## _cr10105

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### Executive summary — context and recent developments
- Following near zero growth in 2009, economic activity is expected to pick up in 2010, supported by accommodative monetary and fiscal policies and a sound financial system.
- Colombia: real GDP growth in 2009 was about zero (reported elsewhere as 0.1 and 0.4 percent in different tables).
- End-2009 conditions:
  - Output gap: about 2 percent.
  - End-year inflation: 2 percent (down from 7.7 percent at end-2008).
  - Central bank net international reserves (excluding the SDR allocation): US$24 billion (end-2008 level, broadly constant).
  - External current account deficit: 1.8 percent of GDP (narrowed from 2.9 percent).
  - Policy rate lowered by 650 basis points to 3½ percent since late 2008.
  - Bank lending rates fell; credit to the private sector decelerated to about 1 percent growth at end-2009.
  - Combined public sector overall fiscal deficit: 2.8 percent of GDP in 2009 (from broad balance in 2008).
  - Structural deficit: 2.2 percent of GDP in 2009 (from 1.2 percent in 2008).
  - Total spending (adjusted for fuel subsidies): real growth of 7 percent; capital expenditure real growth: 25 percent.
  - Gross official external borrowing in 2009: exceeded US$6 billion (2008: US$3.2 billion); sovereign bond placements: US$3.5 billion.
  - Financial soundness: capital adequacy rose from 13.4 to around 15 percent; NPL indicators reached 4½ percent in mid-2009 and declined to 4.1 percent by end-2009; ratio of liquid to total assets increased by about 3¾ percentage points.

### Key policy recommendations (near-term and medium-term)
- Near-term policy stance:
  - Monetary and fiscal policies should protect the nascent recovery.
  - A tightening of the policy stance should await stronger evidence that the recovery is self-sustained.
- Capital flows:
  - Exchange rate should continue to be the main shock absorber in the event of a surge in capital inflows.
  - If the recovery is firm, fiscal tightening should be considered to moderate inflows.
  - Capital controls not contemplated as primary tool but could be an option for temporary surges; staff noted limited effectiveness as a permanent measure.
- Reserve coverage:
  - Current level of reserves judged broadly adequate; scope exists to increase coverage as the balance of payments strengthens.
- Fiscal consolidation and rule:
  - Lower public debt would help protect against risks and improve prospects of regaining investment grade.
  - Set a target on a “broad” structural balance (including central and regional governments) to link to public debt and ensure consistency across government levels.
  - Staff recommends a more ambitious medium-term fiscal target to lower public debt; phased adoption of a fiscal rule is advised.

### Authorities’ views (summarized)
- Concur with staff advice on 2010 policy stance and exchange rate flexibility as key shock absorber.
- Regard reserve levels as adequate but agree higher levels are desirable if conditions allow.
- Consider medium-term debt targets reasonably ambitious but agree lower debt levels would provide more space for contingent risks.
- Favor a fiscal rule, with authorities leaning toward a central government rule easier to control.

### Macroeconomic outlook and projections (selected)
- Growth projections (annual percent change):
  - Real GDP growth: 2009 = 0.1; 2010 = 2.3; 2011 = 4.0; 2012 = 5.0; 2013 = 5.0; 2014 = 4.5; 2015 = 4.5.
  - Staff also notes projection that real GDP growth in 2010 is about 2¼ percent and that the full-year effect of lower exports to Venezuela lowers 2010 growth by ¾ percentage points.
- Inflation, end of period (annual percent change):
  - 2009 = 2.0; 2010 = 3.8; 2011 = 3.4; 2012 = 3.4; 2013 = 3.3; 2014 = 3.0; 2015 = 3.0.
  - Early-2010 indicators suggest end-year inflation may be around 3.8 percent.
- External current account (percent of GDP):
  - 2009 = -1.8; 2010 = -3.1; 2011 = -2.9; 2012 = -2.2; 2013 = -1.6; 2014 = -1.3; 2015 = -1.1.
  - 2010 widening driven by lower exports to Venezuela and increased oil investment-related imports; bulk expected to be financed by FDI.
- Fiscal and public debt projections:
  - Consolidated public sector overall balance (percent of GDP): 2009 = -2.8; 2010 = -3.5; 2011 = -3.0; 2012 = -2.5; 2013 = -2.1; 2014 = -1.8; 2015 = -1.6.
  - Gross public debt (excluding Ecopetrol, percent of GDP): 2009 = 34.1; 2010 = 33.6; 2011 = 34.0; 2012 = 34.0; 2013 = 33.2; 2014 = 32.6; 2015 = 31.3.
  - Staff projects public debt to GDP ratio about 32 percent by 2014-15 (similar to end-2008 level in some scenarios).

### Fiscal outlook, MTFF, and scenarios (detailed)
- MTFF projections and memorandum items (percent of GDP):
  - Combined public sector (CPS) overall balance: -3.5 (2010), -3.0 (2011), -2.5 (2012), -2.1 (2013), -1.8 (2014), -1.6 (2015).
  - Oil revenues: 2.0 (2010), 2.4 (2011), 2.5 (2012), 2.6 (2013), 2.7 (2014), 2.8 (2015).
  - Non-oil revenues: 22.7 (2010), 23.1 (2011), 23.2 (2012), 23.2 (2013), 23.2 (2014), 23.2 (2015).
  - Primary expenditure: 24.8 (2010), 25.2 (2011), 25.3 (2012), 25.0 (2013), 24.9 (2014), 24.9 (2015).
  - CPS structural overall balance 1/: -2.3 (2010), -2.0 (2011), -2.0 (2012), -2.0 (2013), -1.7 (2014), -1.5 (2015).
  - Memorandum: Central government (CG) overall balance: -4.5 (2010), -4.1 (2011), -3.8 (2012), -3.5 (2013), -2.9 (2014), -2.5 (2015).
  - CG structural overall balance: -3.8 (2010), -3.5 (2011), -3.5 (2012), -3.4 (2013), -2.9 (2014), -2.5 (2015).
- Footnotes: 1/ Include adjustments for the output gap, oil price expectations, fuel subsidies, and one-off pension-related revenues in 2009.
- Ecopetrol production assumption: from 500 thousand BOE per day in 2009 to 1 million BOE per day in 2015.

### Alternative fiscal rule scenarios (Box 2 results)
- Scenarios assume fiscal rule in place starting in 2011 with structural adjustments for output gap, future oil prices, fuel subsidy timing, and 2009 one-off pension revenues.
- Scenario: Zero overall balance for combined public sector
  - Lowers debt ratio to about 22 percent of GDP by 2015 (almost 10 percent of GDP below baseline).
  - Requires measures equivalent to about 2 percent of GDP in 2011; if via expenditure cuts implies reduction in real government spending of about 2.6 percent in 2011, followed by 6 percent real growth in 2012.
  - Advantage: easy to communicate and ensures consistency between regional and central governments.
- Scenario: Non-oil deficit for combined public sector of 3.5 percent of GDP
  - Debt declines to about 25 percent of GDP by 2015.
  - With no revenue measures, entails reduction in expenditure of about 1.3 percent of GDP in 2011 relative to baseline.
  - Vulnerability: lower-than-baseline oil prices and production would raise deficits and debt.
- Scenario: Primary surplus for central government of 1 percent of GDP
  - Reduces public sector debt to 25 percent of GDP.
  - Upfront measures of about 1.6 percent of GDP needed in 2011.
  - Directly under central government control but local governments could undermine effects.
- Transition options:
  - Zero overall balance after a three-year transition with deficit of 1 percent of GDP implies implied adjustment for 2011 of 1 percentage point of GDP and debt would decline to 25 percent of GDP by 2015.
  - For a central government structural primary surplus rule, a three-year transition with primary surplus target of 0.5 percent of GDP would require adjustment of 1 percent of GDP and lower public debt to 27 percent of GDP by 2015.

### Risks to the growth outlook
- Upside risk: Significant upside potential in the oil sector could result in significantly higher oil production and overall output over the medium to long term.
- Downside risks:
  - Uncertainty about the strength of the global recovery.
  - Increased political tensions with Venezuela, which could have a larger and more protracted adverse impact on activity.

### Monetary policy and inflation targeting
- Adoption of an inflation target range for 2010 consistent with long-term objective of 2–4 percent is welcomed.
- Staff encouraged moving to a single, permanent target (authorities noted this would require amending central bank law and are not considering it now).
- Operational guidance:
  - Monetary stance in 2010 should remain accommodative until clear evidence of sustained recovery.
  - Central bank should monitor forward-looking indicators and be ready to tighten at first signs of domestic demand pressures.
  - Prevent anticipated food price increases from affecting long-term inflation expectations.

