy responses. - Through subsidiaries, Colombian financial conglomerates have sizable exposures to Central America that warrant vigilance; the financial network’s evolving complexity calls for further development of monitoring tools. - Recommend strengthening resolution planning for cross-border institutions and creating a macroprudential oversight strategy jointly drafted and signed by all relevant institutions. - Basel III implementation continues on track. - Supervisory priorities (SFC): - As recovery progresses, supervisory focus shifts from short-term support to long-term resilience. - Four main building blocks where credit risk is a top priority: - (i) Monitor increased risk-appetite and assess financial burden indicators (close monitoring of credit vintages in consumer loans). - (ii) Heterogeneous sectoral recovery and smooth transition of debtors whose credit conditions remain affected. - (iii) Demand factors affecting performance and dynamics of some loan segments. - (iv) Close monitoring of write-offs in microcredit. - Authorities agreed that continued vigilance is warranted, especially regarding international spillovers. - FSAP helped authorities approach concentration and contagion in financial conglomerates with a different perspective, leveraging network analysis tools. - Authorities emphasized the successful launch of sovereign green bonds to develop local capital markets and mobilize financing for decarbonization and climate change adaptation priorities. ### D. Structural Reforms: Promoting Inclusive, Sustainable Growth and Enhancing External Competitiveness - Social and productivity context: - Pandemic has eroded social gains of the last decade; poverty rate reverted to levels observed ten years ago and income inequality increased. - Colombia’s total factor productivity (TFP) level remains close to that of 1990; flat productivity is a long-standing concern. - Higher productivity growth is crucial to raise living standards; a repetition of the oil-driven investment boom of the 2000s is unlikely. - The 2018-2022 National Development Plan (NDP) and the Sustainable and Resilient Economic Reactivation and Repowering Strategy (Compromiso por Colombia) recognize higher poverty levels and stagnant productivity as major challenges. - AML/CFT and transparency progress: - Updated national AML/CFT policy adopted in 2021; reforms introduced to address technical gaps from the 2018 Mutual Evaluation Report, including wire transfers, correspondent banking, statistics, guidance, and feedback. - SFC improved risk-based AML/CFT supervision and increased attention to cross-border supervisory activities, particularly in Central America. - ML investigations and prosecutions remain not commensurate with the country’s risk profile. - Customer due diligence measures strengthened by law (January 2022), but some DNFBPs remain out of scope. - VASPs must report suspicious transactions to the Financial Intelligence Unit, but licensing and supervisory framework remains unclear. - Beneficial Owner Register under the Directorate of Taxes and Customs went live in January 2022 to mitigate misuse of legal persons. - Anti-corruption steps: - Law 2195 introduced an implementation mechanism for prevention and detection of unjustified increase in assets under the National Prosecutor General’s Office; the mechanism consolidates databases on assets and interests of officials with tax and property information. - Structural reform priorities to support recovery and competitiveness: - Further accelerate the vaccination program to protect people and allow functioning of the economy. - Continue transfer programs with increased targeting—including through more progressive and focused pension subsidies and better utilization of SISBEN IV and a new social registry. - Continue integration of migrants into formal markets via the Temporary Protection Program (TPS). - Finalize NDP implementation and effectively implement the Peace Accords to support regional, social, and economic inclusion. - Facilitate recovery of formal sector jobs by addressing structurally high non-wage labor costs (e.g., contribution costs) and formalization barriers. - Continue implementation of national and regional infrastructure (4G and 5G projects) to address transport costs. - Boost competitiveness by addressing logistics bottlenecks and trade-restricting tariff and non-tariff barriers. - Green recovery and public investment: - Under the National Policy on Climate Change, green recovery is a key pillar of sustainable recovery. - One component of Compromiso por Colombia is dedicated to green and sustainable recovery (sustainable infrastructure, nature-based solutions, and bioeconomy), including a portfolio of projects with a financing envelope of about 1.5 percent of GDP. - Authorities’ progress on inclusion, social protection, and employment: - NDP execution level reached almost 73 percent. - Progress reported on firm formalization initiatives and efficiency improvements in logistics and export-import systems. - DNP finalizing creation of a new social registry to better identify recipients of social transfers and introduce differentiations by household members and poverty rate. - Reactivating employment: programs reported to increase participation of women and youth in the labor market and job training programs; these programs have protected over 4.3 million and created close to 300 thousand new jobs, where 90 percent have been granted to women and young employees. - TPS integration of Venezuelan migrants affecting nearly 2 million people, which will raise Colombia’s economic potential. - Extending the social safety net: Social Protection Floor (SPF) grants access to social security benefits for nearly 10 million workers earning less than minimum wage. - Authorities will follow recommendations from the Labor Mission (Misión de Empleo). - Peace through legality: continued implementation of Peace Accords over 15-year timeframe, progress on Development Plans with a Territorial Focus (PDET), cadastre updates, and securing additional resources for peace from the royalties’ system. _Italic: International Monetary Fund_ ### 36. Progress was also reported on public investment to enhance productivity and ### 1colea2022002 - 36. Progress was also reported on public investment to enhance productivity and ### Public investment and Compromiso por Colombia - Compromiso por Colombia strategy launched aiming to generate one million jobs through the acceleration of large infrastructure projects, mainly toll road concessions, airports and fluvial. - As of December, 100 percent of the projects related to a sustainable and green recovery have been completed or are under execution. - The government’s execution rates of the 4G agenda increased from 16 percent in August 2018 to about 63 percent in December 2021 (27 out of 29 projects are ongoing). - Some projects in the first wave of the 5G agenda are already in pre-construction phase or with a public tendering in process. ### Monetary policy and external buffers - Prior to the pandemic, a flexible exchange rate, central bank credibility under inflation targeting, effective financial sector supervision and regulation, a medium-term fiscal rule, and strong institutions supported resilience. - Recommendation: an accelerated monetary tightening by the central bank is appropriate to control rising consumer prices, prevent second-round effects from supply side factors, and safeguard credibility. - Rationale: low excess capacity and negative real interest rates justify acceleration in monetary policy tightening. - Policy guidance: added steps to