## 1colea2023003

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---

### Executive summary and FCL status
- Current FCL arrangement approved on April 29, 2022 for SDR7.1557 billion (about US$9.8 billion, or 350 percent of quota); the authorities intend to treat the arrangement as precautionary.
- In December 2020 Colombia made a drawing of SDR3.75 billion (about US$5.4 billion) under its earlier FCL arrangement; that earlier arrangement had been approved in May 2020 for SDR7.8496 billion and augmented in September 2020 to SDR12.267 billion.
- Staff assesses that Colombia continues to meet the qualification criteria for access to FCL resources specified under Decision No. 14283-(09/29) (adopted March 24, 2009, as amended).
- Staff recommends that the Board complete this review, which would allow Colombia to make purchases until the expiration of the existing FCL arrangement on April 28, 2024.
- Executive Board statement highlights Colombia’s “credible inflation targeting-regime, a solid medium-term fiscal framework, a flexible exchange rate, and effective financial sector supervision and regulation”; notes the FCL “has helped strengthen Colombia’s resilience to external shocks and signaled the quality of Colombia’s macroeconomic policies and institutional frameworks”; authorities “intend to continue to treat this arrangement as precautionary and to gradually reduce access towards an eventual exit, conditional on a reduction of external tail risks.”

### Recent developments
- GDP growth:
  - Real GDP grew by 11 percent in 2021 and 7.5 percent in 2022.
  - Real GDP growth is expected to slow to 1.0 percent in 2023 and converge toward a potential growth rate of 3¼ percent over the medium term.
- Labor market:
  - Employment levels above pre-pandemic levels.
  - Unemployment rate remained broadly unchanged from December to January at 11.3 percent.
- Inflation:
  - Headline inflation reached 13.3 percent and core exceeded 10 percent through March 2023.
  - Two-years ahead inflation expectations have been above 4 percent since April 2022.
- Monetary policy:
  - Central bank policy rate raised from 1.75 percent in September 2021 to 13 percent in March 2023.
  - Ex-ante real policy rate is “over 5 percent” (about 275 basis points above the neutral rate).
- Fiscal:
  - Central government deficit lowered from 8.1 percent of GDP in 2021 to an estimated 5.5 percent in 2022.
  - Authorities committed to reduce the deficit to 3.8 percent of GDP in 2023.
  - Public sector debt reached 63.5 percent of GDP at end-2022 and is expected to narrow to around 58 percent by end-2023.
- External sector:
  - Current account deficit widened from 5.6 percent of GDP in 2021 to 6.2 percent of GDP in 2022.
  - Terms of trade up 20 percent year-on-year in 2022.
  - Average REER depreciated 4.8 percent in 2022 (after 3.2 percent in 2021).
- Trade volumes:
  - Annual import volumes grew 13.5 percent in 2022; export volumes grew 7.6 percent in 2022.
  - Import volumes contracted about 7 percent in Q4:2022 and about 1.5 percent in January 2023 (annual basis).
- Financial sector:
  - Consumer credit growth slowed from 23 percent y/y in August to 14.5 percent in February.
  - Non-performing loans reached 5.4 percent in November 2022 (up from 4.7 percent in June).
  - High share of fixed-rate mortgages at 80 percent.
  - Banks’ holdings of local currency government debt at 7.5 percent of total assets.

### Outlook and risks
- Growth outlook:
  - Projected real GDP growth of 1.0 percent in 2023; medium-term convergence to 3¼ percent.
- Inflation outlook:
  - Projected to decline to about 8.5 percent y/y by end-2023 and reach the 3 percent target by the first half of 2025.
- Fiscal outlook:
  - Consolidated overall fiscal deficit projected to fall from 6.6 percent of GDP in 2022 to 3.8 percent of GDP in 2023 and to around 2 percent of GDP over the medium term.
  - Gross financing needs expected to average around 5.8 percent of GDP during 2023-25.
- Current account:
  - Projected to narrow to about 5 percent of GDP in 2023 and to 4 percent of GDP over the medium term.
- External financing:
  - FDI and portfolio flows expected to remain main sources of external financing; FDI projected to gradually increase toward its historical average.
- Key risks:
  - External risks elevated and tilted to the downside: disorderly global financial conditions, adverse effects on commodity prices and capital flows, escalation of Russia’s war in Ukraine disrupting trade and supply chains, contagion from international banking sector turmoil.
  - Domestic risks: renewed social tensions; uncertainties over the government’s reform agenda that could raise borrowing costs and undermine growth, investment, and external sustainability.

