## 1colea2023001 ## Source details **Canonical URL:** [1colea2023001](https://www.imf.org/-/media/files/publications/cr/2023/english/1colea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1colea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1colea2023001.pdf.json) --- ### Real sector — recent developments - New administration took office in August 2022 with agenda to reduce inequality and transition toward a greener, more diversified economy. - Flexible Credit Line (FCL) approved April 29, 2022: SDR7.1557 billion (about US$9.8 billion), treated as precautionary. - Real GDP growth: - 2021: 11 percent y/y. - 2022: 7.5 percent y/y. - Economy operating above potential; output reached pre-pandemic trends and is somewhat above potential. - Demand composition: - Private consumption was the major engine of growth. - Construction and mining (including oil) remain well below pre-pandemic levels. - Domestic demand growth started to slow in Q4:2022 with further moderation signaled by high frequency indicators and recent policy tightening. ### Labor market and social indicators - National unemployment rate (s.a.): - End-2021: 12.1 percent. - End-2022: 11.3 percent. - Pre-pandemic average (2015-2019): about 10 percent. - Employment at historical highs; labor force participation nearing pre-pandemic levels. - Unemployment for women and the young remain somewhat above pre-pandemic levels. - Poverty rates rose above levels observed a decade ago. - Population (million), 2022: 51.6. - GDP per capita (US$), 2022: 6,665. - Gini coefficient, 2021: 52.3. - Poverty rate, 2021: 39.3. ### Inflation and monetary policy - Headline inflation: - December 2021: 5.6 percent. - February 2023: 13.3 percent (y/y). - Core inflation: rising to over 10 percent. - Food inflation: 24 percent (y/y) in February 2023, accounting for about a third of the increase in headline inflation. - Medium-term (two-years ahead) inflation expectations: above 4 percent since April 2022; 4 percent is the upper limit of the band around the 3 percent target. - Producer price annual inflation: declining since June 2022 as global commodity prices moderated. - Policy rate: raised from 1.75 percent in September 2021 to 12.75 percent in January 2023. - Ex-ante real rate based on one-year ahead inflation expectations: around 250 basis points above the neutral rate. - Central bank commitment: reach inflation target by end-2024; future policy decisions to remain data-dependent. ### External sector and reserves - Current account deficit: - 2021: 5.6 percent of GDP. - 2022: 6.2 percent of GDP. - Terms of trade: up 20 percent (y/y) in 2022. - Annual import volumes grew 14 percent in 2022. - REER: depreciated 4.8 percent in 2022 following a 3.2 percent depreciation in 2021. - Gross international reserves: $56.7 billion at end-2022. - Reserves coverage: around 113 percent of the ARA metric including the commodity buffer. - Central bank foreign exchange intervention: none since February 2021; no FX intervention during 2022. ### Fiscal developments - Central government overall deficit: - 2021: -8.1 percent of GDP (excluding privatization proceeds). - 2022: -5.5 percent of GDP (estimated). - Transfers to the Fuel Price Stabilization Fund (FEPC): rose to 1 percent of GDP in 2022. - FEPC deficit accumulated around 2.6 percent of GDP by end-2022. - Consolidated public sector (CPS) headline balance: -6.6 percent of GDP in 2022 (estimate). - Gross public sector debt: 63.6 percent of GDP at end-2022 (compared to 64.0 percent at end-2021). - Authorities committed to reducing the central government deficit to 3.8 percent of GDP in 2023. ### Financial sector and credit - Consumer credit growth: 18.3 percent y/y in 2022, then cooled sharply in recent months. - Non-performing loans (consumer loan segments): 5.4 percent in November 2022 (up from 4.7 percent in June 2022). - Average debt service to income (DSTI) ratio: reaching over 37 percent. - Banking sector: capital adequacy well above regulatory levels; liquidity buffers ample; provisions coverage ratio about 150 percent. - Regulatory capital to risk-weighted assets: Dec-22 18.4 percent. - Nonperforming loan provisions: Nov-22 136.3 percent of nonperforming loans. - ROAA (return on average assets): Nov-22 5.2 percent. - Liquid assets to total assets: Nov-22 16.8 percent. - Deposit to loan ratio: Nov-22 94.4 percent. ### Outlook and key projections (baseline) - Real GDP growth: - 2023 (projected): 1.0 percent. - 2024: 1.9 percent. - 2025: 2.9 percent. - 2026–2028: 3.3 percent each year. - Medium-term potential growth rate: 3¼ percent. - Output Gap: - 2022: 1.6 percent. - 2023: -0.2 percent. - 2024: -0.8 percent. - Inflation path: - End-2023: about 8.4 percent (y/y). - First half of 2025: reach the 3 percent target. - Fiscal balances: - Consolidated overall fiscal deficit: -6.6 percent of GDP in 2022 to -3.8 percent of GDP in 2023 (projected) and to around -2 percent of GDP over the medium term. - Central government revenue and expenditure (percent of GDP): - Total revenue 2022: 16.3 percent; 2023: 20.5 percent; 2024: 20.0 percent. - Total expenditure and net lending 2022: 21.8 percent; 2023: 24.3 percent; 2024: 23.6 percent. - Primary deficit (percent of GDP): - 2022: 2.0; 2023: -1.0; 2024: -2.5. - Public debt (baseline, percent of GDP): - 2022: 63.6; 2023: 62.0; 2024: 61.1; 2025: 60.9; 2026: 60.1; 2027: 59.2; 2028: 58.3. - Current account deficit: - 2022: 6.2 percent of GDP. - 2023 (projected): 5.1 percent of GDP. - Medium-term: narrow to 4 percent of GDP. - Gross external financing need (US$ billions): - 2022: 59.3; projected 2023: 63.1; 2024: 62.3; 2025: 66.5. - External debt (percent of GDP): - 2022: 63.0; 2023: 68.1; 2024: 67.3. ### Fiscal adjustment, financing, and debt sustainability - 2021 and 2022 progressive tax reforms expected to yield "1 and 1¼ percent of GDP, respectively". - Revenues supported by dividends and taxes from Ecopetrol (around 3 percent of GDP) due to high oil prices last year. - The Financing Plan envisages central government primary surpluses hovering around 0.3-0.6 ppt of GDP. - Financing under the latest Financing Plan: - Around 2.3 percent of GDP in domestic financing (three-fourths in local currency). - 1.6 percent of GDP in external financing, with roughly 1 percent of GDP from multilateral sources. - Following preemptive US$3.8 billion bond issuance in November 2022 and January 2023, external financing needs for 2023 as a whole are now fully met. - Near-term gross financing needs average 5.5 percent of GDP over 2023-25. - Public sector debt assessed to be sustainable with high probability under a wide range of plausible shock scenarios. ### Policy recommendations and conditional guidance - Monetary policy: - Maintain a tight policy stance to durably reduce inflation and external imbalances. - Policy rate may need to be raised further depending on data developments; should remain tight given upside risks to the inflation outlook and to anchor inflation expectations. - A tightening bias is warranted as a risk-based approach. - Exchange rate: - Continue to allow the exchange rate to play its shock-absorbing role; FX intervention limited to market failure, de-anchoring of inflation expectations, or FX mismatches posing significant financial stability risks (per the Fund’s Integrated Policy Framework). - Reserve coverage could be gradually strengthened over the medium term to facilitate a smooth exit from the FCL, conditional on external risks. - Fiscal policy: - The proposed fiscal adjustment in 2023 described as one of the largest one-year consolidations in decades and appropriate. - Consider further improvements in fiscal balances beyond 2023; planning for larger primary surpluses than fiscal rule—by about 0.4 ppt of GDP per year over 2024-26—would increase likelihood of debt converging to its anchor. - Priorities: gradually unwind distortive fuel subsidies; reduce budget rigidities; improve spending efficiency; ensure windfall revenues are saved and permanent spending financed with permanent revenue sources. - Financial supervision: - Remain vigilant of elevated household leverage. - Continue close monitoring of consumer leverage; expand DSTI regulations to cover non-mortgage consumer loans and leases. - Consider further raising provisioning and capital buffers if asset quality deteriorates. - Expand data collection on household indebtedness and debt burden. - Structural reforms and governance: - Prudently advance key structural reforms consistent with fiscal rules. - Strengthen communication to facilitate a gradual and well-sequenced transition to a more equitable and greener economy. - Energy transition strategy should support growth, ensure affordable domestic energy, protect FX generation capacity, and avoid import substitution/protectionist measures. - Strengthen governance: address logistics bottlenecks, reduce red tape, encourage competition, lower barriers to entry, advance anti-corruption agenda, strengthen public procurement controls, collect and publish beneficial ownership information for companies awarded public contracts. ### Risks, contingency planning, and stress scenarios - Risks elevated and tilted to the downside: - Tighter global financial conditions could tighten further, affecting commodity prices, capital flows, and growth. - Escalation of Russia’s war in Ukraine and related sanctions could disrupt trade, supply chains, and remittances. - Domestic risks: uncertainty over government’s structural reform agenda could raise borrowing costs and undermine investment; risk of increased social tensions; delays or uncertainty in energy transition strategy could hamper potential growth and external sustainability. - Policy implications if inflation is more persistent or external imbalances worsen: macroeconomic policies would need to remain tighter for longer to avoid de-anchoring inflation expectations and to contain debt servicing costs. - FX role: should continue as shock absorber; FX intervention limited to addressing market failure. - Contingency planning: need for agile policymaking; protecting the most vulnerable may require additional efforts while respecting fiscal rule limits. - Risk Assessment Matrix highlights (probability, impact): - Abrupt Global Slowdown or Recession: Probability Medium, Impact High. - Systemic Financial Instability: Probability Medium, Impact High. - Intensification of Regional Conflict(s): Probability High, Impact Medium. - Commodity Price Volatility: Probability Medium, Impact High. - Social Unrest (Colombia-specific): Probability Medium, Impact High. - Shortfalls in mobilizing tax revenue: Probability Medium, Impact High. ### External sector assessment and FX issues - Staff assessment: external position in 2022 was weaker than implied by medium-term fundamentals and desirable policies. - NIIP: -51.7 percent of GDP at end-2022 (1.3 percent of GDP lower than end-2021). - Excluding FDI, NIIP stood at -5 percent of GDP. - Gross assets/debt snapshot (2022, percent of GDP): NIIP -52; Gross Assets 69; Reserve Assets 17; Gross Liab. 121; Debt Liab. 61. - Estimated gross external financing needs: 17.2 percent of GDP for 2022. - Estimated medium-term current account balance required to stabilize NIIP at end-2022 level: -3.5 percent of GDP. - REER: - Average REER depreciated 4.8 percent in 2022, following depreciation of 3.2 percent in 2021. - Staff judges REER gap consistent with the CAB gap as 31 percent (uncertainty +/- 6 percentage points). - FX intervention: - Banco de la República did not intervene in the FX market during 2022. - Historical FXI: between February 2020 and March 2021 sold just above US$9 billion through NDFs. - Staff did not identify frictions warranting FX intervention during 2022 episodes. ### FSAP implementation, macroprudential, and supervisory updates - Implementation progress on 2022 FSAP recommendations continues: strengthening systemic risk monitoring, risk management frameworks, and the central bank’s role in financial oversight. - Recent supervisory measures: - Increase in provisioning requirements for consumer loans. - Changes in Net Stable Funding Ratio (NSFR) requirements: ASF weights for deposits of financial institutions and open-end mutual funds decreased from 25 percent to 