raise interest rates in the first half of the year to sufficiently tighten monetary and financial conditions should guide inflation lower. - Communication: monetary policy decisions and the balance of risks should continue to be clearly communicated to help guide market expectations. - External buffers: international reserve accumulation over time should continue to help maintain reserve adequacy and insure against external liquidity risks. - The IMF’s Flexible Credit Line (FCL) provides additional external buffers and enhances market confidence. ### Fiscal outlook, consolidation, and revenue mobilization - Post-pandemic: public finances showing signs of improving with scope to make further gains following a narrower-than-anticipated fiscal deficit in 2021. - Recommendation: continue policy efforts to further reduce elevated fiscal financing needs and save added fiscal revenue from higher-than-expected GDP and tax collections. - Pandemic measures: unwinding of pandemic-related support measures has been effective, helping put public debt on a downward trajectory already in 2021 (three years earlier than previously expected). - Framework: the SIL is an important step; authorities outlined a transition path towards a structural balance rule with a new debt anchor. - Oversight: strong, independent oversight by the CARF will be important for guiding deficit reduction goals and meeting or exceeding targets, including in 2022. - Fiscal consolidation benefits: would lessen burden on monetary policy, moderate demand pressures, and help ease sovereign borrowing costs by reducing debt. - Revenue mobilization target: further raising revenues durably by an additional 1 – 1 ½ percent of GDP over the medium term would be desirable. - Revenue policy objectives: reduce tax distortions and loopholes, increase progressivity, improve fairness, and protect poorer households using compensating measures where needed. - Spending efficiency gains: better utilize the social benefit system (SISBEN IV) and build a new social registry, further implement energy subsidy reforms, and advance initiatives to improve public procurement. ### Financial sector supervision, AML/CFT, and macroprudential issues - FSAP assessment: Colombia has considerably strengthened its regulatory and supervisory system since 2012, while data availability and certain institutional arrangements for bank resolution and macroprudential frameworks can be enhanced. - Monitoring: given the upswing in credit, continue closely monitoring the behavior of riskier loans and ensure household and corporate leverage do not become excessive. - AML/CFT recommendations: - Address remaining technical deficiencies identified in the MER, including reinforcing politically exposed persons requirements and bringing the remaining DNFBPs under the AML/CFT regime. - Once the regulatory framework for DNFBPs is adopted, ensure an adequate monitoring/supervisory framework is in place. - Address ML/TF risks associated with crypto assets and ensure virtual asset service providers are properly licensed, monitored/supervised for AML/CFT compliance. - Continue refining the accuracy of beneficial ownership information and monitor its effective implementation. - Continue efforts to investigate and prosecute money laundering to achieve more meaningful results. ### Anti-corruption, transparency, and procurement - Legislative gaps: absence of whistleblower protection and the criminal liability of legal entities for acts of corruption identified as deficiencies. - Procurement risks: procurement is considered high-risk for corruption and conflict of interest. - Recommendations: - Introduce internal controls, cross-check debarment lists, and strengthen ethics and compliance programs. - Limit the arbitrary use of direct contracting. - Collect and publish beneficial ownership information of companies awarded public contracts. - Emphasize strong implementation of new and existing laws. ### Structural reforms and social protection - Labor market and productivity: lowering barriers to firm and labor formalization would help reduce structural unemployment and enhance productivity. - Social Protection Floor (SPF): introduction welcomed; grants access to social security benefits for nearly 10 million workers earning less than minimum wage. - Migration: the Temporary Protection Status (TPS) program for Venezuela migrants should strengthen their integration and raise Colombia’s economic potential. - Social transfers: retain cash transfers for families but on a more targeted basis to sustain income support for the most vulnerable households. - Green recovery: - Identified as a key pillar of the sustainable recovery strategy within the Compromiso por Colombia plan and the recently approved Carbon Neutrality and Climate Resilience Law. - Successful launch of sovereign green bonds and introduction of new environmental taxes can support government’s green recovery plans by creating room for continued investment in key climate-related areas. *Source: IMF staff appraisal and related sections from the provided content unit.* ### 46. Staff recommends that the next Article IV takes place on the standard 12-month cycle. ### 1colea2022002 - 46. Staff recommends that the next Article IV takes place on the standard 12-month cycle. ### Recommendation - Staff recommends that the next Article IV takes place on the standard 12-month cycle. ### Financial conditions (Figure 1) - Domestic equity indices: Jan 03, 2020 = 100 (chart relative to LA5 and other EMs). - EMBIG Spreads / CDS and domestic currency sovereign bond yields: series shown Jan-20 to Jan-22 with Colombia exhibiting widening spreads and yields relative to Jan 03, 2020. - Notable events annotated: FCL Renewal Approved; Peru FCL Approved; Chile FCL Approved; Colombia FCL augmentation and withdrawal; S&P downgrade Colombia; Fitch downgrade Colombia; Colombia Social Investment Law. - Sources: Haver Analytics and Bloomberg LLP. ### Real sector developments (Figure 2) - Gross Value Added growth (y/y) series by sector from 2016Q2 to 2021Q2; mining and construction lagging. - Real GDP growth and contributions (y/y): strong recovery in 2021 after record GDP contraction in 2020; consumption is the major driver while investment is still recovering. - Selected high frequency indicators (2019M12=100): electricity demand, manufacturing IP, and economic activity indicator show recovery Oct-19 to Oct-21. - Investment growth components (y/y) include Intellectual property, Cultivated bio resources, Machine & Equipment, Other buildings, Dwellings. - Confidence and PMI series show improvement Oct-19 to Oct-21. - Consumption growth contributions by durability categories shown 2016Q2–2021Q2. ### Current account and external sector (Figure 3; Tables 2a/2b) - Terms of trade and commodity price indices (2013=100): Brent/Coal/Oil indices tracked Dec-13 to Jun-21. - Imports: large rebound due to strong economic recovery (imports and components y/y percent change series). - Exports (3-month moving average y/y percent change): oil and coal exports were affected by demonstrations in Q2. - Current account: deficit widened in 2021 (Current Account and Components as percent of GDP). - Exchange rate: peso continued to weaken in 2021 (REER/NEER and Pesos per dollar series). Key balance of payments figures (Table 2a, 2021 estimate) - Current account balance: -18,149 (millions of US$) for 2021. - Exports, f.o.b.: 42,534 (millions of US$) in 2021. - Commodities: 25,418 - Fuel: 13,421 - Non-fuel: 11,997 - Non-traditional exports: 12,507 - Imports, f.o.b.: 56,616 (millions of US$) in 2021. - Consumer goods: 