## _cr13201

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### EXECUTIVE SUMMARY — Recent developments and macroeconomic conditions
- Real GDP growth moderated to 4 percent in 2012 after surging to nearly 6 percent in 2011.
- Inflation fell from a peak of 4 percent in late 2011 to 2 percent (y/y) by April 2013, at the bottom of the 2‒4 percent official target range.
- Unemployment fell to about 10 percent.
- External current account deficit was about 3 percent of GDP in 2012, broadly unchanged from 2011.
- Financial account surplus was about 4½ percent of GDP in 2012, driven by large net inflows of foreign direct investment.
- International reserves increased by more than US$5 billion in 2012 and by US$2.6 billion in the first four months of 2013, reaching US$39.6 billion as of end-April 2013.
- The peso strengthened about 9 percent in nominal terms during 2012; the real effective exchange rate appreciated about 6 percent.
- Credit growth to the private sector slowed from above 20 percent (y/y) by late 2011 to 15 percent (y/y) as of February 2013.
- Non-performing loans remained low at 2.9 percent.
- Banking sector: banks are well capitalized, profitable, and maintain comfortable liquidity and coverage ratios.

### OUTLOOK — Growth, inflation, external sector, and policy stance
- Growth and inflation projections:
  - Real GDP growth in 2013 is likely to exceed 4 percent and thereafter stabilize at about 4½ percent.
  - Inflation is projected to remain subdued and expectations are well anchored at the midpoint of the 2‒4 percent official target range.
- External sector:
  - External current account deficit expected to remain about 3 percent of GDP in 2013 and decline to about 2.7 percent of GDP in 2014, mainly due to higher commodity exports.
  - Net private capital inflows projected to remain strong.
- Policy stance:
  - Fiscal: 2013 budget envisages increased public investment on infrastructure while adhering to the medium-term fiscal consolidation target. Central government structural deficit projected to decline to 2¼ percent of GDP by 2014 (3 percent of GDP in 2012). Under the structural balance rule, the central government structural deficit is envisaged to fall below 1 percent of GDP by 2022. The public sector overall deficit is projected to fall below 1 percent sooner.
  - Monetary: Policy conducted under inflation targeting. Policy rate lowered to 3¼ percent as of March 2013. Central bank retains policy space to ease further if conditions warrant.

### EXTERNAL RISKS, VULNERABILITIES, AND RATIONALE FOR A SUCCESSOR FCL
- Authorities view external downside risks as elevated and requested a two-year FCL arrangement to be treated as precautionary.
- Commodity dependence:
  - In 2012, commodity exports (mostly oil) accounted for about 70 percent of total export revenues.
  - A steep drop in oil prices would adversely affect export revenues and FDI inflows.
- Trade and growth linkages:
  - Over half of total exports go to the U.S. and Europe; China and Venezuela account for about 5½ and 4½ percent of total exports, respectively.
- Financial channels:
  - Bulk of FDI inflows channeled to commodity-related projects.
  - A sudden increase in global risk aversion could lower private capital inflows and create rollover difficulties.
- Authorities note international reserves (relative to various metrics) remain below values prevailing before the global financial crisis.
- Staff view: access under a two-year FCL arrangement in the order of about US$5.8 billion (SDR 3.87 billion or 500 percent of quota) would provide reasonable coverage against these global risks.

### ILLUSTRATIVE ADVERSE SCENARIO — Assumptions and quantified impacts
- Staff illustrative adverse scenario yields an external financing shortfall on the order of US$6.9 billion on average for 2013–2014 (equivalent to about 580 percent of quota).
- Scenario mechanics and impacts:
  - Balance of payments inflows about US$9.5 billion lower than baseline for 2013 and 2014.
  - Assumes about 30 percent of that notional shortfall could be absorbed by foregoing the increase in international reserves projected for 2013–14.
  - Resulting net external financing needs of about US$6.9 billion, on average, compared to baseline.
- Main shock assumptions:
  - Decline of 15 percent in world oil prices and 7.5 percent in the prices of other commodities relative to the 2013−14 baseline.
  - Decline of 7.5 percent in remittances relative to the 2013−14 baseline.
  - Fall in FDI inflows of 10 percent relative to the 2013−14 baseline.
  - Ceiling on rollover rates on short term debt equal to 100 percent.
  - Declines of 15 percent in medium-term inflows to the non-financial private sector and of 25 percent in inflows to the financial private sector, relative to the 2013−14 baseline.
  - Decline of 10 percent in medium-term inflows to the public sector relative to the 2013−14 baseline.
- Context: these shocks are smaller than those experienced in 2008–09 (e.g., world oil prices declined by more than 35 percent in 2008–09).

### FCL REQUEST AND STAFF RECOMMENDATION
- Authorities’ request:
  - Two-year FCL arrangement for 500 percent of quota (SDR 3.87 billion), intended to be treated as precautionary.
- Staff assessment and recommendation:
  - Staff assesses Colombia meets FCL qualification criteria based on very strong fundamentals and institutional policy frameworks (inflation targeting, flexible exchange rate, structural balance fiscal rule for the central government, sound regulatory and supervisory framework).
  - Staff recommends approval by the Executive Board of a two-year FCL arrangement for the equivalent of SDR 3.87 billion (500 percent of quota).
  - Rationale: a precautionary FCL would provide an appropriate buffer given persistent global risks and support policy flexibility while authorities rebuild policy buffers.

