## 1colea2024001 ## Source details **Canonical URL:** [1colea2024001](https://www.imf.org/-/media/files/publications/cr/2024/english/1colea2024001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1colea2024001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1colea2024001.pdf.json) --- ### Recent developments and macroeconomic outlook - Real GDP growth: 0.6 percent in 2023, down from 7.3 percent in 2022. - Output gap: large positive output gap that opened during the post-pandemic recovery closed during 2023 (estimates uncertain). - Labor market: - Unemployment: 10.8 percent by end-2023. - Labor force participation: reached pre-pandemic levels during most of 2023 but softened in H2 2023. - Demand and investment: - Private consumption: now 5 percentage points above its pre-pandemic trend. - Investment: stands 10 percent below its pre-pandemic trend; sharper declines in machinery and equipment, housing (dwellings), and civil works (other buildings and structures). - Poverty and inequality: - Poverty rate returned to pre-pandemic levels by end-2022. - Extreme poverty has lagged recovery. - External sector: - Current account: narrowed to 2.7 percent of GDP in 2023 from 6.2 percent in 2022. - FDI inflows: 4.8 percent of GDP in 2023. - REER: appreciated about 28 percent in 2023 (end-of-period). - International reserves: - $59.1 billion by end-2023 (119 percent of the ARA metric). - Central bank announced plan to accumulate up to US$1.5 billion over the next two years; as of end-January almost USD 0.2 billion purchased under the plan. ### Inflation and monetary policy - Headline inflation: - Peaked at 13.3 percent (y/y) in March 2023. - Declined to 7.7 percent (y/y) in February 2024. - Core inflation: - Declined from 10.6 percent (y/y) in April 2023 to 7.6 percent (y/y) in February 2024. - Services inflation: persistently high, driven in part by strong indexation to past inflation. - Inflation expectations: - One-year ahead: 4.8 percent in February. - Two-year ahead: 3.5 percent in February. - Policy rate actions: - Policy rate kept at 13.25 percent from April 2023 until cuts of 25 bps each in December and January. - Board began a cycle of reductions in December 2023; monetary policy rate currently stands at 12.75%. - Central bank objective conveyed: bring inflation towards the 3 percent target by the first half of 2025 at the latest (authorities aim for mid-2025). - Policy guidance: - Recommendation: further strengthen communication to more strongly anchor inflation expectations. - Recommendation: allow the exchange rate to flexibly respond to shocks, in line with the Integrated Policy Framework (IPF), unless disorderly market conditions arise. - Recommendation: gradual strengthening of international reserves as conditions allow. ### Fiscal policy, public debt, and fiscal framework - Central government balances: - Headline balance: narrowed from -5.3 percent of GDP in 2022 to -4.3 percent of GDP in 2023. - Total revenue: 16.2 percent of GDP in 2022 to 18.8 percent of GDP in 2023. - Primary expenditure: 17.2 percent of GDP in 2022 to 19.1 percent of GDP in 2023. - Combined public sector: - Headline balance: narrowed from -6.1 percent of GDP in 2022 to -2.6 percent of GDP in 2023. - Combined public sector deficit: 2.6 percent of GDP in 2023. - CPS Gross Debt: 60.1 percent of GDP in 2022 to 52.5 percent of GDP in 2023. - Net central government debt (fiscal rule anchor): estimated to have dropped from 57.9 percent of GDP at end-2022 to an estimated 52.8 percent of GDP at end-2023, falling below the 55 percent anchor earlier than expected (nominal peso appreciation contributed significantly). - Fiscal projections and policy specifics: - 2024 Financial Plan targets an improvement in the net structural primary balance by 1.2 percentage points (as per the fiscal rule). - Overall deficit set to increase to 5.3 percent of GDP in 2024; net CG debt to 57 percent of GDP in 2024. - CPS deficit projected to increase to 3.2 percent of GDP in 2024; public debt reaching 54.4 percent of GDP in 2024. - Staff’s baseline projections exclude gains from faster resolutions of tax arbitrations. - Fiscal recommendations: - Given revenue uncertainties and planned increases in the overall deficit and debt this year, proactively scale back certain expenditure plans to reduce the risk of needing to identify spending cuts later in the year to meet the fiscal rule. - Reorient expenditures towards investment within a lower spending envelope to support the energy transition and enhance growth potential. - Fully eliminating diesel subsidies would generate savings of about 0.5 ppt of GDP per year during 2024-25. - Reduce budget rigidities and assess quality and targeting of social transfers and public investment to improve resource allocation. - Rationale: - Public sector debt assessed to be sustainable with high probability under a wide range of plausible shock scenarios. - Colombia’s r-g averaged about negative 3.8 percent during 2020-23 compared with almost zero during 2005-19; staff projects r-g to turn positive over the medium term. - Scaling back expenditures would reduce debt and financing needs, support faster monetary normalization, lower private sector borrowing costs, and help regain investment grade. ### Financial sector resilience and stability risks - Credit and asset quality: - Credit growth declined from 18 percent y/y in August 2022 to about 3.3 percent y/y in December 2023. - Nonperforming loans (NPLs): rose from 4.5 percent in early 2022 to 8.4 percent in November 2023, especially in consumer loans. - Provisioning coverage ratio declined from 136 percent (December 2022) to about 115 percent (November 2023) but remains adequate. - Banking sector soundness: - Capital adequacy ratio: well above regulatory minimum. - Liquid assets to total asset ratio: above 17 percent. - Loan portfolio: negative real growth since May 2023; consumer loan portfolio contracting 11 percent in real terms (recent). - Stress tests: financial system highly resilient even in tail risk scenarios. - Regulatory and supervisory actions: - Some mid-2023 funding pressures addressed by delaying NSFR full implementation by two years and Banrep providing temporary liquidity in the secondary market. - Late November regulatory change: Financial Superintendency Circular Externa 017 reduced indicators from 4 to 3 to trigger deaccumulation and extended period to rebuild countercyclical provisions from 18 to 24 months. - Recommendations: continue to implement FSAP recommendations; expand DSTI and LTV regulations to cover non-mortgage consumer loans; monitor maturity and liquidity risks ahead of full NSFR implementation. - Pension reform implications: - Reform envisages redirecting a large portion of workers’ contributions from private pension funds to a national savings fund; governance and investment mandates not yet determined. - Recommendation: conduct careful assessment of broader impacts on FX market, TES market, external portfolio flows, banking sector and financial conglomerates. ### Social and structural reforms, productivity, and energy transition - Authorities’ agenda: broad objectives on equity and climate are welcomed. - Social reforms design principles: - Design within Colombia’s very strong policy frameworks. - Ensure reforms address problems in the current system, align economic incentives, encourage investment, and enjoy broad political support. - Clearly communicate policy direction for reforms to be durable. - Structural priorities: - Further advance reforms to enhance productivity and diversify the economy. - Reorient public spending to investment related to the energy transition. - Productivity and savings: - Lifting productivity essential to boost potential growth; Colombia’s average TFP growth has declined over the last three decades. - Actions to improve resource allocation: streamline regulations, lower labor market rigidity, provide policy certainty, remove bottlenecks keeping firms smaller and outside the recorded economy. - Increase national saving: Colombia’s gross national savings averaged 17 percent between 1980-2023 and stayed below EM average. - Energy transition and export diversification: - Reduce dependence on oil and coal; diversify exports by identifying comparative advantages, upgrading export quality, integrating into global value chains, and removing entry barriers while avoiding protectionism. - Implementation requires time, public–private partnerships, and proper pricing of energy. - Current/upcoming large infrastructure projects (5G agenda) expected to reduce logistic costs and increase competitiveness. ### Governance, transparency, and anti-corruption - Recommendations to strengthen governance and transparency: - Develop a comprehensive risk-based anti-corruption strategy. - Continuously publish comprehensive and easily accessible income and asset declarations of politically-exposed persons. - Provide public access to effective beneficial ownership information. - Authorities’ actions and views: - Anti-corruption strategy being developed by the Secretary of Transparency. - Beneficial ownership information currently held at DIAN; efforts to expand access to key agencies with actions against non-reporters being developed. - Draft Whistleblowing Protection Law prepared and scheduled for parliamentary discussion. - Identified bottleneck: investigative capacity for processing corruption cases. ### Outlook, projections, and key macroeconomic forecasts - Real GDP growth: - Expected to grow by 1.1 percent in 2024 and gradually converge to potential by early 2026. - Over the medium-term, expected to reach potential growth rate of around 3 percent. - Inflation projections: - Gradual reduction close to 5 percent (y/y) by end-2024. - Inflation reaching 3 percent by end-2025 (staff recommends aiming for mid-2025). - Current account projections: - Current account deficit projected to increase to around 3 percent of GDP in 2024. - Convergence to medium-term average of about 3¾ percent of GDP thereafter. - Public debt and financing (selected baseline projections, percent of GDP unless indicated otherwise): - Public debt actual 2023: 52.5 - Projected public debt: 54.4 (2024), 55.6 (2025), 55.7 (2026), 55.4 (2027), 55.2 (2028), 54.5 (2029), 54.1 (2030), 53.5 (2031), 52.7 (2032), 52.0 (2033) - Change in public debt: -7.5 (2023), 1.9 (2024), 1.1 (2025), 0.1 (2026), -0.3 (2027), -0.2 (2028), -0.7 (2029), -0.4 (2030), -0.6 (2031), -0.8 (2032), -0.7 (2033) - Gross financing needs (GFN): 6.5 (2023), 4.9 (2024), 5.3 (2025), 5.9 (2026), 6.0 (2027), 6.1 (2028), 4.8 (2029), 5.4 (2030), 5.2 (2031), 5.0 (2032), 5.0 (2033) - Macro assumptions (memo): - Real GDP growth: 0.6 (2023), 1.1 (2024), 2.5 (2025), 3.0 (2026–2033) - Inflation (GDP deflator): 6.3 (2023), 5.6 (2024), 3.0 (2025–2033) - Nominal GDP growth: 7.0 (2023), 6.8 (2024), 5.6 (2025), 6.1 (2026–2033) - Effective interest rate: 7.6 (2023), 8.1 (2024), 9.2 (2025), 6.8 (2026), 6.8 (2027), 6.9 (2028), 6.1 (2029), 6.7 (2030), 6.4 (2031), 6.1 (2032), 6.2 (2033) ### Risks, contingency planning, and policy implications - Key external risks: - Intensification of geopolitical tensions could tighten global financial conditions, disrupt supply chains, and raise global food prices. - Tighter global financial conditions could lead to exchange rate pressures, fuel domestic inflation, raise risk premia, and exacerbate growth-inflation trade-offs. - Key domestic risks: - A stronger-than-expected El Niño could hinder economic activity and raise inflation. - Miscalibration of timing and pace of policy rate cuts could hinder disinflation and jeopardize central bank credibility. - Weaker-than-expected private demand from tighter financial conditions and/or softer labor market poses downside risks to growth. - Uncertainties over direction of policies could raise borrowing costs and undermine private investment. - Policy implications: - Contingency planning and agile policy responses are essential to preserve macroeconomic stability. - If shocks exacerbate inflationary pressures and/or raise external imbalances, macroeconomic policies would need to remain tighter for longer. - Additional efforts may be necessary to protect the most vulnerable while respecting the fiscal rule limits. - Monetary policy: recommended gradual, backloaded reductions in the policy rate, data-dependent, maintain tight stance as needed; enhance communication on the inflation target and time horizon. - Exchange rate policy: maintain flexible exchange rate as shock absorber; limit FX intervention to large shocks that cause disruptive illiquidity, risk de-anchoring inflation expectations, or FX mismatches per IPF. - Fiscal policy: proactively scale back expenditure plans if revenues fall short; reorient spending toward public investment and climate-related projects within a scaled back envelope. ### Financial sector supervision and FSAP implementation (selected updates) - On-site inspections (by year): 2018: 100; 2019: 106; 2020: 36; 2021: 75; 2022: 60; 2023: 67. - Key regulatory updates and time horizons: - External Circular 025, 2022 and External Circular 003 of 2024 addressing IRRBB and concentration risks (MT). - Draft regulation on ICAAP and ILAAP released for comments by November 2023 (MT). - NSFR and LCR recalibrations and operational deposits definitions introduced (MT). - Cross-border exposure data collection and preliminary network analysis developed after IMF TA (ST/MT). - Climate-related supervisory guidance and green taxonomy implementation: External Circular 005, 2022; Roadmap for Greening the Colombian Banking System; sustainability guide planned (MT). - Virtual assets pilot results and draft bill on virtual assets prepared for Congress (ST). ### Social reforms: Annex I summary (selected) - Healthcare reform: - Draft law awaiting Senate discussion; proposal would create a network of primary care centers with payments from a public fund and reduce private insurers’ role. - Authorities estimate fiscal cost could reach close to 0.2 percent of GDP in 2024 and average about 0.8 percent of GDP per year between 2025 and 2033. - Pension reform: - Draft law awaiting second round of debates; envisages moving to a single unified system with about 80 percent of future pension contributions going to the public scheme and saved in a new “National Saving Fund” (FPAC). - Authorities estimate NPV impact approx. 