12,334 - Intermediate goods: 27,147 - Capital goods: 15,794 - Financial account balance (2021): -18,149 (millions of US$). - Direct Investment liabilities (2021): 10,152 (millions of US$) - Portfolio investment (net, 2021): -4,178 (millions of US$) - Change in reserve assets (2021): 624 (millions of US$) - Memo: Brent Crude Oil Price (US$/barrel) in 2021: 77 ### Financial account and reserves (Figure 4; Table 10) - Financial account: Direct investment increased in 2021; net portfolio declined; other investment rose. - Gross international reserves: slight decline in reserves coverage registered (time series and ARA metric coverage). - Table 10, 2022 Baseline gross external financing needs and sources: - Gross external financing needs (baseline projection): -55,485 and alternative column -53,385 (in millions of US$). - External current account balance: -18,149 and -17,791. - Debt amortization: -37,335 and -35,594. - Medium and long term debt amortization: -15,440 and -13,506. - Short-term debt: -21,896 and -22,088. - Gross external financing sources (2021 baseline / 2022 projection): - Foreign direct investment (net): 7,730 and 9,106. - Medium and LT debt disbursements: 24,156 and 23,852. - Short-term debt disbursements: 22,088 and 22,575. - Change in international reserves: 624 and 938. - Memo: Gross international reserves: 59,124 (2021) and 60,062 (2022 projection). ### Inflation and monetary policy (Figure 5; Table 5) - Headline inflation (y/y): series Dec-14 to Dec-20; headline inflation above the upper-bound of the target range since August 2021. - Contributions to headline inflation: goods, services, regulated, food — increase mainly due to food and energy prices. - Core inflation (excluding food and regulated; and excluding food and energy) increased gradually since June. - Inflation expectations ("Yield Curve") panels for Current Through Dec and Over the Next 12M/24M show short-term expectations started to deviate but medium-term expectations remain anchored. - Monetary policy: BanRep started the monetary policy normalization process in September; policy rate series show tightening gradually while still accommodative. - Monetary indicators (Table 5, selected): - Gross official reserve assets (in billions of US$): 47.2 (2017), 47.9 (2018), 52.7 (2019), 58.5 (2020), 59.1 (2021). - CPI inflation, eop: 4.1 (2017), 3.1 (2018), 3.8 (2019), 1.6 (2020), 5.6 (2021). - Policy rate, eop (Table 1): 4.8 (2017), 4.3 (2018), 4.3 (2019), 1.8 (2020), 3.0 (2021). ### Fiscal developments (Figure 6; Tables 3 and 4) - Government deficits widened further in 2021. - Central Government headline balances excluding arrears (percent of GDP): series 2013–2021 showing deterioration. - Structural balance widened in 2021; fiscal impulse shows an additional positive fiscal impulse in 2021. - Expenditures increased due to higher interest payments and current transfers. - Revenue: non-oil tax revenues increased while non-tax revenues and oil revenues declined. - Table 3 (Central Government, percent of GDP, selected lines): - Total revenue: 15.7 (2017), 15.3 (2018), 16.2 (2019), 15.3 (2020), 15.4 (2021). - Total expenditure and net lending: 19.3 (2017), 20.1 (2018), 18.7 (2019), 23.1 (2020), 23.7 (2021). - Overall balance: -3.6 (2017), -4.8 (2018), -2.5 (2019), -7.8 (2020), -8.2 (2021). - Structural balance (IMF staff estimate): -2.6 (2017), -2.2 (2018), -2.1 (2019), -6.2 (2020), -7.4 (2021). - Nominal GDP (in Col$ trillion): 920.5 (2017), 987.8 (2018), 1,060.2 (2019), 998.7 (2020), 1,176.7 (2021). - Table 4 (Combined Public Sector, percent of GDP, selected lines): - Total revenue: 26.8 (2017), 30.0 (2018), 29.4 (2019), 26.6 (2020), 27.7 (2021). - Total expenditure and net lending: 29.4 (2017), 34.5 (2018), 31.8 (2019), 33.6 (2020), 34.5 (2021). - Combined public sector balance: -2.4 (2017), -4.5 (2018), -2.9 (2019), -6.9 (2020), -7.2 (2021). - Public sector gross debt: 49.4 (2017), 53.6 (2018), 52.4 (2019), 65.7 (2020), 64.6 (2021). ### Labor market (Figure 7) - Unemployment rate (3-month moving average): 2020 peak and decline; unemployment rate declined from a historical record but remains above pre-pandemic levels. - Employment: over 90 percent of job losses at the height of the pandemic have been recovered (employment levels relative to Dec 2019). - Labor force participation rate remains below pre-pandemic levels. - Informality: informality rate has declined but remains elevated; women disproportionately affected. - Employment by sector relative to Dec 2019 shows heterogeneity (agriculture, manufacturing, construction, retail, hospitality, transport, communications, financial services, etc.). ### Recent macro-financial developments (Figure 8; Tables 6–9) - Sovereign bond yields: 10-year dollar-denominated and Col$-denominated bond yields have shown an upward trend since May (series Jan-14 to Jan-22). - Stock market: LA4 and Colombia indices (Jan 2013=100) — stock market registered some recovery in 2021H2. - Real credit growth: bank credit started to increase. - Household debt (percent of GDP): series showing slight decline relative to GDP to 2021. - Corporate debt (percent of GDP): private sector corporate debt shows high level relative to GDP. - Mortgage credit: real mortgage credit growth remained dynamic with continued real house price growth rates. - Table 6 (Medium-Term Outlook, key projections): - Real GDP: 1.4 (2017), 2.6 (2018), 3.2 (2019), -7.0 (2020), 10.6 (2021), projections: 5.4 (2022), 3.3 (2023), 3.4 (2024–2027 each year). - Consumer prices (eop): 4.1 (2017), 3.1 (2018), 3.8 (2019), 1.6 (2020), 5.6 (2021), projections: 5.7 (2022), 3.5 (2023), 3.0 (2024–2027). - Gross national savings: 18.4 (2017), 17.0 (2018), 16.8 (2019), 15.7 (2020), 14.0 (2021), projections: 13.9 (2022), 14.6 (2023), 14.9 (2024), 15.1 (2025), 15.4 (2026), 15.6 (2027). - Nonfinancial public sector overall balance: -2.5 (2017), -4.7 (2018), -3.5 (2019), -7.0 (2020), -6.8 (2021), projections: -5.1 (2022), -3.3 (2023), -1.8 (2024), -1.2 (2025), -1.3 (2026), -1.3 (2027). - Gross public sector debt: 49.4 (2017), 53.6 (2018), 52.4 (2019), 65.7 (2020), 64.6 (2021), projections: 62.1 (2022), 61.8 (2023), 60.3 (2024), 59.4 (2025), 57.7 (2026), 56.3 (2027). ### Financial soundness and external vulnerability (Tables 5, 7, 8, 11) - Financial soundness (Table 7, end-of-period): - Regulatory capital to risk-weighted assets: 16.9 (2015), 17.5 (2016), 18.6 (2017), 17.8 (2018), 16.9 (2019), 19.2 (2020), 22.0 (2021). - Regulatory Tier 1 capital to risk-weighted assets: 11.4 (2015), 11.4 (2016), 12.4 (2017), 12.3 (2018), 11.8 (2019), 14.4 (2020), 17.8 (2021). - Provisions to nonperforming loans: 155.5 (2015) … 157.6 (2021). - Liquid assets to total assets: 18.9 (2015) … 20.0 (2021). - Indicators of external vulnerability (Table 8, selected): - Current account balance (billions US$): -9.9 (2017), -14.0 (2018), -14.8 (2019), -9.6 (2020), -18.1 (2021). - Current account (percent of GDP): -3.2 (2017), -4.2 (2018), -4.6 (2019), -3.5 (2020), -5.8 (2021). - Total external debt (percent of GDP): 47.3 (2017), 46.7 (2018), 50.1 (2019), 65.6 (2020), 60.4 (2021). - Gross international reserves (billions US$): 47.1 (2017), 47.9 (2018), 52.7 (2019), 58.5 (2020), 59.1 (2021). - Reserves in months of prospective GNFS imports: 8.8 (2017), 8.8 (2018), 12.3 (2019), 9.9 (2020), 9.1 (2021). - Coverage in percent of ARA: 134 (2017), 132 (2018), 140 (2019), 141 (2020), 137 (2021). ### Debt dynamics and stress tests (Tables 9–12) - Gross external financing need (Table 11): 41.0 (2017), 46.3 (2018), 48.5 (2019), 46.9 (2020), 55.5 (2021), projections: 53.4 (2022), 55.2 (2023), 60.9 (2024), 61.7 (2025), 63.5 (2026), 65.8 (2027) — in billions of US$ and corresponding percent of GDP figures presented. - External debt-stabilizing non-interest current account (Table 11): baseline external debt and identified external debt-creating flows with decomposition of automatic debt dynamics (contributions from nominal interest rate, real GDP growth, price/exchange rate changes). - External debt sustainability bound and shock tests (Table 12 and related figures): scenarios include interest-rate shock, current-account shock, growth shock, combined shock, and a one-time 30 percent real depreciation in 2022 with resulting external debt paths and gross financing need trajectories. *Source: IMF staff report (Colombia) as presented in the supplied content unit.