### Policy recommendations
- Macroeconomic stance:
  - Maintain tight macroeconomic policies through 2024 to durably reduce inflation and external imbalances.
  - Monetary policy: keep a tight stance to achieve the inflation target, reduce uncertainty, keep expectations anchored, and maintain central bank credibility; “further hikes in the policy rate may be needed” depending on inflation, expectations, and demand conditions.
  - Fiscal policy: continue consolidation to reduce deficits and put public debt on a firmly declining path; implement 2021 and 2022 progressive tax reforms and further reduce untargeted energy subsidies while expanding social support.
- Structural reforms:
  - Proceed with reforms aimed to “enhance equality, promote economic diversification, and strengthen governance” but ensure careful and prudent design and communication to preserve fiscal and financial stability and align economic incentives.
- Financial sector:
  - Continue strong supervision and oversight; closely monitor potential spillovers from global financial shocks; maintain high provisioning and liquidity buffers.

### FCL access, role, and exit strategy
- Role of FCL:
  - The FCL has reinforced market confidence, provided insurance against external risks, and signaled the quality of Colombia’s macroeconomic policies and institutional frameworks.
- Authorities’ intent:
  - To continue treating the FCL arrangement as precautionary and to gradually reduce access towards an eventual exit, conditional on a reduction of external tail risks.
- Staff recommendation:
  - Board completion of the review to permit purchases until expiration of the FCL arrangement on April 28, 2024.
- Current access and stance:
  - Authorities are not requesting a change in access at this review; they view access under the FCL of SDR7.1557 billion (350 percent of quota) as providing sufficient buffers and intend to treat the FCL as precautionary.
  - Under a tail risk scenario that prompts a full drawing under the FCL, Colombia’s capacity to repay would remain adequate.
- Exit considerations:
  - Updated assessment of relevant external risks and their evolution (projected Economic Stress Index shows external risks may recede in coming quarters).
  - Policy efforts to strengthen domestic resilience to external shocks, including continued reserve accumulation as conditions allow.

### External risks and adverse scenario
- Stress outlook:
  - The stress index is expected to stabilize during the next quarters as projected higher oil prices and projected unchanged U.S. interest rates are largely offset by lower projected U.S. growth.
- Adverse scenario assumptions and impacts:
  - U.S. GDP levels will be 1.2 percent lower than in the baseline in 2023 and 1.4 percent in 2024.
  - Other adverse scenario assumptions: oil prices 28 percent below baseline (about one standard deviation), the VXEEM two standard deviations above baseline, and yields 100 basis points above baseline.
  - The growth shock is on average smaller than assumed at the time of the FCL approval (April 2022), contributing to lower external economic stress compared with past adverse scenarios, but external risks remain above average.

### Monetary, fiscal, reserves, and external position
- Monetary policy:
  - Central bank reaffirmed commitment to reaching the inflation target in the medium-term and agreed to maintain a tight stance as conditions warrant.
  - Communication strategy: effective communication emphasizing that monetary policy will remain tight and data dependent.
- Fiscal policy:
  - The envisaged fiscal adjustment for 2023 is described as appropriate, growth friendly, and balances the need to reduce imbalances while increasing social support.
  - Beyond 2023, staff recommends considering further improvements in fiscal balances over the fiscal rule path to strengthen debt convergence, create buffers, reduce financing needs, and bolster credibility of the fiscal policy framework.
  - Authorities are committed to continue adhering to the fiscal rule in line with Colombia’s very strong fiscal policy framework.
- Reserves and exchange rate:
  - International reserves holdings remain adequate at about $57 billion (128 (113) percent of ARA metric excluding (including) the commodity buffer).
  - Reserve coverage could be gradually strengthened over the medium term as market conditions allow.
  - The exchange rate should continue to be allowed to adjust flexibly to shocks as long as financial stability is not compromised.
  - Authorities remain committed to the flexible exchange rate regime.
- External position:
  - Current account deficit is expected to narrow to around 4 percent of GDP over the medium term.
  - External debt is expected to stabilize around 65 percent of GDP over the medium term after temporarily increasing during 2023-24.
  - Mitigating factors for external resilience include: adequate net international reserves and reserve coverage, relative stability of capital flows, high share of FDI, favorable debt composition and maturities, sizable peso-denominated sovereign bonds, and flexible exchange rate.