74 percent of GDP until 2069 and 126 percent of GDP by 2100; FPAC savings would reduce these costs to approximately 0.3 percent of GDP per year until 2069 and 2 percent of GDP afterwards. - Expert recommendations: lower threshold of contributions going to public system from 3 to 1-2 minimum wages; strengthen transition regime; ensure strong governance and investment mandate for FPAC. - Labor reform: - Draft law measures include adjustment of night shift definition, increase in surcharge of Sundays/holidays (75 percent to 100 percent by 2026), and higher severance pay. - Banrep study estimates potential reduction in formal jobs by 454,000 (range 152,000 to 746,000), reducing formality rate by 2.1 ppt over three to four years. ### Migration and social pressures - Migration stock: "2.5 million migrants from Venezuela." - Risk: "An escalation of a regional conflict could increase migration flows from Venezuela." - Policy recommendations: - "Seek financing and aid to cover for net fiscal costs in assimilating migrants." - "Use available fiscal resources within the limits of the fiscal framework." - "Continue implementing policies to integrate migrants into the labor force and maximize economic benefits." ### Public debt sustainability and medium- to long-term risk assessment (Annex IV highlights) - Public debt actual and projections (percent of GDP): 52.5 (2023); 54.4 (2024); 55.6 (2025); 55.7 (2026); 55.4 (2027); 55.2 (2028); 54.5 (2029); 54.1 (2030); 53.5 (2031); 52.7 (2032); 52.0 (2033). - Key contributors to debt dynamics (selected): - Primary deficit: -1.5 (2023), -1.4 (2024), -1.3 (2025), -1.3 (2026) ... - Automatic debt dynamics: -5.3 (2023), 1.3 (2024), 2.1 (2025), 0.6 (2026) ... - Real interest rate and relative inflation: 1.4 (2023), 1.9 (2024), 3.4 (2025), 2.2 (2026) ... - Real growth rate contributions: -0.4 (2023), -0.6 (2024), -1.3 (2025), -1.6 (2026) ... - Medium-term risk signals: - Debt fanchart index (DFI): 1.4 (Moderate). - GFN financeability index (GFI): 9.4 (Moderate). - Medium-term index final assessment: "Moderate". - Prob. of false alarms, 2024-2029, if stress predicted: 42.0 pct. - Prob. of missed crisis, 2024-2029, if stress not predicted: 9.1 pct. - Staff overall LT assessment: "moderate" given the fiscal rule and reforms; LT financing risks low/manageable except historical pandemic scenario. ### Staff appraisal and recommended sequencing - Assessment: - Colombia has made important strides in reducing domestic and external imbalances; tight macroeconomic policies helped reduce inflation, fiscal deficit, public debt, excessive credit growth, and the large current account deficit observed in prior years. - The FCL continues to provide additional external buffers and enhances market confidence. - Recommended policy mix and priorities: - Maintain appropriately tight and well-communicated monetary policy to anchor inflation expectations and aim for the 3 percent target by mid-2025. - Preserve a flexible exchange rate as a shock absorber; limit FX intervention to cases of disorderly illiquidity or financial stability-relevant FX mismatches. - Proactively scale back expenditure plans where necessary and reorient spending toward public investment and climate-related projects within the fiscal rule. - Continue implementation of FSAP recommendations, strengthen macroprudential tools (including borrower-based measures as data coverage improves), and monitor NPLs, household indebtedness, and maturity risks closely. - Advance structural reforms to boost productivity, increase national saving, and implement a well-designed energy transition strategy while safeguarding fiscal and external stability. - Strengthen governance and anti-corruption measures, publish asset and beneficial ownership information, and finalize whistleblowing protections. *Source: IMF staff report, March 8, 2024 (content unit 1colea2024001).* ### 2025. Further strengthening communication can help more strongly anchor inflation ### 2025. Further strengthening communication can help more strongly anchor inflation ### Recent developments and macroeconomic outlook - Real GDP growth: 0.6 percent in 2023, down from 7.3 percent in 2022. - Output gap: large positive output gap that opened during the post-pandemic recovery closed during 2023 (estimates uncertain). - Labor market: - Unemployment: 10.8 percent by end-2023. - Labor force participation reached pre-pandemic levels during most of 2023 but softened in H2 2023. - Private consumption: now 5 percentage points above its pre-pandemic trend. - Investment: stands 10 percent below its pre-pandemic trend; sharper declines in machinery and equipment, housing (dwellings), and civil works (other buildings and structures). - Poverty and inequality: - Poverty rate returned to pre-pandemic levels by end-2022. - Extreme poverty has lagged recovery. - Current account: - Narrowed to 2.7 percent of GDP in 2023 from 6.2 percent in 2022. - FDI inflows: 4.8 percent of GDP in 2023. - REER appreciated about 28 percent in 2023 (end-of-period). - International reserves: - $59.1 billion by end-2023 (119 percent of the ARA metric). - Central bank announced plan to accumulate up to US$1.5 billion over the next two years; as of end-January almost USD 0.2 billion purchased under the plan. ### Inflation and monetary policy - Headline inflation: - Peaked at 13.3 percent (y/y) in March 2023. - Declined to 7.7 percent (y/y) in February 2024. - Core inflation: - Declined from 10.6 percent (y/y) in April 2023 to 7.6 percent (y/y) in February 2024. - Services inflation: persistently high, driven in part by strong indexation to past inflation. - Inflation expectations: - One-year ahead: 4.8 percent in February. - Two-year ahead: 3.5 percent in February. - Policy rate actions: - Policy rate kept at 13.25 percent from April 2023 until cuts of 25 bps each in December and January. - Central bank objective conveyed: bring inflation towards the 3 percent target by the first half of 2025 at the latest. - Policy guidance and exchange rate: - Recommendation: further strengthen communication to more strongly anchor inflation expectations. - Recommendation: allow the exchange rate to flexibly respond to shocks, in line with the Integrated Policy Framework (IPF), unless disorderly market conditions arise. - Recommendation: gradual strengthening of international reserves as conditions allow. ### Fiscal policy and public debt - Central government overall balance (selected): - Headline balance narrowed from -5.3 percent of GDP in 2022 to -4.3 percent of GDP in 2023. - Total revenue: 16.2 percent of GDP in 2022 to 18.8 percent of GDP in 2023. - Primary expenditure: 17.2 percent of GDP in 2022 to 19.1 percent of GDP in 2023. - Combined public sector: - Headline balance narrowed from -6.1 percent of GDP in 2022 to -2.6 percent of GDP in 2023. - Combined public sector deficit: 2.6 percent of GDP in 2023. - CPS Gross Debt: 60.1 percent of GDP in 2022 to 52.5 percent of GDP in 2023. - Net central government debt (fiscal rule anchor): estimated to have dropped from 57.9 percent of GDP at end-2022 to an estimated 52.8 percent of GDP at end-2023, falling below the 55 percent anchor earlier than expected (nominal peso appreciation contributed significantly). - Policy recommendations: - Given revenue uncertainties and planned increases in the overall deficit and debt this year, proactively scale back certain expenditure plans to reduce the risk of needing to identify spending cuts later in the year to meet the fiscal rule. - Reorient expenditures towards investment within a lower spending envelope to support the energy transition and enhance growth potential. ### Financial sector policies - Financial sector resilience: overall resilient, but vigilance required. - Risks to monitor: - Rising nonperforming loans (NPLs). - Maturity risks. - Recommendations: - Continue to implement FSAP recommendations. - Conduct thorough analyses of potential implications of the pension reform on financial stability to inform reform discussions. ### Social and structural reforms - Authorities’ agenda: broad objectives on equity and climate are welcomed. - Design principles and implementation: - Design reforms within Colombia’s very strong policy frameworks. - Ensure reforms address problems in the current system, align economic incentives, and encourage investment. - Clear communication on policy direction and broad political support are essential for reforms to be durable. - Structural priorities: - Further advance reforms to enhance productivity and diversify the economy. - Reorient public spending to investment related to the energy transition. ### Governance and anti-corruption - Recommendations to strengthen governance and transparency and reduce corruption risks: - Develop a comprehensive risk-based anti-corruption strategy. - Continuously publish comprehensive and easily accessible income and asset declarations of politically-exposed persons. - Provide public access to effective beneficial ownership information. ### Mission and report context - Discussions took place in Bogotá during January 31-February 14, 2024. - Report approved by Luis Cubeddu (WHD) and Martin Čihák (SPR). - The mission met with the Central Bank Governor and Board, the Minister of Finance, several other ministers and senior officials, think tanks, civil society organizations, and private-sector representatives. - Press conference held at the end of the mission on February 14, 2024. *Source: IMF staff report, March 8, 2024.* ### 11. Improved global sentiment and efforts to reduce domestic imbalances supported a ### 11. Improved global sentiment and efforts to reduce domestic imbalances supported a recovery in Colombian assets prices, although sovereign spreads remain elevated compared to peers ### Asset prices, exchange rate, and sovereign spreads - The peso appreciated by about 21 percent (y/y) against the USD in nominal terms (end-of-period) last year. - Government bond yields and EMBIG spreads declined to pre-election levels, though they remain above those of peer countries. - LA4 is the unweighted average for Brazil, Chile, Mexico, and Peru. ### Financial sector resilience and credit dynamics - Credit growth declined from 18 percent y/y in August 2022 to about 3.3 percent y/y in December 2023. - Nonperforming loans (NPLs) rose from 4.5 percent in early 2022 to 8.4 percent in November 2023, especially in consumer loans. - Provisioning coverage ratio declined from 136 percent (December 2022) to about 115 percent (November 2023) but remains adequate. - Some mid-2023 funding pressures—linked to full implementation of Net Stable Funding Ratio (NSFR) regulation—were addressed by delaying NSFR full implementation by two years and Banrep providing temporary liquidity in the secondary market. - The banking sector remains liquid and well-capitalized: - Capital adequacy ratio is well above regulatory minimum. - Liquid assets to total asset ratio is above 17 percent. - Regulatory change: In late November, the Financial Superintendency issued Circular Externa 017, which includes a reduction from 4 to 3 of the indicators to trigger the deaccumulation phase and an extension from 18 to 24 months the period to rebuild countercyclical provisions. ### Outlook and key macroeconomic projections - Real GDP is expected to grow by 1.1 percent in 2024 and gradually converge to potential by early 2026. - Over the medium-term, real GDP growth is expected to reach potential growth rate of around 3 percent. - Long-term potential growth estimate is