0 percent in 2023 (last remaining deviation from Basel III). - External Circular 025, 2022 issued on IRRBB; External Circular 021 of 2022 addressed NSFR transition. - DSTI metrics cover all loans portfolio and products (Consumer/Credit Cards/Payrolls/Mortgages/Open Destination/Vehicles). - Data and stress-testing improvements: - SFC merged Social Protection System data with individual indebtedness reports to monitor household indebtedness. - MoUs signed to improve cross-border supervision and conduct consolidated stress tests. - Preliminary network analysis model developed; Technical Assistance planned March 2023 to refine methodology. - Resolution and deposit insurance (Fogafin): - Four systemic banks have submitted resolution plans; draft regulation on ICAAP, ILAAP and recovery planning released for internal comments by end-February 2022. - Authorities view operational independence of the Resolution Unit as well established. - Climate and ESG: - External Circular 005, 2022 (April 8, 2022) and other guidance to improve climate-related data and supervisory expectations issued. - Roadmap for Greening the Colombian Banking System published. ### DSA and sovereign risk assessment - DSA summary: - Public sector debt assessed sustainable with high probability across a wide range of shock scenarios. - Medium-term sovereign and financing risks: moderate. - Realism scenarios suggest consolidation efforts somewhat ambitious. - Debt path projected to stabilize and decline toward medium-term anchor conditional on sustained fiscal adjustment. - Baseline public debt (percent of GDP) projections: - 2022: 63.6; 2023: 62.0; 2024: 61.1; 2025: 60.9; 2026: 60.1; 2027: 59.2; 2028: 58.3; 2033: 56.7. - Gross financing needs (percent of GDP) in baseline: - 2022: 9.6; 2023: 6.9; 2024: 6.0; 2025: 4.6. - Debt-stabilizing non-interest current account: -3.5 percent (Table 9 footnote). - Adverse scenario (full FCL draw assumption): Total external debt (percent of GDP) rises to 88.0 in 2023 under the adverse scenario. ### Authorities’ views (summarized) - Authorities broadly agreed with recommendations and reiterated strong commitment to the fiscal rule. - Authorities consider Financing Plan revenue projections conservative and note DIAN yield improvements not included. - Central bank: data-dependent policy decisions; policy interest rate raised by 11 ppt since September 2021. - Authorities view exchange rate as a shock absorber and favor FX intervention only to address market failure. - Financial authorities emphasize proactive supervision, adequate capital and liquidity buffers; provisioning coverage ratio well above 100 percent and all credit institutions meet the LCR. - On reforms: Ministry of Finance stressed reforms subject to budget availability and fitting within the medium-term fiscal framework; energy transition implementation will be gradual. _Italic: IMF staff report section "1. Real Sector Developments" (Content unit: 1colea2023001)._ ### 1. Real Sector Developments _____________________________________________________________________ 19 ### 1. Real Sector Developments ### Background - A new administration took office in August 2022 with an agenda centered on reducing inequality and transitioning toward a greener and more diversified economy. - Colombia’s exports dependency on oil and gas: 56 percent of total exports and the bulk of energy produced for domestic consumption. - The Flexible Credit Line (FCL) approved on April 29, 2022: SDR7.1557 billion (about US$9.8 billion), treated as precautionary. ### Recent developments — output and demand - Real GDP growth: - 2021: 11 percent y/y. - 2022: 7.5 percent y/y. - Economy is operating above potential; output reached pre-pandemic trends and is somewhat above potential. - Demand-side contributions (percent deviation from 2019Q4): private consumption was the major engine of growth; construction and mining (including oil) remain well below pre-pandemic levels reflecting investment weaknesses. - Domestic demand growth started to slow in Q4:2022 with further moderation signaled by high frequency indicators and recent policy tightening. ### Labor market - National unemployment rate (s.a.): - End-2021: 12.1 percent. - End-2022: 11.3 percent. - Pre-pandemic average (2015-2019): about 10 percent. - Employment levels at historical highs; labor force participation nearing pre-pandemic levels. - Unemployment for women and the young remain somewhat above pre-pandemic levels. - Poverty rates rose above levels observed a decade ago. ### Inflation and monetary policy - Headline inflation: - December 2021: 5.6 percent. - February 2023: 13.3 percent (y/y). - Core inflation: rising to over 10 percent. - Food inflation: 24 percent (y/y) in February 2023, accounting for about a third of the increase in headline inflation. - Medium-term (two-years ahead) inflation expectations: above 4 percent since April 2022 (4 percent is the upper limit of the band around the 3 percent target), declining slightly in recent months. - Producer price annual inflation: declining since June 2022 as global commodity prices moderated. - Policy rate: raised from 1.75 percent in September 2021 to 12.75 percent in January 2023. - Ex-ante real rate based on one-year ahead inflation expectations: around 250 basis points above the neutral rate. - Central bank commitment: reach inflation target by end-2024; future policy decisions to remain data-dependent. ### External sector and reserves - Current account deficit: - 2021: 5.6 percent of GDP. - 2022: 6.2 percent of GDP. - Terms of trade: up 20 percent (y/y) in 2022. - Annual import volumes grew 14 percent in 2022. - REER: depreciated 4.8 percent in 2022 following a 3.2 percent depreciation in 2021. - Central bank foreign reserves: around 113 percent of the ARA metric including the commodity buffer. - Central bank foreign exchange intervention: none since February 2021. ### Fiscal developments - Central government overall deficit: - 2021: -8.1 percent of GDP (excluding privatization proceeds; alternate GFSM 1986 presentation noted). - 2022: -5.5 percent of GDP (estimated). - Transfers to the Fuel Price Stabilization Fund (FEPC): rose to 1 percent of GDP in 2022. - FEPC deficit accumulated around 2.6 percent of GDP by end-2022. - Consolidated public sector (CPS) headline balance: -6.6 percent of GDP in 2022 (estimate). - Gross public sector debt: 63.6 percent of GDP at end-2022 (compared to 64.0 percent at end-2021). ### Financial sector and credit - Consumer credit growth: 18.3 percent y/y in 2022 (fastest pace in over a decade), then cooled sharply in recent months. - Non-performing loans (consumer loan segments): 5.4 percent in November 2022 (up from 4.7 per cent in June 2022). - Average debt service to income (DSTI) ratio: reaching over 37 percent. - Banking sector: capital adequacy well above regulatory levels; liquidity buffers ample; provisions coverage ratio about 150 percent. --- ### Outlook and projections - Real GDP growth: - 2023 (projected under baseline policies): 1.0 percent, with output expected to remain above peers. - Medium-term potential growth rate: 3¼ percent. - Inflation path: - End-2023: about 8.4 percent (y/y). - First half of 2025: reach the 3 percent target. - Fiscal balances: - Consolidated overall fiscal deficit: 6.6 percent of GDP in 2022 to 3.8 percent of GDP in 2023 (projected) and to around 2 percent of GDP over the medium term. - Current account deficit: - 2022: 6.2 percent of GDP. - 2023 (projected): 5.1 percent of GDP. - Medium-term: narrow to 4 percent of GDP. - External financing: FDI and portfolio flows expected to remain main sources. ### Risks to the outlook - Risks elevated and tilted to the downside: - Tighter global financial conditions could tighten further, affecting commodity prices, capital flows, and growth. - Escalation of Russia’s war in Ukraine and related sanctions could disrupt trade, supply chains, and remittances. - Domestic risks: uncertainty over the government’s structural reform agenda could raise borrowing costs and undermine investment; risk of increased social tensions; delays or uncertainty in energy transition strategy could hamper potential growth and external sustainability. - Policy implications if inflation is more persistent or external imbalances worsen: macroeconomic policies would need to remain tighter for longer to avoid de-anchoring inflation expectations and to contain debt servicing costs. - Exchange rate role: should continue to play a shock-absorbing role; foreign exchange intervention limited to addressing market failure. ### Contingency planning - Need for agile policymaking and contingency planning given potential higher-than-expected inflation and tighter global financial conditions. - Protecting the most vulnerable may require additional efforts while respecting fiscal rule limits. --- ### Policy discussions and recommendations - Maintain a tight policy stance to durably reduce inflation and external imbalances given: - Positive albeit narrowing output gap. - High debt servicing costs. - External position weaker than implied by fundamentals and desired policies. - Fiscal policy: - Proposed fiscal adjustment in 2023 described as one of the largest one-year consolidations in decades and appropriate. - Consider further improvements in fiscal balances beyond 2023 to ensure convergence to the debt anchor and avoid overburdening monetary policy. - Monetary policy: - Policy rate may need to be raised further depending on data developments and should remain tight given upside risks to the inflation outlook and to anchor inflation expectations. - Exchange rate policy: - Continue to allow the exchange rate to play its shock-absorbing role and support the external adjustment. - Foreign exchange intervention should be limited to addressing market failure. - Financial supervision: - Remain vigilant of elevated household leverage. - Structural reforms: - Prudently advance key structural reforms ensuring consistency with Colombia’s strong policy frameworks. - Strengthen communication to facilitate a gradual and well-sequenced transition to a more equitable and greener economy. _Italic: IMF staff report section "1. Real Sector Developments" (Content unit: 1colea2023001)._ ### 16. The fiscal adjustment that started in 2022 will continue in 2023 with the second largest ### 16. The fiscal adjustment that started in 2022 will continue in 2023 with the second largest adjustment in decades. ### Fiscal adjustment and revenue composition - Authorities committed to reducing the central government deficit to 3.8 percent of GDP. - The 2021 and 2022 progressive tax reforms are expected to yield "1 and 1¼ percent of GDP, respectively", strengthening equity, effectiveness, and simplicity of the tax system. - Revenues would be further supported by dividends and taxes from Ecopetrol (around 3 percent of GDP) due to high oil prices of last year. - The boost in revenues will allow an expansion in social spending of around 2 percent of GDP while reducing untargeted energy subsidies and the FEPC deficit. - Payments related to debt obligations of FEPC are being accounted as central government expenditure (with a one-year lag because of Colombia’s cash-based fiscal accounting). - Gradually moving away from the current price smoothing mechanism using a fuel stabilization fund would increase transparency and lower financing needs by the Ministry of Finance. ### Medium-term fiscal path and policy recommendations - The Financing Plan envisages central government primary surpluses hovering around 0.3-0.6 ppt of GDP, allowing gradual convergence of public debt towards its anchor. - To ensure consistency with planned social spending, priorities include: - Gradually unwind distortive fuel subsidies. - Reduce budget rigidities. - Improve spending efficiency. - Ensure windfall revenues are saved and permanent spending is financed with permanent revenue sources (as per the fiscal rule). - Given downside risks, planning for larger primary surpluses than those implied by the fiscal rule—by about 0.4 ppt of GDP per year over 2024-26—would increase the likelihood of debt converging to its anchor, create buffers, and strengthen fiscal credibility. - A tighter fiscal policy would also support narrowing