### Financial sector policies, soundness, and supervision
- Ongoing and recommended actions:
  - Continue strong oversight and proactive supervisory actions, including raising provisioning and capital buffers as needed.
  - Expand debt-service-to-income (DSTI) regulations to target household indebtedness, per FSAP recommendations.
  - Continue enhancements in monitoring exposure to Central America in close collaboration with host country supervisors.
  - Continue progress in implementing the 2022 FSAP recommendations and follow-up actions.
- System resilience indicators:
  - Banking system capital adequacy ratio as of November 2022: 18.0 percent.
  - Tier-1 capital as of November 2022: 14.1 percent.
  - Liquidity Coverage Ratio (LCR): about 182 percent.
  - Financial conglomerates’ exposure to Central America constituted about 34 percent of their consolidated assets in September 2022.
  - Less than half of external public debt is denominated in foreign currency; roughly 70 percent of all nonfinancial corporate external debt is hedged in various fashions; banking sector foreign-currency debt represented around 9 percent of total bank liabilities.
- Financial soundness indicators (selected, end-of-period to Nov-22):
  - Regulatory capital to risk-weighted assets: 18.4 (Nov-22).
  - Capital (net worth) to assets: 10.5 (Nov-22).
  - Provisions to nonperforming loans: 136.3 (Nov-22).
  - ROAA: 5.2 (Nov-22); ROAE: 36.4 (Nov-22).
  - Liquid assets to total assets: 16.8 (Nov-22).
  - Deposit to loan ratio: 94.4 (Nov-22).
  - Foreign-currency-denominated loans to total loans: 5.2 (Nov-22).
- Staff and authorities assess the financial system as sound and stable, with indicators largely surpassing Basel III-derived regulatory thresholds.

### Structural policies and reform agenda
- Policy priorities to promote inclusive growth and external competitiveness:
  - Address labor informality.
  - Raise financial inclusion.
  - Reduce entry barriers.
  - Strengthen governance.
- Reform highlights:
  - Administration’s equity agenda envisages improving coverage and progressivity of healthcare and pension systems and improving worker rights such as overtime pay.
  - Reduce reliance on oil and coal via a well-designed energy transition and export diversification plan.
  - Reforms should be implemented carefully and prudently, in close consultation with stakeholders, to preserve fiscal and financial stability and align economic incentives.

### Debt sustainability, sovereign stress, and key projections
- DSA summary assessment:
  - Public sector debt is assessed to be sustainable under a wide range of plausible shock scenarios and with high probability, with moderate medium-term sovereign and financing risks.
  - Mechanical signal and final assessment: sustainable with high probability.
- Medium-term risks:
  - Assessed as moderate; consolidation efforts are somewhat ambitious and debt stabilization critically depends on meeting fiscal targets and sustained implementation of the fiscal rule and medium-term fiscal framework.
  - Overall risk of sovereign stress is moderate; main risks include peso depreciation, tighter financial conditions, and ambitious pension reform or a drastic shift away from oil and coal production.
- Selected numeric projections and metrics (preserved as in source):
  - Real GDP growth (memo, baseline projections): 7.5 (2022), 1.0 (2023), 1.9 (2024), 2.9 (2025), 3.3 (2026–2033 individual years shown as 3.3).
  - Public sector gross financing needs averaging 5.8 percent of GDP during 2023-25.
  - Nonfinancial public sector gross debt ratio projected to decline from around 63.6 percent of GDP in 2022 to around 58 percent in 2028.
  - Non-oil structural primary deficit projected to decline from 1.7 percent in 2022 to 1.0 percent of GDP in 2024 and to just below 1 percent of GDP over the medium term.
  - Inflation: Average annual inflation during 2000-2022: 5.1 percent; Inflation as of end-2022: 13.1 percent.
  - Inflation projected at about 8½ percent for 2023 and 3½ percent for 2024.
  - External debt (percent of GDP, Table 11 baseline): 50.1 (2019), 66.6 (2020), 62.2 (2021), 63.0 (2022), projected 68.1 (2023), 68.3 (2024), trending down to 65.4 (2028).
  - Gross international reserves (Table 8): 52.7 (2019), 58.5 (2020), 58.0 (2021), 56.7 (2022), projected 57.8 (2023).
  - Tail-risk/drawing scenario (Table 10): assumes full drawing on the current FCL (350 percent of quota) in 2023; gross international reserves in memo: 57,845 (2023 baseline) and 44,775 (2023 Drawing Scenario) (US$ millions).
  - Spreads and market access: spreads increased to 520 bps in October 2022 and declined by 65 bps as of mid-March; preemptive US$3.8 billion bond issuances in November 2022 and January 2023; external financing needs for 2023 fully met.
  - Public debt (baseline, percent of GDP): 63.6 (2022), 62.0 (2023), 61.1 (2024), projected down to 56.7 (2033).
  - Expected permanent revenue increase from 2021 and 2022 tax reforms: combined 2 percent of GDP per year (conservative scenario).
  - Debt limit at central government level: 70 percent of GDP.
  - FCL access in drawing scenario: full drawing assumed at 350 percent of quota (Table 10 scenario).