### External sector, reserves, and exchange arrangements
- Reserve policy and assessment:
  - Authorities consider reserves broadly adequate for “normal” times; staff notes scope to strengthen reserve position as oil-related revenues increase.
  - Footnote: On March 3, the central bank announced a program of US$20 million of daily purchases of foreign exchange for the first half of the year (cumulative US$1.6 billion).
- Real exchange rate:
  - Real exchange rate assessed broadly in equilibrium with possible moderate undervaluation within margin of error.
  - Expected gradual strengthening of external current account driven by higher oil production and exports.
- Exchange restrictions subject to Fund approval (two measures):
  1. Multiple currency practice and exchange restriction from tax on outward remittances of nonresident profits earned before 2007 and retained less than five years.
  2. Exchange restriction from special regime for the hydrocarbon sector requiring surrender of export proceeds or agreeing to government limitations.
- Staff recommendation:
  - Approve retention of the first measure (temporary, non-discriminatory, phased out by January 1, 2012).
  - Do not recommend approval of the hydrocarbon-sector restriction due to lack of timetable for removal.

### Financial system resilience, reforms, and provisioning
- Financial strength and outlook:
  - Strong financial system supports rapid credit recovery; stress tests in late 2009 suggest resilience.
  - NPLs rose modestly; commercial loan portfolios need continued monitoring.
  - Banks’ exposure to market risk increased via higher holdings of government paper.
- Regulatory progress:
  - Financial reform law (July 15, 2009) broadened permissible repo assets, increased pension fund investment flexibility, opened domestic market to foreign issuers.
  - New liquidity risk management system adopted; deposit insurance coverage broadened; bank resolution procedures improved.
- Provisions and countercyclicality:
  - Dynamic provisioning adopted mid-2007 for commercial loans and extended mid-2008 to consumer loans.
  - September 2009 changes: effective April 2010, rules-based determination of cycle-phase on a bank-specific basis; banks may lower countercyclical provisions in bad times by 40 percent of procyclical provisions.
  - Staff notes regulation complexity and limited scope to reduce procyclicality; suggests moving toward countercyclical rule allowing free reallocation across loans (tax treatment and treatment of existing provisions would need resolution).

### Financial and vulnerability indicators (selected 2009 levels)
- Gross reserves in percent of short-term debt at remaining maturity: 223.7.
- Total gross external debt: 21.3 (percent of GDP).
- Current account balance: -1.8 (percent of GDP).
- Foreign direct investment: 2.6 (percent of GDP).
- Gross external financing requirement 2/: 8.3 (percent of GDP).
- Public sector — Overall balance: -2.8 (percent of GDP).
- Public sector gross debt: 35.1 (percent of GDP).
- Financial system — Capital adequacy ratio: 15.2 (percent).
- Non-performing loans, in percent of total loans: 4.1.
- Return on average assets: 2.4 (percent).

### Fiscal vulnerabilities and efficiency recommendations
- Two major fiscal vulnerabilities:
  - Special regimes and tax incentives for investment that erode the tax base if beneficiaries continue to increase.
    - Current incentives include income tax deduction of 30 percent from fixed-asset investments, special free trade zones with 15 percent income tax, and stability contracts guaranteeing no changes in direct taxes for up to 20 years.
    - 2009 tax reform reduced fixed-asset investment deduction from 40 percent to 30 percent and eliminated combining deduction with special free trade zone regime.
  - Social security expenditure pressures, especially higher health care costs.
    - Explicit assumption of higher health care costs estimated at 0.9 percent of GDP starting in 2011.
    - Authorities set up framework (January 2010) to restrain health costs and identify new revenues (0.2 percent of GDP) and reallocate existing resources (0.2 percent of GDP).
- Staff recommendations:
  - Adopt systematic, forward-looking assessment of contingencies in MTFF with multi-year cost assessments and contingency measures.
  - Improve tax efficiency: broaden VAT base, reduce number of rates, phase out financial transaction tax.
  - Reduce expenditure rigidities gradually to facilitate compliance with fiscal rule targets.

### Staff appraisal and Executive Directors’ guidance (summary)
- Global crisis effects on Colombia were limited due to strong policy and institutional frameworks.
- Monetary and fiscal policies should remain supportive until recovery is sustained.
- Rebound in output in 2010 not expected to be strong due in part to trade disruptions with Venezuela.
- Support for fiscal rule, with several Directors encouraging broad coverage.
- Attention urged to containment of health costs, removal of hydrocarbon-sector exchange restriction, and careful consideration of reserve accumulation costs and externalities.
- Directors welcomed financial-sector reforms, liquidity management system, broader deposit insurance, and bank resolution tools.

### Mission, data, and IMF relations (logistics and statistics)
- Mission meetings: Minister of Finance and Public Credit; Board of Directors of Banco de la República; senior government officials; private sector and labor union representatives.
- Staff team: M. Piñón (Head), E. Flores, L. Jaramillo, J. Jauregui (WHD), E. Baldacci (FAD), I. Petrova (MCM), M. Saenz (SPR); Ms. Agudelo (OED) participated in most meetings.
- IMF relations (as of February 28, 2010):
  - Quota: 774.00 (SDR Million) 100.00 percent.
  - FCL approved May 11, 2009: 6,966.00 (SDR Million), Amount Drawn: 0.00.
- Data quality: Colombia observes SDDS; data generally adequate for surveillance; a data ROSC completed September 2006.

*IMF staff: Executive Summary from _cr10105 - Executive Summary*

### Executive Summary

### Executive Summary

### Context and recent developments
- Following near zero growth in 2009, economic activity is expected to pick up in 2010, supported by accommodative monetary and fiscal policies and a sound financial system.
- Key short term challenges include containing second-round effects on inflation from anticipated supply shocks, as well as mitigating the effects of a possible surge in capital inflows.
- A strong institutional policy framework bodes well for sustained growth and low inflation in the medium term.
- Colombia was not affected too severely by the global crisis. Domestic demand began recovering in the second quarter of 2009, led by public investment and consumption; for the year as a whole, real GDP growth was about zero.
- With near zero food price inflation and an output gap of about 2 percent at end-2009, end-year inflation fell to 2 percent from 7.7 percent at end-2008, well below the official inflation target range of 4½−5½ percent.
- The peso depreciated sharply in the first quarter of 2009 but recovered fairly quickly; central bank net international reserves (excluding the SDR allocation) remained broadly constant at the end-2008 level of US$24 billion.
- The external current account deficit narrowed to 1.8 percent of GDP (from 2.9 percent the previous year).
- Capital account: a sharp increase in public inflows (up by US$8.4 billion) compensated for lower private inflows. Rollover rates of private external debt only declined moderately and the US$10.9 billion in contingent reserves from the FCL approved in May 2009 were not used.
- Monetary policy: since late 2008 the policy rate was lowered by 650 basis points (to 3½ percent). Bank lending rates fell, but credit to the private sector decelerated sharply (to about 1 percent growth at end-2009). Corporates placed domestic bonds in 2009 totaling US$11 billion (twice the level of 2008).
- Fiscal policy: the overall fiscal deficit rose from broad balance in 2008 to 2.8 percent of GDP in 2009, providing more stimulus than anticipated in the budget (mainly due to lower-than-budgeted tax revenues). The structural deficit deteriorated from 1.2 percent of GDP in 2008 to 2.2 percent of GDP in 2009, imparting a fiscal impulse of about 1 percent of GDP.
- Total spending (adjusting for fuel subsidies) grew by 7 percent in real terms; capital expenditure increased by 25 percent in real terms as regional governments made up for budget under-spending in 2008.
- Government foreign borrowing: gross official external borrowing exceeded US$6 billion in 2009 (compared with US$3.2 billion in 2008) with sovereign bond placements totaling US$3.5 billion. In net terms, official external borrowing rose to 2 percent of GDP, and the government increased its deposits abroad by about 1.4 percent of GDP.
- Financial soundness: liquidity indicators improved (ratio of liquid to total assets increased by about 3¾ percentage points). Capital adequacy remained strong. NPL indicators reached 4½ percent in mid-2009 but declined to 4.1 percent by the end of the year, backed by high provisions. The corporate sector’s strong balance sheets and moderate household debt helped avoid financial distress.
- Policy measures since late 2008: banks retained a portion of 2008 profits, increasing capital adequacy from 13.4 to around 15 percent; effective coverage of deposit insurance was raised; risk-based deposit insurance premia were improved; a new liquidity risk management system was introduced; fiscal law passed in July 2009 increases flexibility in pension funds’ investment portfolios (effect September 2010) and enhances consumer protection and financial education; countercyclical provisioning to be more rules-based and bank-specific starting in April 2010.