internal and external imbalances and help avoid overburdening monetary policy. ### Financing needs and debt sustainability - Under the latest Financing Plan, the government expects to secure around 2.3 percent of GDP in domestic financing (three-fourths in local currency) and 1.6 percent of GDP in external financing, with roughly 1 percent of GDP from multilateral sources. - Following the preemptive US$3.8 billion bond issuance in November 2022 and January 2023, external financing needs for 2023 as a whole are now fully met. - Near-term gross financing needs average 5.5 percent of GDP over 2023-25. - Public sector debt is assessed to be sustainable with high probability under a wide range of plausible shock scenarios (Annex V referenced). ### Monetary and exchange rate policies - Durably reducing inflation to target and anchoring expectations will require a tight policy stance and effective communication. - Further hikes in the policy rate may be needed depending on actual inflation, inflation expectations, and demand conditions. - A tight monetary policy stance—with the policy rate above the neutral rate—would need to be maintained beyond 2023 to restrain internal demand and anchor inflation expectations. - A tightening bias is warranted as a risk-based approach to upside inflation risks and to safeguard central bank credibility. - The flexible exchange rate should continue to facilitate external adjustment, with FX intervention limited to market illiquidity, risk de-anchoring of inflation expectations, or FX mismatches that pose significant financial stability risks (per the Fund’s Integrated Policy Framework (IPF)). - Reserve coverage could be gradually strengthened over the medium term to facilitate a smooth exit from the FCL, conditional on external risks. ### Financial sector policies and supervision - Close monitoring of consumer leverage should continue. - Recent measures: increase in provisioning requirements for consumer loans and changes in the Net Stable Funding Ratio requirements. - Stress tests were amended to cover risks from increasing household leverage and conglomerates’ exposure to Central America. - As credit growth is expected to slow, asset quality could deteriorate; further raising provisioning and capital buffers may be needed. - Expanding data collection on household indebtedness and debt burden by the Financial Superintendency is underway; expanding DSTI regulations to cover non-mortgage consumer loans and leases is recommended. - Progress on implementation of the 2022 FSAP recommendations continues, including strengthening systemic risk monitoring, risk management frameworks, and the central bank’s role in financial oversight. - Requested Technical Assistance (TA) areas: network analysis tools and early warning indicators for contagion risks; quantitative tools to study concentration risk; conglomerate supervision. - AML/CFT: progress updating correspondent banking legal framework; further work needed for the nonfinancial sector. ### Structural reforms, energy transition, and governance - The new four-year national development plan (NDP) submitted to Congress in February sets five pillars: i) better use of land and water; ii) human security; iii) food security; iv) internationalization and climate action; and v) reduction in social and economic gaps across regions. - Planned reforms on healthcare, pensions, and labor markets must comply with fiscal rules and balance equity, efficiency, and sustainability: - Healthcare reform aims to improve accessibility and quality (including primary care); fiscal implications are expected to be limited and subject to the medium-term fiscal framework. - Pension reform proposals could have important fiscal and financial stability implications depending on design. - A well-designed energy transition and export diversification plan is vital to secure medium-term sustainability and resilience: - Strategy should support growth, ensure affordable domestic energy, and protect FX generation capacity and external sustainability. - Diversification requires a market-oriented strategy; import substitution and protectionist measures should be avoided. - The energy transition should balance domestic low-carbon transition with global transition risks and include unwinding untargeted fuel subsidies. - Strengthening governance and competitiveness is critical: - Address logistics bottlenecks, reduce red tape, encourage competition, lower barriers to entry. - Advance anti-corruption agenda: enhanced risk-based monitoring of asset declaration regime (including PEPs), strengthen implementation of the Transparency Law, introduce whistleblower protection norms. - Strengthen public procurement internal controls, ethics and compliance programs, limit direct contracting, collect and publish beneficial ownership information for companies awarded public contracts. ### Authorities’ views (summarized across sections) - Authorities broadly agreed with recommendations and reiterated strong commitment to the fiscal rule; noted Financing Plan revenue projections are conservative and do not include expected DIAN yield improvements. - The central bank emphasized data-dependent policy decisions; policy interest rate has been raised by 11 ppt since September 2021. - Authorities view the exchange rate as a shock absorber and favor FX intervention only to address market failure, assessing market failure based on a comprehensive judgment of systemic risks. - Financial authorities emphasized proactive supervision, adequate capital and liquidity buffers, and continued implementation of FSAP recommendations; provisioning coverage ratio is well above 100 percent and all credit institutions meet the LCR. - On reforms, the Ministry of Finance emphasized that all reforms will be subject to budget availability and must fit within the medium-term fiscal framework; energy transition implementation will be gradual. *Source: IMF staff report excerpt.* ### 32. The Colombian economy is undergoing a necessary transition towards a more ### 1colea2023001 - 32. The Colombian economy is undergoing a necessary transition towards a more ### Transition to a more sustainable growth path; external position - The Colombian economy outperformed expectations in 2022, "growing at one of the fastest rates among emerging economies." - With the economy operating above potential, "the continued implementation of tight macroeconomic policies remains necessary to address internal and external imbalances." - Cooling the economy is needed to: - "support bringing inflation down towards the central bank’s target by end-2024" - "lower the high current account deficit." - Staff judges "that the external position in 2022 was weaker than implied by medium-term fundamentals and desirable policies." - The ongoing policy tightening "should support a correction of the external imbalance." - Mitigating factors that support a resilient and sustainable external position include: - "adequate reserve coverage" - "the diversity and relative stability of capital flows" - "the high share of FDI" - "the negative correlation between the income balance and the trade balance" - "the favorable composition of external debt (with long maturities, sizable peso-denominated debt for sovereign bonds, high natural and financial hedges for corporate bonds)" - "a proven flexible exchange rate" ### Resilience, buffers, and policy framework - "Very strong fundamentals and sizable buffers reinforce a favorable medium-term assessment even in the face of downside and elevated risks." - The FCL "continues to provide additional external buffers against tail risks and enhances market confidence, further supporting resilience." - Policy priorities to sustain resilience and shock response capacity: - "maintaining a sustained track record of very strong policy implementation" - "keeping macroeconomic policies sufficiently tight to durably address internal and external imbalances" - "Contingency planning and agile policy making will remain necessary." ### Fiscal policy and the 2023 Financing Plan - The envisaged "growth friendly fiscal adjustment for 2023 is welcome, with higher revenues supporting inclusive goals." - The consolidation path in the "2023 Financing Plan, among the largest in the country’s history," balances deficit improvement with increased social spending via a progressive tax reform. - Policy actions and recommendations: - "The boosted resources for tax administration are welcome and should strengthen tax revenues." - Medium-term plans are "fully in line with the fiscal rules, demonstrating a commitment to comply with the very strong fiscal framework." - Consider "further improvements in fiscal balances over the fiscal rule path" to: - "reduce financing needs" - "strengthen the convergence of public debt to its medium-term anchor" - "create buffers against downside shocks" - "bolster the credibility of the fiscal policy framework." - As social safety nets expand, "better targeting social spending will ensure that public resources reach Colombia’s most vulnerable households." - Further structural fiscal reforms encouraged: - "continue to gradually remove distortive fuel subsidies" - "reduce budget rigidities" - "improve spending efficiency" - "ensure that permanent spending is financed with permanent revenues" ### Monetary policy and inflation - "Continued vigilance and effective communication will be required to durably reduce inflation to its target." - "Further hikes in the policy rate may be needed depending on the evolution of factors including actual inflation, inflation expectations, and demand conditions." - Based on currently available information, "a tight monetary policy stance will need to be maintained beyond 2023." - Communication priorities: - Emphasize that "monetary policy will remain tight and data-dependent to achieve its target" - Reduce uncertainty, "anchor expectations, and maintain central bank credibility." - Exchange rate guidance: "The exchange rate should continue to be allowed to adjust flexibly to shocks, as it appropriately has been, as long as financial stability is not compromised." ### Financial stability and supervision - "Financial stability risks need to continue to be carefully monitored." - Ongoing supervisory actions recommended: - "Continued strong oversight and proactive supervisory actions, including to raise provisioning and capital buffers if and as needed" - Maintain and improve "banks’ preparedness in the event of a further deterioration in credit quality, especially in the consumer sector." - Monitor household sector risks: "it will be important to continue to closely monitor the rising indebtedness of households as growth moderates." - Toolkit and data enhancements: - As data coverage improves, "expanding the macro and microprudential toolkit could serve a complementary role to the robust supervisory oversight." - "Recent enhancements in monitoring the exposure of conglomerates to Central America is welcome; these linkages would require continued close oversight in collaboration with host country supervisors." - Implementation progress: "Important progress has been made in implementing the recommendations of the 2022 FSAP, especially in monitoring and supervising cross-border linkages and households’ balance sheets; continued progress is encouraged." ### Structural reforms and transition to a greener, more equitable economy - "Prudently advancing structural reforms within Colombia’s very strong policy frameworks can foster a successful and durable transition to a more equitable and greener economy." - Implementation guidance: - "Careful and prudent implementation of the National Development Plan, in close consultation with relevant stakeholders, will be essential to preserve fiscal and financial stability, and ensure that economic incentives are well aligned." - Energy transition: - The objective "of reducing Colombia’s reliance on oil and coal is commendable." - A successful transition requires "developing a well-communicated and gradual plan that balances the energy needs of the domestic economy and its foreign exchange generation capacity with the transition of the global economy to a low-carbon one." - Governance and confidence: - "Strengthening the rule of law, transparency, and advancing on the anti-corruption agenda, particularly in preventive areas, remain as important priorities." - "Continuing to improve coordination in messages will further support consumer and business confidence in the Colombian economy." *Source: IMF staff assessment as presented in the supplied content.