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Overall assessment - The external position is moderately weaker than implied by medium-term fundamentals and desirable policies. - Assessment driven by the estimated current account gap of -1.86 percent of GDP (+/-1 percent of GDP, given uncertainty surrounding point estimates). - Mitigating factors: - Diversity and relative stability of capital flows. - Negative correlation between the income balance and the trade balance. - Adequate reserve coverage. - Flexible exchange rate that has continued as a long serving primary mechanism of adjustment to external shocks. ### Potential policy responses - Fiscal consolidation in 2022 and through the medium term is expected to raise national saving. - Structural policies to improve competitiveness and boost non-commodity exports remain essential but will likely only aid the external position over the medium term. - Priorities: - Lowering nontariff barriers. - Enhancing customs procedures. - Reducing transportation costs. - Improving infrastructure. ### Foreign assets and liabilities: position and trajectory - Background: - Estimated NIIP was -57 percent of 2021 GDP in December 2021, an increase of 1.4 percent of GDP compared to end-2020 (-59 percent of 2020 GDP). - NIIP numerator decreased by US$ 18.1 billion (6 percent of 2021 GDP) because of exchange rate and other valuation effects. - Decline of 18 percent of GDP relative to end-2015, consistent with cumulative net inflows of financial liabilities. - Excluding direct investment (DI), NIIP stood at -7 percent of GDP, compared to -6 percent at end-2015. - Considering only reserve assets and debit liabilities, the net position was -42 percent. - Assessment: - Gross external financing needs rose to an estimated 17.9 percent of GDP in 2021. - The external stability (ES) approach suggests a need for an external adjustment once the recovery is fully underway. - Estimated medium-term current account balance required to stabilize the NIIP at its end-2020 level is -3.2 percent of GDP, which is a narrower deficit than the medium-term baseline. - Large share of FDI and a net long foreign currency position may permit a smaller or slower adjustment. - 2021 (% GDP) key aggregates: - NIIP: -57 - Gross Assets: 72 - Reserve Assets: 19 - Gross Liab.: 128 - Debt Liab.: 65 ### Current account - Background: - Estimated current account balance (CAB) of -5.8 percent of GDP in 2021 was a larger deficit than 3.5 percent in 2020 and the -4.4 percent of GDP 2015-20 average. - Imports rose by 37 percent; lagging exports grew by about 32 percent. - Production of oil and coal were particularly dampened in Q2, recovering only partially. - Short- and medium-term CAB is projected to decrease to about -4.1 percent of GDP on the back of the recovery in exports and the moderation of imports growth, including the effects of fiscal consolidation. - Assessment and model adjustments: - Cyclically-adjusted CAB norm: -0.8 percent of GDP. - CAB gap (EBA): -5.4 percent of GDP for 2021. - Identified policy gaps assessed to be small (-0.1). - Adjustments applied: - Contribution of oil exports to the norm reduced by 1.3 percent of GDP (investment needs and channeling of government oil revenue to infrastructure). - Downward adjustment of 0.5 percent to the norm for large stock of migrants from Venezuela. - Cyclically-adjusted CAB also adjusted by 1.34 percent of GDP to account for the effects of the COVID-19 crisis. - Additional 0.4 percent to take into account the effects of blockages that occurred in early 2021. - Combined adjustments reduce the CAB gap by 3.54 percent to -1.86 percent of GDP (+/-1 percent of GDP, given uncertainty). - Staff assesses the CAB to be moderately weaker than justified by medium-term fundamentals and desirable policies. - 2021 (% GDP) reported values: - Estimated CA: -5.8 - Cycl. Adj. CA: -6.2 - EBA Cycl. Adj. CA Norm: -0.8 - EBA CA Gap: -5.4 - COVID-19 Adj: -1.34 - Staff CA Gap: -1.86 ### Real exchange rate (REER) - Background: - Period average REER index depreciated by about 2 percent in 2021, following a depreciation of 11 percent in 2020. - REER was 36 percent weaker than in 2014 owing to lower, but recovering, oil prices. - Assessment: - EBA REER approaches estimate an undervaluation of 32.5 percent (index method) and 29.1 percent (level method) in 2021. - Applying a semi-elasticity of -0.12 to the gap from the CAB approach suggests a REER overvaluation of between 8.5 and 30.5 percent. - Overall staff judgment: REER gap consistent with the CAB gap at 19.5 percent, with a wide range of uncertainty (+/- 11 percent). - Uncertainty driven by: - Poor fit of the EBA CAB model for Colombia with large unexplained residuals persistently biased. - Arithmetic amplification from low semi-elasticity. - Substantial differences across REER and CA approaches. ### Capital and financial accounts: flows and policy measures - Background: - Current account deficits have been financed primarily by capital inflows (FDI and portfolio debt securities) over the last decade. - Net FDI inflows in 2020 were an estimated 2.7 percent of GDP, diversified across sectors. - Private sector received portfolio inflows of roughly 1.3 percent of GDP. - Sovereign issuances on international markets continued in 2021, including the first green bond issuance in Latin America (heavily oversubscribed). - Non-residents’ holdings of domestically issued government debt securities increased substantially in 2021. - Proportion of shorter maturities (<3 years) slightly increased from 7 to 9 percent (still far from 17 percent observed in 2019). - Government diversified foreign funding sources by borrowing from multilateral institutions. - Assessment: - Relative stability of FDI flows, diversification of creditors, very strong macroeconomic policies, and uninterrupted market access have underpinned capital inflows, including around periods of stress. - Colombia’s attractiveness as an investment destination and favorable global monetary conditions should allow temporarily withheld investments to resume once the acute phase of the pandemic has passed and fiscal reform uncertainties have abated. ### FX intervention and reserves level - Background: - Gross reserves increased slightly by about US$0.6 billion in 2021 owing to realized valuation gains and the 2021 IMF General SDR Allocation of roughly US$2.8 billion, which was offset by the selling of the same US$ amount to the government. - Central bank intervened in the FX market between March 13, 2020 and February 3, 2021 by an amount of USD 9.1 billion, mainly through auctions of forward contracts (NDFs). - Assessment: - Flexible exchange rate has long served as the 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 as measured by the ARA metric has increased since 2017 but has declined since 2015 because higher liabilities have contributed