### Key policy recommendations
- Near-term policy stance:
  - Monetary and fiscal policies should protect the nascent recovery.
  - A tightening of the policy stance should await stronger evidence that the recovery is self-sustained.
- Capital flows:
  - The exchange rate should continue to be the main shock absorber in the event of a surge in capital inflows.
  - If the recovery is firm, fiscal tightening should also be considered.
- Reserve coverage:
  - While the current level of reserves is broadly adequate, there is scope to increase coverage as the balance of payments strengthens.
- Fiscal consolidation:
  - While the fiscal position is not weak, lower levels of debt would help protect against risks, and improve prospects of regaining investment grade.
- Fiscal rule:
  - Setting a target on a “broad” structural balance (including the central and regional governments) would establish a clear link to public debt and ensure consistency between the stances of the different levels of government.

### Authorities’ views
- The authorities concur with staff’s advice on the policy stance for 2010 and on the key role of exchange rate flexibility to absorb external shocks.
- They regard their reserve levels as adequate, but agree that higher levels would be desirable if conditions allow.
- They consider their medium term debt targets as reasonably ambitious, but agree that lower debt levels would provide more space to deal with contingent risks.
- They see the benefits of a fiscal rule applicable to a broad aggregate, but tend to favor a central government rule that is more under their control.

### Macroeconomic outlook and projections
- Political calendar: Congressional elections were held in March 2010; presidential elections scheduled for May with a possible second round in June; new government to take office in August. The electoral calendar is not expected to weaken Colombia’s solid policy framework.
- Growth:
  - Real GDP growth in 2010 is projected at about 2¼ percent, reflecting the upturn in the world economy and the impact of the expansionary policies of 2009.
  - The full-year effect of lower exports to Venezuela is estimated to lower 2010 growth by ¾ percentage points.
  - Over the medium-term, real GDP growth is expected to rise to 5 percent until the output gap is closed, and thereafter settle at 4½ percent.
- Inflation:
  - Inflation expectations indicators in early 2010 suggest that end-year inflation may be around 3.8 percent, near the top of the target range.
  - Effects of El Niño on food inflation are likely to be offset by the output gap and peso appreciation.
  - Over the medium-term, inflation is expected to remain well within the target range of 2–4 percent.
- External current account:
  - The external current account deficit is expected to widen to 3.1 percent of GDP in 2010 due to lower exports to Venezuela and an envisaged increase in oil investment-related imports.
  - The bulk of the deficit is expected to be financed by FDI, with other private flows also expected to recover.
  - Over the medium term, the current account deficit is expected to decline to about 1 percent of GDP, driven by higher exports (including from expected increases in oil production), improvements in commodity prices, and a gradual recovery in trade with Venezuela.
- Medium-term projections (selected):
  - Real GDP growth: 2009 = 0.1; 2010 = 2.3; 2011 = 4.0; 2012 = 5.0; 2013 = 5.0; 2014 = 4.5; 2015 = 4.5 (annual percent change).
  - Inflation, end of period (annual percent change): 2009 = 2.0; 2010 = 3.8; 2011 = 3.4; 2012 = 3.4; 2013 = 3.3; 2014 = 3.0; 2015 = 3.0.
  - External current account balance (percent of GDP): 2009 = -1.8; 2010 = -3.1; 2011 = -2.9; 2012 = -2.2; 2013 = -1.6; 2014 = -1.3; 2015 = -1.1.
  - Consolidated public sector overall balance (percent of GDP): 2009 = -2.8; 2010 = -3.5; 2011 = -3.0; 2012 = -2.5; 2013 = -2.1; 2014 = -1.8; 2015 = -1.6.
  - Gross public debt (excluding Ecopetrol, percent of GDP): 2009 = 34.1; 2010 = 33.6; 2011 = 34.0; 2012 = 34.0; 2013 = 33.2; 2014 = 32.6; 2015 = 31.3.

*IMF staff: Executive Summary from _cr10105 - Executive Summary*

### 10.      The overall fiscal deficit would continue rising in 2010, but start declining in

### _cr10105 - 10.      The overall fiscal deficit would continue rising in 2010, but start declining in

### Fiscal outlook and projections
- Updated medium-term fiscal framework (MTFF) projects a combined public sector deficit of 3.5 percent of GDP in 2010, declining gradually thereafter to levels around 1½ percent of GDP.
- Public debt to GDP ratio projected to be about 32 percent by 2014-15 (similar to the end-2008 level).
- Table of key projections (Percent of GDP):
  - Combined public sector (CPS) overall balance: -3.5 (2010), -3.0 (2011), -2.5 (2012), -2.1 (2013), -1.8 (2014), -1.6 (2015)
  - Oil revenues: 2.0 (2010), 2.4 (2011), 2.5 (2012), 2.6 (2013), 2.7 (2014), 2.8 (2015)
  - Non-oil revenues: 22.7 (2010), 23.1 (2011), 23.2 (2012), 23.2 (2013), 23.2 (2014), 23.2 (2015)
  - Primary expenditure: 24.8 (2010), 25.2 (2011), 25.3 (2012), 25.0 (2013), 24.9 (2014), 24.9 (2015)
  - CPS structural overall balance 1/: -2.3 (2010), -2.0 (2011), -2.0 (2012), -2.0 (2013), -1.7 (2014), -1.5 (2015)
  - Memorandum items:
    - Central government (CG) overall balance: -4.5 (2010), -4.1 (2011), -3.8 (2012), -3.5 (2013), -2.9 (2014), -2.5 (2015)
    - CG structural overall balance: -3.8 (2010), -3.5 (2011), -3.5 (2012), -3.4 (2013), -2.9 (2014), -2.5 (2015)
- Footnotes and notes:
  - 1/ Include adjustments for the output gap, oil price expectations, fuel subsidies, and one-off pension-related revenues in 2009.
  - Ecopetrol projects oil and gas production by the company and its associates would double from 2009 to 2015 (from 500 thousand barrels of oil equivalent (BOE) per day in 2009 to 1 million BOE per day in 2015).
  - Given prospects for higher oil production and related revenues, the structural overall deficit would decline from 2.3 percent of GDP in 2010 to about 1.5 percent of GDP in 2015; the improvement at the central government level would be larger.

### Risks to the growth outlook
- Upside: Significant upside potential in the oil sector could result in significantly higher oil production and overall output over the medium to long term.
- Downside:
  - Uncertainty surrounding the strength of the global recovery.
  - Increased political tensions with Venezuela, which could have a larger and more protracted adverse impact on activity.

### Policy discussions — near-term stance
- Consensus that macroeconomic policies should remain supportive until the recovery is self-sustained; avoid early withdrawal of stimulus, especially given trade disruptions with Venezuela affecting 2010 growth.
- Monetary policy:
  - Current stance considered appropriate; premature tightening should be avoided.
  - Significant easing of monetary conditions in 2009 supported domestic demand without endangering the inflation objective.
  - Rise in inflation in 2010 expected to be driven by supply factors and not call for immediate policy response.
  - With short and medium term inflation expectations near the top of the target range, the central bank should remain vigilant and stand ready to tighten at first signs of domestic demand pressures; monitor effects of higher food prices on inflation expectations.
- Fiscal stance for 2010:
  - Spending cuts of 0.7 percent of GDP adopted in early 2010 welcomed to prevent further widening of the deficit.
  - With these measures, the structural fiscal balance would remain broadly at the same level as in 2009.

### Policy responses to capital inflows
- Authorities’ baseline: non-FDI outflows in 2010 slightly lower than 2009; improved domestic investment opportunities and low global interest rates could induce larger gross inflows.
- Agreed response options:
  - Exchange rate flexibility as first line of defense, possibly supported by rules-based intervention to smooth volatility.
  - Macroeconomic policies, including some fiscal tightening once recovery is solid, could moderate capital inflows.
  - Capital controls not contemplated at the time but could be an option if warranted by type and size of foreign inflows; staff noted controls are of limited effectiveness as a permanent measure but could manage a temporary surge in capital flows.
  - Historical note: authorities imposed capital controls on non-FDI flows in mid-2007 (unremunerated reserve requirements); controls removed in October 2008.

### Strengthening the policy framework — fiscal policy
- Updated outlook implies fiscal revenues benefit from sizable increases in oil production; key expenditure risks have materialized, particularly on health due to court-mandated decisions.
- Public debt projected to be 8 percentage points of GDP above the medium term level suggested in 2008 Article IV consultation.
- Recommendation: more ambitious medium term fiscal targets to lower public debt and create fiscal space; could improve prospects for credit rating upgrades.
- Staff support for adoption of a fiscal rule given Colombia’s moderate public debt and strong fiscal institutions (effective fiscal responsibility law, MTFF, budget rules for regional governments).
  - Fiscal rule benefits: signal commitment to fiscal consolidation, facilitate countercyclical policies, shield economy from oil receipt volatility.
  - Caveat: fiscal rule not effective to prevent equilibrium exchange rate appreciation.