* ### 38. Staff recommends that the next Article IV consultation take place on the standard 12- ### 1colea2023001 - 38. Staff recommends that the next Article IV consultation take place on the standard 12- ### Article IV timing - Staff recommends that the next Article IV consultation take place on the standard 12-month cycle. ### Real sector and labor market developments - Real GDP: 2022 growth 7.5 percent; projections 2023 1.0 percent, 2024 1.9 percent, 2025 2.9 percent, 2026–2028 3.3 percent each year. - Potential GDP growth: 2022 4.8 percent; 2023 2.7 percent; 2024 2.5 percent; 2025 2.4 percent; 2026–2028 3.3 percent each year. - Output Gap: 2022 1.6 percent; 2023 -0.2 percent; 2024 -0.8 percent; 2025 -0.2 percent; 2026–2028 0.0 percent. - Employment and informality: - Population (million), 2022: 51.6 - Unemployment rate, 2022 (SA, percent): 11.3 - Informality rate: continued gradual decline (reporting suspended during the pandemic for some series). - Formal employment: "returned to pre-pandemic levels" (figure annotation). ### Inflation and monetary policy - Consumer prices (average): 2022 10.2 percent; CPI, end of period 2022 13.1 percent. - Inflation drivers: headline inflation continues to be driven by food prices; inflation has become generalized across core and non-core components. - Inflation expectations: increased, with slight declines at the 24m horizon recently (figure annotation). - Monetary policy stance: described as now in restrictive territory. - Policy rate, end of period: 2022 12.0 percent; BanRep increased the pace of tightening in 2022. ### External sector and financial accounts - Current account: 2022 deficit -6.2 percent of GDP; projections 2023 -5.1 percent, 2024 -4.6 percent. - Exports, f.o.b. (US$ billion): 2022 59,764; 2023 54,060. - Commodities 2022 39,215; Fuel 2022 18,938; Non-fuel 2022 20,277. - Imports, f.o.b. (US$ billion): 2022 71,582; 2023 65,750. - Financial account: current account deficit financed by robust capital inflows, mainly direct investment. - Financial account (percent of GDP): 2022 -5.9 percent. - Direct investment (net, US$ millions): 2022 -13,327; in percent of GDP 2022 -3.9 percent. - Portfolio investment: 2022 265 (US$ millions) net. - Gross international reserves: - 2022 level: 56.7 (In billions of US$). - Reserves adequacy: Reserves as percent of ARA metric within the ARA range; Reserves as percent of ARA (including commodity buffer) 2022 113. - International Investment Position: net liabilities showed a slight increase, with direct investment mitigating risks. - Net external debt and vulnerability: - Total external debt (percent of GDP): 2022 63.0 percent; projections 2023 68.1 percent, 2024 67.3 percent. - Short-term external debt (percent of GDP): 2022 7.9 percent. - Gross external financing need (US$ billions) 2022 59.3; in percent of GDP 17.2 percent. ### Fiscal developments - Central government headline balance (percent of GDP): 2022 -5.5 percent; projections 2023 -3.8 percent, 2024 -3.6 percent. - Central government structural balance: 2022 -4.6 percent of potential GDP; projections 2023 -3.0, 2024 -3.8, 2025 -3.7. - Consolidated public sector (CPS) balance: 2022 -6.6 percent; projections 2023 -3.8 percent, 2024 -1.8 percent. - Central government revenue and expenditure (percent of GDP): - Total revenue 2022 16.3 percent; projections 2023 20.5, 2024 20.0. - Total expenditure and net lending 2022 21.8 percent; projections 2023 24.3, 2024 23.6. - Interest (central government) 2022 4.4 percent of GDP; projections 2023 4.4, 2024 4.0. - Fiscal dynamics: - Fiscal deficits narrowed in 2022 due to cyclical factors and some expenditure restraint. - Withdrawal of COVID related measures helped narrow the central government structural deficit; higher fuel subsidies made the fiscal stance less contractive at the public sector level. - Public sector gross debt: - 2022 63.6 percent of GDP; projections 2023 62.0, 2024 61.1, 2025 60.9, 2026 60.9, 2027 58.2, 2028 58.3 (Table variations across tables—tables report comparable series in percent of GDP). ### Financial markets, soundness, and monetary aggregates - Broad money (annual change): 2022 11.2 percent; projections 2023 6.4, 2024 6.9, 2025–2028 7.0 percent each year. - Credit to the private sector (annual change): 2022 16.8 percent; projections 2023 7.1, 2024 7.4, 2025–2028 7.5 percent each year. - Central bank monetary base (Col$ billion): 2022 154,731; 2023 165,147; projected growth through 2028 to 231,632. - Financial soundness indicators (selected, end-of-period values): - Regulatory capital to risk-weighted assets: Dec-22 18.4 percent. - Regulatory Tier 1 capital to risk-weighted assets: Dec-22 14.9 percent. - Capital (net worth) to assets: Dec-22 10.5 percent. - Nonperforming loan provisions: Nov-22 136.3 percent of nonperforming loans. - ROAA (return on average assets): Nov-22 5.2 percent. - Liquid assets to total assets: Nov-22 16.8 percent. - Deposit to loan ratio: Nov-22 94.4 percent. ### External debt sustainability and stress tests - External debt-stabilizing non-interest current account: debt-stabilizing value -3.5 percent (Table 9 footnote). - Baseline external debt (percent of GDP): 2019 50.1; 2020 66.6; 2021 62.2; 2022 63.0; projected 2023 68.1; 2024 67.3; 2025 67.9; 2026 66.8; 2027 65.9; 2028 65.4. - Gross external financing need (US$ billions): 2022 59.3; projections 2023 63.1; 2024 62.3; 2025 66.5; 2026 69.6; 2027 70.5. - External Debt Sustainability: Table 10 bound tests show higher debt ratios under shocks: - Example scenario: 30 percent real depreciation in 2022 leads to a higher external debt path (figure annotation shows 93 for that scenario vs baseline 65 in chart labels). - Adverse scenario capacity to repay (Table 11): - Assumes full drawing on current FCL (350 percent of quota) on March 15, 2023; adverse shocks taken from 2022 FCL approval. - Under adverse scenario, Total external debt (percent of GDP) rises to 88.0 in 2023 and remains elevated thereafter in projections in Table 11. ### Key social and demographic indicators (selected) - Population (million), 2022: 51.6 - Urban population (percent of total), 2020: 81.4 - GDP per capita (US$), 2022: 6,665 - Gini coefficient, 2021: 52.3 - Poverty rate, 2021: 39.3 - Life expectancy at birth (years), 2019: 76.8 *Source: IMF staff estimates and projections, Colombian authorities, and figures/tables contained in the content unit.* ### Annex I. Recommendations of the 2022 Article IV Consultation ### Annex I. Recommendations of the 2022 Article IV Consultation and Authorities’ Actions ### Monetary Policy - Fund recommendation: - "Amid low excess capacity and negative real interest rates, accelerated monetary tightening by the central bank is appropriate to control rising consumer prices and prevent second-round effects from supply side factors." - Authorities’ action: - "The central bank pro-actively reacted to the buildup of inflationary pressures and raised the policy rate by 900 basis points in 2022." ### Financial Sector - Fund recommendation: - "Given legacy effects and debt vulnerabilities from past credit cycles, monitoring of household and corporate indebtedness remains important for managing macrofinancial risks. If consumer debt maturities were to lengthen, provisioning requirements should be raised accordingly." - Authorities’ action: - "The authorities are closely monitoring financial sector vulnerabilities, while reinforcing an already sound regulatory framework, including by (i) improving data collection on household balance sheets, (ii) strengthening systemic risk analysis, and (iii) increasing provisioning requirements when consumer loan maturities are lengthened." ### Fiscal Policy - Fund recommendation: - "The strong economic recovery is an opportunity to strengthen public finances that were weakened by the pandemic, including further deficit reduction in the near term. Securing new revenue sources will be paramount to safeguarding key social protection programs and public investment in the future, while supporting a faster reduction in the debt level. These new revenue sources should be complemented by spending efficiency measures." - Authorities’ action: - "The authorities enacted a tax reform making Colombia’s tax system more progressive, while mobilizing about 1¼ percent of GDP to expand social spending and reduce high inequality, while facilitating fiscal consolidation. The new national development plan includes initiatives to strengthen the social benefit system (SISBEN IV), including through the creation of a new social registry to better identify recipients." ### Structural Reforms - Fund recommendation: - "Structural policies should be deployed to bolster inclusive growth and external competitiveness—including reducing labor market informality, completing the infrastructure agenda, strengthening governance, and further addressing trade (tariff and non-tariff) barriers. Continued implementation of the National Policy on Climate Change is key to pursuing a sustainable, green recovery." - Authorities’ action: - "Following the tax reform, the government is extending an unconditional transfer program, enhancing the role of public service provision, and improving quality and access. The government is also advancing the climate and productivity agenda." *Source: Annex I. Recommendations of the 2022 Article IV Consultation and Authorities’ Actions* ### Annex II. External Sector Assessment, 2022 ### Overall assessment and policy response - Overall Assessment: - "Staff assesses that the external position in 2022 was weaker than implied by medium-term fundamentals and desirable policies, although policy tightening underway is supporting a slowdown in import volumes and a depreciation of the real exchange rate to help correct the imbalance." - Mitigating factors listed include: diversity and relative stability of capital flows, high share of FDI, negative correlation between the income balance and the trade balance, adequate reserve coverage, favorable composition of external debt with long maturities, sizable peso-denominated debt for sovereign bonds, high natural and financial hedges for corporate bonds, and a flexible exchange rate. - Potential Policy Responses: - "Continued tightening of macroeconomic policies will be critical to narrow the current account deficit." - "Efforts will be required to sustain fiscal consolidation over the medium term." - "Consideration should be given to secure a fiscal balance path above the fiscal rule path to strengthen the convergence of public debt to its medium-term anchor." - "Efforts to diversify the country’s export base should continue through measures that strengthen the investment climate and bolster human capital, openness to trade, and competitiveness." - For competitiveness: "address logistic bottlenecks, foster competition, and lower barriers to entry." ### Foreign assets and liabilities: position and trajectory - Key metrics (2022): - "NIIP was -51.7 percent of GDP at end-2022, 1.3 percent of GDP lower compared to end-2021 (-50.4 percent of 2021 GDP)." - "Excluding FDI, the NIIP stood at only -5 percent of GDP, the same as at end-2017." - "Considering only reserve assets and debt liabilities, the net position was -44 percent." - Drivers: - "The change was driven mainly by an increase in other investment liabilities and some reduction in the value of portfolio assets." - "During the last five years (2017-2022), the increase in liabilities (up 18 percent of GDP driven by FDI) has more than offset the increase in assets (up 11 percent of GDP, driven by portfolio investment)." - Financing needs and adjustment: - "Estimated gross external financing needs amounted to 17.2 percent of GDP for 2022, broadly the same as in 2021 (17.3 percent of GDP)." - "The estimated medium-term current account balance required to stabilize the NIIP at its end-2022 level is -3.5 percent of GDP, which is narrower than the