### Safeguards and staff appraisal
- Safeguards procedures:
  - Procedures included review of the central bank’s 2021 financial statements and KPMG Colombia’s (external auditor) reports.
  - Safeguards procedures were completed for the 2022 FCL with no significant issues identified.
- Staff appraisal:
  - Colombia continues to benefit from the FCL.
  - The FCL has helped to strengthen the country’s resilience, provide an insurance against external risks, and signal the quality of its macroeconomic policies and institutional policy frameworks.
  - The authorities remain committed to gradually reduce access under the FCL arrangement, external risks permitting.

*International Monetary Fund — Colombia: Review under the Flexible Credit Line Arrangement (April 7, 2023).*

### 7.1557 billion (about US$9.8 billion). The Colombian authorities stated their intention to

### COLOMBIA — REVIEW UNDER THE FLEXIBLE CREDIT LINE ARRANGEMENT

### Executive summary and FCL status
- Current FCL arrangement approved on April 29, 2022 for SDR7.1557 billion (about US$9.8 billion, or 350 percent of quota); the authorities intend to treat the arrangement as precautionary.
- In December 2020 Colombia made a drawing of SDR3.75 billion (about US$5.4 billion) under its earlier FCL arrangement; that earlier arrangement had been approved in May 2020 for SDR7.8496 billion and augmented in September 2020 to SDR12.267 billion.
- Staff assesses that Colombia continues to meet the qualification criteria for access to FCL resources specified under Decision No. 14283-(09/29) (adopted March 24, 2009, as amended).
- Staff recommends that the Board complete this review, which would allow Colombia to make purchases until the expiration of the existing FCL arrangement on April 28, 2024.
- Executive Board statement (Ms. Antoinette Sayeh, Deputy Managing Director and Acting Chair): highlights Colombia’s “credible inflation targeting-regime, a solid medium-term fiscal framework, a flexible exchange rate, and effective financial sector supervision and regulation”; notes the FCL “has helped strengthen Colombia’s resilience to external shocks and signaled the quality of Colombia’s macroeconomic policies and institutional frameworks”; authorities “intend to continue to treat this arrangement as precautionary and to gradually reduce access towards an eventual exit, conditional on a reduction of external tail risks.”  

### Recent developments
- GDP growth: real GDP grew by 11 percent in 2021 and 7.5 percent in 2022; real GDP growth is expected to slow to 1.0 percent in 2023 and converge toward a potential growth rate of 3¼ percent over the medium term.
- Labor market: employment levels above pre-pandemic levels; unemployment rate remained broadly unchanged from December to January at 11.3 percent.
- Inflation: headline inflation reached 13.3 percent and core exceeded 10 percent through March 2023; two-years ahead inflation expectations have been above 4 percent since April 2022.
- Monetary policy: central bank policy rate raised from 1.75 percent in September 2021 to 13 percent in March 2023; ex-ante real policy rate is “over 5 percent” (about 275 basis points above the neutral rate).
- Fiscal: central government deficit lowered from 8.1 percent of GDP in 2021 to an estimated 5.5 percent in 2022; authorities committed to reduce the deficit to 3.8 percent of GDP in 2023; public sector debt reached 63.5 percent of GDP at end-2022 and is expected to narrow to around 58 percent by end-2023.
- External sector: current account deficit widened from 5.6 percent of GDP in 2021 to 6.2 percent of GDP in 2022; terms of trade up 20 percent year-on-year in 2022; average REER depreciated 4.8 percent in 2022 (after 3.2 percent in 2021).
- Trade volumes: annual import volumes grew 13.5 percent in 2022; export volumes grew 7.6 percent in 2022; import volumes contracted about 7 percent in Q4:2022 and about 1.5 percent in January 2023 (annual basis).
- Financial sector: consumer credit growth slowed from 23 percent y/y in August to 14.5 percent in February; non-performing loans reached 5.4 percent in November 2022 (up from 4.7 percent in June); high share of fixed-rate mortgages at 80 percent; banks’ holdings of local currency government debt at 7.5 percent of total assets.