### QUALIFYING METRICS AND INDICATORS OF STRENGTH
- External and fiscal indicators cited by staff:
  - External debt is low (less than 22 percent of GDP at end-2012).
  - Staff projects external current account deficit will stabilize at about 2½ percent of GDP over the medium term.
  - Net FDI rose from US$5 billion to US$16.1 billion, 4½ percent of GDP, between 2011 and 2012.
  - January 2013: Colombia placed a 10-year bond for US$1 billion at an all-time low interest rate of 2.7 percent.
  - Sovereign spreads remain low at about 140 basis points; CDS spreads around 90 basis points.
  - Gross international reserves increased by over US$9 billion during the last FCL arrangement and reached US$39.6 billion as of April 2013.
  - Public debt estimated 32½ percent of GDP at end-2012; staff’s DSA suggests public debt would continue to decline.
  - Inflation is low (2 percent y/y in April 2013) with medium-term inflation expectations anchored in the 2‒4 percent target range.
  - Reserve metric in "Assessing Reserve Adequacy" stands at 155 percent for Colombia (compared to suggested adequate range of 100-150 percent).
  - 2012 FSAP Update: good liquidity and capitalization, strong credit quality, and profitability; absence of systemic bank solvency problems posing an immediate threat.

### IMPACT ON FUND FINANCES, LIQUIDITY, AND CAPACITY TO REPAY
- Proposed access and Fund liquidity:
  - Proposed two-year FCL arrangement: SDR 3.87 billion (500 percent of quota).
  - Staff: the access requested would have a small effect on the Fund’s liquidity; Fund liquidity expected to remain adequate after approval.
  - Current Forward Commitment Capacity (FCC): "265,596" (SDR millions).
  - Impact on FCC on approval of FCL (net): "-3,870" (SDR millions).
  - If fully drawn (effect on FTP): "-619" (percent of FTP).
  - Current precautionary balances (FY 2012): "11,500" (SDR millions).
  - Total FCL commitments, including proposed FCL: "73,162" (SDR millions).
- Capacity to repay indicators (assumes full drawings upon approval):
  - GRA credit to Colombia (SDR millions): "0 3,870 3,870 3,870 2,903 968 0" (for years 2012–2018 as presented).
  - GRA credit to Colombia (In percent of GDP): "0 1.5 1.4 1.3 0.9 0.3" (as presented).
  - Debt service due on GRA credit (Millions SDR): "0 48.7 72.0 72.0 1,042.8 1,967.9 972.8" (2012–2018 series as presented).
  - Total external debt (In percent of GDP): 2012 "21.4"; 2013 "22.4"; 2014 "21.4"; 2015 "20.7"; 2016 "19.7"; 2017 "18.4"; 2018 "17.4".
  - Public external debt (In percent of GDP): 2012 "12.6"; 2013 "14.3"; 2014 "13.8"; 2015 "13.3"; 2016 "12.5"; 2017 "11.5"; 2018 "10.7".
  - GRA credit to Colombia (In percent of Gross International Reserves): 2013 "12.7"; 2014 "12.2"; 2015 "11.7"; 2016 "8.7"; 2017 "3.0".
- Assessment:
  - Even if Colombia drew all resources available under the requested FCL, its capacity to meet financial obligations to the Fund would remain strong.
  - The arrangement would account for only a small share of total GRA credit outstanding and be well below the existing level of precautionary balances.

### DEBT SUSTAINABILITY, STRESS TESTS, AND PROJECTIONS (selected figures preserved)
- Public sector gross debt (percent of GDP) baseline path: "36.7 36.9 36.0 32.7 31.8 31.1 29.7 28.3 26.8" (2009–2017 as presented).
- Real GDP growth series (2008–2017 as presented): "3.5 1.7 4.0 6.6 4.0 4.1 4.5 4.5 4.5 4.5".
- Consumer prices (end of period series as presented): "7.7 2.0 3.2 3.7 2.4 2.4 3.0 3.0 3.0 3.0".
- Gross international reserves levels (US$ millions as presented): "23,672 24,992 28,078 31,912 36,998 40,417 42,285".
- GIR in months of imports of goods and services (series as presented): "7.4 6.4 5.5 5.8 6.4 6.8 6.7".
- Exports (f.o.b., US$ millions series as presented): "38,534 34,018 40,828 58,171 61,637 62,952 66,636".
  - Petroleum products component: "12,204 10,254 16,499 28,421 31,584 33,104 35,173".
- Debt-stabilizing primary balance (percent of GDP): "0.5" (as presented).
- Gross financing need (US$ billions and percent of GDP, Table 9 as presented): "18.3 21.0 20.3 13.3 19.8 17.4 17.3 14.7 16.3" (US$ billions) and "7.9 7.4 6.2 3.6 5.1 4.2 3.9 3.1 3.3" (percent of GDP).

### POLICY REFORMS, RESILIENCE BUILDING, AND AUTHORITIES’ PRIORITIES
- Recent and ongoing reforms:
  - Comprehensive tax reform (approved December 2012) aimed at reducing nonwage labor costs and inequality, facilitating tax administration and compliance, and promoting formal job creation.
  - Consideration of options to increase coverage and fairness in the public pension system.
  - Implementation of a structural fiscal rule at the central government level (enacted in 2011).
  - Adoption of reforms in management and distribution of oil and mining royalties.
  - Commitment to address FSAP recommendations to strengthen financial system resilience (including improving the risk-based approach to supervision and consolidated supervision of financial conglomerates).
- Reserve policy and exchange rate:
  - Flexible exchange rate remains a key shock absorber.
  - Central bank has used large capital inflows to allow some appreciation while rebuilding international reserves.
- Authorities’ stated priorities (from letter dated "Bogota, May 24, 2013"):
  - Maintain exchange rate flexibility, strengthen fiscal buffers, continue to accumulate international reserves, and keep inflation within the 2–4 percent target range.
- Financial sector readiness:
  - FSAP/FSAA: supervisory and regulatory framework described as "strong"; banks are "healthy, liquid and profitable"; Basel III quality capital compliance required in August 2013.