somewhat lower (¼ ppt of GDP) than previously estimated. - Inflation projections: - Gradual reduction in inflation close to 5 percent (y/y) by end-2024. - Inflation reaching 3 percent by end-2025. - Current account projections: - Current account deficit projected to increase to around 3 percent of GDP in 2024. - Convergence to medium-term average of about 3¾ percent of GDP thereafter. - Over the medium-term, continued strength in non-traditional exports is expected to support the current account. ### Policy stance: fiscal and monetary - Fiscal stance: - Measured as changes in the CPS structural non-oil primary balances (excluding valuation changes), expected to remain in contractionary territory in 2024, before shifting toward a neutral stance in 2025-26. - Overall CPS deficit projected to converge to around 2 percent of GDP over the medium term. - Monetary policy: - Expected to remain tight during 2024 and fully normalize afterwards. - Monetary policy is expected to remain tight this year, but increasingly less so, until 2025. ### Risks and contingency planning - Risks remain elevated and to the downside (Annex III). - External risks: - Intensification of geopolitical tensions could tighten global financial conditions, disrupt supply chains, and raise global food prices. - Tighter global financial conditions could lead to exchange rate pressures, fuel domestic inflation, raise risk premia, and exacerbate growth-inflation trade-offs. - Domestic risks: - A stronger-than-expected El Niño could hinder economic activity and raise inflation. - Miscalibration of timing and pace of policy rate cuts could hinder disinflation and jeopardize central bank credibility. - Weaker-than-expected private demand from tighter financial conditions and/or softer labor market poses downside risks to growth. - Uncertainties over direction of policies could raise borrowing costs and undermine private investment. - Policy implications: - Contingency planning and agile policy responses are essential to preserve macroeconomic stability. - If shocks exacerbate inflationary pressures and/or raise external imbalances, macroeconomic policies would need to remain tighter for longer. - Additional efforts may be necessary to protect the most vulnerable while respecting the fiscal rule limits. ### Authorities’ views (summary) - Authorities broadly agree with the characterization of risks, citing high uncertainty. - External risks highlighted: geopolitical tensions, fragmentation of international trade, volatility of international capital markets. - Inflation risks: climate shocks and persistence of services inflation. - Growth risks: downside risks that heighten policy trade-offs. - Concern about possible non-linear responses of inflation to aggregate demand and of aggregate demand to cumulative effects of monetary tightening. ### Policy discussions and recommendations - Overall guidance: - Macroeconomic policies must be carefully calibrated to durably reduce imbalances, strengthen public finances, and manage smooth transition to potential activity. - Monetary policy rate cuts should proceed with caution and be effectively communicated to continue reducing inflation and expectations to target. - Scale back expenditure plans to pursue slightly smaller deficits than allowed by the fiscal rule and reorient spending towards investment. - Social reforms should comply with Colombia’s strong policy frameworks and align incentives to encourage private investment. - Structural reforms should boost productivity and domestic saving. - Energy transition and export diversification strategies required to reduce dependence on oil and coal. - Strengthen governance, transparency, and reduce corruption risks. - Monetary and exchange rate policy specifics: - Aim to bring inflation firmly to the 3 percent target by mid-2025; this implies gradually reducing the policy rate in a backloaded way, maintaining a tight stance, and being data-dependent. - Enhance communication focusing on the inflation target level and expected time horizon to reach it. - Maintain flexible exchange rate as shock absorber; limit foreign exchange intervention (FXI) to large shocks that cause disruptive illiquidity, risk de-anchoring inflation expectations, or FX mismatches that pose financial stability risks, per Integrated Policy Framework (IPF). - Announced plan to gradually accumulate $1.5 billion in reserves is appropriate. - Fiscal policy specifics: - 2024 Financial Plan (FP) targets an improvement in the net structural primary balance by 1.2 percentage points (as per the fiscal rule). - Overall deficit is set to increase to 5.3 percent of GDP in 2024; net CG debt to 57 percent of GDP in 2024. - CPS deficit projected to increase to 3.2 percent of GDP in 2024; public debt reaching 54.4 percent of GDP in 2024. - Risks include ambitious but uncertain gains from faster resolutions of tax arbitrations and a 1 percentage point of GDP increase in primary CG expenditures. - If revenues fall short, expenditure plans would need to be scaled back relative to the Budget law to comply with the fiscal rule. - Staff’s baseline projections exclude gains from faster resolutions of tax arbitrations. - Recommendation to proactively scale back expenditure plans to lower borrowing costs and allow monetary policy to normalize faster. - Reorient spending within a scaled back envelope toward public investment and climate-related projects to support growth potential and the energy transition. - Fully eliminating diesel subsidies would generate savings of about 0.5 ppt of GDP per year during 2024-25. - Reducing budget rigidities and assessing quality and targeting of social transfers and public investment could improve resource allocation. - Rationale for fiscal prudence: - Public sector debt assessed to be sustainable with high probability under a wide range of plausible shock scenarios (Annex IV). - Borrowing costs have been above that of peers since Colombia lost investment grade in 2021. - Colombia’s r-g averaged about negative 3.8 percent during 2020-23 compared with almost zero during 2005-19; staff projects r-g to turn positive over the medium term. - Scaling back expenditures would reduce debt and financing needs, support faster monetary normalization, lower private sector borrowing costs, and help regain investment grade. ### Authorities’ views on fiscal execution - Authorities reiterated firm commitment to meet the fiscal rule. - Noted substantial fiscal consolidation in 2022 and 2023 and overcompliance with fiscal rule targets. - Stated 2024 Financing Plan (FP) deficit and debt plans are aligned with the fiscal rule; revenue projections already include lower gains from tax litigations with concomitantly lower spending. - Emphasized expenditures will be executed according to pace of revenue collections; budget cuts to comply with deficit limit, if needed, will be made during the fiscal year. - Issued a Presidential decree in late February to improve efficiency and effectiveness of public resources. - Highlighted importance of boosting public investment but noted budget rigidities limit scope for spending shifts, often resulting in reliance on public investment cuts to meet deficit targets. *Source: IMF staff chapter content provided in the source PDF.* ### 26. Close monitoring of NPLs, household indebtedness, and maturity risks should ### 26. Close monitoring of NPLs, household indebtedness, and maturity risks should ### Financial stability risks and near-term monitoring - Nonperforming loans (NPLs) are likely to continue rising before recovering as the economy adjusts towards more sustainable growth. - Household indebtedness will remain elevated, following a lagged cycle relative to the economic cycle. - Developments in NPLs, particularly in consumer loans, and household indebtedness should be monitored closely. - Allowing banks to use counter-cyclical provisions is noted as a welcome development that creates some breathing space for banks. ### Potential implications of the pension reform on financial stability - The reform under debate in Congress envisages redirecting a large portion of workers’ contributions from private pension funds to a national savings fund. - Governance and investment mandates of the national savings fund are not yet determined. - Given the systemically important role of private pension funds in financial and capital markets, careful assessment of broader impacts is recommended, including effects on: - the foreign exchange market, - the government bond (TES) market, - external portfolio flows, - the banking sector and financial conglomerates. - Such assessments should inform debates on the reform to mitigate financial stability risks. ### Implementation of FSAP recommendations and regulatory actions - Expand debt-service-to-income (DSTI) and loan-to-value (LTV) regulations to cover non-mortgage consumer loans to complement supervisory oversight and bolster systemic financial stability. - Carefully monitor banks’ maturity and liquidity risks in preparation for full NSFR implementation to avoid temporary funding pressures or maturity bunching. - The SFC is updating definitions of related parties for each industry in accordance with current regulations. - Efforts to align large exposure regulations with Basel III are ongoing to control credit concentration risks. - For cross-border exposures: - SFC is collecting data on exposures to foreign counterparties and working with counterparts in other countries to fill information gaps and conduct joint risk evaluations. - After IMF technical assistance, a preliminary network analysis model has been developed. - Cross-border contagion risks have been incorporated in both the SFC’s and Banco de la República’s stress-testing exercises. - These efforts should continue to further strengthen cross-border oversight. ### Authorities’ views on recent developments and supervision - Authorities emphasized that proactive supervision along with adequate buffers allowed credit institutions to absorb the materialization of credit risk last year. - Banks had built up capital and liquidity above minimum regulatory levels during the high credit growth period, which, together with the countercyclical provisioning scheme, helped absorb the deterioration in asset quality. - Credit growth has slowed down significantly in response to a contractionary monetary policy stance and tightening of credit standards by banks. - NPLs have increased, although they have moderated recently for consumer loans. - Authorities did not see a need to extend the toolkit with borrower-based prudential measures, arguing that proactive supervision and banks’ tightened origination processes (including more stringent cutoff points for debt-service ratios) effectively tighten standards. - Stress tests indicate the financial system is highly resilient and in a solid position to face a tail risk scenario. - Authorities view currency mismatches for the private sector as low, facilitating the role of a highly flexible exchange rate regime as a shock absorber without compromising financial stability. - Monitoring of foreign exposure of Colombia’s financial conglomerates will continue and be strengthened with regional stress testing exercises and information sharing with regional supervisors. - The next phase of regulatory reforms is expected to focus on banking, supervision, and data protection, including large exposures, open finance, and open data. ### Social and structural reforms: design and fiscal frameworks - Planned social reforms aim to increase equity and inclusion but should be designed within Colombia’s policy frameworks, with any fiscal costs fitting within the fiscal rule. - Reforms should address problems in the current system, ensure incentives support investment, and be clearly communicated to enhance credibility and safeguard broader stability. - Reforms should be formulated in close consultation with relevant stakeholders and aim for broad political support. ### Productivity, energy transition, and export diversification - Lifting productivity is essential to boosting potential growth in the medium-term; Colombia’s average total factor productivity (TFP) growth has declined over the last three decades. - Reversing productivity declines requires improving resource allocation by: - streamlining regulations, - lowering labor market rigidity, - providing more policy certainty (e.g., on regulated prices), - removing bottlenecks that keep firms smaller and outside the recorded economy. - Actions are necessary to boost Colombia’s low national saving, which has been well below the EM average and the level implied by the country’s fundamentals. - A well-designed energy transition and export diversification plan is vital to secure medium-term sustainability and resilience. - The administration’s goal of reducing dependence on oil and coal is highlighted. - Diversifying exports requires identifying comparative advantages, upgrading