### Staff recommendations for fiscal rule design
- Target a broad structural fiscal balance (including central and subnational governments) to link to overall public debt and ensure consistency across levels of government. Authorities are considering options, including a central government target easier to control.
- Aim at a significant decline in public debt. Staff suggested reducing the public debt ratio in a five-year period to the level prior to the global crisis (32 percent of GDP) may be a missed opportunity; a more ambitious target would signal commitment to fiscal prudence and debt sustainability. Authorities agreed fiscal rule should be consistent with an ambitious decline in public debt.
- Phased adoption recommended:
  - A zero structural balance for combined public sector starting in 2011 would require a fiscal adjustment of about 2 percent of GDP in the first year; staff recognized upfront adjustment of this magnitude may entail demand risks.
  - Phased implementation example: transitional structural deficit of about ¾−1 percent of GDP for two to three years while announcing a more ambitious target at a specific date (e.g., zero structural overall balance by 2013).

### Box 1 — Debt levels and sovereign ratings (key points)
- Colombia reduced public debt from 50 percent of GDP at end-2002 to 32 percent of GDP at end-2008.
- Despite increased borrowing in 2009, Colombia’s public debt to GDP ratio similar to those of emerging markets with investment grade ratings.
- Panel data analysis (48 emerging markets) finds rating agencies weigh: public debt levels, size of export sector, depth of financial system, and political risk.
- Debt simulation model results: 50 percent probability that by 2015 Colombia’s public debt to GDP ratio will be below the pre-crisis level (32 percent); 25 percent probability it will exceed 40 percent of GDP.
- Likely adoption of an explicit fiscal rule and associated debt targets bode well for fiscal consolidation and public debt reduction.

### Box 2 — Alternative fiscal rule scenarios (results summarized)
- Scenarios assume fiscal rule in place starting in 2011 and structural fiscal balance adjustments for output gap, future oil prices, timing of fuel subsidies, and one-off pension-related revenues in 2009.
- Scenario results:
  - Zero overall balance for combined public sector:
    - Lowers debt ratio to about 22 percent of GDP by 2015 (almost 10 percent of GDP below baseline).
    - Measures equivalent to about 2 percent of GDP needed in 2011; if achieved via expenditure cuts, implies reduction in real government spending of about 2.6 percent in 2011, followed by 6 percent real growth in 2012.
    - Easy to communicate and ensures consistency between regional and central governments.
  - Non-oil deficit for combined public sector of 3.5 percent of GDP:
    - Debt declines to about 25 percent of GDP by 2015.
    - With no revenue measures, entails reduction in expenditure of about 1.3 percent of GDP in 2011 relative to baseline.
    - If oil prices and production are lower than baseline, overall deficits and debt would rise.
  - Primary surplus for central government of 1 percent of GDP:
    - Also reduces public sector debt to 25 percent of GDP.
    - Upfront measures of about 1.6 percent of GDP needed in 2011.
    - More directly under control of central government but local governments could adopt stances undermining intended effects.
- Transition options:
  - Zero overall balance implemented after three-year transition period with deficit of 1 percent of GDP implies implied adjustment for 2011 of 1 percentage point of GDP and debt would decline to 25 percent of GDP by 2015.
  - For central government structural primary surplus rule, a three-year transition with primary surplus target of 0.5 percent of GDP would require adjustment of 1 percent of GDP and lower public debt to 27 percent of GDP by 2015.

### Addressing fiscal vulnerabilities and efficiency
- Two major sources of medium term fiscal vulnerabilities:
  - Special regimes and tax incentives for investment:
    - Continued increases in beneficiaries would erode tax base.
    - Authorities view incentives as having positive investment impact but are ready to reconsider scope; 2009 tax reform reduced income tax deduction of fixed-asset investments from 40 percent to 30 percent and eliminated combining that deduction with special free trade zone regime.
    - Investment incentives include an income tax deduction of 30 percent from fixed-asset investments, a regime of special free trade zones with a 15 percent income tax rate, and stability contracts guaranteeing no changes in direct taxes for up to 20 years.
  - Social security expenditure, especially higher health care costs:
    - Explicit assumption of higher health care costs estimated at 0.9 percent of GDP starting in 2011 incorporated.
    - Authorities set up framework in January 2010 to restrain health costs, identify new revenues (0.2 percent of GDP), and reallocate existing resources (0.2 percent of GDP).
- Recommendations:
  - Adopt a more systematic, forward-looking assessment of contingencies in the MTFF, expanding to multi-year cost assessments and identifying contingency measures to implement if risks materialize.
  - Improve tax system efficiency and reduce expenditure rigidities:
    - Simplify tax system by broadening the VAT base and reducing number of rates.
    - Phase out the financial transaction tax.
    - A more efficient tax system would facilitate compliance with fiscal rule targets.
    - Expenditure rigidities remain high; expected to decline gradually as a result of previous reforms.

### Monetary policy framework
- Monetary policy framework discussed with emphasis on remaining supportive while vigilant; see "Policy discussions — near-term stance" for operational guidance.

*Source: _cr10105 - 10.      The overall fiscal deficit would continue rising in 2010, but start declining in*

### 26.      The recent adoption of an inflation target range for 2010, in line with the long

### _cr10105 - 26.      The recent adoption of an inflation target range for 2010, in line with the long

### Inflation targeting and monetary policy
- The recent adoption of an inflation target range for 2010, in line with the long-term objective of 2–4 percent, is welcome and will help lock in the gains of the sharp drop in inflation in 2009 and strengthen the inflation targeting framework.
- Staff encouraged the authorities to discontinue making reference to annual and medium-term targets for inflation in favor of a single, permanent target. The authorities saw merit in this proposal but noted that such change would require amending the central bank law, a step they are not considering at the moment.
- The authorities agreed to emphasize in their communication strategy that the near-term and long-term target ranges are expected to remain the same.
- Monetary policy assessment and guidance:
  - The tightening during 2008, declining food inflation, and well-anchored inflation expectations created room for letting the exchange rate absorb the brunt of the external shock, while easing monetary conditions.
  - With expectations still inside the target range, the monetary stance during 2010 should remain accommodative until there is clear evidence of a sustained recovery.
  - Close monitoring of forward looking indicators of activity and inflation will be critical to decide the timing of the change in stance.
  - Authorities should prevent anticipated increases in food prices from affecting long-term inflation expectations.

### External sector: resilience, reserves, and exchange restrictions
- Colombia’s solid policy framework and reduced balance sheet risks helped mitigate the impact of the global crisis; strengthening of the policy framework over the last decade made late-1990s channels (large unhedged exposures and a rigid exchange rate regime) significantly less important.
- Reserves and external vulnerabilities:
  - Higher reserve levels may help lessen remaining external vulnerabilities.
  - Authorities considered current reserve levels broadly adequate for “normal” times and judged that the FCL had served them well during the global crisis, but acknowledged higher reserve levels would be desirable as additional protection against large shocks.
  - Staff noted that authorities could take advantage of the projected strengthening of the balance of payments to gradually build reserves.
  - Authorities agreed in principle, emphasizing any intervention to build reserves would be carried out transparently and fully consistent with exchange rate flexibility and monetary policy objectives.
  - Staff: “There is scope to strengthen further Colombia’s reserve position. Higher oil-related revenues over the medium term would provide the opportunity to gradually build up reserves and continue lowering external vulnerabilities.”
  - Footnote: On March 3, the central bank announced a program of US$20 million of daily purchases of foreign exchange for the first half of the year (i.e., cumulative purchases of US$1.6 billion for the whole period). The central bank cited the rapid strengthening of the peso as the key reason for adopting the intervention strategy.
- Real exchange rate:
  - Agreement that the real exchange rate was broadly in equilibrium.
  - Staff’s updates of the macrobalance and external stability approaches point to a moderate undervaluation within the margin of error.
  - Results are in line with a gradual strengthening of the external current account balance expected over the medium term as a result of higher oil production and exports, as well as stronger nontraditional exports.
  - Large investments in exploration imply further upside potential for oil production and exports that would tend to appreciate the equilibrium real exchange rate over the medium term.
- Exchange restrictions:
  - No changes in Colombia’s exchange restrictions since the last Article IV consultation.
  - Colombia maintains two exchange measures subject to Fund approval under Article VIII:
    1. A multiple currency practice and an exchange restriction arising from a tax on outward remittances of nonresident profits earned before 2007 and that have been retained in the country for less than five years.
    2. An exchange restriction arising from the special regime for the hydrocarbon sector, in which branches of foreign corporations are required to either surrender their export proceeds or agree to a government limitation on their access to the foreign exchange market.
  - Staff recommended approval of the first measure (temporary, maintained for balance of payments reasons, and non-discriminatory) and encouraged the authorities to set a timetable for the removal of the second.
  - Staff appraisal conclusion: “Staff recommends approval of the retention of the restriction and multiple currency practice arising from taxing remittances of nonresident profits earned prior to 2007, given that they are non-discriminatory in application, maintained for balance of payments reasons, and will have been fully phased out by January 1, 2012. Staff does not recommend approval of the retention of the restriction derived from the special regime in the hydrocarbons sector, since there is no timetable for its removal.”