### POLICY RECOMMENDATIONS (staff emphasis)
- Maintain exchange rate flexibility as the main shock absorber.
- Further strengthen fiscal buffers and savings consistent with the Fiscal Rule and Royalties Law.
- Continue to accumulate international reserves.
- Keep inflation within the 2–4 percent target range and maintain well-anchored expectations.
- Treat the FCL arrangement as precautionary while authorities rebuild policy buffers and monitor global risks.

*Source: _cr13201 (IMF staff report excerpts and tables, May–June 2013).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Background
- Colombia’s recent economic performance has been robust, underpinned by a very strong institutional framework and prudent macroeconomic management.
- Key elements of the policy framework: an inflation-targeting regime, a flexible exchange rate, effective financial sector supervision and regulation, and a medium-term fiscal framework.
- Three successive FCL arrangements have supported policies, with access varying in line with the outlook for global risks at the time of request.

### Recent developments and macroeconomic conditions
- Output and inflation:
  - Real GDP growth moderated to 4 percent in 2012 after surging to nearly 6 percent in 2011.
  - Inflation fell from a peak of 4 percent in late 2011 to 2 percent (y/y) by April 2013, at the bottom of the 2‒4 percent official target range.
  - Unemployment fell to about 10 percent.
- Financial and external:
  - External current account deficit was about 3 percent of GDP in 2012, broadly unchanged from 2011.
  - Financial account surplus was about 4½ percent of GDP in 2012, driven by large net inflows of foreign direct investment.
  - International reserves increased by more than US$5 billion in 2012 and by US$2.6 billion in the first four months of 2013, reaching US$39.6 billion as of end-April 2013.
  - The peso strengthened about 9 percent in nominal terms during 2012; the real effective exchange rate appreciated about 6 percent.
- Banking sector and credit:
  - Credit growth to the private sector slowed from above 20 percent (y/y) by late 2011 to 15 percent (y/y) as of February 2013.
  - Non-performing loans remained low at 2.9 percent.
  - Financial soundness indicators show Colombian banks are well capitalized, profitable, and maintain comfortable liquidity and coverage ratios.

### Outlook
- Growth and inflation projections:
  - Real GDP growth in 2013 is likely to exceed 4 percent and thereafter stabilize at about 4½ percent.
  - Inflation is projected to remain subdued and expectations are well anchored at the midpoint of the 2‒4 percent official target range.
- External sector:
  - The external current account deficit is expected to remain about 3 percent of GDP in 2013 and decline to about 2.7 percent of GDP in 2014, mainly due to higher commodity exports.
  - Net private capital inflows are projected to remain strong.
- Policy stance:
  - Fiscal: 2013 budget envisages increased public investment on infrastructure while adhering to the medium-term fiscal consolidation target. Central government structural deficit projected to decline to 2¼ percent of GDP by 2014 (3 percent of GDP in 2012). Under the structural balance rule, the central government structural deficit is envisaged to fall below 1 percent of GDP by 2022. The public sector overall deficit is projected to fall below 1 percent sooner.
  - Monetary: Policy conducted under inflation targeting. Policy rate lowered to 3¼ percent as of March 2013. Central bank retains policy space to ease further if conditions warrant.

### Risks
- Key short-term global risks:
  - Standstill or incomplete delivery of policy commitments at the Euro area level or its individual members.
  - A contractionary fiscal policy shock in the United States.
  - A deeper than expected slowdown in emerging market economies.
  - A sudden increase in global risk aversion.
- Key medium-term risks:
  - A protracted period of slow growth in Europe.
  - Distortions arising from exit from unconventional monetary policies in advanced economies.
- Domestic sensitivity:
  - A steep drop in oil prices would adversely affect export revenues (commodity exports account for 70 percent of total exports) and FDI inflows (mainly destined to oil and metals).
  - A prolonged rise in global risk aversion would increase Colombia’s risk premium, reduce investor confidence, and curb financing to private and public sectors.

### Policy reforms and resilience building
- Recent and ongoing reforms:
  - Comprehensive tax reform (approved December 2012) aimed at reducing nonwage labor costs and inequality, facilitating tax administration and compliance, and promoting formal job creation.
  - Consideration of options to increase coverage and fairness in the public pension system.
  - Implementation of a structural fiscal rule at the central government level (enacted in 2011).
  - Adoption of reforms in management and distribution of oil and mining royalties.
  - Commitment to address FSAP recommendations to strengthen financial system resilience (including improving the risk-based approach to supervision and consolidated supervision of financial conglomerates).
- Reserve policy and exchange rate:
  - Flexible exchange rate remains a key shock absorber.
  - Central bank has used large capital inflows to allow some appreciation while rebuilding international reserves.

### Flexible Credit Line (FCL) arrangement request and Fund assessment
- Authorities’ request:
  - Requesting a two-year FCL arrangement for 500 percent of quota (SDR 3.87 billion), intended to be treated as precautionary.
- Staff assessment and recommendation:
  - The access requested would provide Colombia with reasonable cover in an adverse external scenario.
  - Staff assesses that Colombia meets the qualification criteria for access to Fund resources under the FCL arrangement, and recommends approval by the Executive Board.
- Fund finances:
  - The proposed commitment of SDR 3.87 billion would have a small effect on the Fund’s liquidity position.
- Process:
  - An informal meeting was held on May 6, 2013 to consult with the Executive Board on a possible FCL arrangement for Colombia.

