## _cr15142 - 1.6 percent of GDP, pushing public debt to about 39 percent of GDP.

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---

### Recent developments
- Real GDP increased by 4.6 percent in 2014, driven by domestic demand.
- Central bank raised the policy rate by 125 bps between May and August, to 4.5 percent; real interest rates remained moderately supportive.
- The central government fiscal balance remained broadly unchanged from 2013 and met the structural balance target embedded in the fiscal rule.
- Subnational governments posted strong expenditure growth, which drove a widening of the consolidated public sector deficit to 1.6 percent of GDP and pushed public debt to about 39 percent of GDP.
- Brisk growth was supported by an expansion of civil works and the government’s mortgage subsidy program for middle-income households.

### External sector and reserves
- Current account deficit widened to 5.2 percent in 2014.
- Strong inflows of foreign direct investment and portfolio flows more than offset the current account deficit.
- Gross international reserves rose to 47 billion at year end; this level appears adequate for precautionary purposes but may be insufficient for tail risks.
- The current account deficit is projected to widen in 2015 due to the oil price decline, but would gradually narrow over the medium term with a slight recovery in oil prices and growth in Colombia’s trading partners.
- The sharp peso depreciation (20 percent vis-à-vis the U.S. dollar since mid-2014) should help contain imports and spur non-traditional exports.

### Financial sector and corporate health
- Financial soundness indicators have been strong and financial system exposure to the oil sector is very low.
- Growth in credit to the private sector was 14.7 percent in 2014 (nominal year-over-year).
- House price growth has slowed.
- Corporate profitability was strong, and liquidity remained adequate.
- Corporate and household debt increased in 2014 but remains modest by international standards and leverage is within historical norms.

### Outlook and risks
- Growth outlook:
  - Growth is expected to slow to 3.4 percent in 2015 given a subdued outlook for investment, especially oil-related, and private consumption.
  - Growth is expected to gradually rise toward its potential (around 4.25 percent) over the medium term, supported by the government’s Public-Private Partnership-based infrastructure program and a gradual recovery in oil prices and external demand.
- Inflation and exchange rate:
  - Inflation rose to 4.6 percent in March (year-over-year) due to a weather-related agricultural output supply shock and some pass-through from exchange rate depreciation.
  - Inflation expected to diminish to 3.6 percent year-over-year by end-December with inflation expectations remaining anchored within the target band of 2−4 percent.
- Downside risks (selected):
  - Higher interest rates and financial volatility.
  - Protracted slower growth in advanced and emerging economies.
  - Economic or political stress in neighboring countries.
  - Delayed implementation of the infrastructure program.

### Fiscal impacts and policy response
- Central government announced expenditure reduction of 0.7 percent of GDP in 2015 in response to lower corporate profits and a partial postponement of dividends from the state oil company.
- The fiscal rule allows a smoother adjustment to the permanent decline in wealth but will only partially shield expenditure plans from the oil shock; some fiscal tightening will be required to accommodate lower-than-expected oil revenues.
- Authorities enacted a tax reform to raise revenue and have taken steps toward consideration of a broader tax reform; mobilizing non-oil revenues identified as urgent to protect social and infrastructure spending while adhering to medium-term fiscal rule targets.

### Monetary and reserve policy stance
- Broadly neutral stance of monetary policy is supported; authorities are encouraged to stand ready to take appropriate action if growth falters.
- Directors considered that the current level of official international reserves provides adequate insurance in normal times; the exchange rate has adjusted flexibly in line with fundamentals.

### Structural and financial sector priorities (Executive Board views)
- Continue efforts to enhance resilience of the economy; eventual exit from the Flexible Credit Line arrangement supported once external risks recede.
- Comprehensive tax reform recommended to simplify the tax structure, increase progressivity, broaden the tax base, and improve tax administration.
- Strengthen supervision of complex financial conglomerates and further improve risk-based supervision.
- Enhance regional cooperation primarily in Central America, deepen the capital market, and promote financial inclusion.
- Priorities for inclusive growth: reduce informality, improve competitiveness and infrastructure, foster social mobility through better education and health care.
- Support for the fourth generation road investment program—implemented with appropriate funding and safeguards—and initiatives to promote private participation, including divestiture of a public utility company.