### Selected Vulnerability Indicators, 2009 (In percent of GDP, unless otherwise indicated)
- Table header context: "Selected Vulnerability Indicators, 2009 1/ (In percent of GDP, unless otherwise indicated)"
- Median, sample of Colombia / 51 emerging markets / Median, sample of 21 investment grade emerging markets:
  - Gross reserves in percent of short-term debt at remaining maturity: 223.7 / 197.0 / 164.5
  - Total gross external debt: 21.3 / 40.1 / 40.1
  - Current account balance: -1.8 / -2.1 / 0.2
  - Foreign direct investment: 2.6 / 1.8 / 1.4
  - Gross external financing requirement 2/: 8.3 / 12.3 / 16.3
  - Public sector — Overall balance: -2.8 / -4.8 / -4.3
  - Public sector gross debt: 35.1 / 37.7 / 32.9
  - Of which: Exposed to exchange rate risk 3/: 15.4 / 16.0 / 5.5
  - Of which: Exposed to rollover risk (ST debt, residual maturity) 4/: 4.4 / 5.0 / 5.3
  - Financial system — Capital adequacy ratio, in percent: 15.2 / 14.6 / 13.6
  - Non-performing loans, in percent of total loans: 4.1 / 4.8 / 5.7
  - Return on average assets, in percent: 2.4 / 1.1 / 1.0
- Source and notes: Source: Fund staff estimates. 1/ End-year staff projections. 2/ Current account balance plus maturing external debt. 3/ Debt in foreign currency or linked to the exchange rate, domestic and external. 4/ Short-term debt and maturing medium- and long-term debt, domestic and external, excluding external debt to official creditors. 5/ Latest available observation. In the case of Colombia, it refers to December 2009.

### Financial system: resilience, reforms, and provisioning
- Strength and outlook:
  - Colombia’s strong financial system will help sustain a rapid credit recovery.
  - The system’s relative strength, particularly compared to other emerging markets, should allow banks to satisfy any prospective increase in credit demand and bodes well for higher output growth.
  - Stress tests conducted in late 2009 suggest banks remain resilient and strengthened further following the crisis.
  - NPLs increased modestly during 2009 but commercial loan portfolios need continued monitoring.
  - Banks’ exposure to market risk increased owing to increased holdings of government paper, which could affect profitability when the monetary tightening cycle starts.
- Capital market and regulatory progress:
  - A financial reform law approved on July 15, 2009, broadened permissible assets in repo operations, introduced greater investment strategy options for pension funds, and opened the doors for foreign issuers in the domestic stock exchange.
  - Improvements in OTC market infrastructure and regulation for collective investment vehicles.
  - New liquidity risk management system adopted, deposit insurance coverage broadened, and bank resolution procedures improved.
- Provisions and procyclicality (Box 3 summary):
  - Colombia adopted dynamic provisioning for commercial loans in mid-2007 and extended it to consumer loans in mid-2008, aiming to accumulate provisions during the upcycle based on through-the-cycle expected losses.
  - In late 2008, banks were encouraged to retain a large share of profits from 2008 (1.4 percent of risk-weighted assets) as an additional capital buffer.
  - In September 2009 the system of dynamic provisioning was strengthened: effective April 2010, introduced a rules-based determination of the phase of the cycle on a bank-specific basis (taking into account delinquency rates and the financial strength of individual banks) rather than the system; banks may lower countercyclical provisions in bad times by a proportion (40 percent) of the procyclical provisions.
  - Staff welcomed the regulatory changes but noted shortcomings: the regulation is complex compared to those adopted in other countries and may not be too effective at reducing pro-cyclicality.
  - Further enhancements suggested: move toward a countercyclical rule for provisions that could be reallocated freely across loans, though this would require deciding the future treatment of the outstanding stock of countercyclical provisions and the tax treatment of provisions.

### Fiscal policy, policy coordination, and staff recommendations
- Fiscal policy performance and outlook:
  - Fiscal policy was supportive in 2009; deterioration of the fiscal position included a modest fiscal stimulus but did not jeopardize medium-term sustainability.
  - Fiscal stance for 2010 is appropriate, with an additional deterioration explained mostly by transitory factors.
  - Going forward, the fiscal deficit is expected to fall below 2 percent of GDP and public debt to resume a downward trend as the output gap is closed, growth returns to potential, government spending is kept in check, and oil-related revenues increase.
  - The intention to adopt a fiscal rule is welcome; a rule would provide stronger assurances that the recent increase in public debt is temporary and greater clarity regarding fiscal policy going forward.
  - Authorities' recent efforts to contain health costs and intention to take compensatory measures if fiscal risks materialize are important.
  - Staff underscores the need to develop a strategy to minimize medium-term fiscal risks, including those resulting from investment tax incentives and special tax regimes, and pension spending.
- Policy coordination for capital inflows:
  - The response to a possible surge in capital inflows should be comprehensive and well-coordinated.
  - Staff supports the authorities' strategy of relying on the exchange rate as the first line of defense if large inflows materialize, but the response may have to involve other instruments.
  - Fiscal policy may need to be tightened in response to large inflows.
  - If capital controls are used, they should be price-based and applied to a wide range of transactions.
- Final staff appraisal highlights:
  - With strong policy and institutional frameworks, the global crisis did not have too severe effects on Colombia’s economy.
  - The slowdown in activity preceded the crisis because policies had been tightened in 2008 to correct an overheated economy.
  - The rebound in output in 2010 is not likely to be strong, in part due to the full-year effect of trade disruptions with Venezuela.
  - Recent reforms to develop capital markets and improve financial regulation are welcome and will contribute to financial deepening; crisis preparedness improved via new liquidity management system, broader deposit insurance coverage, and tools to facilitate bank resolution.
  - Staff reiterated concerns that recent regulatory changes on banks’ provisions, while an improvement, are complex compared to other countries and have limited scope to reduce procyclicality.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 42.      It is recommended that the next Article IV consultations be held on the 12-month

### 42.      It is recommended that the next Article IV consultations be held on the 12-month cycle.

### Recommendation
- It is recommended that the next Article IV consultations be held on the 12-month cycle.

### Macroeconomic performance and near-term projections
- Real GDP growth (annual): 2005: 5.7; 2006: 6.9; 2007: 7.5; 2008: 2.4; 2009 (p): 0.1; 2010 (projection): 2.3.
- Consumer prices (average): 2005: 5.0; 2006: 4.3; 2007: 5.5; 2008: 7.0; 2009 (p): 4.2; 2010 (p): 3.5.
- GDP deflator (annual change): 2005: 6.1; 2006: 6.8; 2007: 4.8; 2008: 8.1; 2009 (p): 3.1; 2010 (p): 4.1.
- Current account balance (in percent of GDP): 2005: -1.3; 2006: -1.8; 2007: -2.8; 2008: -2.9; 2009 (p): -1.8; 2010 (p): -3.1.
- Exports (f.o.b., US$ millions): 2005: 21,729; 2006: 25,181; 2007: 30,577; 2008: 38,531; 2009 (p): 33,787; 2010 (p): 36,114.
- Imports (f.o.b., US$ millions): 2005: 20,134; 2006: 24,859; 2007: 31,173; 2008: 37,556; 2009 (p): 31,054; 2010 (p): 37,083.
- Gross official reserves (US$ millions): 2005: 14,634; 2006: 15,109; 2007: 20,607; 2008: 23,672; 2009: 24,995; 2010 (p): 27,554.
- Gross international reserves (in US$ billion, memorandum): 2005: 14.6; 2006: 15.1; 2007: 20.6; 2008: 23.7; 2009: 25.0; 2010 (p): 27.6.

### Fiscal outcomes and projections (percent of GDP)
- Central government balance: 2005: -4.0; 2006: -3.4; 2007: -2.7; 2008: -2.3; 2009 (p): -4.1; 2010 (p): -4.5.
- Combined public sector balance: 2005: 0.0; 2006: -0.7; 2007: -0.7; 2008: -0.1; 2009 (p): -2.8; 2010 (p): -3.5.
- Total revenue (percent of GDP, projections): 2010: 14.2; 2011: 14.6; 2012: 14.9; 2013: 14.9; 2014: 15.0; 2015: 15.0.
- Total expenditure and net lending (percent of GDP, projections): 2010: 19.8; 2011: 18.7; 2012: 18.8; 2013: 18.7; 2014: 17.9; 2015: 17.5.
- Overall structural balance (percent of GDP, projections): 2010: -3.5; 2011: -3.8; 2012: -3.5; 2013: -3.5; 2014: -3.4; 2015: -2.9.
- Primary balance (percent of GDP, projections): 2010: -1.1; 2011: -1.2; 2012: -0.9; 2013: -0.7; 2014: -0.4; 2015: 0.1.