*Source: _cr13201 - EXECUTIVE SUMMARY (June 7, 2013)*

### 12.      The authorities are of the view that external downside risks remain elevated, and have

### 12.      The authorities are of the view that external downside risks remain elevated, and have

### External risks and rationale for a successor FCL
- Authorities view external downside risks as elevated and expressed interest in a successor 2-year FCL arrangement, to be treated as precautionary.
- They consider global risks have lasted longer than anticipated in 2011 and that access to FCL resources would provide breathing space to strengthen policy frameworks and increase policy flexibility.
- Authorities note that international reserves (relative to various metrics) remain below values prevailing before the global financial crisis.
- Staff view: access under a two-year FCL arrangement in the order of about US$5.8 billion (SDR 3.87 billion or 500 percent of quota) would provide reasonable coverage against these global risks.

### Vulnerabilities and channels of external exposure
- Commodity dependence
  - In 2012, commodity exports (mostly oil) accounted for about 70 percent of total export revenues.
  - A sharp and prolonged fall in prices of Colombia’s main commodity exports would significantly weaken the balance of payments and increase external financing needs.
- Trade and growth linkages
  - Colombia has strong trade links with the U.S. and Europe (accounting for over half of total exports), and with China and Venezuela (about 5½ and 4½ percent of total exports, respectively).
  - Lower global growth in partner economies would adversely affect the current account balance, public finances, and output.
- Financial channels
  - Bulk of FDI inflows are channeled to commodity-related projects (e.g., oil and mining).
  - A sudden increase in global risk aversion lowering inflows of private capital to emerging markets could create rollover difficulties, especially for the private sector.
- Increased sensitivity
  - Colombia’s trade and FDI linkages have increased, increasing nominal balance of payments flows and sensitivity to commodity prices and rollover risks.

### Illustrative adverse scenario and quantified impacts
- Staff illustrative adverse scenario suggests Colombia could experience an external financing shortfall in 2013 or 2014 on the order of US$6.9 billion on average (equivalent to about 580 percent of quota) from shocks occurring within a 12-month period.
- Applying the same set of shocks used in the 2011 FCL request to projected 2013–14 financing requirements yields:
  - Balance of payments inflows about US$9.5 billion lower than baseline for 2013 and 2014.
  - Assumes about 30 percent of that notional shortfall could be absorbed by foregoing the increase in international reserves projected for 2013–14.
  - Accounting for this, the combination of shocks gives rise to net external financing needs of about US$6.9 billion, on average, compared to baseline.
- Main assumptions underlying the adverse scenario:
  - A decline of 15 percent in world oil prices and 7.5 percent in the prices of other commodities relative to the 2013−14 baseline.
  - A decline of 7.5 percent in remittances relative to the 2013−14 baseline.
  - A fall in FDI inflows of 10 percent relative to the 2013−14 baseline.
  - A ceiling on rollover rates on short term debt equal to 100 percent.
  - Declines of 15 percent in medium-term inflows to the non-financial private sector and of 25 percent in inflows to the financial private sector, relative to the 2013−14 baseline.
  - A decline of 10 percent in medium-term inflows to the public sector relative to the 2013−14 baseline.
- Context on scale: these shocks are smaller than those experienced in 2008–09 (e.g., world oil prices declined by more than 35 percent in 2008–09).

### Qualification assessment and key metrics demonstrating strength
- Staff assesses Colombia continues to meet FCL qualification criteria based on very strong fundamentals and institutional policy frameworks (inflation targeting, flexible exchange rate, structural balance fiscal rule for the central government, sound regulatory and supervisory framework).
- Key statistics and indicators cited:
  - External debt is low (less than 22 percent of GDP at end-2012).
  - Staff projects external current account deficit will stabilize at about 2½ percent of GDP over the medium term (based on latest WEO projections for commodity prices).
  - Capital account dominated by private flows; net FDI rose from US$5 billion to US$16.1 billion, 4½ percent of GDP, between 2011 and 2012.
  - Uninterrupted sovereign access to international capital markets; in January 2013 Colombia placed a 10-year bond for US$1 billion at an all-time low interest rate of 2.7 percent.
  - Sovereign spreads remain low at about 140 basis points (compared to 270 basis points on average for emerging economies).
  - CDS spreads around 90 basis points.
  - Gross international reserves increased by over US$9 billion during the last FCL arrangement and reached US$39.6 billion as of April 2013.
  - Authorities increased foreign reserves by US$2.6 billion by intervening in the foreign exchange market (subsequent to the Article IV discussions).
  - Public debt estimated 32½ percent of GDP at end-2012; staff’s DSA suggests public debt would continue to decline.
  - Inflation is low (2 percent y/y in April 2013) with medium-term inflation expectations anchored in the 2‒4 percent target range.
  - Reserve metric in "Assessing Reserve Adequacy" stands at 155 percent for Colombia (compared to suggested adequate range of 100-150 percent).
  - Financial system sound: 2012 FSAP Update found good liquidity and capitalization, strong credit quality, and profitability; absence of systemic bank solvency problems posing an immediate threat.

### Impact on Fund finances, safeguards, and authorities’ intentions
- Access under the proposed two-year FCL arrangement (SDR 3.87 billion or 500 percent of quota) would have a small effect on the Fund’s liquidity; Fund liquidity expected to remain adequate after approval.
- Authorities intend to treat the FCL arrangement as precautionary.
- Even if Colombia drew all resources available under the requested FCL, its capacity to meet financial obligations to the Fund would remain strong.
- Authorities have provided authorization for PricewaterhouseCoopers to discuss directly with Fund staff the results of the external audit of the 2012 financial statements of the Banco de la República and to provide copies of those audited financial statements and the external auditor’s written observations.