### Outlook and risks
- Growth outlook: projected real GDP growth of 1.0 percent in 2023; medium-term convergence to 3¼ percent.
- Inflation outlook: projected to decline to about 8.5 percent y/y by end-2023 and reach the 3 percent target by the first half of 2025.
- Fiscal outlook: consolidated overall fiscal deficit projected to fall from 6.6 percent of GDP in 2022 to 3.8 percent of GDP in 2023 and to around 2 percent of GDP over the medium term; gross financing needs expected to average around 5.8 percent of GDP during 2023-25.
- Current account: projected to narrow to about 5 percent of GDP in 2023 and to 4 percent of GDP over the medium term.
- External financing: FDI and portfolio flows expected to remain main sources of external financing; FDI projected to gradually increase toward its historical average.
- Key risks (external and domestic):
  - External risks elevated and tilted to the downside: disorderly global financial conditions, adverse effects on commodity prices and capital flows, escalation of Russia’s war in Ukraine disrupting trade and supply chains, contagion from international banking sector turmoil.
  - Domestic risks: renewed social tensions; uncertainties over the government’s reform agenda that could raise borrowing costs and undermine growth, investment, and external sustainability.

### Policy recommendations
- Macroeconomic stance:
  - Maintain tight macroeconomic policies through 2024 to durably reduce inflation and external imbalances.
  - Monetary policy: keep a tight stance to achieve the inflation target, reduce uncertainty, keep expectations anchored, and maintain central bank credibility; “further hikes in the policy rate may be needed” depending on inflation, expectations, and demand conditions.
  - Fiscal policy: continue consolidation to reduce deficits and put public debt on a firmly declining path; implement 2021 and 2022 progressive tax reforms and further reduce untargeted energy subsidies while expanding social support.
- Structural reforms:
  - Proceed with reforms aimed to “enhance equality, promote economic diversification, and strengthen governance” but ensure careful and prudent design and communication to preserve fiscal and financial stability and align economic incentives.
- Financial sector:
  - Continue strong supervision and oversight; closely monitor potential spillovers from global financial shocks; maintain high provisioning and liquidity buffers.

### FCL access, role, and exit strategy
- Role of FCL: the FCL has reinforced market confidence, provided insurance against external risks, and signaled the quality of Colombia’s macroeconomic policies and institutional frameworks.
- Authorities’ intent: to continue treating the FCL arrangement as precautionary and to gradually reduce access towards an eventual exit, conditional on a reduction of external tail risks.
- Staff recommendation: Board completion of the review to permit purchases until expiration of the FCL arrangement on April 28, 2024.

_International Monetary Fund — Colombia: Review under the Flexible Credit Line Arrangement (April 7, 2023)._

### 2019. The stress index is expected to stabilize during the

### 1colea2023003 - 2019. The stress index is expected to stabilize during the

### External risks and adverse scenario
- The stress index is expected to stabilize during the next quarters as projected higher oil prices and projected unchanged U.S. interest rates are largely offset by lower projected U.S. growth.
- Adverse scenario assumptions and impacts:
  - U.S. GDP levels will be 1.2 percent lower than in the baseline in 2023 and 1.4 percent in 2024.
  - Other adverse scenario assumptions: oil prices 28 percent below baseline (about one standard deviation), the VXEEM two standard deviations above baseline, and yields 100 basis points above baseline.
  - The growth shock is on average smaller than assumed at the time of the FCL approval (April 2022), contributing to lower external economic stress compared with past adverse scenarios, but external risks remain above average.

### Monetary policy
- The central bank has reaffirmed its commitment to reaching the inflation target in the medium-term and agreed to maintain a tight stance as conditions warrant.
- Communication strategy: effective communication emphasizing that monetary policy will remain tight and data dependent.

### Fiscal policy
- The envisaged fiscal adjustment for 2023 is described as appropriate, growth friendly, and balances the need to reduce imbalances while increasing social support.
- Beyond 2023, staff recommends considering further improvements in fiscal balances over the fiscal rule path to:
  - Strengthen the convergence of public debt to its medium-term anchor.
  - Create buffers against downside shocks.
  - Reduce financing needs.
  - Bolster credibility of the fiscal policy framework.
- Authorities are committed to continue adhering to the fiscal rule in line with Colombia’s very strong fiscal policy framework.

### Reserves, exchange rate, and external position
- Reserve position and recommendations:
  - Colombia’s international reserves holdings remain adequate at about $57 billion (128 (113) percent of ARA metric excluding (including) the commodity buffer).
  - Reserve coverage could be gradually strengthened over the medium term as market conditions allow.
  - The exchange rate should continue to be allowed to adjust flexibly to shocks as long as financial stability is not compromised.
  - Authorities remain committed to the flexible exchange rate regime.
- External position and outlook:
  - Current account deficit is expected to narrow to around 4 percent of GDP over the medium term.
  - External debt is expected to stabilize around 65 percent of GDP over the medium term after temporarily increasing during 2023-24.
  - Mitigating factors for external resilience include: adequate net international reserves and reserve coverage, relative stability of capital flows, high share of FDI, favorable debt composition and maturities, sizable peso-denominated sovereign bonds, and flexible exchange rate.