### Public debt and financing
- Public debt (percent of GDP): 2005: 38.8; 2006: 35.8; 2007: 32.4; 2008: 32.3; 2009: 35.1; 2010 (p): 35.1.
- Public debt, excluding Ecopetrol (percent of GDP): 2009: 34.1; 2010 (p): 33.6.
- External debt (percent of GDP): 2005: 26.2; 2006: 23.4; 2007: 20.6; 2008: 21.6; 2009: 21.3; 2010 (p): 20.6.
- External debt service (percent of exports of goods, services, and income): 2005: 45.8; 2006: 35.4; 2007: 25.0; 2008: 22.5; 2009: 21.8; 2010 (p): 24.2.
- Gross financing need (public sector, percent of GDP, staff projections): 2010: 8.4; 2011: 7.0; 2012: 7.4; 2013: 6.5; 2014: 6.6; 2015: 6.3.
- Public sector debt-to-revenue ratio (percent): 2009: 130.1; 2010 (p): 142.2; 2011 (p): 139.3.

### External sector and vulnerabilities
- Current account balance (US$ millions): 2005: -1,886; 2006: -2,989; 2007: -5,824; 2008: -6,846; 2009: -4,232; 2010 (p): -8,384.
- Trade balance (US$ millions): 2005: 1,595; 2006: 322; 2007: -596; 2008: 976; 2009: 2,733; 2010 (p): -968.
- Net errors and omissions (US$ millions): 2005: 378; 2006: 121; 2007: 175; 2008: -16; 2009: -415.
- Gross international reserves (months of imports of goods and services): 2005: 5.8; 2006: 4.8; 2007: 5.5; 2008: 7.6; 2009: 6.7; 2010 (p): 6.9.
- Oil Price (Colombian mix, US$ per barrel, memorandum): 2005: 49.8; 2006: 58.3; 2007: 66.2; 2008: 90.2; 2009: 59.0; 2010 (p): 72.4.

### Financial sector indicators
- Regulatory capital to risk-weighted assets (total banking system): 2004: 14.2; 2005: 14.7; 2006: 13.1; 2007: 13.6; 2008: 13.4; 2009: 15.2.
- Nonperforming loans to gross loans (percent): 2004: 3.3; 2005: 2.7; 2006: 2.6; 2007: 3.3; 2008: 4.0; 2009: 4.1.
- Provisions to nonperforming loans (percent): 2004: 149.7; 2005: 166.9; 2006: 153.6; 2007: 132.6; 2008: 120.5; 2009: 136.5.
- Liquid assets to total assets (percent): 2004: 20.6; 2005: 20.8; 2006: 14.0; 2007: 13.0; 2008: 13.9; 2009: 17.7.
- Loan to deposit ratio (end-period, percent): 2004: 78.8; 2005: 79.0; 2006: 89.7; 2007: 95.8; 2008: 95.3; 2009: 90.9.

### Medium-term outlook and debt sustainability
- Medium-term real GDP growth projections: 2011: 4.0; 2012: 5.0; 2013: 5.0; 2014: 4.5; 2015: 4.5.
- Combined public sector balance (percent of GDP, medium term): 2010: -3.5; 2011: -3.0; 2012: -2.5; 2013: -2.1; 2014: -1.8; 2015: -1.6.
- Total public gross debt (percent of GDP, projections): 2010: 35.1; 2011: 35.5; 2012: 35.3; 2013: 34.5; 2014: 33.7; 2015: 32.3.
- Public sector external debt (percent of GDP, projections): 2010: 14.9; 2011: 14.9; 2012: 14.6; 2013: 13.7; 2014: 13.2; 2015: 12.4.
- Debt-stabilizing primary balance (staff projections, baseline public sector debt): 2015: 0.1 (percent of GDP).

*Source: IMF staff estimates, projections, and tables contained in the Article IV consultation documents for Colombia.*

### 2010. The mission met with the Minister of Finance and Public Credit; the Board of

### _cr10105 - 2010. The mission met with the Minister of Finance and Public Credit; the Board of

### Mission, meetings, and staff
- The mission met with the Minister of Finance and Public Credit; the Board of Directors of the Banco de la República; senior staff of several government ministries and agencies; and representatives of the private sector and a major labor union.
- Staff team comprised:
  - M. Piñón (Head), E. Flores, L. Jaramillo, J. Jauregui (all WHD), E. Baldacci (FAD), I. Petrova (MCM), and M. Saenz (SPR).
  - Ms. Agudelo (OED) participated in most meetings.

### Fund relations (as of February 28, 2010)
- Membership status:
  - Joined: December 27, 1945; Article XIV.
- General Resources Account (SDR Million % Quota):
  - Quota 774.00 100.00
  - Fund holdings of currency 515.33 66.58
  - Reserve Position 258.67 33.42
- SDR Department (SDR Million % Allocation):
  - Net cumulative allocation 738.32 100.00
  - Holdings 755.48 102.32
- Outstanding purchases and loans: None.
- Latest financial arrangements (Type / Date of Arrangement / Date of Expiration / Amount Approved (SDR Million) / Amount Drawn (SDR Million)):
  - FCL May 11, 2009 / May 10, 2010 / 6,966.00 / 0.00
  - Stand-By May 02, 2005 / Nov 02, 2006 / 405.00 / 0.00
  - Stand-By Jan 15, 2003 / May 02, 2005 / 1,548.00 / 0.00
- Projected payments to Fund (in SDR Million) — Charges/Interest forthcoming by year:
  - 2010: 0.06
  - 2011: 0.06
  - 2012: 0.06
  - 2013: 0.06
  - 2014: 0.06
  - Total (each year line): 0.06
- Implementation of HIPC Initiative: Not applicable.
- Implementation of Multilateral Debt Relief Initiative (MDRI): Not applicable.
- Recent Fund relationship activity:
  - Last Article IV consultation concluded on January 14, 2009 (IMF Country Report No. 09/23).
  - Colombia has no outstanding credit from the Fund.
  - An FSAP update was carried out in September–October 2004 and the FSSA was discussed in April, 2005 (IMF Country Report No. 05/287).
  - FAD, STA and MCM have provided technical assistance since 2006.

### Exchange arrangements
- Regime:
  - Colombia has had a flexible exchange rate regime since September 1999, and the regime is classified as floating.
- Measures subject to Fund approval under Article VIII:
  1. A multiple currency practice and an exchange restriction arising from a tax on outward remittances of nonresident profits earned before 2007 and that have been retained in the country for less than five years.
  2. An exchange restriction arising from the special regime for the hydrocarbon sector, under which branches of foreign corporations are required to either surrender their export proceeds or agree to a government limitation on their access to the foreign exchange market.
- Consistency with Article VIII:
  - Conditioning exemptions from surrender requirements on the acceptance of limitations on the availability of foreign exchange for the making of payments and transfers for current international transactions is inconsistent with Article VIII, section 2 (a) of the Fund’s Articles.

### Statistical issues and data quality
- Overall assessment:
  - The quality of data in Colombia is generally adequate for surveillance.
  - Colombia observes the Special Data Dissemination Standards (SDDS) and its metadata are posted on the Dissemination Standards Bulletin Board (DSBB).
  - Colombia is availing itself of a flexibility option on the timeliness of certain production, monetary and external data.
  - A data ROSC was completed in September 2006 and published as IMF Country Report No. 06/356.
- Real sector:
  - The National Department of Statistics (DANE) compiles national accounts; Banco de la República (BdR) compiles financial accounts.
  - GDP estimates by production and expenditure use 2000 as base year and conform to the System of National Accounts 1993 (1993 SNA).
  - Revision of the national accounts’ base year (announced December 2006) resulted in step increases in nominal GDP levels of about 12 percent relative to prior official estimates.
- Government finance statistics:
  - Ministry of Finance and Public Credit (MFPC) compiles public revenue, expenditure, and financing data.
  - Needs: improve timeliness and coverage of fiscal data; develop timely and reliable data on finances of local governments; improve monitoring of floating debts.
  - Coverage: data cover the nonfinancial public sector (NFPS), but coverage of “above-the-line” operations of units outside the national administration is not exhaustive.
  - General Accounting Office (GAO) developed a single accounting database for the public sector; GAO classification is bridged to GFSM 2001.
  - Monthly data reported for publication in IFS and annual data for subsectors of general government on accrual and cash bases reported for GFS Yearbook with data up to 2006; consolidated general government data not yet published due to consolidation shortcomings.
- Financial sector statistics:
  - BdR compiles financial sector data; Superintendency of Banks and Superintendency of Securities compile respective domain data.
  - Technical assistance emphasized interagency cooperation and data consistency procedures.
  - Introduction of a new call report form in March 2005 improved monetary statistics quality.
  - Mid-2007 migration to standardized STA reporting forms: central bank (form 1SR) and other depository corporations (form 2SR); migration to form 4SR for other financial corporations recently finalized.
- Balance of payments and external debt:
  - BdR compiles and disseminates balance of payments statistics.
  - Quarterly data have been produced since 1994, and the BdR adopted the BPM5 standard.