export quality, integrating into global value chains, and removing entry barriers while avoiding protectionist measures. - Implementing the strategy requires time, strong public–private partnerships, and proper pricing of energy. - The pace and timing of the transition should balance climate goals with preserving growth, fiscal, and external stability. ### Authorities’ views on reforms, energy, and infrastructure - Authorities reaffirmed that social reforms will be within policy frameworks and subject to budget availability and the medium-term fiscal framework and fiscal rule. - Pension and healthcare reform discussions in Congress aim for broad support before the summer recess. - Elements of healthcare reform are being implemented through decrees (e.g., on expanding access to primary care). - Labor reform objectives include improving worker rights while weighing potential costs of discouraging formal employment against positive effects on aggregate demand. - Authorities committed to not grant new exploration contracts on the energy supply side and to rely on existing contracts and enhanced recovery for hydrocarbon production in coming years. - Diversifying energy production (e.g., renewables, household production) is part of the strategy and is intended to lower energy costs. - On the demand side, the strategy includes increasing the use of electric vehicles in transportation. - Export diversification involves increasing productivity, strengthening production chains, developing new export sectors, and deepening economic integration with Latin America, the Caribbean, Asia, and Africa. - Current and upcoming large infrastructure projects (5G agenda) are expected to contribute to reducing logistic costs, increasing productivity, and international competitiveness. ### Governance and anti-corruption measures - Strengthening governance, transparency, and reducing corruption risks are priorities to support improvements in the business and investment climate. - Ensuring publication of asset declarations with information detailing assets held domestically and abroad (as per the model OAS law) is warranted to strengthen accountability. - Beneficial ownership declaration should be enhanced by allowing access to information currently held by DIAN. - Continuous publication of comprehensive and easily accessible income and asset declarations of politically exposed persons and public access to effective beneficial ownership information would increase transparency and accountability. - The Secretary of Transparency has prepared a draft of the Whistleblowing Protection Law scheduled for upcoming parliamentary discussion. - Art. 200 of the new development plan tasks the Secretary of Transparency with formulating a comprehensive shared risk-based strategy to combat corruption in collaboration with control bodies and civil society organizations. - Special attention to improving advancement of grand corruption cases through the judicial system with enhanced investigation capacity is recommended. ### Authorities’ views on governance actions - An anti-corruption strategy is being developed by the Secretary of Transparency to strengthen and coordinate efforts across relevant agencies, including Procuraduría, Ministry of Justice, and the Prosecutor’s Office (Fiscalía). - Beneficial ownership information is currently held at DIAN, with ongoing efforts to expand information access by key agencies. - An action against non-reporters of beneficial ownership information is being developed; a taskforce to assess judicial congestion has been set up. - Asset declarations have been partially restored, though data security concerns limit public release of some information. - Authorities identified investigative capacity for processing corruption cases as a key bottleneck and are hopeful the draft Whistleblowing Protection Law will be enacted in upcoming parliamentary sessions. ### Staff appraisal and policy guidance - The Colombian economy has made important strides in reducing domestic and external imbalances, transitioning to a more sustainable level of economic activity and demand. - Appropriately tight macroeconomic policies have helped reduce inflation, the fiscal deficit, public debt, excessive credit growth, and the large current account deficit observed in the last two years. - Narrowing of the current account deficit has been supported by tourism and remittances and contributed to an improved external position in 2023 relative to 2022. - While downside risks remain, strong policies and policy frameworks underpin Colombia’s resilience and capacity to respond to shocks. - The FCL continues to provide additional external buffers against tail risks and enhances market confidence. - Authorities’ commitment to sustained, very strong policy implementation and strengthening domestic and external buffers would further support resilience. - Contingency planning and agile policymaking will remain necessary. - Monetary policy normalization should proceed with caution; future policy rate reductions should be data dependent given upside risks to inflation. - Aiming to bring inflation firmly to the 3 percent target by mid-2025 is recommended to balance safeguarding economic activity and policy credibility. - Policy communications should focus on the inflation target level and the expected time horizon to reach it, while recognizing risks and uncertainties, to better anchor inflation expectations. - The exchange rate should continue to flexibly respond to shocks unless disorderly market conditions arise, with gradual and opportunistic purchases to further strengthen reserve coverage. *Source: 1colea2024001 - 26. Close monitoring of NPLs, household indebtedness, and maturity risks should* ### 40. Continued prudence in fiscal management is necessary given elevated borrowing ### 40. Continued prudence in fiscal management is necessary given elevated borrowing ### Fiscal stance and risks - The authorities’ unwavering commitment to meeting the fiscal rule is welcomed, as well as the tight overall public sector fiscal stance this year. - The planned increases in the overall deficit and debt pose fiscal risks. - Pursing smaller deficits than implied by the rule would help lower debt and financing needs at a time when spreads and borrowing costs remain high, especially relative to peers, and reduce the burden on monetary policy. - Given substantial budget rigidities, standing ready to activate contingency plans will be essential in case revenues fall short of expectations. - Proactively scaling back expenditure plans rather than relying on ad-hoc spending restraint would be a more transparent and effective way of implementing the priorities in the budget while ensuring meeting the fiscal rule. ### Spending structure and public investment - Improving the structure of spending to boost public investment should remain a priority. - Reorienting expenditures towards investment, within a scaled back spending envelope, would support the energy transition and enhance growth potential, including by crowding in private investment. - One way to create budget space for public investment and save scarce public resources would be to continue removing fuel subsidies, following the exemplary removal of gasoline subsidies by end-2023. - Removing fuel subsidies would also align well with Colombia’s goal of reducing reliance on fossil fuels. *Content unit 1colea2024001* ### 42. While the banking sector remains resilient, financial stability risks need to continue to ### While the banking sector remains resilient, financial stability risks need to continue to ### Financial stability and banking sector risks - Banking sector described as resilient, but financial stability risks require continued careful monitoring. - Nonperforming loans (NPLs) could continue rising as the economy stabilizes; close monitoring recommended. - Maintain the countercyclical provisioning framework’s rules-based mechanisms to avoid creating expectations that frameworks can be adjusted at times of pressure, and ensure due consultation across stakeholders. - Continue to closely monitor liquidity and maturity risks. - Follow international best practice in stable funding regulations to contain funding pressures. - Given the systemically important role of private pension funds, conduct a comprehensive analysis of the potential impact of the pension reform to inform reform discussions. - As data coverage is enhanced, expand the macroprudential toolkit towards more borrower-based tools to complement existing tools and supervisory practices. - Continue monitoring cross-border exposures, interconnectedness, and contagion risks. ### Structural reforms and the energy transition - Further advance structural reforms to lift productivity and support the energy transition. - Design and implement social reforms in compliance with Colombia’s fiscal frameworks; address current system problems while ensuring economic incentives remain well-aligned. - Reduce policy uncertainty and improve the business climate by: - simplifying regulations, - lowering labor market rigidity, - removing barriers to entry. - Increase public and private savings, including through a deepening of capital markets, to ensure a greater share of investment is domestically financed. - Pursue export diversification as an essential part of the energy transition strategy by identifying sectors with comparative advantage and removing market frictions, while avoiding protectionist measures. - Recognize that implementing the energy transition strategy will take time and will need strong public-private partnerships and proper pricing of energy. ### Governance, transparency, and anti-corruption measures - Strengthen governance and transparency and reduce corruption risks to complement reform efforts. - Develop a comprehensive anti-corruption strategy. - Ensure continuous publication of comprehensive and easily accessible income and asset declarations of politically exposed persons. - Provide public access to effective beneficial ownership information to increase transparency and accountability. ### Institutional recommendation - Staff recommends that the next Article IV consultation take place on the standard 12-month cycle. *Source: IMF staff.* ### Annex I. Summary of Social Reforms ### Annex I. Summary of Social Reforms ### Healthcare Reform - Proposal status: - A healthcare reform proposal was submitted to Congress in February 2023; the draft law is awaiting discussion in the Senate. - System description: - Current model: contributory health insurance where a public institution collates contributions from formal workers and the government and pays mostly private insurers on a capitation basis, who in turn purchase services from health care providers. - Coverage and access: nearly universal coverage with low out-of-pocket payments and generally favored by the public, but access in rural areas remains limited. - Main elements of the draft proposal: - Create a network of primary care centers throughout the country to whom payments would go directly from the public fund. - Reduce the role of private insurers to payment administration. - Concerns and political context: - Some analysts warn that government responsibility for paying services is likely to politicize healthcare and lead to governance issues. - The reform has been controversial in Congress; the role of private insurers is a divisive aspect. - Fiscal estimates: - Authorities estimate that the fiscal cost of the reform could reach close to 0.2 percent of GDP in 2024 and average about 0.8 percent of GDP per year between 2025 and 2033. ### Pension Reform - Proposal status: - Pension reform submitted to Congress in March 2023; draft law is awaiting a second round of debates in Congress. - Objectives and design: - Aim: expand coverage to almost the whole retirement-age population, tackle legacy issues related to high informality rates and long contribution spans. - Envisages expanding solidarity pillar for low-income people (transfer from the budget) and guarantees a minimum pension to those who do not fully meet the contribution requirement. - Seeks to improve progressivity, reduce subsidies to the defined-benefit scheme (Regimen de Prima Media) managed by the public sector, and eliminate competition between private and public pensions. - Proposal: move to a single unified system, with complementary public and private accounts; about 80 percent of future pension contributions would go to the public scheme and be saved in a new “National Saving Fund” (Fondo de Ahorro del Pillar Contributivo—FPAC). Only contributions above a certain income level would go to the private system. - Includes increasing the currently very small non-contributory social pensions to eliminate extreme poverty. - Current system and coverage: - Current system: dual — workers must contribute to either the public defined-benefit scheme or to the private retirement scheme and can