### Financial sector policies and supervision
- Ongoing and recommended actions:
  - Continue strong oversight and proactive supervisory actions, including raising provisioning and capital buffers as needed.
  - Expand debt-service-to-income (DSTI) regulations to target household indebtedness, per FSAP recommendations.
  - Continue enhancements in monitoring exposure to Central America in close collaboration with host country supervisors.
  - Continue progress in implementing the 2022 FSAP recommendations and follow-up actions.
- System resilience indicators:
  - Banking system capital adequacy ratio as of November 2022: 18.0 percent.
  - Tier-1 capital as of November 2022: 14.1 percent.
  - Liquidity Coverage Ratio (LCR): about 182 percent.
  - Financial conglomerates’ exposure to Central America constituted about 34 percent of their consolidated assets in September 2022.
  - Less than half of external public debt is denominated in foreign currency; roughly 70 percent of all nonfinancial corporate external debt is hedged in various fashions; banking sector foreign-currency debt represented around 9 percent of total bank liabilities.

### Structural policies
- Policy priorities to promote inclusive growth and external competitiveness:
  - Address labor informality.
  - Raise financial inclusion.
  - Reduce entry barriers.
  - Strengthen governance.
- Reform agenda highlights:
  - Administration’s equity agenda envisages improving coverage and progressivity of healthcare and pension systems and improving worker rights such as overtime pay.
  - Reduce reliance on oil and coal via a well-designed energy transition and export diversification plan.
  - Reforms should be implemented carefully and prudently, in close consultation with stakeholders, to preserve fiscal and financial stability and align economic incentives.

### FCL access, exit strategy, and qualification
- Current FCL access and stance:
  - Authorities are not requesting a change in access at this review; they view access under the FCL of SDR7.1557 billion (350 percent of quota) as providing sufficient buffers and intend to treat the FCL as precautionary.
  - Under a tail risk scenario that prompts a full drawing under the FCL, Colombia’s capacity to repay would remain adequate.
- Exit strategy and conditions for reducing access:
  - Authorities remain committed to gradually reduce access towards an eventual exit, risks permitting; current access level is the lowest since 2011.
  - Exit considerations include:
    - An updated assessment of relevant external risks and their evolution (projected Economic Stress Index shows external risks may recede in coming quarters).
    - Policy efforts to strengthen domestic resilience to external shocks, including continued reserve accumulation as conditions allow.
- Staff assessment of qualification:
  - Staff assesses that Colombia continues to meet the qualification criteria for an FCL arrangement, citing very strong macroeconomic policies, fundamentals, and institutional policy frameworks.
  - Authorities committed to keeping macroeconomic policies tight to reduce domestic and external imbalances, allowing exchange rate to act as shock absorber, and implementing structural reforms while safeguarding macroeconomic and financial stability.

### Key statistics and projections
- Adverse scenario: U.S. GDP 1.2 percent lower in 2023 and 1.4 percent lower in 2024 (relative to baseline).
- Adverse scenario shocks: oil prices 28 percent below baseline; VXEEM two standard deviations above baseline; yields 100 basis points above baseline.
- International reserves: about $57 billion (128 (113) percent of ARA metric excluding (including) the commodity buffer).
- FCL access: SDR7.1557 billion (350 percent of quota).
- Past FCL drawing: SDR3.75 billion (about US$5.4 billion) drawn in December 2020.
- Spreads and market access: spreads increased to 520 bps in October 2022 and declined by 65 bps as of mid-March; preemptive US$3.8 billion bond issuances in November 2022 and January 2023; external financing needs for 2023 fully met.
- External and fiscal metrics:
  - Current account deficit expected to narrow to around 4 percent of GDP over the medium term.
  - External debt stabilizing around 65 percent of GDP over the medium term.
  - Public sector gross financing needs averaging 5.8 percent of GDP during 2023-25.
  - Nonfinancial public sector gross debt ratio projected to decline from around 63.6 percent of GDP in 2022 to around 58 percent in 2028.
  - Non-oil structural primary deficit projected to decline from 1.7 percent in 2022 to 1.0 percent of GDP in 2024 and to just below 1 percent of GDP over the medium term.
- Inflation and monetary outlook:
  - Average annual inflation during 2000-2022: 5.1 percent.
  - Inflation as of end-2022: 13.1 percent.
  - Inflation projected at about 8½ percent for 2023 and 3½ percent for 2024.
- Banking system metrics:
  - Capital adequacy ratio: 18.0 percent (November 2022).
  - Tier-1 capital: 14.1 percent (November 2022).
  - Liquidity Coverage Ratio: about 182 percent.