medium-term baseline." - 2022 (% GDP) snapshot: - "NIIP: -52" - "Gross Assets: 69" - "Reserve Assets: 17" - "Gross Liab.: 121" - "Debt Liab.: 61" ### Current account - Key figures: - "The current account deficit (CAD) rose from 5.6 percent of GDP in 2021 to 6.2 percent of GDP in 2022" - Export performance: "non-traditional exports (18 percent in value; 10 percent volumes)" - Imports: "imports grew 26 percent in value and 14 percent in volume" - Drivers: - "Reflecting dynamic domestic demand, imports grew... with trade data showing lower volume growth during 2022Q4." - "Weakness in oil export volumes reflect the still lingering effects from the production shutdowns during the 2021 protests." - "Increased profit transfers abroad, reflecting the significant FDI in Colombia, also contributed to the increase in the current account deficit." - Outlook and assessment: - "Policy tightening underway is helping to reduce the current account imbalance, which is expected to narrow over the medium-term to around 4 percent of GDP." - "Prospects of increased exports to Venezuela could lead to a faster and stronger narrowing." - Model estimates: - "cyclically-adjusted CAB norm of -1.3 percent of GDP and a CAB gap of -6.5 percent of GDP for 2022." - "Identified policy gaps are assessed to be small (-0.2 percent of GDP), with the fiscal gaps are contributing -0.3 percent of GDP." - Colombia-specific adjustments applied: - "(i) reducing the contribution of oil exports to the norm by 1.3 percent of GDP" - "(ii) reducing the norm by an additional 0.5 percent of GDP, given the need to absorb the large stock of migrants from Venezuela." - "Additional adjustments... COVID-19 cyclical effects (0.8 percent of GDP); weather effects (La Niña) that affected agricultural production and exports (0.12 percent of GDP)." - Combined result: - "The combined adjustments above reduce the CAB gap to -3.7 percent of GDP, with a standard error of +/-0.7 percent of GDP." - 2022 (% GDP) summary table in text: - "Estimated CA: -6.2" - "Cycl., Adj. CA: -7.8" - "EBA Cycl. Adj. CA Norm: -1.3" - "EBA CA Gap: -6.5" - "COVID-19 Adj.: 0.8" - "Other Adj.: 1.9" - "Staff CA Gap: -3.7" ### Real exchange rate (REER) - Background: - "The average Real Effective Exchange Rate (REER) depreciated 4.8 percent in 2022, following a depreciation of 3.2 percent in 2021 and 7.7 percent in 2020." - "The REER was 35 percent weaker than in 2014 owing to generally lower terms of trade." - "The average nominal effective exchange rate (NEER) depreciated 7.3 percent in 2022." - Assessment: - "Overall, staff judges the REER gap consistent with the CAB gap as 31 percent, although with a wide range of uncertainty (+/- 6 percentage points)." - "Applying a semi-elasticity of -0.12 to the gap from the CAB approach suggests a REER overvaluation of between 25 and 37 percent, while application of the external sustainability approach implies an overvaluation of 35 percent in 2022." - "EBA REER approaches estimate an undervaluation of 46 percent (index method) and 25 percent (level method) in 2022." ### Capital and financial accounts: flows and policy measures - Flows in 2022: - "Net FDI inflows are estimated at 5 percent of GDP, diversified across sectors." - "Portfolio inflows... amounted to 0.8 percent of GDP." - "Short-term debt, mainly private, represented 7.9 percent of external debt, similar to its level in 2021 (7.8 percent)." - Policy measures: - "The government issued sovereign bonds to partly pre-finance 2023 needs and further diversified its foreign funding sources by borrowing from multilateral institutions." - Assessment: - "The relative stability of FDI flows, diversification of creditors, strong policy frameworks, and a track record of uninterrupted market access have underpinned capital inflows." ### FX intervention and reserves level - Reserves and intervention: - "Gross international reserves amounted to $56.7 billion at end-2022, $1.3 billion less than in 2021 mainly due to valuation effects." - "The central bank did not intervene in the FX market during 2022." - Assessment and coverage: - "Reserve coverage (including the commodity buffer) reached 113 percent of the ARA metric, and 128 percent if the commodity buffer is excluded." - "Access to unused resources available under Colombia’s FCL provides an additional liquidity buffer equivalent to 19 percent of the ARA metric that includes the commodity buffer." - Recommendation: "Further reserve accumulation would help insure against elevated external risks." *Source: Annex II. External Sector Assessment, 2022* ### Annex III. Risk Assessment Matrix (February) ### Global risks (probability and impact from RAM) - Abrupt Global Slowdown or Recession: - Probability: Medium - Impact: High - Policy advice: - "Use existing policy space to support the economy and protect the most vulnerable, consistent with the inflation targeting framework and fiscal sustainability." - "Allow the exchange rate to play its role as shock absorber." - Systemic Financial Instability: - Probability: Medium - Impact: High - Policy advice: - "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 the use of international reserves, if needed." - "The government needs to continue implementing its medium-term fiscal consolidation adjustment plans to build credibility in the fiscal framework and reduce further pressures on sovereign yields." - Intensification of Regional Conflict(s): - Probability: High - Impact: Medium - Policy advice: - "If inflationary pressures build up, extend the tightening cycle within the inflation-targeting framework. Allow the exchange rate to play its role as a shock absorber. Provide targeted fiscal support to vulnerable groups, mindful of the need to comply with the medium-term fiscal framework and curb demand pressures." - Commodity Price Volatility: - Probability: Medium - Impact: High - Policy advice: - "Use the flexible exchange rate as the first line of defense against external shocks. If needed, deploy reserves to mitigate the impact of potentially weaker capital outflows. Reduce reliance on oil-related tax revenues. Speed up structural reforms to enhance external competitiveness and economic diversification." ### Colombia-specific risks - Social Unrest: - Probability: Medium - Time horizon: Short - Impact: High - Policy advice: - "Advance reforms to tackle social demands, anchored on broad political support. Continue with policies to achieve the inflation target and maintain fiscal sustainability, while providing targeted support to the most vulnerable." - Shortfalls in mobilizing tax revenue: - Probability: Medium - Impact: High - Policy advice: - "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." - Stronger than expected recovery in Venezuela: - Probability: Medium - Impact: High - Policy advice: - "Speed up structural reforms and diversification measures. Continue with policies to integrate Venezuelan migrants to the labor force." - Additional advice for macro shocks: - "In a global recession scenario, use existing policy space to support the economy and protect the most vulnerable, consistent with the inflation targeting framework and fiscal sustainability." *Source: Annex III. Risk Assessment Matrix (February)* ### Annex IV. Implementation of the 2022 FSAP Key Recommendations (selected entries) ### Banking Supervision — legal and regulatory framework - Recommendation: "Introduce necessary legal amendments to strengthen the independence of the SFC: (i) specifying that the Superintendent is appointed for a minimum term and removed from office only for reasons specified in the law; and (ii) provide explicit legal protections to the SFC." - Update: "The appointment and the condition for removing the Superintendent is regulated via Decree 1817 issued in September 15 of 2015. The conditions are regulated by the mentioned decree. However, the minimum term has not yet be regulated by higher order legislation." - Time horizon: MT - Recommendation: "Develop more specific guidance/regulations on concentration, transfer and country risks, related party transactions, internal capital assessment and the IRRBB." - Updates and measures: - "External Circular 025, 2022 (November 17, 2022) was issued with explicit instructions on the Interest Rate Risk on the Banking Book Risk Management (IRRBB). These requirements were also added to the Internal Risk Management Framework (SIAR for its Spanish acronym)." - "Concentration risk: Analytical work continues to be in place (Technical Assistance planned for March, 2023)." - "Transfer and country risk: The SFC included explicit requirements on the transfer and country risk management in External Circular 18, 2021 (September 22, 2021) which compiles each individual risk management framework on a single chapter named SIAR (Chapter 31 on Integrated Risk Management Framework of Circular Básica Contable y Financiera)." - "Internal capital assessment and liquidity: An internal draft was prepared, and it is under review and due by end of February, 2023." - Time horizon: MT - Recommendation: "Establish a consolidated body of requirements on related-party transactions." - Update: "Decree 1533 (August 4, 2022) was issued to establish rules for managing large exposures following the Basel framework. Secondary regulation by SFC is under preparation and expected to be issued before January 2024. Supervised entities must comply with this new framework no later than august 4th, 2026." - Time horizon: ST - Recommendation: "Readjust or determine some parameters used in the computation of the local LCR and NSFR ratios to further align with Basel III requirements and require the local NSFR ratio to be also calculated at a consolidated level." - Update (excerpt): - "NSFR: according to External Circular 021 of 2022, the transition period for some weights ends in March" *Source: Annex IV. Implementation of the 2022 FSAP Key Recommendations* ### 2023. Specifically, ASF (Available Stable Funding) weights for deposits of financial institutions and open- ### 1colea2023001 - 2023. Specifically, ASF (Available Stable Funding) weights for deposits of financial institutions and open- ### ASF / LCR adjustments - ASF (Available Stable Funding) weights for deposits of financial institutions and open-end mutual funds will be decreased from 25 percent to 0 percent. - This change constitutes the last remaining deviation from the Basel III standard in this indicator. - LCR: the SFC considers deviations from the Basel III standard, particularly those referring to the run-off factors, are not planned to be modified in the near future, since they reflect the particularities of the local market, unless there is statistical evidence to suggest the parameters that were calibrated using historical data have changed. (Basel III, paragraph 70 allows some discretionary choice). ### Supervision and on‑site inspections - Recommendation: Maintain a direct and intrusive supervision of banks by the SFC, including an adequate level of on-site inspections, and avoid over-reliance on external and internal auditors when performing supervisory tasks. - Update: The SFC does not rely on internal audits to perform its supervisory procedures; internal audit results are relevant whenever this function is rated as Strong. On-site supervision is a fundamental part of supervisory exercises. Changes in figures reflect adoption of new supervisory tools (post COVID-19), rather than reliance on internal auditors. - On-Site inspections by year: - 2018: 100 - 2019: 106 - 2020: 36 - 2021: 75 - 2022: 60 ### Macroprudential oversight and tools - Recommendation: Strengthen the role of the central bank in systemic risk monitoring and of the Banco de la República (BR) and the Superintendency of Financial Institutions in macroprudential decision-making. - Update: CCSSF’s rules of procedures were updated to strengthen the role of the central bank. Common stress scenarios were prepared by SFC and the central bank and presented to CCSSF on December 5, 2022. - Recommendation: Expand LTV and DSTI tools to cover leasing products and the DSTI tool to include nonmortgage debt. - Update: Authorities view External Circular 026, 2022 (29 November 2022) with the term provisioning aims at preventing debt overhang in the consumer