switch under certain conditions. - Fewer than 40 percent of the workforce contributes and about 20 percent of the elderly receive contributory pensions. - Fiscal cost estimates and recommendations: - Authorities estimate that, compared with the scenario without a pension reform, the net present value (NPV) of the impact of the reform is approximately 74 percent of GDP until 2069 and 126 percent of GDP by 2100. - FPAC savings would reduce these costs to approximately 0.3 percent of GDP per year until 2069 (equivalent to the fiscal costs of the solidarity pillar) and 2 percent of GDP afterwards (encompassing the costs of all pillars after the savings of FPAC are exhausted). - Expert recommendations: - Lower the threshold of contributions that will go to the public system from 3 to 1-2 minimum wages to limit the increase in pension liabilities. - Strengthen the transition regime. - Ensure a strong governance and investment mandate for the FPAC. ### Labor Reform - Proposal status: - The labor reform was presented to Congress in mid-March 2023; the draft law is being discussed in a sub-commission in Congress. - Main measures in the draft proposal: - Grant greater remuneration and protection to formal employees via: - Reduction in the daytime (night shift would start at 7:00 pm). - Increase in the surcharge of Sundays and holidays, which would gradually go from 75 percent to 100 percent by 2026. - Increase in severance pay without just cause: from 30 days' salary for the first year of service plus 20 days' salary for each additional year, to 45 days' salary for the first year of service plus 45 days' salary for each additional year. - Concerns and quantitative impact estimates: - Likely to add to the already-large informal economy. - Banrep study estimates: - The draft labor reform, if approved in its current format, would increase the average labor cost due to both higher salaries (recurrent costs) and higher compensation (effective in case of unjustified dismissals). - The increase in labor costs could reduce formal jobs by 454,000 (in a range between 152,000 and 746,000, depending on the estimated response of formal employment to wage costs), reducing the formality rate by 2.1 ppt over three to four years. *Source: Annex I. Summary of Social Reforms* ### 2.5 million migrants ### 2.5 million migrants ### Migration pressures and policy recommendations - Source text: "2.5 million migrants from Venezuela." - Risk: "An escalation of a regional conflict could increase migration flows from Venezuela." - Policy recommendations: - "Seek financing and aid to cover for net fiscal costs in assimilating migrants." - "Use available fiscal resources within the limits of the fiscal framework." - "Continue implementing policies to integrate migrants into the labor force and maximize economic benefits." ### Risk Assessment Matrix (RAM) guidance - The RAM shows events that could materially alter the baseline path and classifies relative likelihood as: - "low" = probability below 10 percent - "medium" = probability between 10 and 30 percent - "high" = probability between 30 and 50 percent - Note: "Non-mutually exclusive risks may interact and materialize jointly." ### Public debt sustainability: summary assessment - "Public sector debt is assessed to be sustainable with high probability under a wide range of plausible shock scenarios, with moderate medium- and long-term risks." - Key qualifiers: - "Debt stabilization in the baseline" - "Sustainable with high probability" - Critical dependencies: - "Given financing conditions at home and abroad, adherence to the fiscal rule and sustained implementation of fiscal plans are critical for debt stabilization." - "Debt stabilization critically depends on meeting the fiscal targets." - Specific risk noted: "While debt is projected to reach the medium-term debt anchor, a drastic shift away from oil and coal production could affect long-term fiscal sustainability." ### Recent fiscal and debt developments (selected findings) - Debt and financing changes: - "Public debt" fell from "60.1 percent of GDP in 2022" to "an estimated 52.5 percent at end-2023." - "Gross financing needs have declined too." - Assessment of overall risk: "The overall risk of sovereign stress is moderate." - Drivers of improvement: "Fiscal consolidation, together with inflation and the appreciation of the peso, has brought down public debt." ### Debt coverage and consolidation (selected disclosures) - Coverage perimeter: "nonfinancial public sector." - Subsector inclusion (baseline): - "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" - 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." ### Public debt structure indicators (selected projections and notes) - Currency composition note: "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 averages." - Residual maturity: "6. years" (as shown in figure notes). ### Baseline fiscal and debt projections (percent of GDP unless indicated otherwise) - Public debt path (selected years): - "Public debt" actual 2023: "52.5" - Projected: "54.4" (2024), "55.6" (2025), "55.7" (2026), "55.4" (2027), "55.2" (2028), "54.5" (2029), "54.1" (2030), "53.5" (2031), "52.7" (2032), "52.0" (2033) - Change in public debt (selected): - "Change in public debt": "-7.5" (actual 2023), "1.9" (2024), "1.1" (2025), "0.1" (2026), "-0.3" (2027), "-0.2" (2028), "-0.7" (2029), "-0.4" (2030), "-0.6" (2031), "-0.8" (2032), "-0.7" (2033) - Contribution of identified flows (selected): - "Primary deficit": "-1.5" (2023), "-1.4" (2024), "-1.3" (2025), "-1.3" (2026), "-1.4" (2027), "-1.3" (2028), "-1.2" (2029), "-0.9" (2030), "-0.9" (2031), "-0.9" (2032), "-0.9" (2033) - "Noninterest revenues": "32.3" (2023), "30.6" (2024), "29.8" (2025), "29.4" (2026), "29.6" (2027), "29.6" (2028), "29.6" (2029), "29.6" (2030), "29.6" (2031), "29.6" (2032), "29.6" (2033) - "Noninterest expenditures": "30.8" (2023), "29.2" (2024), "28.5" (2025), "28.2" (2026), "28.2" (2027), "28.3" (2028), "28.4" (2029), "28.7" (2030), "28.7" (2031), "28.7" (2032), "28.7" (2033) - "Automatic debt dynamics": "-5.3" (2023), "1.3" (2024), "2.1" (2025), "0.6" (2026), "0.6" (2027), "0.7" (2028), "0.2" (2029), "0.5" (2030), "0.4" (2031), "0.2" (2032), "0.2" (2033) - "Real interest rate and relative inflation": "1.4" (2023), "1.9" (2024), "3.4" (2025), "2.2" (2026), "2.2" (2027), "2.3" (2028), "1.8" (2029), "2.1" (2030), "1.9" (2031), "1.8" (2032), "1.7" (2033) - "Real growth rate": "-0.4" (2023), "-0.6" (2024), "-1.3" (2025), "-1.6" (2026), "-1.6" (2027), "-1.6" (2028), "-1.6" (2029), "-1.6" (2030), "-1.6" (2031), "-1.6" (2032), "-1.5" (2033) - Gross financing needs (GFN): - "Gross financing needs": "6.5" (2023), "4.9" (2024), "5.3" (2025), "5.9" (2026), "6.0" (2027), "6.1" (2028), "4.8" (2029), "5.4" (2030), "5.2" (2031), "5.0" (2032), "5.0" (2033) - Of which: "debt service": "8.0" (2023), "6.3" (2024), "6.6" (2025), "7.2" (2026), "7.5" (2027), "7.4" (2028), "6.0" (2029), "6.3" (2030), "6.1" (2031), "6.0" (2032), "5.9" (2033) - Local currency component: "5.6" (2023), "3.9" (2024), "3.9" (2025), "4.3" (2026), "4.9" (2027), "4.8" (2028), "3.5" (2029), "3.6" (2030), "3.4" (2031), "3.3" (2032), "3.3" (2033) - Foreign currency component: "2.4" (2023), "2.4" (2024), "2.7" (2025), "2.9" (2026), "2.5" (2027), "2.7" (2028), "2.6" (2029), "2.7" (2030), "2.7" (2031), "2.6" (2032), "2.6" (2033) - Memo macro assumptions: - "Real GDP growth (percent)": "0.6" (2023), "1.1" (2024), "2.5" (2025), "3.0" (2026), "3.0" (2027), "3.0" (2028), "3.0" (2029), "3.0" (2030), "3.0" (2031), "3.0" (2032), "3.0" (2033) - "Inflation (GDP deflator; percent)": "6.3" (2023), "5.6" (2024), "3.0" (2025), "3.0" (2026), "3.0" (2027), "3.0" (2028), "3.0" (2029), "3.0" (2030), "3.0" (2031), "3.0" (2032), "3.0" (2033) - "Nominal GDP growth (percent)": "7.0" (2023), "6.8" (2024), "5.6" (2025), "6.1" (2026), "6.1" (2027), "6.1" (2028), "6.1" (2029), "6.1" (2030), "6.1" (2031), "6.1" (2032), "6.1" (2033) - "Effective interest rate (percent)": "7.6" (2023), "8.1" (2024), "9.2" (2025), "6.8" (2026), "6.8" (2027), "6.9" (2028), "6.1" (2029), "6.7" (2030), "6.4" (2031), "6.1" (2032), "6.2" (2033) ### Realism checks and fiscal framework - Commentary: "The realism scenarios suggest that Colombia’s fiscal adjustment and debt reduction feature close to the median of its peers." - Policy note: "The fiscal adjustment is guided by a fiscal rule and medium-term fiscal framework that are sanctioned by law. Adherence to the fiscal consolidation path is critical for debt stabilization." - Distribution metrics (selected): - "3-year debt reduction above 75th percentile (5.9 ppts of GDP)" - "3-year adjustment above 75th percentile (2 ppts of GDP)" - Percentile rank examples: "percentile rank 36" (for 3-year debt reduction); "percentile rank 51" (for 3-year adjustment) ### Medium-term risk analysis (selected indices and signals) - Debt fanchart index (DFI): "1.4" - Risk signal: "Moderate" (signal table indicates moderate when neither low nor high thresholds met) - GFN financeability index (GFI): "9.4" - Risk signal: "Moderate" - Medium-term index: final assessment: "Moderate" - Probabilities: - "Prob. of false alarms, 2024-2029, if stress predicted: 42.0 pct." - "Prob. of missed crisis, 2024-2029, if stress not predicted: 9.1 pct." - Commentary: "The medium-term analysis suggests a low level of risks of sovereign stress over that time horizon, supported by moderate financing needs. Debt stabilization crticially depends on meeting the fiscal targets. Risks associated with commodity prices, exchange rate, and interest-growth rate differentials may pose challenges over the medium term. Hence, staff assesses medium-term risks as moderate." ### Long-term risk assessment (selected findings) - Overall LT assessment: "Staff overall assessment of LT risks is moderate because Colombia's fiscal rule sets a firm debt limit, and the healthcare reform is expected to attenuate these risks at a moderate fiscal cost to be fully incorporated in the budget." - Findings: - "The LT analysis suggests low and manageable financing risks (GFN-to-GDP) in all scenarios except the historical one, which is affected by the pandemic." - "High amortization risks in the scenarios also reflect the pandemic." - "LT risks pertaining to the health module do not account for the impact of the healthcare reform being discussed in Congress." _Source: IMF staff (excerpted content unit "2.5 million migrants" from Annex IV and related figures)._ ### Annex V. Implementation of the 2022 FSAP Key ### Annex V. Implementation of the 2022 FSAP Key Recommendations ### Banking Supervision - Recommendation: Introduce legal amendments to strengthen the independence of the SFC: (i) specify 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 on September 15 of 2015. The conditions are regulated by the mentioned decree. However, the minimum term has not yet been 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. - Update: - External Circular 025, 2022 (November 17, 2022) issued with explicit instructions on IRRBB. Requirements added to the Internal Risk Management Framework (SIAR). - Concentration risk: External Circular 003 of 2024 established instructions regarding concentration risks. - Transfer and country risk: Explicit requirements included in External Circular 18, 2021 (September 22, 2021) in SIAR (Chapter 31 of the Circular Básica Contable y Financiera). - Internal capital assessment and liquidity: Draft regulation on ICAAP and ILAAP released for external comments by November 2023. SFC analyzing comments to continue issuance process this year. - IRRBB Significant Activity Guide: SMS and DRCC developing a guide since 2023; planned publication in the first semester of 2024. - External Circular 003 de of 2024 – Large Exposure: Enacted instructions to implement the large exposure Basel standard in line with Decree 1533 of 2022. - Time horizon: MT - Recommendation: Establish a consolidated body of requirements on related-party transactions. - Update: - Decree 1533 (August 4, 2022) issued to establish large exposure rules following Basel. Secondary regulation by SFC issued on February 1, 2024 (External Circular 003, 2024). Supervised entities must comply no later than August 4th, 2026. - SFC updating ANNEX 3. RELATED DEFINITIONS AND REGULATORY LIMITS BY INDUSTRY; planned publication in the first semester of 2024. - URF working on a decree to regulate criteria to identify a related party of a given bank. - Time horizon: ST - Recommendation: Readjust or determine parameters for local LCR and NSFR ratios and require NSFR at consolidated level. - Update: - NSFR: External Circular 013 of 2023 defined "operational deposits" concept for deposits by: (i) large customers of the real sector, (ii) open investment funds, and (iii) supervised financial entities. Qualitative and quantitative methodologies must be submitted to the SFC for non-objection 4 months prior to application. - LCR: SFC considers deviations