### Staff appraisal and recommendation
- Staff assesses Colombia continues to meet the qualification criteria for access to FCL resources given very strong policy frameworks, fundamentals, and the authorities’ track record and commitment.
- Staff recommends approval of a two-year FCL arrangement for the equivalent of SDR 3.87 billion (500 percent of quota).
- Rationale: risks to the global outlook have been more persistent than anticipated; a new precautionary FCL for 500 percent of quota would provide an appropriate buffer (including against lower oil prices); authorities’ intention to rebuild policy buffers supports eventual discontinuation of contingent Fund financing when global risks recede.

*Source: _cr13201 - 12.      The authorities are of the view that external downside risks remain elevated, and have*

### 23.      Staff deems that the proposed FCL arrangement carries low risks to the Fund. The

### Staff deems that the proposed FCL arrangement carries low risks to the Fund

### Overall staff assessment
- Staff concludes the proposed FCL arrangement carries "low risks to the Fund."
- The proposed arrangement will have a "small effect on the Fund’s liquidity."
- Colombia intends to treat the FCL as "precautionary."
- "The Fund’s credit exposure to Colombia would remain moderate even with a drawing."
- Risks are further contained by "Colombia’s very strong debt-servicing record and manageable external debt service profile."

### Authorities' request and intent
- Authorities requested a two-year FCL arrangement in the amount of "SDR 3.87 billion (500 percent of quota)."
- The authorities intend to "treat the new arrangement as precautionary."
- Letter dated "Bogota, May 24, 2013" from Governor José Darío Uribe Escobar and Minister Mauricio Cárdenas Santamaría stresses: maintain exchange rate flexibility, strengthen fiscal buffers, continue to accumulate international reserves, and keep inflation within the 2–4 percent target range.

### Impact on Fund finances and liquidity (selected figures)
- Current Forward Commitment Capacity (FCC): "265,596" (SDR millions).
- Impact on FCC on approval of FCL (net): "-3,870" (SDR millions).
- If fully drawn (effect on FTP): "-619" (percent of FTP).
- Current precautionary balances (FY 2012): "11,500" (SDR millions).
- Total FCL commitments, including proposed FCL: "73,162" (SDR millions).
- Quota of FTP members with actual and proposed FCLs, in percent of total quota of FTP members: "3.1" (percent).

### Indicators of Fund credit and prospective drawings (Table 12 figures)
- Assumes full drawings under the FCL upon approval; stocks from prospective drawings (end of period):
  - Fund credit (Millions of SDR): "0 3,870 3,870 3,870 2,903 968 0" (for years 2012–2018 as presented).
  - In percent of quota: "0 50 50 50 37 12 50" (as presented).
  - In percent of GDP: "0 1.5 1.4 1.3 0.9 0.3" (as presented).
  - In percent of exports of goods and services: "0 8.5 8.0 7.6 5.5 1.8 0" (as presented).
  - In percent of gross reserves: "0 12.7 12.2 11.7 8.7 3.0 0" (as presented).
- Flows from prospective drawings (charges and debt service):
  - Charges (Millions of SDR): "0 16.8 41.0 41.0 40.2 25.0 5.3" (as presented).
  - Debt Service due on GRA credit (Millions SDR): "0 48.7 72.0 72.0 1,042.8 1,967.9 972.8" (as presented).
  - In percent of quota (debt service): "0 6.3 9.3 9.3 134.7 254.3 125.7" (as presented).
  - In percent of GDP (debt service): "0 0.0 0.0 0.0 0.3 0.6 0.3" (as presented).
  - In percent of exports of goods and services (debt service): "0 0.1 0.1 0.1 2.0 3.6 1.7" (as presented).
  - In percent of gross reserves (debt service): "0 0.2 0.3 0.2 3.4 6.3 3.0" (as presented).
- Memorandum item: Total External Debt (percent of GDP): "21.4 22.4 21.4 20.7 19.7 18.4 17.4" (as presented).

### Financing needs and gap analysis (selected figures)
- Gross external financing requirements (examples from Table 3): "22,203 27,491 38,862 37,444 39,405 36,452 40,287" (US$ millions as presented across columns).
- Financing gap analysis (in US$ millions, unless specified):
  - Financing needs (A+B-C): "5,952 7,891" (US$ millions).
  - A. Current account shock: "5,381 5,703" (US$ millions).
  - B. Capital account shock: "3,991 4,056" (US$ millions).
  - Combined shock: "9,372 9,758" (US$ millions).
  - C. Reserve accumulation in baseline: "3,419 1,868" (US$ millions).
- Memorandum items:
  - "100 percent of quota (in SDR million) 774 774"
  - "100 percent of quota (in US$ million) 1,165 1,165"
- Gross international reserves (projection rows): examples "28,078 31,912 36,998 40,417 36,998 42,285 40,417" (US$ millions as presented).

### Debt, liquidity, and resilience indicators (selected macro-fiscal and external figures)
- Public debt (in percent GDP): 2012 "32.7"; 2013 "31.8"; 2014 "31.1"; projections through 2017 include "29.7 28.3 26.8" (as presented in various tables).
- Public debt, excluding Ecopetrol: 2012 "31.5"; 2013 "30.7"; 2014 "30.7"; 2017 "26.0" (as presented).
- External debt (percent of GDP) series: "19.7 23.2 22.7 23.2 21.4 20.9 20.0" (as presented).
- Gross international reserves (levels and months of imports):
  - Levels (US$ millions): "23,672 24,992 28,078 31,912 36,998 40,417 42,285" (as presented).
  - In months of imports of goods and services: "7.4 6.4 5.5 5.8 6.4 6.8 6.7" (as presented).
- GIR in percent of short-term (ST) debt: "207.3 242.5 198.7 142.7 164.5 173.4 161.9" (as presented).
- External debt service (percent of exports of goods and services): "32.0 37.9 30.2 28.4 39.6 39.4 38.0" (as presented).
- Exports (f.o.b., US$ millions): "38,534 34,018 40,828 58,171 61,637 62,952 66,636" (as presented).
  - Petroleum products component: "12,204 10,254 16,499 28,421 31,584 33,104 35,173" (as presented).