loan portfolio. DSTI metrics cover all loans portfolio and products (Consumer/Credit Cards/Payrolls/Mortgages/Open Destination/Vehicles). ### Data gaps, cross‑border exposures, and stress testing - Recommendation: Close data gaps in cross-border exposures and household indebtedness. - Updates: - Household indebtedness: SFC merged data from the Social Protection System and individual indebtedness reports; this information is used to provide quantitative inputs for designing prudential measures. - Cross border exposures: SFC gathers data of financial conglomerates and conducts common stress tests with other jurisdictional supervisors in CAM (CCSBSO). Memoranda of Understanding (MoUs) were signed allowing on-site supervision, data exchange, technical assistance, and cyber risks cooperation. MoUs have allowed SFC to perform on-site inspections in most jurisdictions where Colombian Financial Conglomerates operate, with cooperation from home supervisors. - CCSBSO Multilateral Memorandum on Information Exchange and Mutual Cooperation for Consolidated and Cross-Border Supervision was unified (reference to MoU text and Addendum). - The central bank included cross-border exposure risks into its stress testing. - Recommendation: Strengthen the ability to monitor cross-border exposures and conduct a fully consolidated stress-testing by filling data gaps on the exposures and risk metrics of ultimate subsidiaries. - Update: MoUs were signed between supervisors in CAM and Colombia on data exchange and stress tests using consolidated data on exposures and risk metrics. Stress testing exercises comprise foreign exposure risks. - Recommendation: Extend data collection to monitor liquidity risks by currency and collect more granular data on assets and liabilities generating cashflows, including those related to cross-border exposures. - Update: SFC and BR requested information from credit institutions to measure the NSFR by currency. Information is expected to be submitted in June 2023 and the draft regulation will be issued in 1H2024. Banco de la República calculates liquidity ratios by different currencies (the Individual Exposure Index on the Short-Run (IEI) and the Consolidated Exposure Index (IEC)). Over the medium term, SFC plans to work with the central bank to merge the short term liquidity indicators (IRL, IEI, and IRL) to arrive at a common indicator by currency. - Recommendation: Develop network analysis tools and improve data coverage to bolster EWS for domestic and cross-border contagion. - Update: Preliminary version of network analysis model was developed by SFC and a Technical Assistance mission was scheduled in March 2023 to refine the methodology and calibrate parameters using local data. Cross-border contagion risks were incorporated in both SFC’s and Banco de la República’s stress testing exercises. ### Climate risks and disclosure - Recommendation: Adopt a risk-based approach in supervision for climate-related risks and continuously improve information disclosures (both by nonfinancial corporates and by financial institutions) and data availability. - Updates: - Implementation of green taxonomy for the financial system (External Circular 005, 2022; April 8, 2022) to improve availability of climate related data. - SFC issued guidelines on supervisory expectations on ESG management in credit institutions (Documento Técnico para la Administración de Riesgos y Oportunidades Climáticas para los Establecimientos de Crédito, April 20, 2022). - SFC issued “Roadmap for Greening the Colombian Banking System” on taxonomy, financial innovation, ESG adoption, data metrics and information, and climate risk measurement and supervision. - External Circular 031, 2021 (22 December 2021) for issuers regarding ASG and climate reporting: asks the largest issuers to disclose their ASG and climate risks and opportunities against TCFD and SASB. - SFC issued External Circular 07 (10 May 2021), External Circular 08, 2021 (26 April 2021), and a draft guideline on supervisory regulation on ESG management for pension fund administrators (November 04, 2020, updated on May 3, 2021). - Climate risk exercise was performed with asset managers and pension funds. ### Resolution, crisis management, and Fogafin (deposit insurance) - Recommendation: Strengthen the operational independence of the Resolution Unit (GR). - Update: Authorities view operational independence of the Resolution Unit (Grupo de Resolución - GR) as well established, though it reports to the Deputy Superintendent for Financial Intermediaries and Insurance Companies and is separated from other SFC divisions. - Recommendation: Make financial institutions responsible for recovery planning and make the GR responsible for resolution planning. - Update: Four systemic banks have submitted resolution plans to SFC and these plans are under evaluation. Draft regulation on ICAAP, ILAAP and recovery planning was released for internal comments by the end of February 2022 at SFC. - Recommendation: Streamline mandates and tasks of the resolution unit and the deposit insurer (Fogafin). - Update: Execution of the coordinated resolution strategy corresponds to each authority according to its mandate. Unifying the resolution process would require a structural reform passed in Congress (reform of the EOSF). The SFC performs recovery planning exercises and systemic entities have been required to develop resolution plans (RP). The Intersectoral Resolution Commission - CIR - is a technical body made up of officials designated by both SFC and Fogafin. In 2022 SFC received the first version of these RP and is working on comments. SFC set criteria to define which new entities must present RP. In the first quarter of 2023, two more entities will have to establish RP and have their first version by the end of the year. - Recommendation: Strengthen resolution tools by: (i) giving Fogafin flexibility to conduct purchase and assumption powers with only insured deposits; (ii) restrict Fogafin being shareholder of restructured or bridge banks; (iii) consider establishing bail-in powers. - Update: - (i) Authorities view inclusion of all deposits in a P&A as meeting objectives of preserving financial stability and maintaining depositor confidence; regulation is viewed as flexible to select other liabilities. Fogafin will work on requesting an adjustment to Decree 521 of 2018 to achieve greater leeway to select only the insured amount. - (ii) Fogafin provides resources for matching assets and liabilities in structuring a P&A and is therefore main shareholder of the bridge bank if operation is not carried out with another credit institution. Fogafin considers tension between its shareholder role and resolution authority role mitigated by temporary ownership and compliance with structural and prudential regulation. Fogafin included a study in its 2021-2025 strategic planning to mitigate conflict of interest. - (iii) According to Fogafin, banks’ liability structure in Colombia is mainly composed of deposits, so a bail-in mechanism is not currently applicable or practicable. Adoption of bail-in is a matter of further analysis; Fogafin plans a study on this in its 2021-2025 strategic plan. - Recommendation: Fogafin’s financing should be limited to resolution funding. - Update: Authorities note the broad set of interventions from the 90s are present in the legal framework; a different approach would require structural legal reform to be discussed in Congress. - Recommendation: Establish guaranteed backup liquidity facility for Fogafin. - Update: Law defines Fogafin as autonomous and prioritizes using Deposit Insurance reserve premiums rather than General Budget resources. If reserve resources are insufficient, law requires adoption of a plan to reconstitute it; if such plan incorporates resources from the General Budget or debt operations with a sovereign guarantee, it must be approved with the favorable vote of the Minister of Finance and Public Credit (who is President of Fogafin’s Board). Fogafin is reviewing the operability of the request for resources to the Ministry of Finance and Public Credit to strengthen the procedure for fulfilling this mandate. ### Anti‑Money Laundering / Combating the Financing of Terrorism (AML/CFT) - Recommendation: Ensure swift implementation of the 2018 MER’s recommendations to strengthen overall effectiveness of the AML/CFT regime. - Update: Colombia provided regular follow-up reports to GAFILAT. Recent reports highlighted upgrades related to correspondent banking, electronic transfers, high risk countries, statistics, guidance and feedback, customer due diligence, and politically exposed persons. - Recommendation: Continue efforts to enhance sanctioning practices so that effective, proportionate, and dissuasive sanctions are applied for AML/CFT breaches. - Update: In mid-2020, the Office of the Deputy Superintendent for money laundering/terrorism financing Risk (DRLAFT) issued upgraded AML/CFT guideline related to preventative measures and imposition of sanctions. The issuing of administrative orders and the time to initiate sanctioning processes decreased in 2022, enhancing SFC sanctioning practices. - Recommendation: Address ML/TF risks associated with crypto assets and ensure virtual asset service providers are properly licensed, monitored and supervised for AML/CFT compliance. - Update: Pilot project started in September 2020. Results to date: - 4.057 direct users - 12.317 operations - total value of $COP4.9 billion - 472 unusual operations identified, which were managed accordingly - Findings identified ML/TF risk typologies related to agents that could work indirectly with Darknet, agents sanctioned by OFAC, Scams, money laundering by illicit money capture of the public, and possible irregular activity by Peer to Peer activity. - Some participating supervised entities adjusted alert standards according to client profiles and integrated information across cryptographic and traditional financial worlds. - SFC considers pilot results show supervised entities can manage risks inherent to linking and providing financial services to such providers or entering alliances with them; activities will contribute to SFC forming a clear position if National Government decides on the matter. ### Debt sustainability and sovereign stress assessment (Annex V) - DSA Summary Assessment: - Public sector debt is assessed to be sustainable under a wide range of plausible shock scenarios and with high probability. - Medium-term sovereign and financing risks are moderate. - Realism scenarios suggest consolidation efforts going forward are somewhat ambitious. - Given tighter financing conditions at home and abroad, the tight fiscal stance and sustained implementation of fiscal plans are critical for debt stabilization. - The ambitious pension reform could be an important risk to long-term fiscal sustainability. - Additional commentary: - Medium-term risks are assessed as moderate, mainly as a result of the strength of the fiscal framework in guiding fiscal policy and rebuilding buffers. - The projected debt path is expected to stabilize and GFNs will remain at manageable levels, conditional on sustained implementation of the fiscal adjustment path set out by the fiscal rule and medium-term fiscal framework. - Debt is assessed as sustainable with high probability. - The overall risk of sovereign stress is moderate. Peso depreciation and tighter financial conditions are preventing a faster reduction in the still-elevated debt level. The medium-term fiscal framework will help contain the debt path and lower financing costs; debt is projected to decline over the extended 10-year period. Debt stabilization critically depends on meeting the fiscal targets. - While debt is projected to reach the medium-term debt anchor, the ambitious pension reform and/or a drastic shift away from oil and coal production could affect long-term fiscal sustainability. *Source: Colombian authorities and IMF 2022 FSAP (content unit: 1colea2023001 - 2023).