### Key statistics (select figures preserved exactly)
- Real GDP: 4.9 (2013), 4.6 (2014), 3.4 (2015 proj.)
- Consumer price index (period average): 2.0 (2013), 2.9 (2014), 3.9 (2015 proj.)
- Consumer price index (end of period): 1.9 (2013), 3.7 (2014), 3.6 (2015 proj.)
- GDP deflator: 1.9 (2013), 1.8 (2014), 1.0 (2015 proj.)
- Terms of trade (deterioration -): -4.1 (2013), -3.2 (2014), -18.0 (2015 proj.)
- Real effective exchange rate (depreciation -): -3.3 (2013), -5.3 (2014), -14.3 (2015 proj.)
- Central government balance (percent of GDP): -2.3 (2013), -2.6 (2014), -2.6 (2015 proj.)
- Combined public sector balance (percent of GDP): -1.1 (2013), -1.6 (2014), -3.4 (2015 proj.)
- Public debt (percent of GDP): 35.6 (2013), 38.7 (2014), 39.7 (2015 proj.)
- Current account (deficit - percent of GDP): -3.3 (2013), -5.2 (2014), -5.9 (2015 proj.)
- External debt (percent of GDP): 24.2 (2013), 29.3 (2014), 30.9 (2015 proj.)
- Gross international reserves: 47 billion (year end 2014)
- Credit to the private sector (12-month percentage change): 12.1 (2013), 14.7 (2014), 11.9 (2015 proj.)
- Broad money (M2) (12-month percentage change): 13.4 (2013), 10.0 (2014), 13.0 (2015 proj.)
- Interest rate (90-day time deposits; nominal percent per year): 4.1 (2013), 4.3 (2014), n.a. (2015 proj.)
- Peso depreciation: 20 percent vis-à-vis the U.S. dollar since mid-2014
- Central government announced expenditure reduction: 0.7 percent of GDP (2015)

---

### Macroeconomic shock and near-term effects
- Oil prices plummeted by about 40 percent during the second half of 2014.
- Economy was operating slightly above potential in mid-2014; inflation expectations anchored near the center of the central bank’s 2−4 percent target band.
- Sharp peso depreciation: 17 percent during Q4 (later described as 20 percent against the U.S. dollar and 14 percent in real effective terms estimated on average for 2015).
- Inflation accelerated to 3.7 percent at end-December; a temporary upsurge in inflation reached 4.6 percent y/y in March and is projected to ease to 3.6 percent y/y by end-December.
- Staff projects growth to slow to 3.4 percent in 2015, with private investment decelerating, especially in the oil sector, and a negative fiscal impulse. Growth is projected to boost to about 4¼ percent by 2018.

### External position and reserves (additional detail)
- Portfolio inflows (net 3.1 percent of GDP) and inward foreign direct investment (net 3.2 percent of GDP) more than financed the current account deficit in 2014.
- Gross international reserves rose by US$3.7 billion in 2014, reaching US$47 billion at end-2014.
- Reserves represented 131 percent of the reserve adequacy metric for commodity exporters.
- Total external debt remained low at 28.6 percent of GDP.
- Oil production was above 1 million bpd in the first quarter of 2015 and is projected to remain high throughout the year.

### Financial sector and corporate sector health (additional detail)
- Financial soundness indicators remained strong following enhanced capital standards in August 2013; capital adequacy declined marginally but stayed above the regulatory limit.
- Vulnerabilities from cyclical house price increases remained contained due to low household leverage, a low share of mortgages in banks’ portfolios, and conservative forward-looking loan-loss provisioning.
- Corporate debt increased to some 29 percent of GDP, with over 2/3 due to domestic banks; total leverage remained modest by international standards and within historical norms.
- Share of corporate debt in firms with weak debt servicing capacity (interest coverage ratios less than 2) declined during 2010–14 by about 15 percent points to 1 percent.
- Central bank stress tests (June 2014) indicate corporate sector resilience to an interest rate shock.

### 4G PPP program and infrastructure
- First and second wave of projects constitute about US$14 billion out of a total program of US$25 billion (about 6.2 percent of 2014 GDP over 2014−22); construction expected to commence in 2016.
- Official timetable: project awardees would arrange financing in the year of the report and start building in 2016.