### Macroeconomic projections and fiscal stance (selected projections)
- Real GDP growth: series "3.5 1.7 4.0 6.6 4.0 4.1 4.5 4.5 4.5 4.5" (2008–2017 as presented).
- Consumer prices (end of period): "7.7 2.0 3.2 3.7 2.4 2.4 3.0 3.0 3.0 3.0" (as presented).
- Total revenue (percent of GDP): "15.6 15.3 13.8 15.3 16.3 16.9 16.5 16.1 16.0 15.9" (central government series as presented).
- Total expenditure and net lending (percent of GDP): "17.9 19.4 17.7 18.1 18.6 19.3 18.7 18.2 17.8 17.7" (as presented).
- Overall central government balance: series "-2.3 -4.1 -3.9 -2.8 -2.4 -2.4 -2.2 -2.0 -1.8 -1.8" (percent of GDP, as presented).
- Nonfinancial public sector balance (percent of GDP): series "-0.3 -2.8 -3.3 -2.0 0.2 -1.0 -0.9 -0.8 -0.7 -0.6" (as presented).
- Combined public sector balance (percent of GDP): "-0.1 -2.7 -3.3 -2.0 0.3 -1.0 -0.8 -0.7 -0.6 -0.5" (as presented).
- Primary balance (percent of GDP, Tables 4/7): "0.9 -1.1 -1.1 -0.1 0.2 0.2 0.4 0.5 0.6 0.7" (central government series as presented).

### Debt sustainability and stress tests (selected outcomes)
- Public sector gross debt (percent of GDP) baseline path (Table 9): "36.7 36.9 36.0 32.7 31.8 31.1 29.7 28.3 26.8" (2009–2017 as presented).
- Change in public sector debt: "5.8 0.3 -0.9 -3.3 -0.9 -0.8 -1.4 -1.4 -1.5" (as presented).
- Debt-stabilizing primary balance (percent of GDP): "0.5" (as presented in Table 9).
- Gross financing need (billion US$ and percent of GDP, Table 9): "18.3 21.0 20.3 13.3 19.8 17.4 17.3 14.7 16.3" (US$ billions) and "7.9 7.4 6.2 3.6 5.1 4.2 3.9 3.1 3.3" (percent of GDP) as presented.
- External debt-stabilizing non-interest current account (Table 10): baseline external debt series "23.2 22.7 23.2 21.4 20.9 20.0 19.4 18.7 18.1" (percent of GDP).
- External gross financing need (US$ billions and percent of GDP, Table 10): "16.4 19.1 23.7 33.8 34.0 34.6 37.8 33.7 36.4" (US$ billions) and "7.1 6.7 7.2 9.2 8.7 8.4 8.6 7.2 7.3" (percent of GDP) as presented.
- Bound tests and scenario labels presented: interest rate shock, growth shock, primary balance shock / no policy change scenario, combined shock, contingent liabilities + depreciation shocks (Figures 7 and 8).

### Key policy elements highlighted by authorities and staff context
- Authorities emphasize: exchange rate flexibility as main shock absorber; strengthen fiscal buffers and savings per the Fiscal Rule and Royalties Law; continue reserve accumulation; maintain inflation target (2–4 percent) and anchored expectations; preserve sound policies to reduce vulnerabilities.
- Monetary stance: Banco de la República raised policy rate from "3%" in January 2011 to "5.25%" in February 2012 and reduced to "3.25%" in March 2013.
- Financial sector: FSAP/FSAA concluded supervisory and regulatory framework is "strong" and banks are "healthy, liquid and profitable"; Basel III quality capital compliance required in August 2013.

*Source: IMF staff assessment and accompanying tables and attachments in the Colombia FCL documentation (staff report excerpts and authorities’ letter, May 24, 2013).*

### INTRODUCTION ___________________________________________________________________________ 2

### INTRODUCTION

### INTRODUCTION (summary of arrangement)
- The proposed Flexible Credit Line (FCL) arrangement for Colombia would cover a two-year period and access would be in an amount equivalent to SDR 3.870 billion (500 percent of quota).
- It would succeed the previous FCL arrangement with identical access, which expired on May 5, 2013.
- The full amount of access proposed would be available throughout the arrangement period, in one or multiple purchases.
- The authorities intend to treat the arrangement as precautionary.

### BACKGROUND
- Colombia has had three FCLs since 2009:
  - One-year FCL approved on May 11, 2009 in an amount equivalent to SDR 6.966 billion (900 percent of quota), treated as precautionary.
  - Successor one-year FCL approved on May 7, 2010 in an amount equivalent to SDR 2.322 billion (300 percent of quota), treated as precautionary.
  - Two-year FCL approved on May 6, 2011 in an amount equivalent to SDR 3.870 billion (500 percent of quota), treated as precautionary.
- No drawings have been made under any of the FCL arrangements.
- Colombia has had six arrangements since 1999, but has not drawn on Fund resources since 1971.