* ### 1. Debt coverage in the DSA: 1/ ### 1. Debt coverage in the DSA: 1/ ### Debt coverage and subsectors - Coverage chosen: Nonfinancial public sector (NFPS) and portions of the financial public sector (Finagro and Fogafin) are included in public debt figures. - Nonfinancial public sector components explicitly covered: - Budgetary Central Government: Yes - Extra Budgetary Funds (EBFs): No - Social Security Funds (SSFs): Yes - State Governments: Yes - Local Governments: Yes - Public Nonfinancial Corporations: Yes - Central Bank: No - Other Public Financial Corporations: Yes - Reporting on intra-government debt holdings: table entries show zeros for holders across listed subsectors (Budget. Central Govt, Extra-Budget. Funds, Social Security Funds, State Govt., Local Govt., Nonfin. Pub. Corp., Central Bank, Oth. Pub. Fin. Corp) resulting in totals of 0 where indicated. - Commentary: “The public debt figures reported for Colombia cover the non-financial public sector and the financial public sector (Finagro and Fogafin). The non-financial public sector covers the central government, regional and local governments, decentralized entities, and Ecopetrol. Public debt also includes the recognition of public debt arrears stemming from past court rulings, social security, energy subsidies and liabilities from pension bonds and FOMAG (see IMF Country Report 20/104). Domestic debt is defined on a currency basis.” ### Instrument coverage, accounting, and valuation notes - Notes included in source: - Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable. - Insurance, Pension, and Standardized Guarantee Schemes typically include government employee pension liabilities. - Accounting bases may include accrual recording, commitment basis, due for payment, etc. - Nominal value definition: “the amount the debtor owes to the creditor. It reflects the value of the instrument at creation and subsequent economic flows (such as transactions, exchange rate, and other valuation changes other than market price changes, and other volume changes).” - Face value definition: “The face value of a debt instrument is the undiscounted amount of principal to be paid at (or before) maturity.” - Market value: “Market value of debt instruments is the value as if they were acquired in market transactions on the balance sheet reporting date (reference date). Only traded debt securities have observed market values.” ### Public debt structure indicators (selected) - Perimeter shown: nonfinancial public sector. - Commentary: “The share of foreign currency debt increased during the pandemic, due in part to the partial drawdown of the FCL. Over the medium-term the share of foreign currency debt is expected to converge to historical values.” - Residual maturity: 6. years (as shown in figure caption). - Debt by currency, by holder, by governing law, by instruments, and by maturity are presented for the NFPS perimeter (figures referenced). ### Baseline scenario (Figure 4) — key projected values (percent of GDP unless indicated) - Public debt: - 2022: 63.6 - 2023: 62.0 - 2024: 61.1 - 2025: 60.9 - 2026: 60.1 - 2027: 59.2 - 2028: 58.3 - 2029: 58.2 - 2030: 58.0 - 2031: 57.8 - 2032: 57.5 - 2033: 56.7 - Change in public debt: - 2022: -0.4 - 2023: -1.6 - 2024: -0.9 - 2025: -0.2 - 2026: -0.8 - 2027: -0.9 - 2028: -0.9 - 2029: -0.1 - 2030: -0.2 - 2031: -0.2 - 2032: -0.3 - 2033: -0.8 - Contribution of identified flows: - 2022: -0.6 - 2023: 0.3 - 2024: -1.0 - 2025: -0.2 - 2026: -0.8 - 2027: -0.9 - 2028: -0.9 - 2029: -0.1 - 2030: -0.2 - 2031: -0.2 - 2032: -0.3 - 2033: -0.8 - Primary deficit (percent of GDP): - 2022: 2.0 - 2023: -1.0 - 2024: -2.5 - 2025: -1.7 - 2026: -1.4 - 2027: -1.3 - 2028: -1.3 - 2029: -0.1 - 2030: -0.1 - 2031: -0.1 - 2032: -0.1 - 2033: -0.1 - Noninterest revenues (percent of GDP): - 2022: 27.6 - 2023: 31.4 - 2024: 32.1 - 2025: 31.0 - 2026: 30.6 - 2027: 30.7 - 2028: 30.7 - 2029: 29.8 - 2030: 30.3 - 2031: 30.4 - 2032: 31.0 - 2033: 31.0 - Noninterest expenditures (percent of GDP): - 2022: 29.6 - 2023: 30.4 - 2024: 29.6 - 2025: 29.3 - 2026: 29.2 - 2027: 29.4 - 2028: 29.4 - 2029: 29.7 - 2030: 30.2 - 2031: 30.3 - 2032: 30.9 - 2033: 30.9 - Automatic debt dynamics (contribution, percent of GDP): - 2022: -2.9 - 2023: 1.4 - 2024: 1.5 - 2025: 1.4 - 2026: 0.7 - 2027: 0.4 - 2028: 0.4 - 2029: 0.0 - 2030: -0.1 - 2031: -0.1 - 2032: -0.2 - 2033: -0.7 - Real interest rate and relative inflation (percent): - 2022: -0.1 - 2023: 2.0 - 2024: 2.7 - 2025: 3.2 - 2026: 2.6 - 2027: 2.3 - 2028: 2.3 - 2029: 1.9 - 2030: 1.7 - 2031: 1.8 - 2032: 1.7 - 2033: 1.2 - Real interest rate (percent): - 2022: -2.8 - 2023: 0.4 - 2024: 2.3 - 2025: 3.0 - 2026: 2.4 - 2027: 2.1 - 2028: 2.1 - 2029: 1.7 - 2030: 1.6 - 2031: 1.6 - 2032: 1.5 - 2033: 0.8 - Relative inflation (percent): - 2022: 2.8 - 2023: 1.6 - 2024: 0.4 - 2025: 0.2 - 2026: 0.2 - 2027: 0.2 - 2028: 0.2 - 2029: 0.2 - 2030: 0.2 - 2031: 0.2 - 2032: 0.2 - 2033: 0.4 - Real growth rate (percent): - 2022: -4.5 - 2023: -0.6 - 2024: -1.2 - 2025: -1.7 - 2026: -2.0 - 2027: -1.9 - 2028: -1.9 - 2029: -1.9 - 2030: -1.9 - 2031: -1.9 - 2032: -1.9 - 2033: -1.9 - Other identified flows and contingent liabilities are shown as 0.3 in 2022 and 0.0 thereafter in the projection. - Contribution of residual: - 2022: 0.2 - 2023: -2.0 - 2024: 0.1 - 2025: 0.1 - 2026–2033: 0.0 - Gross financing needs: - 2022: 9.6 - 2023: 6.9 - 2024: 6.0 - 2025: 4.6 - 2026: 7.4 - 2027: 6.0 - 2028: 5.9 - 2029: 4.4 - 2030: 6.2 - 2031: 4.1 - 2032: 3.6 - 2033: 6.5 - Of which: debt service: - 2022: 7.3 - 2023: 7.9 - 2024: 8.5 - 2025: 6.2 - 2026: 8.8 - 2027: 7.3 - 2028: 7.2 - 2029: 4.5 - 2030: 6.3 - 2031: 4.2 - 2032: 3.7 - 2033: 6.6 - Local currency and foreign currency components of debt service listed with exact numbers for each year (e.g., Local currency: 2022: 5.4, 2023: 4.6, ..., Foreign currency: 2022: 1.9, 2023: 3.3, ...). - Memo items: - Real GDP growth (percent): 2022: 7.5, 2023: 1.0, 2024: 1.9, 2025: 2.9, 2026–2033: 3.3 (repeated). - Inflation (GDP deflator; percent): 2022: 14.2, 2023: 8.0, 2024: 3.9, 2025–2032: 3.0, 2033: 4.0 - Nominal GDP growth (percent): 2022: 22.7, 2023: 9.0, 2024: 5.9, 2025: 6.0, 2026: 6.5, 2027–2032: 6.4, 2033: 7.5 - Effective interest rate (percent): 2022: 8.8, 2023: 8.7, 2024: 7.8, 2025: 8.1, 2026: 7.2, 2027: 6.8, 2028: 6.8, 2029: 6.1, 2030: 5.8, 2031: 5.9, 2032: 5.8, 2033: 5.5 - Staff commentary: “Public debt will stabilize, reflecting expectations of a narrowing of primary deficits (driven by sustained primary surpluses at the central government level) and stable economic conditions.” ### Medium-term risk analysis (Figure 6) — selected indicators and messages - Fanchart width: 51.7 0.8 - Probability of debt not stabilizing (pct): 24.5 0.2 - Terminal debt level x institutions index: 33.1 0.7 - Debt fanchart index: ...1.7 - Average GFN in baseline: 6.1 2.1 - Bank claims on government (pct bank assets): 10.3 3.3 - Change in claims on govt. in stress (pct bank assets): 10.9 3.6 - GFN Financeability Index: ...9.0 - Medium-term analysis conclusion: “The medium-term analysis suggests a moderate level of risks of sovereign stress over that time horizon. The main issue suggested by the analysis is the possibility of substantial increases in the public debt ratio under low probability downside scenarios. However, this risk is contained as Colombia has set a debt limit of 70 percent of GDP (at the central government level). The stress of gross financing needs under a stress scenario is moderate.” - Probabilities reported: - Prob. of missed crisis, 2023-2028 (if stress not predicted): 18.2 pct. - Prob. of false alarm, 2023-2028 (if stress predicted): 38.6 pct. - Medium-Term Index and related module outputs indicate a “Moderate” risk signal in presented modules. ### Long-term risk analysis (Figure 7) — pensions and natural resources scenarios - Pension financing needs and total benefits paid are presented across long horizons with specific scenario outcomes: - Permanent adjustments needed in the pension system (pp of GDP per year) to keep pension assets positive for specified horizons: - 50 years: 2.88% - Until 2100: 5.03% - 30 years: 7.70% - Figures show projections of GFN-to-GDP Ratio and Total Public Debt-to-GDP Ratio under scenarios with and without pension cost increases and under natural resources scenarios; charts are provided for long-horizon projections (2023–2101 and beyond). ### Annexes: Monetary policy risk approach and FX intervention considerations - Annex VI (Monetary policy risk approach) — key points: - Observed increased dispersion around one-year ahead inflation expectations during 2022; both level and dispersion have trended upward. - Main external risks: uncertainty regarding dynamics of inflation in the United States and external financial conditions (Fed interest rate and risk premium), impact of Russia's invasion of Ukraine, disruption of global supply chains. - Main domestic risks: slower convergence of inflation toward target due to persistent supply shocks affecting goods and food, strong domestic demand, and higher-than-expected fuel price adjustments. - Balance of risks to inflation is biased to the upside; skewness around central bank’s inflation projections over the 2-year horizon increased. - Under heightened uncertainty, a risk management approach could justify a tightening bias to insure against materialization of upside risks and help anchor inflation expectations. - Annex VII (FX intervention under the Integrated Policy Framework) — key points and facts: - Exchange rate volatility episodes in 2022: - July: peso depreciated by about 8 percent in one month (post-election). - Early October to mid-November: peso depreciated by about 12 percent (policy-uncertainty-related statements). - FX market functioning: - FX market absorbed increases in number of operations (amount transacted) during July of up to 50 (40) percent relative to the average number of operations (amount transacted) in July. - During October/November episode, absorbed increases in number of operations (amount transacted) of up to 40 (30) percent relative to the average in those months. - Banco de la República did not intervene in the FX market in 2022. - Historical FX intervention: - Last FXI episode occurred between February 2020 and March 2021; the central bank sold just above US$9 billion through non-deliverable forward contracts (NDF) cumulatively during that period. - Staff did not identify frictions warranting FXI during 2022 episodes: - Increases in UIP risk premia have not been destabilizing due to capital flows shocks over the last two years; country risk premium movements mainly reflected shocks affecting fundamentals. - FX mismatches: as of December 2022, debt in foreign currency represented 9.2 percent of total bank liabilities; non-financial corporate sector (NFC) had 40 percent of its debt in FX (around 20 percent of GDP), about 70 percent of which is hedged. - De-anchoring of inflation expectations: IEs have at times deviated but have generally reverted; with pandemic shocks, IEs increased but less at the 2-year horizon and began to come down in response to tightening. - FX market metrics presented: EMBIG spreads, exchange rate maximum-minimum, exchange rate volatility (coefficient of variation), bid-ask spreads, market depth and volumes across the pandemic and post-election periods. *Source: 1colea2023001 - 1. Debt coverage in the DSA: 1/.* ### 2022. A data ROSC took place in 2006 and a fiscal ROSC in 2003. ### 1colea2023001 - 2022. A data ROSC took place in 2006 and a fiscal ROSC in 2003. ### Technical Assistance (IMF departments, time of delivery, purpose) - 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 - STA Apr 2020 — Sectoral accounts - 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, Mar. 2022, Jul. 2022, Oct. 