### Key risks and policy advice (selected)
- Further declines or volatility in energy prices (Likelihood: High; Impact: High). Policy advice: Use the exchange rate and international reserves as shock absorber.
- Protracted slower growth in advanced and emerging economies (Likelihood: Medium; Impact: Medium). Policy advice: Use monetary policy to support growth; speed up execution of capital projects in the public sector.
- Delay in PPP implementation due to financing or obstacles (Low likelihood; Medium impact). Policy advice: Re-prioritize projects, develop new financing instruments while avoiding increased government exposure.

---

### Debt outlook and fiscal trajectory
- Total public gross debt projections (percent of GDP): 35.6, 38.7, 39.7, 39.3, 39.2, 38.8, 38.2, 37.3 (2013–2020).
- Total public net debt projections (percent of GDP): 24.8, 28.4, 30.5, 30.8, 31.3, 31.5, 31.4, 31.0 (2013–2020).
- Staff note: debt rises to 38.7 percent of GDP—due to the widening of the central government deficit and the valuation effects of the peso depreciation—but will gradually decline and remain in line with other investment-grade countries and sustainable.
- Risk factor: Additional downward revisions to the oil price outlook would further constrain expenditure plans and increase debt levels.

### Medium-term macro and fiscal projections (selected indicators)
- Real GDP (percent): 4.9, 4.6, 3.4, 3.7, 4.0, 4.2, 4.3, 4.3 (2013–2020).
- Consumer prices (end of period): 1.9, 3.7, 3.6, 3.2, 3.0, 3.0, 3.0, 3.0 (2013–2020).
- External current account balance (percent of GDP): -3.3, -5.2, -5.9, -5.0, -4.4, -4.2, -4.0, -3.7 (2013–2020).
- Combined public sector balance 1/ (percent of GDP): -1.1, -1.6, -3.4, -2.8, -2.7, -2.4, -2.1, -1.9 (2013–2020).
- Overall balance of payments balance: 1.8, 1.2, -0.3, -0.1, 0.4, 0.4, 0.4, 0.4 (2013–2020).

### Revenue mobilization and tax reform
- Authorities established an independent expert commission in early 2015 to advise on tax reform options to mobilize revenue and protect social and infrastructure spending given falling oil revenues.
- Short-term pragmatic step considered: revamping the tax system for non-profit organizations to boost revenue in time for the 2016 budget.
- Staff and authorities agreed revenues should:
  - Simplify the existing tax structure.
  - Increase progressivity.
  - Broaden the tax base.
  - Facilitate private investment by ensuring international competitiveness.
- Staff options include strengthening the income tax system and increasing the VAT rate and base; if sufficient revenue gained, reduce non-conventional taxes (e.g., personal wealth tax, financial transaction tax, VAT on capital goods).

### Expenditure framework and consolidation
- Baseline scenario does not assume new tax measures; gradual decline in central government revenues as a fraction of GDP is due to reduced oil-related revenues.
- Outlook for expenditure in baseline broadly based on the 2014 Medium-Term Fiscal Framework (MTFF), which includes a plan for achieving consolidation mandated by the fiscal rule through reductions in expenditure, including a moderation in investment (about ½ percent of GDP between 2015 and 2020).
- Medium-term fiscal framework implies a 1½ percent of GDP reduction in the structural deficit between 2015 and 2020 with structural oil revenues declining as a percent of GDP.
  - Average fiscal impulse projected at -0.3 percent of GDP.
  - Under unchanged tax policy, consolidation would require primary expenditure cuts of about 1½ percent of GDP, leaving limited room for social and infrastructure spending.

### Infrastructure program and financing
- Authorities expect contractors to establish financing agreements by year end for first set of road concessions.
- Authorities intend to use proceeds from prospective sale of power company Isagen to increase development fund resources.
- Infrastructure investment estimated to raise long-run potential growth by about 0.7 percent (estimate of the national planning department, DNP).

### Fiscal impact of a potential peace agreement
- Possible fiscal expenditures included in MTFF; likely manageable:
  - Re-integration of demobilized combatants: up to 0.1 percent of GDP.
  - Victims’ reparations: 1 percent of GDP.
- Financing options: redistribution of government assets through land and rural development reforms, and partly financed through lower military spending.