from Basel III run-off factors not planned to be modified soon unless statistical evidence suggests calibration changes. - Time horizon: MT - Recommendation: Maintain direct and intrusive supervision including adequate on-site inspections and avoid over-reliance on external/internal auditors. - Update: - SFC does not rely on internal audits to perform supervisory procedures; internal audit results become relevant when function is rated as Strong. - On-site supervision is fundamental; changes in inspection figures reflect adoption of new supervisory tools (post COVID-19). - In the first half of 2023, SFC published Annex 6-Internal Audit as part of the Comprehensive Supervision Framework to provide detailed evaluation criteria. - Time horizon: ST - Key statistic: On-site inspections by year: 2018: 100; 2019: 106; 2020: 36; 2021: 75; 2022: 60; 2023: 67. ### Macroprudential Oversight - Recommendation: Strengthen the role of the central bank in systemic risk monitoring and of BR and SFC in macroprudential decision-making. - Update: CCSSF rules of procedures updated to strengthen the Central Bank role. Common stress scenarios prepared by SFC and Central Bank presented to CCSSF on December 4, 2023. - Time horizon: ST - Recommendation: Expand LTV and DSTI tools to cover leasing products and DSTI to include nonmortgage debt. - Update: Authorities view External Circular 026, 2022 [29 November 2022] as term provisioning to prevent debt overhang in consumer loan portfolio. DSTI metrics analyzed by SFC regularly cover all loans portfolios and products (Consumer/Credit Card/Payroll/Mortgage/Open Destination/Vehicle). - Time horizon: ST - Recommendation: Close data gaps in cross-border exposures and household indebtedness. - Update: - Household indebtedness: SFC merged Social Protection System data and individual indebtedness reports for quantitative inputs to prudential measures. - Cross-border exposures: SFC gathers data of financial conglomerates and conducts common stress tests with other jurisdictional supervisors in CAM (CCSBSO). MoUs signed enabling on-site supervision, data, technical assistance, cyber risks; allowed SFC on-site inspections in most jurisdictions where Colombian Financial Conglomerates operate. - Central Bank included cross-border exposure risks into its stress testing. - Time horizon: I (Immediate) ### Risk Analysis - Recommendation: Strengthen ability to monitor cross-border exposures and conduct fully consolidated stress-testing by filling data gaps on exposures and risk metrics of ultimate subsidiaries. - Update: MoUs signed with CAM supervisors on data exchange and consolidated stress tests. SFC linked cross-border exposure information to monitoring dashboards and will request additional information via available channels. CCSBSO strategic initiative to develop regional capital, liquidity and contagion stress tests. - Time horizon: ST - Recommendation: Extend data collection to monitor liquidity risks by currency and collect more granular cashflow data including cross-border exposures. - Update: - SFC and BR requested information from credit institutions to measure NSFR by currency; information submitted in June 2023 and draft regulation will be issued in 2S 2024. - Banco de la República calculates liquidity ratios by different currencies (Individual Exposure Index on the Short-Run (IEI) and Consolidated Exposure Index (IEC)). Over medium term SFC plans to work with Central Bank to merge short-term liquidity indicators (IRL, IEI, and IRL) to arrive at a common indicator by currency. - Time horizon: ST - Recommendation: Develop network analysis tools and improve data coverage to bolster EWS for domestic and cross-border contagion. - Update: - Preliminary network analysis model developed by SFC after IMF TA mission (March 2023). - Cross-border contagion risks incorporated in SFC and Banco de la República stress-testing exercises. - Progress in mapping interconnections, building centrality metrics; SFC will continue comprehensive contagion exercises to identify contagious and vulnerable entities. - Time horizon: ST ### Climate Risks and Opportunities - Recommendation: Adopt a risk-based approach in supervision for climate-related risks and continuously improve disclosures and data availability. - Update: - Implementation of green taxonomy for the financial system: External Circular 005, 2022 (April 8, 2022). - SFC issued guidelines on supervisory expectations on ESG management in credit institutions (Technical Document for the Administration of Climate Risks and Opportunities for Credit Establishments). - “Risk management and climate opportunities for the insurance sector” (June 09, 2023) guides integration of risks into strategies. - SFC issued “Roadmap for Greening the Colombian Banking System” covering taxonomy, financial innovation, ESG adoption, data metrics, climate risk measurement and supervision. - External Circular 031, 2021 (December 22, 2021) requests largest issuers to disclose ESG and climate risks and opportunities against TCFD and SASB. - Other issuances: External Circular 07 (May 10, 2021), External Circular 008, 2021 (April 26, 2021), Draft guideline for pension fund administrators (November 04, 2020; updated May 3, 2021). - Climate risk exercises performed with banks (2020) and pension funds (2021). - "Results of the Colombian Green Taxonomy Pilots" released March 2023. - December 2023: SFC published glossary of sustainability terms and working on a sustainability guide planned for publication in the first semester of 2024, with subsequent trainings. - Supervision program for 2024: pilot test with entities from different industries to verify guide criteria; monitoring exercise on compliance with External Circular 031 regarding ESG disclosure by issuers; exercise for financial products/services labeled sustainable to monitor potential greenwashing. - Time horizon: MT ### Resolution, Crisis Management and Safety Nets - Recommendation: Strengthen operational independence of the Resolution Unit (GR). - Update: SFC structure and operational functioning currently underway. - Time horizon: ST - Recommendation: Require financial institutions to prepare recovery plans using wide range of risk scenarios and make GR responsible for resolution planning. - Update: - SFC analyzing viability of regulating this topic; comments of first external circular draft being reviewed. - Draft regulation on ICAAP, ILAAP and recovery planning released for external comments by November 2023. - Regulation in Colombia does not have recovery plans prepared per Key Attributes guidelines; Colombia follows United States’ model for resolution plans. - Holding institutions accountable for recovery planning requires wide range of scenarios and identification of mitigation measures. - Time horizon: ST - Recommendation: Streamline mandates and tasks of resolution unit and deposit insurer (Fogafin). - Update: - Execution of coordinated resolution strategy corresponds to each authority according to its mandate. Unifying resolution process would require structural reform (reform of the EOSF) to be passed in Congress. - SFC performs recovery planning exercises; systemic entities required to develop resolution plans (RP). Intersectoral Resolution Commission -CIR- is technical body with SFC and Fogafin officials. - In 2023 SFC received first version of RPs from 4 systemic entities; in the first half of 2024 it will issue a concept on this version. SFC established criteria to define which new entities must present RP. In 2024 two more banks must present RP. - Time horizon: MT - Recommendation: Strengthen resolution tools by: (i) giving Fogafin flexibility to conduct purchase and assumption powers with only insured deposits; (ii) restrict Fogafin's ability to be shareholder of restructured/bridge banks; (iii) consider establishing bail-in powers. - Update: - (i) Authorities view including all deposits in a P&A as necessary to preserve financial stability; Fogafín will work on requesting adjustment to Decree 521 of 2018 to achieve greater leeway to select only the insured amount. - (ii) Fogafín is main shareholder of bridge banks when matching assets/liabilities and providing capital; Fogafín notes tension between shareholder role and resolution authority role, mitigated by temporary ownership and compliance with structural/prudential regulation; Fogafín's 2021-2025 strategic plan includes a study to mitigate conflict of interest. - (iii) Fogafín: bank liability structure is mainly deposits, so bail-in is not currently applicable/practicable; ability to execute bail-in reduces resolution costs and promotes market discipline; its adoption is a matter for further analysis; Fogafín plans a study on this subject in its 2021-2025 strategic plan. - Time horizon: MT - Recommendation: Limit Fogafin’s financing to resolution funding. - Update: Authorities state legal framework from crises in late 1990s remains; changing approach would require structural legal reform in Congress. - Time horizon: ST - Recommendation: Establish guaranteed backup liquidity facility for Fogafin. - Update: Fogafín is autonomous and seeks to prioritize building Deposit Insurance reserve from premiums paid by registered entities; when Reserve insufficient, law provides adoption of plan to reconstitute it, which may incorporate resources from General Budget or debt operations with sovereign guarantee, subject to favorable vote of Minister of Finance. Fogafín is reviewing operability of resource request procedure to the Ministry of Finance to strengthen the procedure. - Time horizon: ST ### Anti-Money Laundering / Combating the Financing of Terrorism (AML/CFT) - Recommendation: Swiftly implement 2018 MER recommendations to strengthen overall effectiveness of AML/CFT regime. - Update: - Colombia has been correcting pending issues from GAFILAT Mutual Evaluation (2016). - Financial Superintendency of Colombia pending improvement actions were approved in plenary session of GAFILAT representatives in 2022, obtaining maximum Complied rating for Recommendations: 13 Correspondent Banking, 16 Electronic Transfers, 19 Higher Risk Countries, 33 Statistics, 34 Guidance and Feedback. - Mostly Complied rating obtained for Recommendations 10 Customer Due Diligence and 12 Politically Exposed Persons. - UIAF (Financial Information and Analysis Unit) has presented intensified monitoring reports providing progress in technical compliance and effectiveness. - Time horizon: MT - Recommendation: Enhance sanctioning practices so effective, proportionate, dissuasive sanctions are applied for AML/CFT breaches. - Update: - SFC continues developing sanctioning power under Decree 2555 of 2010 and the Financial System Organic Statute. - 2022: four (4) sanctions imposed (three (3) institutional and pecuniary, one (1) personal reprimand); four (4) administrative orders issued. - 2023: one (1) institutional sanction (monetary fine) imposed; eight (8) administrative orders issued. - SFC published “Compliance Officers and Responsible Officials” reports in 2021 and 2022 diagnosing compliance; pecuniary sanctions for noncompliance are decreasing. - Time horizon: MT - Recommendation: Address ML/TF risks associated with crypto assets and ensure VASPs are properly licensed, monitored and supervised for AML/CFT compliance. - Update: - SFC participated in CCSBSO working groups to update Virtual Asset regulations. - Cross-border supervision process in El Salvador in July 2022 to understand virtual asset market operations. - Supervision processes incorporated reviews of client rules and instructions regarding acquisition schemes and bin sponsors. - SFC developed sandbox pilot (laArenera SFC) to test risk management and consumer protection measures for linking VASPs to the financial system via a financial deposit product. Pilot closing phase: 5 alliances completed operations and 2 will complete in first quarter of 2024. - Pilot results as of December 31, 2023: - 4057 individuals participated through cash-in or cash-out operations. - Average ticket for deposit operations: COP $539,962. - Average ticket for withdrawals: COP $332,649. - 40 suspicious operations reported. - 820 unusual operations reported. - 1,238 advisory services provided. - 546 complaints attended to. - Pilot demonstrated supervised entities adequately managed risks. SFC prepared a technical document on virtual assets and provision of financial services to VASPs (conceptual and principles/good practices approaches). Recommendations for supervised entities prior to providing services to VASPs: - Verify VASP reports to UIAF as a subject providing virtual asset services. - Verify VASP has AML/FT risk management system aligned with FATF guidelines. - Verify VASP has technological/operational capacity for KYT and to obtain/preserve/transmit originator and beneficiary information per FATF guidelines. - Technical document published March 2023 with pilot results report. - Regulation and supervision progress (July 2023–January 2024): Ministry (MFPC), with technical proposal and SFC support, drafted a bill on virtual assets to provide general regulatory framework aligned with BIS, FSB, OECD, IOSCO and FATF recommendations; planned filing in Congress in the first semester of 2024. - Bill contains: (i) categorization of virtual assets, VASPs and activities (focus on pseudo-anonymous virtual assets; does not regulate DeFi and CBDC); (ii) VASP licensing process in charge of the SFC; (iii) SFC as competent authority for supervision, control and oversight including sanctioning; (iv) user protection policies for transparency and disclosure; (v) cooperation and coordination mechanisms for information sharing and prevention. - Bill accounts for FATF Recommendations including Recommendation 15 (VASPs regulated for AML/FT purposes), Recommendation 16 (originator and beneficiary information on transfers - travel rule), and Recommendations 37 to 40 (information exchange and cooperation). - Next steps: Bill must go through Congressional procedure to become law; National Government to issue regulatory Decrees, External Circulars and SFC procedures; development of human and technical capacities for supervision required. - Time horizon: ST *Annex V. Implementation of the 2022 FSAP Key Recommendations — update provided by the authorities.