to a higher metric. - For 2021, coverage is estimated at 113 percent of the ARA metric including a commodity buffer and 137 percent excluding the commodity buffer. - Access to unused resources available under Colombia’s FCL provides an additional liquidity buffer equivalent to 23 percent of the ARA metric including the commodity buffer. - Further reserve accumulation would help insure against elevated external risks. *Source: Annex I. External Sector Assessment (1colea2022002)* ### 4. Negative shocks to GDP growth and the real exchange rate would put pressure to the ### 1colea2022002 - 4. Negative shocks to GDP growth and the real exchange rate would put pressure to the ### Debt vulnerability and stress-test findings - Negative shocks to real GDP growth (calibrated as one standard deviation) and the real exchange rate (calibrated at 30 percent) would increase the public debt ratio to levels just below 80 percent in the near-term. - A shock to the primary balance would not be as stringent as the shocks to real GDP growth and the real exchange rate, but staff recognize risks associated with a potential shortfall of revenue mobilization efforts (see Annex III). - Stress-test scenarios shown (Figures and tables) include: - Primary Balance Shock - Real GDP Growth Shock - Real Interest Rate Shock - Real Exchange Rate Shock (30 percent depreciation) - Combined Macro-Fiscal Shock - Under the Real Exchange Rate Shock: inflation in 2023 is shown as 14.0 (percent) in the stress scenario table. - Under the Real Interest Rate Shock: effective interest rates rise across projection years (example: 2024 = 6.3, 2025 = 7.3, 2026 = 8.0, 2027 = 8.2 in the Real Interest Rate Shock panel). - Combined Shock effective interest rates reported: 2023 = 6.7, 2024 = 6.3, 2025 = 7.5, 2026 = 8.2, 2027 = 8.4 (percent). ### Foreign participation, refinancing, and market risks - The share of NFPS debt held by non-residents is above its risks benchmark, reflecting a rapid increase of foreign investors’ participation in Colombia’s local currency public debt market since 2013. - Refinancing risks are mitigated by a more diversified foreign investor base, cash on hand and pre-financing. - Authorities have progressed in their strategy to: - increase the proportion of loans carrying fixed interest rates, - extend maturities, - increase liquidity in the local market, - minimize roll-over risk (see Medium-Term Debt Management Strategy 2018−22). - The level and share of local currency sovereign debt held by non-residents exhibited a decline in February and March of 2021 related to the increase of US yields and the announcement of a higher fiscal deficit in 2021 (the level decline was 2.5 percent). - Foreign investors adjusted positions anticipating loss of investment grade, which occurred in May (S&P) and July (Fitch). - The observed decline highlights the risk that non-residents could sell and exit for a sustained period. - Risks are elevated with respect to external financing requirements which rose notably in 2020 due to the pandemic, as short-term external debt rose while nominal growth contracted. ### Baseline projections and key fiscal indicators (selected exact figures) - Nominal gross public debt: 2020 = 45.1, 2021 = 65.7, 2022 = 64.6, 2023 = 62.1, 2024 = 61.8, 2025 = 60.3, 2026 = 59.4, 2027 = 57.7, 2028 = 56.3 (in percent of GDP; table heading context: "As of February 17, 2022"). - Public gross financing needs: 2020 = 5.4, 2021 = 8.7, 2022 = 10.0, 2023 = 6.8, 2024 = 6.8, 2025 = 6.0, 2026 = 5.4, 2027 = 6.6, 2028 = 5.5 (in percent of GDP). - Real GDP growth (in percent): 2020 = 3.6, 2021 = -7.0, 2022 = 10.6, 2023 = 5.4, 2024 = 3.3, 2025 = 3.4, 2026 = 3.4, 2027 = 3.4, 2028 = 3.4. - Inflation (GDP deflator, in percent): 2020 = 3.9, 2021 = 1.4, 2022 = 6.6, 2023 = 6.0, 2024 = 3.4, 2025 = 3.1, 2026 = 3.1, 2027 = 3.1, 2028 = 3.1. - Effective interest rate (in percent): 2020 = 7.4, 2021 = 5.4, 2022 = 6.0, 2023 = 7.4, 2024 = 5.6, 2025 = 5.9, 2026 = 6.6, 2027 = 7.0, 2028 = 6.9. - Identified debt-creating flows (cumulative change in gross public sector debt): 2020 = 1.8, 2021 = 13.3, 2022 = 1.1, 2023 = -1.0, 2024 = -2.5, 2025 = -0.3, 2026 = -1.4, 2027 = -0.9, 2028 = -1.7, cumulative = -1.3, total = -8.3 (table row headings preserved). - Primary (noninterest) revenue and grants: 2020 = 27.7, 2021 = 26.2, 2022 = 27.2, 2023 = 28.7, 2024 = 29.6, 2025 = 29.7, 2026 = 29.2, 2027 = 29.0, 2028 = 28.7, cumulative = 174.8 (percent of GDP). - Primary (noninterest) expenditure: 2020 = 28.0, 2021 = 30.8, 2022 = 31.1, 2023 = 30.8, 2024 = 29.9, 2025 = 28.6, 2026 = 27.4, 2027 = 27.1, 2028 = 27.2, cumulative = 170.9 (percent of GDP). - Change in gross public sector debt contributions (examples): real interest rate, real GDP growth, exchange rate depreciation entries are provided in detailed formula footnotes and table cells. ### Policy recommendations and risk mitigation from Risk Assessment Matrix (selected) - 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. - Use the flexible exchange rate as the first line of defense against external shocks; targeted liquidity interventions, including unconventional measures like asset purchases, can address disorderly market conditions, as can use of international reserves, if needed. - The government needs to continue implementing its medium-term fiscal consolidation adjustment plans starting in 2022 to build credibility in the fiscal framework and reduce further pressures on sovereign yields. - To reduce the risk of domestic tensions and protests, speed up implementation of Compromiso por Colombia and Peace Agreement, with focus on reducing inequality. - Reduce reliance on oil-related tax revenues. - If needed, deploy reserves to mitigate the impact of potentially weaker capital outflows. - Reprioritize public investment projects and speed up structural reforms to enhance external competitiveness and diversification. - 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 over time; reprioritize public investment projects. - Seek concessional financing and aid ensuring medium-term declining path for public debt; speed-up policies to integrate migrants into the labor force. *Source: IMF staff (from the provided PDF content).* ### Annex VI. 2022 Financial Sector Assessment Program (FSAP) ### Annex VI. 2022 Financial Sector Assessment Program (FSAP) ### Overview - FSAP conducted from February to November 2021. - Objective: help identify key sources of systemic risk in the financial sector and implement policies to enhance resilience to shocks and contagion. - Main findings summarized below. ### Progress since 2012 and structural developments - Since the previous FSAP in 2012, Colombia has taken important steps to strengthen and develop its financial system. - Key developments: - Financial supervision and systemic risk oversight enhanced, especially through the Conglomerates Law of 2017. - Strong and sustained public sector commitment towards financial inclusion coupled with legal and regulatory reforms led to achievement of access targets; digital payments are lagging and inequalities persist due to high costs and frictions. - The 2018 Capital Markets Mission contributed to diagnostics and consensus building and led to several legal reforms, though challenges remain. - Colombia is at the regional forefront in facilitating capital mobilization towards sustainable projects and enhancing the financial sector’s role in managing climate-related risks. ### Institutional framework for macroprudential policy - The institutional framework has been effective to date. - Systemic risk monitoring framework described as advanced. - Macroprudential