### EXTERNAL DEBT AND SUSTAINABILITY
- Total external debt evolution (levels and shares):
  - 2007: Total External Debt US$44,553 million; Total External Debt 21.2 percent of GDP; Private 7.5 percent; Public 13.7 percent.
  - 2008: US$46,369 million; 19.7 percent of GDP; Private 7.2 percent; Public 12.5 percent.
  - 2009: US$53,719 million; 23.2 percent of GDP; Private 7.2 percent; Public 16.0 percent.
  - 2010: US$64,739 million; 22.7 percent of GDP; Private 8.8 percent; Public 13.9 percent.
  - 2011: US$75,903 million; 23.2 percent of GDP; Private 10.1 percent; Public 13.1 percent.
  - 2012: US$78,642 million; 21.4 percent of GDP; Private 8.8 percent; Public 12.6 percent.
- The bulk of external debt is long term and owed by the public sector.
- Private sector external debt increased from 7.2 percent of GDP in 2008 to 8.8 percent of GDP in 2012.
- The external current account deficit is currently about 3 percent of GDP and is expected to decline as a share of GDP and be largely financed by FDI.
- Debt sustainability analysis suggests external debt ratios would remain manageable even under significant negative shocks.

### IMPACT IF FULL AMOUNT IS DRAWN IN 2013
- Immediate levels with full drawing in 2013:
  - Total external debt would reach 22.4 percent of GDP.
  - Public external debt would reach 14.3 percent of GDP.
  - Fund credit would be 1.5 percent of GDP.
- Peak shares and ratios if fully drawn:
  - Colombia’s outstanding use of GRA resources would account for 6.7 percent of total external debt at its peak.
  - It would account for 10.5 percent of public external debt at its peak.
  - It would account for 12.7 percent of gross international reserves at its peak.
- External debt service including obligations to the Fund:
  - Projected debt service to the Fund would peak in 2017 at about SDR 2 billion, or close to 0.6 percent of GDP.
  - In 2017, external debt service to the Fund would peak at 3.6 percent of exports of goods and services.
  - In 2017, Fund-related service would account for about 27 percent of public external debt service, which would rise to 13.1 percent of exports of goods and services.

### CAPACITY TO REPAY INDICATORS (assumes full drawings upon approval)
Selected projections from Table 2 (values preserved exactly):
- Exposure and Repayments (In SDR millions):
  - GRA credit to Colombia: 2013--3,870.0; 2014--3,870.0; 2015--3,870.0; 2016--2,902.5; 2017--967.5.
  - (In percent of quota): 2013 (500.0), 2014 (500.0), 2015 (500.0), 2016 (375.0), 2017 (125.0), 2018 (0.0).
  - Charges due on GRA credit: 2013 48.7; 2014 72.0; 2015 72.0; 2016 75.3; 2017 32.9; 2018 5.3.
  - Debt service due on GRA credit: 2013 48.7; 2014 72.0; 2015 72.0; 2016 1,042.8; 2017 1,967.9; 2018 972.8.
- Debt and Debt Service Ratios:
  - Total external debt (In percent of GDP): 2012 21.4; 2013 22.4; 2014 21.4; 2015 20.7; 2016 19.7; 2017 18.4; 2018 17.4.
  - Public external debt (In percent of GDP): 2012 12.6; 2013 14.3; 2014 13.8; 2015 13.3; 2016 12.5; 2017 11.5; 2018 10.7.
  - GRA credit to Colombia (In percent of GDP): 2013 1.5; 2014 1.4; 2015 1.3; 2016 0.9; 2017 0.3.
  - Total external debt service (In percent of GDP): 2012 7.2; 2013 7.0; 2014 6.7; 2015 7.0; 2016 5.9; 2017 6.3; 2018 5.1.
  - Public external debt service (In percent of GDP): 2012 2.1; 2013 1.6; 2014 1.7; 2015 1.7; 2016 1.6; 2017 2.2; 2018 1.3.
  - Debt service due on GRA credit (In percent of GDP): 2016 0.3; 2017 0.6; 2018 0.3.
- In percent of Gross International Reserves:
  - Total external debt: 2012 212.6; 2013 188.6; 2014 184.0; 2015 181.8; 2016 183.6; 2017 187.6; 2018 189.7.
  - Public external debt: 2012 125.4; 2013 120.4; 2014 118.9; 2015 117.2; 2016 116.9; 2017 116.8; 2018 116.5.
  - GRA credit to Colombia: 2013 12.7; 2014 12.2; 2015 11.7; 2016 8.7; 2017 3.0.
- In percent of Exports of Goods and Services:
  - Total external debt service: 2012 39.6; 2013 39.5; 2014 38.1; 2015 40.0; 2016 34.5; 2017 37.6; 2018 31.5.
  - Public external debt service: 2012 11.4; 2013 8.9; 2014 9.5; 2015 9.8; 2016 9.7; 2017 13.1; 2018 8.2.
  - Debt service due on GRA credit: 2014 0.1; 2015 0.1; 2016 0.1; 2017 2.0; 2018 3.6; 2019 1.7 (note: table entries show values through 2018).
- GRA credit shares:
  - In percent of Total External Debt: GRA credit to Colombia 2013 6.7; 2014 6.6; 2015 6.4; 2016 4.8; 2017 1.6.
  - In percent of Public External Debt: GRA credit to Colombia 2013 10.5; 2014 10.2; 2015 10.0; 2016 7.5; 2017 2.6.
- U.S. dollars per SDR (period average): 2012 1.53; 2013 1.52; 2014 1.51; 2015 1.51; 2016 1.51; 2017 1.50; 2018 1.50.
- U.S. dollars per SDR (end of period): 2012 1.54; 2013 1.52; 2014 1.51; 2015 1.51; 2016 1.50; 2017 1.50; 2018 1.50.