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 - MCM Sep. 2022 — Assessment of Financial Stability Report ### Assessment of Data Adequacy and Statistics (As of February 22, 2023) - General: Provision of macroeconomic statistics is adequate for surveillance. - National Accounts - DANE compiles national accounts; Banco de la República (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 and recommended 2008 SNA tables compiled regularly include: - annual value added and GDP at current and at previous year prices, and chain-linked volume series by economic activity; - annual expenditure GDP components at current and at previous year prices, and chain-linked volume series; - components of annual value added at current prices by economic activity; - sequence of accounts for the economy as a whole (up to net lending) with annual frequency; - annual accounts of the rest of the world (up to net lending); - quarterly value added and GDP at current and chain-linked volume series by economic activity; - quarterly expenditure GDP components at current and chain-linked volume series; - annual supply-use tables. - During 2016-2020, IMF STA assisted DANE and BdR in developing quarterly financial and non-financial accounts by institutional sector. - Since June 30, 2021, BdR, jointly with DANE, began compiling and disseminating the “Integrated Quarterly National Accounts by Institutional Sector.” - Price Statistics - DANE compiles and disseminates the consumer price index (CPI) and the producer price index (PPI) monthly. - CPI basket and weights updated in 2019 based on 2016/17 household expenditures with STA technical assistance. - PPI (December 2014=100) redesigned in 2015 using a 2011 weighting structure and covers agriculture, livestock, fishing, mining, and industry. - STA assisted DANE to improve residential property price statistics based on the RPPI Practical Compilation Guide 2020. The quarterly index currently compiled covers the capital Bogota only. - Government Finance Statistics (GFS) - Ministry of Finance and Public Credit (MFPC) compiles public revenue, expenditure, and financing data. - Authorities are working to adopt the Government Finance Statistics Manual (GFSM) 2014 framework, enhance inter-institutional coordination, and increase resources for compiling government finance statistics. - Latest reported data published in the Government Finance Statistics Yearbook (GFSY). - Next steps: align classification of revenue and expenditure with GFSM 2014, improve consolidation, adopt a common list of public sector entities, and disseminate high-frequency data nationally and internationally. - General Accounting Office (GAO) developed a single accounting framework for the public sector based on International Public Sector Accounting Standards and maintains a financial management information system with accounting information of all public sector units. - MFPC’s Macroeconomic Policy Unit and the GAO developed a bridge table converting national accounting classification to the GFSM 2014 framework to compile GFS on accrual and cash bases. - Monetary and Financial Statistics - Classification follows the Monetary and Financial Statistics Manual (MFSM). - BdR reports SRF 1SR (central bank), 2SR (other depository corporations), and 5SR (monetary aggregates) for IFS monthly with a lag of two months for 1SR and 4 months for 2SR. - Superintendencia Financiera de Colombia (SFC) compiles SRF 4SR for other financial corporations (OFC) but reporting to STA is delayed due to ongoing review and mapping to IFRS. - BdR reports several Financial Access Survey (FAS) indicators including mobile and internet banking, mobile money, gender-disaggregated data, and UN-adopted indicators (commercial bank branches per 100,000 adults and ATMs per 100,000 adults) for SDG Target 8.10. - Financial Sector Surveillance - Colombia reports Financial Soundness Indicators (FSI) beginning from 2005. - Colombia reports all 13 core and 8 additional FSIs for deposit takers monthly according to the 2019 FSI Compilation Guide. - FSIs, metadata, and underlying series available on IMF’s data portal. - External Sector Statistics - BdR compiles quarterly balance of payments and international investment position (IIP) statistics on a BPM6 basis. - Improved services surveys have enhanced coverage; recording of transactions in securities 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 data to CPIS, and submits quarterly external debt statistics to QEDS. - Colombia has not reported data to the Coordinated Direct Investment Survey (CDIS) yet. - Data Standards and Quality - Colombia subscribes to the Special Data Dissemination Standard (SDDS) since 1996; metadata posted on DSBB. ### Table of Common Indicators Required for Surveillance (As of February 28, 2023) — select entries - Exchange Rates: Date of Latest Observation Feb. 28, 2022; Date Received Feb. 28, 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. 2023; Date Received Feb. 2023; Frequency M M M - Reserve/Base Money: Date of Latest Observation Feb. 10, 2023; Date Received Feb. 28, 2023; Frequency W W W - Broad Money: Date of Latest Observation Feb. 10, 2023; Date Received Feb. 28, 2023; Frequency W W W - Central Bank Balance Sheet: Date of Latest Observation Jan. 2023; Date Received Feb. 2023; Frequency M M M - Consolidated Balance Sheet of the Banking System: Date of Latest Observation Oct. 2022; Date Received Feb. 2023; Frequency M M M - Interest Rates: Date of Latest Observation Feb. 28, 2023; Date Received Feb. 28, 2023; Frequency D D D - Consumer Price Index: Date of Latest Observation Jan. 2023; Date Received Feb. 2023; Frequency M M M - Revenue, Expenditure, Balance and Financing Composition – General Government (GG): Date of Latest Observation Q2 2022; Date Received Dec. 2022; Frequency Q Q Q - Revenue, Expenditure, Balance and Financing Composition – Central Government: Date of Latest Observation Nov. 2022; Date Received Jan. 2023; Frequency M M M - Stocks of Central Government and Central Government-Guaranteed Debt: Date of Latest Observation Dec. 2022; Date Received Feb. 2023; Frequency M M M - External Current Account Balance: Date of Latest Observation Q3 2022; Date Received Dec. 2022; Frequency Q Q Q - Exports and Imports of Goods: Date of Latest Observation Dec. 2022; Date Received Feb. 2023; Frequency M M M - GDP/GNPQ4: Date of Latest Observation 2022; Date Received Feb.2023; Frequency Q Q Q - Gross External Debt: Date of Latest Observation Nov. 2022; Date Received Feb. 2023; Frequency M M M - International Investment Position: Date of Latest Observation Q3 2022; Date Received Dec. 2022; Frequency Q Q Q ### Recent Developments and Outlook (Statement by Juan Sebastian Betancur Mora, March 22, 2023) - Economic Recovery and Growth - After growing 11% in 2021, the Colombian economy grew 7.5% in 2022. - Recovery led by domestic demand, particularly private consumption. - Employment figures vigorous; machinery and equipment investment dynamics outstanding. - Latest data suggest private consumption is adjusting amid monetary and fiscal policy tightening. - Inflation and Expectations - Headline inflation reached 13.28% in February (annually). - Food inflation reached 24.14%. - Core inflation reached 10%. - One-year ahead inflation expectations: 7.2%. - Two-year ahead inflation expectations: 4.1% (above the 3% target). - External Sector and Current Account - Current account deficit reached 6.2% of GDP in 2022, higher than 5.7% observed one year before. - Government and Central Bank forecast the current account deficit to be lower than 4% of GDP in 2023. - Recent figures show the dollar value of imports declined in absolute terms in the last two months of 2022, after growth rates of more than 40% in the first half of the year. - FDI flows continue financing most of the external deficit. - Financial Markets and External Buffers - Risk premium peaked in October 2022 but partially corrected in recent months. - Exchange rate, domestic sovereign bond yields, and international risk margins have shown a downward trend since October 2022, although with volatility. - Colombia maintains a strong level of external buffers; international reserves are considered adequate using different metrics. - Access to the Flexible Credit Line (FCL) complements international reserves; authorities welcome the positive signal and remain committed to a gradual exit. - Monetary Policy and Exchange Rate - Monetary policy follows a fully-fledged inflation targeting regime with exchange rate flexibility. - Central Bank committed to bringing inflation back to the 3% target by end-2024. - Policy rate raised by 11 percentage points since September 2021, bringing it to its current level of 12.75%. - Monetary policy stance is clearly contractionary given high inflation, excess demand, and inflation expectations above target. - Reduction in food price growth led to inflation decline for low-income households in February. - Colombian peso depreciated close to 20% between January and October 2022 and has shown an appreciation trend since then, with volatility. - Central Bank allows exchange rate to float and acts as a shock absorber; low currency mismatches limit balance sheet risks. - Fiscal Policy and Outlook - Fiscal policy anchored by a fiscal rule and a medium-term fiscal framework. - Latest Financial Plan anticipates fiscal deficit in 2023 will over comply the Fiscal Rule target for a second year in a row. - From 2024 onwards, plan fully aligned with the Fiscal Rule and promotes gradual convergence of debt to the medium-term anchor. - 2021 tax reform (Social Investment Law) linked structural fiscal deficit targets to debt levels and created the Autonomous Fiscal Rule Committee. - Fiscal outlook improved due to better economic activity and higher revenues reflecting the 2021 Social Investment Law and the 2022 Tax Reform for Equality and Social Justice. - General Government fiscal deficit expected to decrease from 6.4% of GDP in 2022 to 3.5% of GDP in 2023. - Central Government expects to return to positive primary balances in 2023. - Central Government net debt expected to decline from 58.8% of GDP in 2022 to 57.6% in 2023, maintaining a decreasing trend that started in 2021. - Measures undertaken include gradual cutback of fuel subsidies and enhancement of focalization of social programs. - Financial Sector - Lending activity exhibited substantial dynamism in 2022; loan portfolio grew strongly. - Consumer loan portfolio reached real growth rates of 14% in mid-2022. - Households’ indebtedness hit historical highs. - Consumer loan portfolio recently slowed, consistent with adjustment of domestic demand, monetary policy tightening, and prudential measures. - Banking provisions for consumer loans were reinforced amid robust consumer credit growth. - Regulation, macroprudential oversight, and banking supervision aligned with Basel III standards. - Financial sector remained liquid, solvent, and well provisioned; stress testing shows good buffers for extreme scenarios. - Authorities committed to implementing 2022 FSAP recommendations. - Policy Reforms - Government undertaking reforms to reduce poverty and inequality and guarantee better pension and health coverage. - Supplementary budget proposal sent to Congress including a significant increase in social spending fully funded with higher tax revenues from the 2022 tax reform. - Financial inclusion set as first objective of public sector financial institutions. - Measures to accelerate integration of Venezuelan migrants into the formal economy continue. - Production sector strategies aim to reduce dependence on exports of oil and coal and promote energy transition. - Top priorities include implementation of the Peace Agreements and the Total Peace strategy. - Authorities emphasize reforms should include gradualism and be in accordance with the fiscal framework; Ministry of Finance coordinating the structural economic agenda. - Final Remarks - Colombia mounted impressive efforts to overcome the pandemic; fiscal and monetary responses supported rapid recovery. - Economy heading for an adjustment after extraordinary growth; slowdown necessary to cool economic activity and credit, adjust the current account deficit, prevent buildup of imbalances, and help inflation return to target. - Authorities committed to a strong macroeconomic policy and institutional framework including a fiscal rule strengthened with IMF TA inputs, an independent Central Bank (inflation targeting, flexible exchange rate, adequate international reserves), and financial regulation/supervision following international standards. - External buffers, including the FCL, together with solid policies and institutions, expected to help navigate future challenges amid persistent global uncertainty. *Source: 1colea2023001 - 2022. A data ROSC took place in 2006 and a fiscal ROSC in 2003.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1colea2023001.pdf_