toolkit enhanced in line with Basel III recommendations. - Recommendations: - Prepare a macroprudential oversight strategy, jointly drafted and signed by all relevant institutions. - Strengthen the central bank’s role in macroprudential policy to harness its macro-financial analysis expertise. - To address potential risks from rapid household indebtedness growth: - Expand Loan-to-Value (LTV) and Debt-Service-to-Income (DSTI) tools to cover leasing products and nonbank credit. - Ensure the DSTI tool includes nonmortgage debt. ### Crisis management and safety net - Some features would benefit from further enhancement. - FSAP recommends: - Strengthen the operational independence of the resolution unit within the SFC. - Review responsibilities for developing recovery and resolution plans and expand the content of recovery plans. - Strengthen safeguards for FOGAFIN’s fund and provide unambiguous access to a back-up liquidity facility. ### Solvency and liquidity stress testing - Bank solvency: - Appears resilient to stress. - A severe combined shock (global pandemic resurgence, tightening global financial conditions, political uncertainty, and fiscal deterioration) shows the banking system overall would stay above regulatory minima, aided by well-capitalized banks and relatively strong profit buffers. - Liquidity stress: - Banking system largely resilient; liquidity shortfalls relatively small under an extreme funding shock. - In very extreme scenarios, liquidity risk would arise for some banks with heavier reliance on unsecured wholesale funding and lower holdings of liquid assets. - Corporate sector: - Corporate vulnerability analysis: the pandemic shock led to deterioration in repayment capacity and profitability in 2020, but it did not trigger widespread systemic failures due to pandemic-related policy actions. ### Structural and emerging risks - Key structural and emerging risks identified: - Financial system dominated by large and complex financial conglomerates with increasing cross-border exposures. - Colombian conglomerates have become systemic players in several Central American countries. - Monitoring of interconnectedness and contagion channels is essential. - Supervisory and resolution gaps: - Considerable progress in cross-border information sharing and supervisory cooperation, but further development of monitoring tools to bolster early-warning systems is recommended. - Resolution planning for cross-border institutions should be strengthened. - Credit and household indebtedness: - Pre-pandemic domestic credit growth was contained overall, but consumer credit was growing rapidly, particularly in the unsecured segment; this portfolio had high impairment rates during the pandemic. - Lending to households is expected to grow strongly again; closing data and oversight gaps on household indebtedness is necessary. *Source: Annex VI. 2022 Financial Sector Assessment Program (FSAP).* ### 2022. A data ROSC took place in 2006 and a fiscal ROSC in 2003. ### 1colea2022002 - 2022. A data ROSC took place in 2006 and a fiscal ROSC in 2003. ### Technical assistance provided (selected chronology and purposes) - FAD Aug. 2016 — Discussion of the 2017 structural tax reform - STA Dec. 2016 — National Accounts - FAD Feb. 2017 — Revenue Administration - FAD Mar. 2017 — Fiscal Transparency Assessment - STA Jun. 2017 — National Accounts - FAD Aug. 2017 — Tax and Customs Administration - FAD Sep. 2017 — Treasury Management - STA Sep. 2017 — National Accounts - STA Nov. 2017 — Government Finance Statistics - STA Dec. 2017 — National Accounts - STA Apr. 2018 — Sectoral Accounts - STA Apr. 2018 — Residential Property Prices Indices - STA May. 2018 — National Accounts - STA Sep. 2018 — Residential Property Price Index - FAD Oct. 2018 — Tax Administration - STA Oct. 2018 — Consumer Price Index - STA Dec. 2018 — Sectoral Accounts - FAD Mar. 2019 — Compliance and Core Procedures - FAD Mar. 2019 — Fiscal Rule and Fiscal Risks - STA Mar. 2019 — Sectoral Accounts - FAD Apr. 2019 — Energy Subsidy Reform - FAD Aug. 2019 — Establishing a debt anchor and updating the fiscal rule - FAD Oct. 2019 — Strengthening the fiscal risk management office and managing fiscal risks from SOEs - FAD Jul 2020 — TADAT Assessment - FAD Oct. 2020 — BRP Treasury Reporting - STA Apr. 2021 — Fiscal and Public Debt Data Compilation - STA Apr. 2021 — Improve Capacity for Residential Property Price Index - ICD Sep. 2021 (Nov. 2021, Jan.2022) — Strengthening Macro-Fiscal Analysis and Forecasting Capacity - STA Aug. 2021 — Compilation of FSIs - FAD Aug. 2021 — Revenue Administration - FAD Nov. 2021 — Strengthening Fiscal Risks Analysis and Reporting ### Relations with other international financial institutions - World Bank Group: country page and overview of lending to Colombia (URLs listed in source) - Inter-American Development Bank: country page and lending portfolio (URLs listed in source) ### Statistical issues — Assessment of data adequacy for surveillance (key points) - General: Provision of macroeconomic statistics is adequate for surveillance. - National Accounts: - DANE compiles national accounts; BdR compiles financial accounts and stocks according to the 2008 SNA. - Annual and quarterly GDP estimates use 2015 as the reference year for annually chained volume measures; a monthly indicator for monitoring the economy is disseminated. - Minimum 2008 SNA requirements compiled regularly: annual value added and GDP at current and previous year prices; chain-linked volume series by activity; annual expenditure GDP components; sequence of accounts up to net lending (annual); annual rest of the world accounts (up to net lending); quarterly value added and GDP; quarterly expenditure components; and annual supply-use tables. - During 2016-2020 IMF assistance helped develop quarterly financial and non-financial accounts by institutional sector. Since June 30, 2021, BdR jointly with DANE began disseminating "Integrated Quarterly National Accounts by Institutional Sector" integrating DANE and BdR accounts. - Price Statistics: - DANE compiles monthly CPI and PPI. CPI basket/weights updated in 2019 using 2016/17 household expenditures with STA support. PPI (December 2014=100) redesigned in 2015 using 2011 weights; covers agriculture, livestock, fishing, mining, and industry. - STA assisted DANE to improve residential property price statistics based on the RPPI Practical Compilation Guide 2020. Quarterly RPPI currently covers Bogota only. - Government Finance Statistics: - MFPC compiles public revenue, expenditure, and financing data. Authorities committed to adopt GFSM 2014, enhance inter-institutional coordination, increase resources for GFS compilation. Latest data published in the Government Finance Statistics Yearbook (GFSY). - Next steps: align revenue and expense classification with GFSM 2014, improve consolidation, adopt a common list of public sector entities, and disseminate high-frequency data nationally and internationally. - GAO developed a single accounting framework based on International Public Sector Accounting Standards and maintains a financial management information system for all public sector units. MFPC’s Macroeconomic Policy Unit and GAO developed a bridge table converting national accounting classification to GFSM 2014 to compile GFS on accrual and cash bases. - Monetary and Financial Statistics: - BdR reports SRFs: 1SR (central bank), 2SR (ODCs), and 5SR (monetary aggregates) for IFS monthly with lags (1SR two months; 2SR four months). SFC compiles OFC data using 4SR but last reported OFC data are for December 2014 due to SFC review and