### External stability and current account adjustment
- External Balance Assessment (EBA) methodologies show a current account gap of around 2 percent of GDP (adjusted for potential oil reserves).
- EBA REER methodology estimates the exchange rate fully in line with fundamentals.
- REER depreciation: 18 percent at end-2014.
- As of end-2014, international reserves covered approximately 7 months of imports and about 100 percent of 2015 gross external financing needs.
- FDI inflows expected to moderate from 4.2 percent of GDP in 2014 to 3.3 percent by 2020, financing about 80 percent of the current account deficit over the medium-term.

---

### Financial system and macro-financial stability (Appendix I highlights)
- Overall financial sector vulnerability risk: assessed as “medium”.
- Drivers of changed assessment: strong credit growth pushed the change in the credit-to-GDP indicator marginally above the threshold of 3 percent.
- Mitigating factors and buffers:
  - Provisioning strong at 151.3 percent.
  - Capital adequacy ratio: 17.1 percent (above the minimum requirement of 9 percent).
  - Profitability: ROE 19.8.
  - Leverage: 14.9 percent.
  - NPL ratio: 2.9 (latest reported).
- Selected financial soundness indicators (selected series preserved exactly where given):
  - Change in credit / GDP ratio (pp, annual): 0.7 -1.2 2.4 2.6 3.0 1.8 1.8 1.8 1.9 3.1
  - Credit growth: 14.7 percent in 2014.
  - Household debt: historically high at 30 percent of disposable income (other series: household debt 17.5 percent of GDP and 28 percent of disposable income reported elsewhere).
- Stress test outcomes:
  - Central bank stress test (June 2014) indicates banking sector would remain solvent under an extreme combined macroeconomic shock.
  - Liquidity stress test: liquidity coverage ratio would remain well above regulatory minima of 100 percent for banks and non-banks.

### Cross-border banking risks and contagion
- Colombian banking conglomerates are systemic for the region (including Central America and Panama).
- Removing goodwill from banks’ capital results in a more negative scenario in which Colombia becomes significantly more contagious for the region and its banks more vulnerable to shocks.
- Policy recommendations:
  - Consider strengthening capital buffers further for Colombian banks.
  - Build a regional body in charge of financial stability to act as a forum for coordination of regional macro-prudential surveillance.
- Progress on FSAP recommendations: draft laws before Congress to strengthen supervisory independence and regulatory powers over holding companies of financial conglomerates; SFC advancing risk-based supervision.

### Nonbank financial intermediation and market infrastructure (selected)
- Total nonbank financial system assets amounted to Col$532.2 billion in June 2014 (72.5 percent of GDP).
- Broker-dealers have grown in size; some large entities account for around 30 percent of key public debt and derivatives markets.
- Policy recommendations: continue risk-based supervision of broker-dealers and nonbanks; simplify regulatory framework for derivatives; upgrade supervisory tools.

### Capital markets and liquidity
- Money markets beyond overnight are illiquid; repo liquidity concentrated at overnight maturities.
- Policy recommendations: increase issuance of short-term government securities; impose a higher cost of overnight credit to develop longer-maturity money markets.

---

### Box 3 — Oil Sector Prospects (summary)
- Oil production expanded by about 90 percent between 2006 and 2013, and surpassed one million barrels per day.
- The 2.5 percent decline in 2014 was due in part to security and other operational constraints but it has recovered in recent months.
- Ecopetrol announced cuts of 25 percent to investment plans; Pacific Rubiales announced cuts of 50 percent.
- Extraction costs remain 30−40 dollars per barrel for 70 percent of Ecopetrol’s production.
- Authorities’ draft development plan includes a 2018 oil production target of 980 kbpd―14 percent below the target announced in the 2014 medium-term fiscal framework.
- Oil production would decline by about 8 percent between 2015 and 2020.

### Box 10 — Poverty and Income Inequality (summary)
- Share of population living below US$4 per day (PPP): rose to 60 percent in the late 1990’s; fell to 32.9 percent in 2012.
- Middle class (US$10–50 per day; PPP): 11 percent in 2000; roughly 22 percent in 2010.
- Gini coefficient: 53.8 in 2014.
- Top 1 percent income concentration: the richest holding around 20 percent of the total national income.
- Policy implications: coordinated efforts in labor market, education, pensions, tax and transfers required to reduce inequality sustainably.