*Source: IMF staff calculations and assessments as presented in the document.*

### 16.      Safeguards procedures were completed for the 2022 FCL with no significant issues

### 16.      Safeguards procedures were completed for the 2022 FCL with no significant issues

### Safeguards procedures
- The procedures included review of the central bank’s 2021 financial statements and KPMG Colombia’s (external auditor) reports.
- Safeguards procedures were completed for the 2022 FCL with no significant issues identified.

### Staff appraisal
- Colombia continues to benefit from the FCL.
- The FCL has helped to strengthen the country’s resilience, provide an insurance against external risks, and signal the quality of its macroeconomic policies and institutional policy frameworks.
- The authorities remain committed to gradually reduce access under the FCL arrangement, external risks permitting.

*Source: 1colea2023003 - 16.      Safeguards procedures were completed for the 2022 FCL with no significant issues*

### 18.      Colombia is assessed as meeting the qualification criteria for an FCL arrangement. As

### 1colea2023003 - 18.      Colombia is assessed as meeting the qualification criteria for an FCL arrangement. As

### FCL qualification and executive assessment
- Colombia is assessed as meeting the qualification criteria for an FCL arrangement.
- Staff recommends completion of the review under the FCL arrangement for Colombia.
- The Executive Board assessment of the 2023 Article IV consultation: Colombia continues to have very strong policy frameworks anchored by:
  - a credible inflation-targeting regime,
  - a flexible exchange rate,
  - a guiding fiscal framework,
  - effective financial system regulation and supervision.
- Colombia is implementing and has a sustained track record of implementing very strong policies and remains committed to maintaining such policies.

### Recent macroeconomic developments and outlook
- Consumption-led expansion continued in 2022; domestic demand started to slow in 2022Q4 with leading indicators pointing to more subdued growth.
- Real GDP growth (memo, baseline projections): 7.5 (2022), 1.0 (2023), 1.9 (2024), 2.9 (2025), 3.3 (2026–2033 individual years shown as 3.3).
- Inflation dynamics:
  - Inflation became generalized across core and non-core components.
  - Producer Price Index slowed from 13.2 percent y/y in February to 7.4 percent in March.
- Monetary policy:
  - Policy rate increased again in March, reaching 13 percent.
  - Authorities have increased the policy rate by 11.25pp since September 2021.
  - Banco de la República objective: guide inflation to the target by end-2024.
- External sector:
  - The peso weakened significantly in 2022 despite stronger terms of trade, but has appreciated thereafter.
  - Current account deficit widened in 2022; staff projects CAD to return to historical levels (around 4 percent of GDP) in 2023.
  - The current account has been financed by robust capital inflows, mainly direct investment.
  - Foreign direct investment covers around 80 percent of the CAD (authorities’ statement).
  - Gross international reserves: cited as currently at USD 57.3 billion (authorities’ statement).
- Fiscal outlook and public debt:
  - Public debt path projected in the baseline: 63.6 (2022), 62.0 (2023), 61.1 (2024), with a gradual decline to 56.7 (2033) in the baseline table (percent of GDP).
  - Staff commentary: public debt will stabilize reflecting narrowing primary deficits and stable economic conditions.
  - Authorities note public debt is in a clear downward trend since 2021.
  - Two tax reforms (2021 and 2022) are expected, in a conservative scenario, to yield a combined increase in permanent revenues of 2 percent of GDP per year (authorities’ statement).
  - Colombia has set a debt limit of 70 percent of GDP (central government level).
- Financial conditions and market access:
  - Investor appetite for local currency bonds recovered; recent government bond issuances saw demand surpass initial supply by around six times (authorities’ statement).
  - Ten-year sovereign bond yields have declined by almost 4pp from the peak reached in October (authorities’ statement).
  - Local currency strengthened by around 6 percent in the last month (authorities’ statement).