IFRS mapping. Financial instrument and sector classification follow the MFSM. - BdR reports several Financial Access Survey (FAS) indicators, including commercial bank branches per 100,000 adults and ATMs per 100,000 adults (UN SDG Target 8.10 indicators). - Financial Sector Surveillance: - Colombia has reported Financial Soundness Indicators (FSI) since 2005. Colombia reports all 13 core and eight additional FSIs for deposit takers monthly per the 2019 FSI Compilation Guide. FSIs, metadata, and underlying series are available on the IMF’s data portal. - External Sector Statistics: - BdR compiles quarterly balance of payments and IIP on a BPM6 basis. Improved services surveys enhanced BOP coverage. Recording of securities transactions between residents and nonresidents in secondary markets could be improved. - BdR compiles and disseminates monthly Data Template on International Reserves and Foreign Currency Liquidity; reports semi-annual CPIS data; submits quarterly external debt statistics to QEDS. Colombia has not reported data to CDIS yet. ### Data standards and dissemination - Colombia subscribes to the Special Data Dissemination Standard (SDDS) since 1996; metadata posted on the DSBB. - Table of Common Indicators Required for Surveillance (as of February 28, 2022) — selected observations and reporting frequencies (verbatim from source): - Exchange Rates: Date of Latest Observation Feb. 24, 2022; Date Received Feb. 24, 2022; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation Jan. 2022; Date Received Feb. 2022; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Reserve/Base Money: Jan. 2022; Feb. 2022; W; W; W. - Broad Money: Jan. 2022; Feb. 2022; W; W; W. - Central Bank Balance Sheet: Jan. 2022; Feb. 2022; W; W; W. - Consolidated Balance Sheet of the Banking System: Nov. 2021; Feb. 2022; M; M; M. - Interest Rates: Feb. 24, 2022; Feb. 24, 2022; D; D; D. - Consumer Price Index: Jan. 2022; Feb. 2022; M; M; M. - Revenue, Expenditure, Balance and Financing Composition – General Government (GG): Jun. 2021; Nov. 2021; Q; Q; Q. - Revenue, Expenditure, Balance and Financing Composition – Central Government: Jun. 2021; Nov. 2021; M; M; M. - Stocks of Central Government and Central Government-Guaranteed Debt: Dec. 2021; Jan 2022; M; M; M. - External Current Account Balance: Q4 2021; Mar. 2022; Q; Q; Q. - Exports and Imports of Goods and Services: Q4 2021; Feb. 2022; Q; Q; Q. - GDP/GNP: Q4 2021; Feb. 2022; Q; Q; Q. - Gross External Debt: Nov. 2021; Feb. 2022; M; M; M. - International Investment Position: Q4 2021; Mar. 2022; Q; Q; Q. ### Supplementary information — Initial assessment of Russia-Ukraine war effects (staff update) - Global commodity price revisions (baseline changes): - Brent oil average price for 2022 revised by 30 percent (from USD 82 per barrel to USD 107 per barrel). - Coal baseline price revised by 300 percent (from USD 235 per metric ton to USD 558 per metric ton). - International agricultural commodity (food) prices revised up by 7 percent. - Macroeconomic implications summarized: - GDP growth projection for 2022 revised up by 0.4 percentage points to 5.8 percent of GDP. - Expected large increase in key commodity prices would reduce current account deficit from 5.7 percent of GDP in 2021 to 3.3 and 3.4 percent of GDP in 2022 and 2023, respectively. - External financing needs expected to decline from 18 percent of GDP in 2021 to around 14 percent in 2022 and 2023. - Consolidated public sector deficit projected at 4.4 and 2.1 percent of GDP in 2022 and 2023, respectively, down from 7.2 percent of GDP in 2021. - Higher oil prices will boost fiscal revenues mainly in 2023 via higher corporate taxes and dividends from Ecopetrol (state as largest shareholder); fiscal revenue effects are delayed. - Inflation and monetary policy: - Staff’s inflation forecast revised up to 6.9 percent from 5.7 percent for end-2022. - Inflation climbed to 8 percent in February (source text: "as inflation climbed to 8 percent in February"). - Pressures: strong domestic demand, elevated commodity prices, persistent supply shocks; currency appreciation has modestly mitigated inflationary effects. - Staff advice: accelerate monetary policy tightening on a frontloaded basis to safeguard credibility, anchor inflation expectations, and insure against upside inflation risks. - Risks: - Downside growth risks remain prominent; key risks include uncertainty around the Ukraine conflict, effects on global growth, commodity prices, financial markets, and risks from elevated inflation and uncertain monetary tightening in major economies. - Faster-than-expected monetary tightening in major economies could dampen global growth and commodity prices and prompt capital outflows from emerging markets. - Fiscal recommendation: - Save additional fiscal revenues, especially in 2023, related to higher GDP growth and hydrocarbon prices (higher income tax collections and dividends from Ecopetrol), to help further reduce the fiscal deficit and to achieve or overperform fiscal targets along the transition path anchored by the new fiscal rule as provided by the Social Investment Law. ### Key selected economic and financial indicators (verbatim entries from Table 1) - Real GDP: 2017 1.4; 2018 2.6; 2019 3.2; 2020 -7.0; 2021 10.6; 2022 5.8; 2023 3.6; 2024 3.4; 2025 3.4; 2026 3.4; 2027 3.4 - Potential GDP: 2017 2.9; 2018 3.0; 2019 3.1; 2020 -2.0; 2021 5.0; 2022 4.4; 2023 3.8; 2024 3.4; 2025 3.4; 2026 3.4; 2027 3.4 - Output Gap: 2017 -0.8; 2018 -1.2; 2019 -1.1; 2020 -6.2; 2021 -1.2; 2022 0.1; 2023 -0.1; 2024 0.0; 2025 0.0; 2026 0.0; 2027 0.0 - GDP deflator: 2017 5.1; 2018 4.6; 2019 4.0; 2020 1.4; 2021 6.6; 2022 7.5; 2023 3.4; 2024 3.1; 2025 3.1; 2026 3.1; 2027 3.1 - Consumer prices (average): 2017 4.3; 2018 3.2; 2019 3.5; 2020 2.5; 2021 3.5; 2022 7.7; 2023 4.2; 2024 3.5; 2025 3.0; 2026 3.0; 2027 3.0 - Consumer prices, end of period (eop): 2017 4.1; 2018 3.1; 2019 3.8; 2020 1.6; 2021 5.6; 2022 6.9; 2023 3.8; 2024 3.0; 2025 3.0; 2026 3.0; 2027 3.0 - Exports (f.o.b.): 2017 16.8; 2018 8.1; 2019 -5.4; 2020 -20.5; 2021 32.3; 2022 47.0; 2023 1.8; 2024 -3.4; 2025 -0.3; 2026 2.6; 2027 2.2 - Imports (f.o.b.): 2017 1.9; 2018 12.1; 2019 2.3; 2020 -18.5; 2021 37.7; 2022 16.3; 2023 3.7; 2024 2.9; 2025 1.9; 2026 3.4; 2027 3.4 - Terms of trade (deterioration -): 2017 9.9; 2018 3.5; 2019 -2.3; 2020 -12.2; 2021 13.4; 2022 26.6; 2023 -11.1; 2024 -6.3; 2025 -1.8; 2026 -1.4; 2027 -0.7 - Broad money: 2017 6.4; 2018 5.7; 2019 10.0; 2020 10.3; 2021 12.3; 2022 12.2; 2023 8.5; 2024 7.8; 2025 7.6; 2026 7.5; 2027 7.5 - Credit to the private sector: 2017 12.8; 2018 6.8; 2019 11.6; 2020 -0.8; 2021 11.5; 2022 12.5; 2023 8.5; 2024 7.9; 2025 7.8; 2026 7.6; 2027 7.5 - Central government balance: 2017 -3.6; 2018 -4.8; 2019 -2.5; 2020 -7.8; 2021 -8.2; 2022 -6.1; 2023 -3.7; 2024 -3.6; 2025 -2.6; 2026 -2.5; 2027 -2.5 - Consolidated public sector (CPS) balance: 2017 -2.4; 2018 -4.5; 2019 -2.9; 2020 -6.9; 2021 -7.2; 2022 -4.4; 2023 -2.1; 2024 -1.3; 2025 -0.8; 2026 -0.9; 2027 -1.0 - Public sector gross debt: 2017 49.4; 2018 53.6; 2019 52.4; 2020 65.7; 2021 64.6; 2022 60.6; 2023 59.2; 2024 57.5; 2025 56.3; 2026 54.5; 2027 52.9 - Current account (deficit -): 2017 -3.2; 2018 -4.2; 2019 -4.6; 2020 -3.4; 2021 -5.7; 2022 -3.3; 2023 -3.4; 2024 -3.8; 2025 -3.9; 2026 -3.9; 2027 -3.9 - External Financing Needs: 2017 13.5; 2018 14.3; 2019 15.3; 2020 17.9; 2021 17.8; 2022 13.9; 2023 14.1; 2024 15.3; 2025 15.0; 2026 14.8; 2027 14.6 - External debt: 2017 47.3; 2018 46.7; 2019 50.1; 2020 65.6; 2021 60.3; 2022 58.1; 2023 58.4; 2024 59.1; 2025 59.0; 2026 58.6; 2027 58.2 - Exports (f.o.b.) — share of total (selected): 2017 39.8; 2018 43.0; 2019 40.7; 2020 32.3; 2021 42.7; 2022 62.8; 2023 64.0; 2024 61.8; 2025 61.6; 2026 63.2; 2027 64.6 - Of which: Petroleum products (share of exports): 2017 13.3; 2018 16.8; 2019 16.0; 2020 8.8; 2021 13.5; 2022 21.4; 2023 23.5; 2024 22.4; 2025 19.9; 2026 19.3; 2027 18.5 - Gross international reserves: 2017 47.1; 2018 47.9; 2019 52.7; 2020 58.5; 2021 59.1; 2022 60.2; 2023 61.5; 2024 62.9; 2025 64.2; 2026 65.1; 2027 65.9 *Source: 1colea2022002 - 2022. A data ROSC took place in 2006 and a fiscal ROSC in 2003.