* ### Annex VI. Understanding Colombia’s Low Saving Rate ### Annex VI. Understanding Colombia’s Low Saving Rate ### Stylized facts about Colombia’s saving rate - Gross national savings in Colombia has fluctuated between 10-20 percent of GDP and averaged 17 percent between 1980-2023. - Colombia’s saving rate has tracked closely the Latin America regional average but has stayed well below: - North America and Europe (20 percent or above), - Asia (around 30 percent), - emerging market average of 19 percent. - While Latin America’s saving rate has recovered to pre-pandemic levels, Colombia’s saving rate has continued to decline. - Colombia’s saving rate tends to comove with commodity prices; historically higher during and following commodity price booms (e.g., early 1980s and late 2000s). - The decline from a peak of 20 percent of GDP could be partly attributed to a worsening of the terms of trade that started with the collapse of oil prices in late 2014. - Changes in aggregate saving have typically been driven by private saving, although public saving contributes more to the decline in recent years: - Private saving dominates public saving by magnitude and correlates better with changes in aggregate saving. - Private saving is negatively correlated with public saving (correlation = -0.42). - Since 2016, public saving has contributed over half of the aggregate savings decline (compared to a median contribution of around 15 percent in earlier periods). ### Literature and empirical approach - Determinants considered (motivated by literature): GDP per capita, GDP per capita squared, public saving/GDP, working-age share of total population, financial development index, current account/GDP (proxy for foreign capital availability), and a political stability index. - Two panel data OLS regressions (1980-2023) were estimated: - Column (1): time fixed effects only. - Column (2): time and country fixed effects. ### Cross-country regression key results (1980-2023) - General findings from regressions: - Log GDP: positive association with the saving rate. - Log GDP squared: negative coefficient, consistent with a humped-shape relationship. - Public saving / GDP: positive and statistically significant association with aggregate saving. - Working-age population: positive and statistically significant association with aggregate saving. - Financial development: positive point estimates but not statistically significant. - Current account / GDP: positive and statistically significant; coefficient less than one, implying higher foreign capital availability crowds out domestic saving in less than one-to-one fashion. - Political stability: negative and statistically significant in column (1) but the effect disappears in column (2). - Regression summary table (coefficients with standard errors in parentheses): - Dependent Variable: Saving Rate - Fixed effects: (1) Time; (2) Time & Country - Log GDP: 8.61*** (2.90) ; 26.14** (10. 31) - Log GDP squared: -0.38** (0.17) ; -1.16* (0.60) - Public saving / GDP: 0.31*** (0.03) ; 0.43*** (0.04) - Working-age population: 0.25*** (0.06) ; 0.67*** (0.13) - Financial development: 1.71 (1.34) ; 2.39 (2.25) - Current account / GDP: 0.32*** (0.06) ; 0.24*** (0.05) - Political stability: -0.18** (0.09) ; 0.04 (0.05) - Constant: -42.66*** (13.58) ; -163.57*** (46.54) - No. observations: 1750 ; 1750 - R-squared: 0.44 ; 0.35 ### Colombia-specific findings and interpretation - The estimated country fixed effect for Colombia from the regression is -5 percent, indicating Colombia’s saving rate is roughly 5 percent of GDP below the level consistent with its income, demographics, public saving, and foreign capital availability. - The finding aligns with the IMF’s EBA model conclusion that low saving rather than high investment is the driver of Colombia’s high current account deficit. - One potential omitted factor noted: taxation (Cardenas and Escobar, 1998), as higher profit taxes could reduce the net rate of returns and help explain low saving. The annex states further work is needed to explore other omitted variables. *Prepared by Vu Chau. Source: Annex VI. Understanding Colombia’s Low Saving Rate (1980-2023).* ### 2022. A data ROSC took place in 2006 and a fiscal ROSC in 2003. ### 1colea2024001 - 2022. A data ROSC took place in 2006 and a fiscal ROSC in 2003. ### Technical Assistance - Department: FAD; Time of Delivery: Aug. 2016; Purpose: Discussion of the 2017 structural tax reform - Department: STA; Time of Delivery: Dec. 2016; Purpose: National Accounts - Department: FAD; Time of Delivery: Feb. 2017; Purpose: Revenue Administration - Department: FAD; Time of Delivery: Mar. 2017; Purpose: Fiscal Transparency Assessment - Department: STA; Time of Delivery: Jun. 2017; Purpose: National Accounts - Department: FAD; Time of Delivery: Aug. 2017; Purpose: Tax and Customs Administration - Department: FAD; Time of Delivery: Sep. 2017; Purpose: Treasury Management - Department: STA; Time of Delivery: Sep. 2017; Purpose: National Accounts - Department: STA; Time of Delivery: Nov. 2017; Purpose: Government Finance Statistics - Department: STA; Time of Delivery: Dec. 2017; Purpose: National Accounts - Department: STA; Time of Delivery: Apr. 2018; Purpose: Sectoral Accounts - Department: STA; Time of Delivery: Apr. 2018; Purpose: Residential Property Prices Indices - Department: STA; Time of Delivery: May. 2018; Purpose: National Accounts - Department: STA; Time of Delivery: Sep. 2018; Purpose: Residential Property Price Index - Department: FAD; Time of Delivery: Oct. 2018; Purpose: Tax Administration - Department: STA; Time of Delivery: Oct. 2018; Purpose: Consumer Price Index - Department: STA; Time of Delivery: Dec. 2018; Purpose: Sectoral Accounts - Department: FAD; Time of Delivery: Mar. 2019; Purpose: Compliance and Core Procedures - Department: FAD; Time of Delivery: Mar. 2019; Purpose: Fiscal Rule and Fiscal Risks - Department: STA; Time of Delivery: Mar. 2019; Purpose: Sectoral Accounts - Department: FAD; Time of Delivery: Apr. 2019; Purpose: Energy Subsidy Reform - Department: FAD; Time of Delivery: Aug. 2019; Purpose: Establishing a debt anchor and updating the fiscal rule - Department: FAD; Time of Delivery: Oct 2019; Purpose: Strengthening the fiscal risk management office and managing fiscal risks from SOEs - Department: STA; Time of Delivery: Apr 2020; Purpose: Sectoral accounts - Department: FAD; Time of Delivery: Jul 2020; Purpose: TADAT Assessment - Department: FAD; Time of Delivery: Oct 2020; Purpose: BRP Treasury Reporting - Department: STA; Time of Delivery: Apr. 2021; Purpose: Fiscal and Public Debt Data Compilation - Department: STA; Time of Delivery: Apr. 2021; Purpose: Improve Capacity for Residential Property Price Index - Department: ICD; Time of Delivery: Sep. 2021, Nov. 2021, Jan. 2022, Mar. 2022, Jul. 2022, Oct. 2022; Purpose: Strengthening Macro-Fiscal Analysis and Forecasting Capacity. - Department: STA; Time of Delivery: Aug. 2021; Purpose: Compilation of Financial Soundness Indicators (FSIs) - Department: FAD; Time of Delivery: Aug. 2021; Purpose: Revenue Administration - Department: FAD; Time of Delivery: Nov. 2021; Purpose: Strengthening Fiscal Risks Analysis and Reporting - Department: MCM; Time of Delivery: Sep. 2022; Purpose: Assessment of Financial Stability Report - Department: FAD; Time of Delivery: Mar. 2023; Purpose: Public Financial Management-Inception Mission - Department: MCM; Time of Delivery: Mar. 2023; Purpose: Contagion Risk Analysis - Department: STA; Time of Delivery: Jul. 2023; Purpose: Data Management and Operations Mission. - Department: FAD; Time of Delivery: Jul. 2023; Purpose: Funding Program Assessment-Colombia: Revenue Administration. - Department: STA; Time of Delivery: Oct. 2023; Purpose: Monetary and Financial Statistics - Department: STA; Time of Delivery: Nov. 2023; Purpose: Government Financial Statistics - Department: FAD; Time of Delivery: Nov. 2023; Purpose: Bases to improve customs compliance by adopting comprehensive risk management. - Department: MCM; Time of Delivery: Nov. 2023; Purpose: Systemic Risk Analysis- IFRS 9 Developing an Expected Loss Model. - Department: ICD; Time of Delivery: Jun. 2023, Sep.-Dec. 2023, Jan. -Mar. 2024; Purpose: Macroeconomic Frameworks-Minsitry of Finance-CARF - Department: ICD; Time of Delivery: Oct. 2023; Purpose: Macroeconomic Frameworks-Ministry of Finance. ### Statistical Issues — Assessment of Data Adequacy for Surveillance (As of February 26, 2024) - 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 estimates of GDP by the production and expenditure approaches use 2015 as the reference year for the annually chained volume measures. - A monthly indicator for monitoring the economy is disseminated. - Accounts and tables identified as minimum requirements and recommended for implementation of the 2008 SNA are compiled regularly, including: - 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; - the 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. - The CPI basket and weights were updated in 2019, with the support of STA technical assistance, based on 2016/17 household expenditures. - The PPI was redesigned in 2015 using a weighting structure from the year 2011 and covers agriculture, livestock, fishing, mining, and industry. - DANE publishes a quarterly new home price index (IPVN) that covers Bogotá only. - Government Finance Statistics: - The Ministry of Finance and Public Credit (MFPC) is responsible for compiling 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 has been published in the Government Finance Statistics Yearbook (GFSY). - Next steps include aligning classification of revenue and expenditure with GFSM 2014, improving consolidation, adopting a common list of public sector entities, and disseminating high-frequency data nationally and internationally. - The 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 containing accounting information of all public sector units. - MFPC’s Macroeconomic Policy Unit and the GAO developed a bridge table that converts national accounting classification to the GFSM 2014 framework to compile GFS on accrual and cash bases. - Monetary and Financial Statistics: - Classification follows the 2016 Monetary and Financial Statistics Manual and Compilation Guide (MFSMCG). - BdR reports Standardized Report Forms (SRFs) 1SR for the central bank, 2SR for the other depository corporations (ODCs), and 5SR for monetary aggregates for publication in the IMF's International Financial Statistics (IFS) on a monthly basis with a lag of two months for the 1SR and 4 months for the 2SR. - BdR reports data on several Financial Access Survey (FAS) indicators including mobile and internet banking, mobile money, gender-disaggregated data, and the two indicators adopted by the UN to monitor Target 8.10 of the SDGs: commercial bank branches per 100,000 adults and ATMs per 100,000 adults. - Financial Sector Surveillance: - Colombia has reported Financial Soundness Indicators (FSI) beginning from 2005. - Colombia reports all 13 core and 8 additional FSIs for deposit takers on a monthly basis according to the list prescribed in the 2019 Financial Soundness Indicators Compilation Guide. - The FSIs, metadata and underlying series are available on the IMF’s data portal. - External Sector Statistics: - BdR compiles and disseminates quarterly balance of payments and international investment position (IIP) statistics on a BPM6 basis. - Improved surveys, particularly in the services sector, have enhanced coverage of balance of payments statistics. - Recording of transactions in securities between residents and nonresidents in secondary markets could be improved. - BdR compiles and disseminates the monthly Data Template on International Reserves and Foreign Currency Liquidity, reports semi-annual data to the Coordinated Portfolio Investment Survey (CPIS), and submits quarterly external debt statistics to the Quarterly External Debt Statistics (QEDS) database. - 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 and metadata are posted on the Fund’s Dissemination Standards Bulletin Board (DSBB). ### Table of Common Indicators Required for Surveillance (As of February 26, 2024) — Selected entries - Exchange Rates: Date of Latest Observation: Feb. 26, 2024; Date Received: Feb. 26, 2024; 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. 