### IMPACT ON FUND FINANCES AND LIQUIDITY
- Liquidity measures (as of 5/16/13):
  - Current Forward Commitment Capacity (FCC): 265,596 (In SDR millions).
  - Impact on FCC on approval of FCL: -3,870.
  - If drawing under the arrangement: -619 (the decline in the FCC would be equal to 80 percent of Colombia's quota).
- Prudential measures, assuming full FCL drawing:
  - Fund credit to Colombia in percent of total GRA credit outstanding: 4.2.
  - Fund credit to Colombia in percent of current precautionary balances: 33.7.
  - Fund credit outstanding to five largest debtors in percent of total GRA credit outstanding, before approval: 81.2.
  - Fund credit outstanding to five largest debtors in percent of total GRA credit outstanding, upon approval of the FCL: 77.8.
- Memorandum items:
  - Current precautionary balances (FY 2013): 11,500.
  - Total FCL commitments, including proposed FCL: 73,162.
  - Quota of FTP members with actual and proposed FCLs, in percent of total quota of FTP members: 3.1.

### ASSESSMENT
- The proposed arrangement will have a small effect on the Fund’s liquidity; the Fund’s liquidity is expected to remain adequate after approval.
- Even if Colombia were to draw, the effect on the Fund’s liquidity would be small.
- A close monitoring of the liquidity position is warranted given uncertainty about the global recovery and likely strong demand for Fund financing.
- If fully drawn, the Fund’s credit exposure to Colombia would remain moderate:
  - The arrangement would account for only a small share of total GRA credit outstanding and be well below the existing level of precautionary balances.
  - Fund credit to Colombia would be equivalent to about 34 percent of the Fund’s current precautionary balances if fully drawn.
- Colombia’s sustained track record of very strong policy implementation, low external debt, and commitment to maintain policies supports a strong projected capacity to repay even under potential downside risks (e.g., reversal of commodity prices and external financing conditions).
- The scale of potential Fund exposure, together with recent increases in lending to other members and prospects for further credit expansion under existing or possible new arrangements, underscores the need to strengthen the Fund’s precautionary balances.

### ANNEX I — HISTORY OF IMF ARRANGEMENTS (highlights)
- Colombia had six Fund arrangements since 1999 but has not drawn on Fund resources since 1971.
- Key post-1999 arrangements (In millions of SDR):
  - 1999 EFF, 20-Dec-99 to 19-Dec-02, Amount of New Arrangement 1,957.
  - 2003 SBA, 15-Jan-03 to 2-May-05, Amount of New Arrangement 1,548.
  - 2005 SBA, 2-May-05 to 2-Nov-06, Amount of New Arrangement 405.
  - 2009 FCL, 11-May-09 to 10-May-10, Amount of New Arrangement 6,966.
  - 2010 FCL, 7-May-10 to 6-May-11, Amount of New Arrangement 2,322 (cancelled and replaced).
  - 2011 FCL, 6-May-11 to 5-May-13, Amount of New Arrangement 3,870.

*Source: IMF staff report "INTRODUCTION" (June 4, 2013) and related tables and annexes.*

### 25.1 percent and is expected to hover around 15 percent by 2018 according to the FRL;

### _cr13201 - 25.1 percent and is expected to hover around 15 percent by 2018 according to the FRL;

### Fiscal position and resilience
- Public debt at 25.1 percent and is expected to hover around 15 percent by 2018 according to the FRL;
- Public savings increased to 6.2 percent of GDP.
- Conclusion: Such fiscal discipline and low levels of debt strengthen Colombia's resilience to adverse economic shocks in the short, medium and long term.

### External vulnerabilities and risk factors
- Key external shock channels and their potential impact:
  - A slowdown in economic growth in the US and in Europe (50 percent of exports).
  - Deeper than expected slowdowns in emerging markets such as China, India and Venezuela (15 percent of exports).
  - A sharp decline in commodity prices—particularly oil—which would also impact FDI.
  - An increase in risk aversion and worsening of markets’ confidence which would lower external financing and provoke outflows by residents.
- Specific concern: The uncertainty associated with the exit of the accommodative monetary policy in the United States and the resulting increase in long-term interest rates.
  - A bumpy exit might cause sudden reversal of capital flows, large fluctuations in the exchange rate and a sharp fall in the terms of trade.
  - In such a scenario, the protection provided by the FCL would be worthwhile.

### Request for the FCL (Flexible Credit Line)
- Authorities request:
  - A two-year FCL arrangement in the amount of SDR 3.87 billion SDR (500 percent of quota).
- Rationale and sizing considerations:
  - Authorities estimate potential financing need would be even larger (in part due to the bigger size of the economy), but part of the shock could be absorbed through international reserves.
  - Current level of reserves, although higher, is not sufficient to offset most of the effects.
  - The authorities’ intention is to gradually lessen the economy's dependency on contingent external financing should risks recede and resilience strengthens.
  - The amounts requested relative to the scale of the economy have been declining since the first FCL in 2009.
  - The authorities are ready to review the access level during the first review should domestic and external conditions improve.
  - The authorities intend to treat the new arrangement as precautionary.

### FCL amounts and traditional metrics (comparative figures by year)
- As a percentage of imports:
  - 2009: 3.5 percent
  - 2011: 1.3 percent
  - Current request: 1 percent
- As a percentage of Broad Money:
  - 2009: 0.12 percent
  - 2011: 0.05 percent
  - Current request: 0.04 percent
- Compared to current account deficit plus external debt amortizations:
  - 2009: 0.64 percent
  - 2011: 0.22 percent
  - Current request: 0.19 percent

### Policy strategy and recommendations
- Maintain exchange rate flexibility as the main shock absorber.
- Further strengthen fiscal buffers and savings.
- Continue to accumulate international reserves.
- Keep inflation within the target range and expectations well anchored.
- Expected outcome: These policies will help reduce vulnerabilities and build resilience to external shocks, allowing the country to increase its self protection while the arrangement reinforces market confidence.

*Source: _cr13201 - 25.1 percent and is expected to hover around 15 percent by 2018 according to the FRL;*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13201.pdf_