* ### 2022. Financing of the external deficit should continue benefitting from ample access to ### 2022. Financing of the external deficit should continue benefitting from ample access to international markets and resilient FDI flows, although risks to financial flows are elevated ### Macro-fiscal outlook and growth - Public deficit in 2021 was 7.1 percent of GDP, well below the level estimated by the Government at the beginning of last year (8.6 percent), due to the better performance of the economy and the associated higher tax collections. - The improved economic activity will have a positive impact on Government revenues in 2022, which will allow the deficit to go as low as 6.2 percent of GDP this year, much lower than previously predicted. - Debt to GDP ratio: - 64.7 percent in 2020 - 63.8 percent of GDP in 2021 - expected to decline further, to 62.7 percent in 2022 - The Central Bank’s growth forecast of 4.3 percent for 2022 is likely to be revised upwards after positive surprises in economic activity data. - Growth drivers and outlook: - Statistical base effects - Dynamic investment (noted as still lagging but recovering) - Greater exports - Labor market: not yet fully recovered from the pandemic, but unemployment rate expected to fall gradually throughout 2022 - Successful execution of the national vaccination plan will continue supporting the recovery - Inflation: - Expected to stay above target for the remainder of the year due to protracted supply shocks - Should gradually decrease in the second semester and get close to target in 2023 - Local food supply shocks expected to dissipate in the second half of the year, while external cost pressures affecting many sectors shall remain ### External environment, risks, and financing - Current global situation generates considerable uncertainty; risks to financial flows are elevated. - Key external risks: - Speed of monetary policy normalization in advanced economies - Conflict in Ukraine, raising uncertainty and potentially heightening external supply shocks (especially food), complicating inflationary pressures - Uncertainty regarding capital flows to Colombia and risk perception towards emerging markets - Further waves of COVID-19 infections as a downside risk (new lockdowns not expected in Colombia) - Recent market developments: - As an oil exporter, Colombia’s terms of trade have improved - Portfolio capital apparently flowed into the country during recent weeks, increasing Colombian treasury bonds’ prices and inducing some currency appreciation - The extent and duration of these effects are hard to discern - External cushions and policy stance: - Flexible exchange rate regime within the Central Bank’s inflation targeting framework - Low currency mismatches and limited pass-through from exchange rate to local prices support exchange rate as shock absorber - International reserves remain within the adequacy range suggested by the Fund’s ARA metric during the last years - The Flexible Credit Line (FCL) has served as an additional important buffer and increased confidence among foreign creditors and investors - Authorities committed to maintaining adequate international liquidity cushions and a flexible exchange rate ### Monetary policy and financial sector - Colombia follows a fully-fledged inflation targeting regime; the Central Bank responded to the COVID-19 shock to stabilize markets, support credit supply, and stimulate aggregate demand. - A gradual normalization of monetary policy started in September 2021; the policy stance is still expansionary, consistent with lingering excess capacity. - Policy approach: - Data-dependent given high uncertainty - Authorities recognize the need to bring the benchmark interest rate to the level required to control inflation and expectations - Financial sector condition: - Remains liquid, solvent, and well capitalized - Demonstrated resilience after the COVID-19 shock; macro-financial risks remain contained - Exceptional measures to support credit and borrowers during the pandemic are being phased out - Credit growth is supporting economic recovery; authorities monitor credit quantity and quality - Macroprudential framework: - Institutional framework effective and enhanced in line with Basel III recommendations, as found in the 2022 FSAP - Authorities committed to advance along FSAP recommendations to further strengthen supervisory and regulatory frameworks ### Fiscal policy, revenue measures, and institutions - Social Investment Law (approved September 14, 2021) introduces social spending programs and measures to generate additional revenues of 1.4 percent of GDP, including: - Increase of corporate income tax rate from 30 percent to 35 percent - Corporate surtax to companies with higher profits during the pandemic - Additional rules to strengthen the Tax Administration - Adjustment program to reduce expenditures and significant improvements to the fiscal rule - Income tax sources projected to increase fiscal revenues starting in 2023. - Fiscal rule reform: - Congress approved a proposal based on IMF technical assistance; the fiscal anchor was redefined to better ensure medium-term sustainability - New Fiscal Rule considers the debt level as a fiscal anchor, focusing on adjustments necessary to return to a sustainable path in the medium term - An Autonomous Fiscal Committee appointed as a technical and independent Board, already in place and active - Tax administration modernization: - Electronic invoice system implemented covering 95 percent of economic transactions - System based in artificial intelligence and a new functional structure - Tax revenues grew 19% in 2021 compared with 2020, explained by economic reactivation and advances in modernization of the Colombia Tax Administration (DIAN) - Authorities remain committed to improve revenues through more efficient tax collection ### Policy commitments and final assessment - Authorities committed to a strong economic policy framework: - Data-dependent monetary policy by a credible and independent Central Bank focused on keeping inflation close to target - Fiscal policy focused on medium-term sustainability - Financial regulation to guarantee a liquid, capitalized, and solvent financial system - Final remarks emphasize: - Colombia traversed the pandemic shock well; recovery faster than expected - Sound policies enabled rapid responses to shocks: fiscal and monetary policy supported activity; financial policy and supervision ensured resilience - Despite complex political outlook due to upcoming presidential elections, authorities commit to maintain policy and institutional frameworks, inflation targeting with exchange-rate flexibility, public finances anchored by a fiscal rule, and strong financial regulation and supervision as main lines of defense *IMF content unit: 1colea2022002 - 2022. Financing of the external deficit should continue benefitting from ample access to international markets and resilient FDI flows, although risks to financial flows are elevated* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1colea2022002.pdf_