### External vulnerability and financing
- Current account (percent of GDP, Table 2b): -6.2 (2022), projected -5.1 (2023), -4.6 (2024), -4.3 (2025), -4.1 (2026–2027), -4.0 (2028).
- Financial account mirrors current account: -5.9 (2022), projected -5.1 (2023), -4.6 (2024).
- External debt (percent of GDP, Table 11 baseline): 50.1 (2019), 66.6 (2020), 62.2 (2021), 63.0 (2022), projected 68.1 (2023), 68.3 (2024), trending down to 65.4 (2028).
- Gross financing needs (percent of GDP, Table 11 baseline): 17.8 (2023), 18.2 (2024), with levels shown across projections (e.g., 17.1–16.5 in later years).
- Reserves adequacy metrics (Table 8):
  - Gross international reserves: 52.7 (2019), 58.5 (2020), 58.0 (2021), 56.7 (2022), projected 57.8 (2023).
  - In months of prospective GNFS imports: 12.3 (2019), 9.9 (2020), 7.8 (2021), 8.2 (2022), projected 8.4 (2023).
- Tail-risk/drawing scenario (Table 10): assumes full drawing on the current FCL (350 percent of quota) in 2023; gross external financing needs and sources quantified for 2023–24 with gross international reserves in memo: 57,845 (2023 baseline) and 44,775 (2023 Drawing Scenario) (US$ millions).

### Debt sustainability and sovereign stress risk
- DSA summary assessment (Figure 7 commentary): public sector debt is assessed to be sustainable under a wide range of plausible shock scenarios and with high probability, with moderate medium-term sovereign and financing risks.
- Mechanical signal and final assessment: sustainable with high probability.
- Medium-term risks: assessed as moderate; realism scenarios suggest consolidation efforts are somewhat ambitious; debt stabilization critically depends on meeting fiscal targets and sustained implementation of the fiscal rule and medium-term fiscal framework.
- The overall risk of sovereign stress is moderate; main risks include peso depreciation, tighter financial conditions, and ambitious pension reform or a drastic shift away from oil and coal production affecting long-term sustainability.

### Financial sector soundness
- Financial Soundness Indicators (Table 7 highlights, end-of-period values to Nov-22):
  - Regulatory capital to risk-weighted assets: 18.4 (Nov-22).
  - Capital (net worth) to assets: 10.5 (Nov-22).
  - Provisions to nonperforming loans: 136.3 (Nov-22).
  - ROAA: 5.2 (Nov-22); ROAE: 36.4 (Nov-22).
  - Liquid assets to total assets: 16.8 (Nov-22).
  - Deposit to loan ratio: 94.4 (Nov-22).
  - Foreign-currency-denominated loans to total loans: 5.2 (Nov-22).
- Staff and authorities assess the financial system as sound and stable, with indicators largely surpassing Basel III-derived regulatory thresholds.
- Supervisory vigilance emphasized, with special attention to household segment where consumer credit deceleration and moderate increases in NPLs are noted.

### Policy stance and recommendations (staff and authorities' positions)
- Monetary policy:
  - Continue a data-dependent, contractionary monetary stance until inflation is guided back to the target by end-2024.
  - Maintain exchange rate flexibility as a first line of defense; FX interventions only for market disruptions or temporary foreign currency liquidity shortages.
- Fiscal policy:
  - Sustain the tight fiscal stance and implement fiscal plans to stabilize and lower public debt; continued adherence to the Fiscal Rule is critical.
  - Continue fiscal consolidation while protecting social spending and phasing out fuel subsidies gradually.
- External and reserve management:
  - Maintain adequate international reserves and access to international financial markets; use the FCL precautionarily to complement external buffers.
- Financial sector:
  - Maintain strong regulation and supervision; continue rigorous oversight by the Financial Superintendency, with emphasis on household credit risks.
- Structural reforms:
  - Continue the structural reform agenda to enhance equality and promote economic diversification within current macroeconomic frameworks.
- Use of FCL:
  - Authorities intend to treat the current FCL as precautionary and commit to an orderly exit strategy, subject to external risk developments; current level of access judged adequate for the mid-term review.

### Key numeric highlights (selected, preserved as in source)
- Policy rate: 13 percent (March increase).
- Policy rate increase since September 2021: 11.25pp.
- Producer Price Index: 13.2 percent y/y in February to 7.4 percent in March.
- Local currency appreciation: around 6 percent in the last month (authorities’ statement).
- Ten-year sovereign bond yields decline: almost 4pp from the October peak (authorities’ statement).
- Gross international reserves cited by authorities: USD 57.3 billion.
- Public debt (baseline, percent of GDP): 63.6 (2022), 62.0 (2023), 61.1 (2024), projected down to 56.7 (2033) in Figure/Table sequence.
- Current account target/historical level: around 4 percent of GDP (authorities expect CAD to return to this in 2023).
- Expected permanent revenue increase from 2021 and 2022 tax reforms: combined 2 percent of GDP per year (conservative scenario).
- Debt limit at central government level: 70 percent of GDP.
- FCL access in drawing scenario: full drawing assumed at 350 percent of quota (Table 10 scenario).

*Source: IMF staff and Colombian authorities’ statements and tables in the midterm FCL review (text and tables provided).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1colea2023003.pdf_