### Relations with the World Bank Group (as of February 22, 2010)
- Outstanding debt to IBRD: US$6.6 billion.
- Bank portfolio:
  - 17 active projects with a total undisbursed balance of about US$1.3 billion.
- Country Partnership Strategy:
  - Latest CPS approved April 2008; CPS Progress Report to be presented April 13, 2010.
  - CPS pillars: (i) Sustained Equitable Growth; (ii) Poverty Alleviation and Equality of Opportunity; (iii) Environment and Natural Resource Management; (iv) Peace; (v) a State at the Service of its Citizens.
- Bank response to global financial crisis:
  - Since April 2008, Bank Board approved loans to Colombia amounting to US$2.57 billion.
  - Approximately 55 percent of the lending was in the form of development policy loans.
  - Disbursements since endorsement of the CPS around US$2.1 billion.
  - Overall exposure to Colombia, following scheduled amortizations, risen to approximately US$6.6 billion.
  - IBRD lending to Colombia increased from US$940 million in FY 08 to US$1,275 in FY 09.
- IBRD status:
  - IBRD is currently Colombia’s largest single creditor.
  - Colombia is the 7th largest portfolio in the Bank Group (by exposure) and the 3rd largest in the region behind Mexico and Brazil.
  - IBRD portfolio: 17 operations under implementation with 23 active grants (US$48 million).
- IFC activity:
  - IFC portfolio in Colombia tripled in the last 4 years: from US$387 million committed in FY 05 to over US$900 million at end-2009.
  - Country is the 3rd largest country exposure in LAC and 7th in the world.
  - Sector diversification: Oil & Gas, General Manufacturing, Infrastructure, Sub-national Finance, Private Equity, Agribusiness.
- Recent sectoral activities (high-level):
  - Sustained Equitable Growth: competitiveness, financial sector development, infrastructure; DPLs supporting business efficiency and financial sector reforms; project lending in infrastructure.
  - Poverty Alleviation and Equality of Opportunity: support for Familias en Accion; Social Sector DPL approved February 2010.
  - Environment and Natural Resource Management: loans and grants for policy reforms, protection, adaptation, flood protection, water treatment, disaster risk management, climate change adaptation.
  - Peace and Development: Additional Financing for the Peace and Development Project approved (with parallel co-financing from the European Union and other partners).
  - Efficient Government: work on public management information systems, tax and customs administration integration, monitoring and evaluation systems, sub-national government assistance, judiciary modernization.

### World Bank portfolio and financials (as of February 22, 2010)
- Operations portfolio (IBRD/IDA and Grants):
  - Closed Projects 183
  - Active Projects 17
  - Total Disbursed (Active) 1,240.43 (in millions of U.S. dollars)
    - of which has been repaid 170
  - Total Disbursed (Closed) 15,703.09
    - of which has been repaid 9,713.18
  - Total Disbursed (Active + Closed) 16,943.52
    - of which has been repaid 10.380
  - Total Undisbursed (Active) 1,278.3
  - Total Undisbursed (Closed) 0.00
  - Total Undisbursed (Active + Closed) 1,278.3
- Loan information (IBRD) — Total disbursements by Fiscal Year (Fiscal Year: July 1–June 30):
  - 2004: 491
  - 2005: 567
  - 2006: 692
  - 2007: 830
  - 2008: 638
  - 2009: 1,240
- Repayment amount by Fiscal Year:
  - 2004: 205
  - 2005: 254
  - 2006: 223
  - 2007: 278
  - 2008: 381
  - 2009: 170
- Net disbursements by Fiscal Year:
  - 2004: 286
  - 2005: 313
  - 2006: 469
  - 2007: 477
  - 2008: 257
  - 2009: 1,070

### IFC portfolio summary (selected figures)
- Debt ($m) 457
- Equity ($m) 250
- Quasi Equity ($m) 155
- Total ($m) (Loan+Equity) 880
- Guarantee 18
- Top IFC sectors / clients:
  - Sector 1 Oil & Gas: Petrocol
  - Sector 2 Finance & Insurance: Davivienda-Protección
  - Sector 3 Pulp & Paper: Carvajal S.A.
  - Sector 4 Wholesale & Retail Trade: Sodimac Colombia
  - Sector 5 Agriculture & Forestry: Procafecol
  - Top client: DAVIVIENDA

*Prepared by the Western Hemisphere Department; Staff Report for the 2010 Article IV Consultation—Informational Annex (March 17, 2010).*

### 1998. Balance of payment statistics have been extended to cover transactions in the free trade

### 1998. Balance of payment statistics have been extended to cover transactions in the free trade

### External statistics and data compilation
- Balance of payment statistics:
  - Extended to cover transactions in the free trade zones.
  - Improved surveys, particularly in the service sector, have enhanced coverage and consistency.
  - Financial account data are now based on actual disbursement rather than registers.
- Recommendations from the 2005 data ROSC mission:
  - The BdR, in consultation with the DANE, should develop a methodology to include unrecorded trade in the balance of payments on a timely basis.
  - The BdR should reclassify FDI intercompany debt transactions from “other investment” to FDI and reclassify some FDI equity transactions to portfolio equity; adjust the related investment income series accordingly.
  - Continue efforts to identify government bonds issued abroad and purchased by residents as well as those purchased by residents on the secondary market.
- Other datasets compiled and disseminated by the BdR:
  - International Investment Position statistics.
  - External Debt statistics.
  - Data Template on International Reserves and Foreign Currency Liquidity.

### Data dissemination and frequency (selected items)
- Exchange Rates: Date of latest observation Mar 8, 2010; Date received Mar 09, 2010; Frequency: D; Frequency of Reporting: W; Frequency of publication: D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Jan. 2010; Date received Feb 15, 2010; Frequency: M; Frequency of Reporting: M; Frequency of publication: M.
- Reserve/Base Money: Jan. 2010; Date received Feb 15, 2010; Frequency of Data: D; Frequency of Reporting: W; Frequency of publication: W.
- Broad Money: Dec. 2009; Date received Feb 15, 2010; Frequency: D; Frequency of Reporting: W; Frequency of publication: W.
- Central Bank Balance Sheet: Jan. 2009; Date received Feb 15, 2010; Frequency: M; Frequency of Reporting: M; Frequency of publication: M.
- Consolidated Balance Sheet of the Banking System: Dec. 2009; Date received Feb 15, 2010; Frequency: M; Frequency of Reporting: M; Frequency of publication: M.
- Interest Rates: Feb. 2010; Date received Feb 19, 2010; Frequency of Data: D; Frequency of Reporting: W; Frequency of publication: D.
- Consumer Price Index: Feb. 2010; Date received Mar 5, 2010; Frequency: M; Frequency of Reporting: M; Frequency of publication: M.
- External Current Account Balance: Q3 2009; Date received Dec 26, 2009; Frequency: Q; Frequency of Reporting: Q; Frequency of publication: Q.
- GDP/GNP: Q3 2009; Date received Dec 21, 2009; Frequency: Q; Frequency of Reporting: Q; Frequency of publication: Q.
- Gross External Debt: Sep. 2009; Date received Jan. 2010; Frequency: M; Frequency of Reporting: M; Frequency of publication: M.
- International Investment Position: Q3 2009; Date received Dec. 2010; Frequency: Q; Frequency of Reporting: Q; Frequency of publication: Q.

### Executive Board assessment and macroeconomic background
- Context and 2009 performance:
  - Real GDP growth in 2009: 0.4 percent.
  - End-year inflation fell to 2 percent from 7.7 percent at end-2008.
  - Net international reserves (excluding the SDR allocation) remained broadly constant at end-2008 level of US$24 billion.
  - The financial system did not experience major strains; capital adequacy remained strong and non-performing loans increased only slightly, backed by high provisions.
  - Corporate sector balance sheets were strong and household debt moderate.
- Policy response to the global crisis:
  - Monetary policy: reduction in the policy rate by 650 basis point (to 3½ percent).
  - Fiscal policy: fiscal impulse of about 1 percent of GDP in 2009 as measured by the change in the combined public sector overall structural balance.
  - Government increased foreign borrowing by about 2 percent of GDP.
  - Measures to strengthen financial sector resilience included agreement between banks and the superintendent to retain a portion of 2008 profits.
- Outlook for 2010:
  - Projected real GDP growth in 2010: about 2¼ percent.
  - Inflation likely to remain within the central bank target range of 2−4 percent.
  - External current account deficit expected to widen in 2010 to 3.1 percent of GDP.
  - Bulk of the deficit financing expected from foreign direct investment, with other private flows expected to recover.