2024; Date Received: Feb. 2024; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Reserve/Base Money: Date of Latest Observation: Feb. 2, 2024; Date Received: Feb. 22, 2024; Frequency of Data: W; Frequency of Reporting: W; Frequency of Publication: W - Broad Money: Date of Latest Observation: Feb. 2, 2023; Date Received: Feb. 22, 2024; Frequency of Data: W; Frequency of Reporting: W; Frequency of Publication: W - Central Bank Balance Sheet: Date of Latest Observation: Jan. 2024; Date Received: Feb. 2024; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Consolidated Balance Sheet of the Banking System: Date of Latest Observation: Nov 2023; Date Received: Feb. 2024; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Interest Rates: Date of Latest Observation: Feb. 22, 2024; Date Received: Feb. 22, 2024; Frequency of Data: D; Frequency of Reporting: D; Frequency of Publication: D - Consumer Price Index: Date of Latest Observation: Dec. 2023; Date Received: Feb. 2024; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Revenue, Expenditure, Balance and Financing Composition – General Government (GG): Date of Latest Observation: Q4 2022; Date Received: Dec. 2023; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q - Revenue, Expenditure, Balance and Financing Composition – Central Government: Date of Latest Observation: Nov. 2023; Date Received: Jan. 2024; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Stocks of Central Government and Central Government-Guaranteed Debt: Date of Latest Observation: Jan. 2024; Date Received: Feb. 2024; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - External Current Account Balance: Date of Latest Observation: Q3 2023; Date Received: Dec. 2023; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q - Exports and Imports of Goods: Date of Latest Observation: Dec. 2023; Date Received: Feb. 2024; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - GDP/GNP: Date of Latest Observation: Q4 2023; Date Received: Feb. 2024; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q - Gross External Debt: Date of Latest Observation: Nov. 2023; Date Received: Feb. 2024; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - International Investment Position: Date of Latest Observation: Q3 2023; Date Received: Dec. 2024; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q ### Statement by Juan Sebastian Betancur Mora, Alternate Executive Director for Colombia (March 25, 2024) — Selected excerpts - Colombia is well-advanced in transitioning towards a more sustainable macroeconomic situation after a period of exceptional GDP growth, high inflation, a large external deficit, and rapid loan portfolio growth. - The Flexible Credit Line is highly valuable to the authorities and contributes to complementing external liquidity buffers. - The government is advancing a structural agenda to unlock inclusive growth capacity, implement a prudent energy transition, and strengthen the social safety net within the existing fiscal policy framework. ### Recent Developments and Outlook — Key statistics and assessments - Growth history: - 2022 annual growth rate: 7.3% - 2021 annual growth rate: 10.8% - 2023 growth: 0.6% - Central bank’s forecast for 2023: 1% - 2024 outlook: growth is expected to remain weak, with consumption growing at low rates and investment gradually recovering. - Inflation: - Annual inflation rate: 7.7% in February 2024 - Peak inflation: 13.3% reached in March 2023 - Food inflation: 1.9% (current), after reaching more than 27% in 2022 - Central bank forecast: decrease in inflation to 5.9% by the end of 2024; reach 3% target by mid-2025 - Main risks to inflation outlook: higher persistence in service price inflation, increases in regulated prices, and El Niño - Noted that regulated fuel prices rose more than 50% in 2023 - External position: - Current account deficit: 6.2% of GDP in 2022; 2.7% of GDP in 2023 - Expected current account deficit in 2024: around 2.9% of GDP - Factors improving external account: lower domestic demand, resilience of non-traditional exports, positive performance of service exports ### Monetary Policy, Exchange Rate, and External Buffers - Regime: Inflation-targeting with a highly flexible exchange rate. - Policy rate changes: - Since September 2021, central bank increased interest rates by 11.5 percentage points. - Policy rate reached 13.25% in May 2023 and remained unchanged at that level until December 2023. - The contractionary policy has contributed to reducing inflation and inflation expectations. - The central bank aims to bring inflation to the target by mid-2025. *Source: 1colea2024001 - 2022. A data ROSC took place in 2006 and a fiscal ROSC in 2003.* ### 2025. The authorities note that their forecasts of inflation through 2025 are broadly aligned ### 1colea2024001 - 2025. The authorities note that their forecasts of inflation through 2025 are broadly aligned ### Monetary policy and inflation - Authorities and IMF staff forecasts of inflation through 2025 are "broadly aligned". - Authorities communicated that monetary policy will remain contractionary throughout 2024 to ensure convergence of inflation towards the 3% target. - Given high uncertainty, authorities have not committed to a specific interest rate path and follow a data-dependent monetary policy approach aiming to bring inflation to target by mid-2025. - The Board of Directors began a cycle of reductions in the policy rate in December 2023 after 8 months of downward inflation; the monetary policy rate currently stands at 12.75%. ### Exchange rate, reserves, and external liquidity - The Colombian peso outperformed regional peers in 2023 and corrected the depreciation observed in 2021 and 2022. - Exchange rate appreciation of more than 20% in 2023 contributed to the reduction of inflation. - Risk premia have fallen and sovereign bond yields have seen a sizable decline, though current levels remain above historical averages. - At the December 2023 meeting, the Board announced a reserve accumulation program of up to USD 1.5 billion to strengthen international liquidity coverage ratios and signal commitment to adequate reserves and external liquidity buffers ahead of a gradual reduction of FCL access. - Through the program, the central bank has accumulated USD 423.9 million of international reserves so far without producing pressure on the level or volatility of the exchange rate. ### Fiscal policy and fiscal framework - Colombia is governed by a Fiscal Rule and a Medium-Term Fiscal Framework; the Autonomous Fiscal Rule Committee was created to enhance public debate. - Significant fiscal consolidation continued in 2023; the government over-complied with the fiscal rule for the second year in a row. - The headline deficit of the general government declined by 4pp of GDP between 2022 and 2023 and closed at 2.5 percent. - Central government results: - Primary deficit: down from 1% of GDP in 2022 to 0.3% in 2023. - Total deficit: decreased from 5.3% to 4.3% of GDP. - Central government’s net debt closed 2023 at 52.8% of GDP, below the 55% medium-term anchor established by the Fiscal Rule. - Drivers of improvement: higher revenue mobilization from the 2021 and 2022 tax reforms (tax revenues reached historical highs) and measures such as gradually phasing out fuel subsidies. - The 2024 Financial Plan is aligned with the fiscal rule and balances accommodating additional expenditure pressures, promoting public investment recovery, and ensuring public finances sustainability. - By law the structural net primary balance improves by 1,1pp compared to 2023; consequently, the fiscal deficit and public debt will temporarily increase in 2024 to 5.3% and 57% of GDP. - Authorities pledged to take measures to scale back spending if necessary to meet objectives and safeguard fiscal sustainability; the latest Financial Plan already included a reduction in planned spending versus the 2023 Medium-Term Fiscal Framework. - Medium-term path: structural primary balance will continue to augment so that debt stabilizes around the anchor; additional consolidation will be guided by gradual increases in non-oil revenues (including tax administration strategy and economic recovery) and gradual reduction of diesel subsidies. ### Financial sector resilience and risks - Following tighter monetary policy, tighter bank credit standards, and economic slowdown, the loan portfolio recorded negative real growth rates since May 2023. - Consumer loan portfolio: contracting 11% in real terms after growing at a rate of more than 14% in July 2022. - Non-performing loans have increased across credit types but the deterioration has been contained. - Households’ financial burden has fallen due to the drop in real growth of consumer loans and lower dynamics of mortgage loans; households’ debt-to-income ratio has decreased alongside a recovery in savings. - Financial institutions are highly resilient with sufficient buffers to face the macroeconomic adjustment: - Capital and liquidity levels are well above Basel III requirements. - Provisioning coverage ratio remains appropriate. - The countercyclical provisioning scheme has worked effectively. - Stress tests show the financial system is highly resilient even in tail risk scenarios. - Authorities committed to strengthening the regulatory framework through implementation of IMF recommendations from the recent FSAP and to close monitoring of cross-border exposures and contagion risks. - Coordination through the Committee for Coordination and Oversight of the Financial System is emphasized; robust supervision and regulation aligned with Basel III standards remain cornerstones. ### Governance, transparency, and anti-corruption - Governance, transparency, and anti-corruption agenda has been strengthened with active participation of stakeholders in regulatory formulation. - Assets and income declarations of public officials are published annually in accordance with the law. - DIAN promoted publication of import, export, and transportation declaration data in formats accessible to the public; an apprehension committee was created in 2023 to increase customs system efficiency and effectiveness. - DIAN is applying AI to enhance corruption detection and is working with the Directorate of Audit Management to promote due diligence in reporting beneficial owners using Chamber of Commerce information; legal constraints to facilitate publication are being assessed. - The Transparency Secretariat is developing tools to manage corruption risks and promote a culture of legality. - At the subnational level, public entities must have a Transparency and Public Ethics Program guaranteeing internal compliance, due diligence, and risk management policies. ### Final remarks and policy implications - Colombia is undergoing a necessary adjustment after a pandemic-era recovery with exceptional growth in domestic absorption and output: loan portfolio contraction, adjusting domestic demand, declining inflation converging to the 3% target, and more sustainable external and fiscal balances. - Authorities remain committed to maintaining strong economic fundamentals and institutional frameworks: - Independent central bank with an inflation-targeting regime. - Fully flexible exchange rate. - Adequate level of international reserves. - Financial framework and regulation meeting Basel III standards. - Fiscal sustainability ensured through the Medium-Term Fiscal Framework and the Fiscal Rule (enhanced following IMF recommendations). - Within this framework, authorities continue decisive actions to safeguard fiscal sustainability, ensure price stability, create conditions for higher and more inclusive medium-term growth, guarantee effective financial regulation and supervision, and encourage improved financial inclusion. - Maintenance of adequate external buffers through international reserves and the FCL positions Colombia to confront external risks; these macroeconomic policies and institutions have proven effective historically and will continue to play a crucial role amid uncertain global developments. *Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1colea2024001.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1colea2024001.pdf_