### Executive Directors’ policy guidance
- General:
  - Commended strong policy and institutional frameworks and early request for a flexible credit line.
  - Monetary and fiscal policies should remain broadly supportive until clear evidence of sustained recovery.
  - Close monitoring of forward looking indicators of activity and inflation is essential.
  - Prevent anticipated increases in food prices from affecting long-term inflation expectations.
- Fiscal policy:
  - Deterioration in fiscal position mainly driven by weak domestic demand.
  - Medium-term expectation: fiscal deficit to fall and public debt to resume a downward trend as activity recovers and oil-related revenues increase, provided government spending is kept in check.
  - Welcome intention to establish a fiscal rule; several Directors encouraged broadening its coverage.
  - Encourage containment of health costs and development of a strategy to minimize medium-term fiscal risks, including those from investment tax incentives, special tax regimes, and pension spending.
- Exchange rate and reserves:
  - Flexible exchange rate policy has helped protect external position.
  - Some Directors suggested temporary instruments to complement flexibility and rule-based foreign exchange intervention if capital inflow surges materialize.
  - Mixed views on strengthening reserve coverage; Directors urged attention to costs and externalities of reserve accumulation.
  - Encouraged removal of exchange restriction arising from the special regime for the hydrocarbons sector.
- Financial sector:
  - Noted soundness of the financial system and welcomed improvements in regulation and capital market development.
  - New liquidity management system, broader deposit insurance coverage, and enhanced bank resolution tools strengthen crisis preparedness.
  - Improvements in over-the-counter market infrastructure, regulations on collective investment vehicles, and broader investment options for pension funds contribute to financial deepening.

### Fiscal stance and medium-term considerations (authorities’ views)
- 2009 fiscal results:
  - Combined Public Sector deficit increased from 0.1 percent of GDP in 2008 to 2.7 percent of GDP in 2009.
  - Increase mainly due to tax revenues significantly lower than planned.
- 2010 measures:
  - Current budget reduces expenditures by 1.1 percent of GDP.
  - Structural fiscal deficit would increase slightly in 2010, balancing public debt sustainability and fiscal stimulus.
- Medium-term fiscal challenges:
  - Increasing health-related expenditures due to Constitutional Court ruling mandating full coverage of health services.
  - Government accommodated full coverage for children and young adults within the budget and current fiscal targets.
  - Government increased taxes at the beginning of the year to finance part of the bill and is assessing full costs and potential revenue measures.
  - Expenditure pressure also arises from care for people displaced by internal conflict.
- Debt outlook and policy:
  - Government’s Medium Term Fiscal Framework (mid 2009) recognized crisis-driven deviation of public debt and expected continued rise for four years, with eventual reversion to lower levels after expected declines in pension outlays after 2014 and resumption of higher growth rates.
  - Commitment to save revenues from upside risks (higher oil prices or larger growth) to accelerate debt convergence.
- Authorities’ caution:
  - More cautious than staff about speed of GDP and oil price pick up; expect a more gradual recovery and slower narrowing of current account deficit after 2010.
  - Limited room to achieve more ambitious primary fiscal balances in the near term given uncertainty and potential larger expenditures.

### Monetary and exchange rate policy (authorities’ views)
- Inflation and monetary stance:
  - Inflation fell into long-term target range of 2 to 4 percent in 2009.
  - Policy interest rate reduced by 650 basis points since December 2008; lending interest rates are now 600 basis points lower than a year earlier.
  - No evidence of strong credit supply constraints; loan growth rates persist relative to GDP growth.
  - Challenge to keep inflation expectations under control given El Niño-driven food price increases expected in Q2 and Q3 2010, with a reversion expected in Q4 2010.
- Exchange rate policy and reserves:
  - Exchange rate floated freely in 2009 with very limited Central Bank intervention; exchange rate flexibility remains key.
  - Daily purchase of 20 million dollars reintroduced in March 2010 to increase international reserves; purchases scheduled throughout the first semester of the year in a transparent way without defending a particular exchange rate level.
  - Resulting monetary expansion to be sterilized as necessary to keep short-term interest rates close to the policy rate.
  - Capital controls considered part of the toolkit, viewed as temporary measures; authorities deem them ineffective in the long term if maintained.

### Financial sector and provisioning
- Assessment:
  - Financial sector has sound indicators, is well capitalized and has buffers to face extreme events.
  - Financial Reform Law (July 2009) enhanced liquidity provision ability of the Central Bank and improved pension fund portfolio matching.
- Countercyclical provisioning:
  - Staff noted shortcomings: provisions tied to individual loans and countercyclicality depends on bank-specific triggers, potentially dampening countercyclical effect.
  - Staff argued for a rule allowing provisions to be freely reallocated across loans.
  - Authorities’ response: agree with the comments but highlight taxation difficulties—general provisions are not deductible from income tax in Colombia—and note the new system is a clear improvement:
    - Rules-based.
    - Triggers account for average deterioration of loan quality of a bank.
    - On average, system should capture general credit trends and ensure countercyclical movement of provisions.

### Structural reforms and fiscal rule
- Government decision:
  - Complement the Medium Term Fiscal Framework with a fiscal rule to secure public debt sustainability and allow countercyclical fiscal response to output and oil price changes.
  - Fiscal rule design in process; decided it will be applied on the primary balance of the Central Government and supported by a law.
- Staff advice and authorities’ stance:
  - Staff recommends applying rule to a broader structural balance (including central and regional governments).
  - Authorities view inclusion of local governments as unnecessary due to existing stringent budget rules and a fiscal responsibility law for regions, and cite political difficulty in involving local governments via new legislation.
  - Authorities agree on benefits of a tax reform to address current deficiencies; to be addressed by the new government taking office in August.

### Selected economic indicators (annual percentage change or percent of GDP as indicated; Prel. 2005–2009)
- National income and prices:
  - Real GDP: 2005 5.7; 2006 6.9; 2007 7.5; 2008 2.4; 2009 0.4.
  - Consumer prices (average): 2005 5.0; 2006 4.3; 2007 5.5; 2008 7.0; 2009 4.2.
  - Consumer prices (end-of-period): 2005 4.9; 2006 4.5; 2007 5.7; 2008 7.7; 2009 2.0.
  - Real effective exchange rate (depreciation -): 2005 11.6; 2006 -1.9; 2007 8.2; 2008 -5.7; 2009 9.7.
- Money and credit:
  - Broad money: 2005 17.6; 2006 18.0; 2007 17.4; 2008 18.5; 2009 8.1.
  - Credit to the private sector: 2005 11.3; 2006 38.5; 2007 23.5; 2008 5.7; 2009 0.9.
  - Interest rate (90-day time deposits; percent per year) — Nominal: 2005 6.3; 2006 6.8; 2007 9.0; 2008 10.2; 2009 4.1.
  - Interest rate (90-day time deposits; percent per year) — Real: 2005 1.4; 2006 2.3; 2007 3.3; 2008 2.5; 2009 2.1.
- External sector (percent of GDP):
  - Current account (deficit-): 2005 -1.3; 2006 -1.8; 2007 -2.8; 2008 -2.9; 2009 -1.8.
  - External debt: 2005 26.2; 2006 23.4; 2007 20.6; 2008 21.6; 2009 21.3.
    - Of which: Public sector: 2005 16.4; 2006 15.3; 2007 13.4; 2008 13.8; 2009 15.2.
  - NIR in percent of short-term debt: 2005 108.1; 2006 147.0; 2007 198.8; 2008 216.2; 2009 223.7.
- Savings and investment (percent of GDP):
  - Gross domestic investment: 2005 21.6; 2006 24.3; 2007 24.3; 2008 25.0; 2009 23.1.
  - Gross national savings: 2005 20.3; 2006 22.5; 2007 21.5; 2008 22.1; 2009 21.3.
- Public finances (percent of GDP):
  - Combined public sector balance 1/: 2005 0.0; 2006 -0.7; 2007 -0.7; 2008 -0.1; 2009 -2.8.
  - Nonfinancial public sector balance 1/: 2005 0.0; 2006 -1.0; 2007 -0.8; 2008 -0.3; 2009 -2.7.
  - Central government balance: 2005 -4.0; 2006 -3.4; 2007 -2.7; 2008 -2.3; 2009 -4.1.
  - Public debt: 2005 38.8; 2006 35.8; 2007 32.4; 2008 32.3; 2009 35.1.

*IMF Public Information Notice and staff report material as of March 31, 2010.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10105.pdf_