### Emerging market risks (visualization notes)
- Risk dimensions listed: 1. Macroeconomic risks; 2. Inward spillover risks; 3. Credit risks; 4. Market and liquidity risks; 5. Monetary and financial conditions; 6. Risk appetite.
- Numeric axis labels shown: 0, 2, 4, 6, 8, 10.
- Date markers shown: April 2014; April 2015; alternate markers: 2013Q4; 2014Q4.
- Interpretive caption: "Away from center signifies higher risks, easier monetary and financial conditions, or higher risk appetite."

*International Monetary Fund staff report for the 2015 Article IV Consultation (based on information available on May 1, 2015).*

### 1.6 percent of GDP, pushing public debt to about 39 percent of GDP.

### _cr15142 - 1.6 percent of GDP, pushing public debt to about 39 percent of GDP.

### Recent developments
- Real GDP increased by 4.6 percent in 2014, driven by domestic demand.
- Central bank raised the policy rate by 125 bps between May and August, to 4.5 percent; real interest rates remained moderately supportive.
- The central government fiscal balance remained broadly unchanged from 2013 and met the structural balance target embedded in the fiscal rule.
- Subnational governments posted strong expenditure growth, which drove a widening of the consolidated public sector deficit to 1.6 percent of GDP and pushed public debt to about 39 percent of GDP.
- Brisk growth was supported by an expansion of civil works and the government’s mortgage subsidy program for middle-income households.

### External sector and reserves
- The current account deficit widened to 5.2 percent in 2014.
- Strong inflows of foreign direct investment and portfolio flows more than offset the current account deficit.
- Gross international reserves rose to 47 billion at year end; this level appears adequate for precautionary purposes but may be insufficient for tail risks.
- The current account deficit is projected to widen in 2015 due to the oil price decline, but would gradually narrow over the medium term with a slight recovery in oil prices and growth in Colombia’s trading partners.
- The sharp peso depreciation (20 percent vis-à-vis the U.S. dollar since mid-2014) should help contain imports and spur non-traditional exports.

### Financial sector and corporate health
- Financial soundness indicators have been strong and financial system exposure to the oil sector is very low.
- Growth in credit to the private sector was 14.7 percent in 2014 (nominal year-over-year).
- House price growth has slowed.
- Corporate profitability was strong, and liquidity remained adequate.
- Corporate and household debt increased in 2014 but remains modest by international standards and leverage is within historical norms.

### Outlook and risks
- Growth is expected to slow to 3.4 percent in 2015 given a subdued outlook for investment, especially oil-related, and private consumption.
- Growth is expected to gradually rise toward its potential (around 4.25 percent) over the medium term, supported by the government’s Public-Private Partnership-based infrastructure program and a gradual recovery in oil prices and external demand.
- Inflation rose to 4.6 percent in March (year-over-year) due to a weather-related agricultural output supply shock and some pass-through from exchange rate depreciation, but is expected to diminish to 3.6 percent year-over-year by end-December with inflation expectations remaining anchored within the target band of 2−4 percent.
- Downside risks: higher interest rates and financial volatility; a protracted period of slower growth in advanced and emerging economies; economic or political stress in neighboring countries; delayed implementation of the infrastructure program.

### Fiscal impacts and policy response
- In response to lower corporate profits and a partial postponement of dividends from the state oil company, the central government announced an expenditure reduction of 0.7 percent of GDP in 2015.
- The fiscal rule allows a smoother adjustment to the permanent decline in wealth but will only partially shield expenditure plans from the oil shock; some fiscal tightening will be required to accommodate lower-than-expected oil revenues.
- Authorities have enacted a tax reform to raise revenue and have taken steps toward consideration of a broader tax reform; mobilizing non-oil revenues is highlighted as urgent to protect social and infrastructure spending while adhering to medium-term fiscal rule targets.

### Monetary and reserve policy stance
- A broadly neutral stance of monetary policy is supported; authorities are encouraged to stand ready to take appropriate action if growth falters.
- Directors considered that the current level of official international reserves provides adequate insurance in normal times; the exchange rate has adjusted flexibly in line with fundamentals.

### Structural and financial sector priorities (Executive Board views)
- Continue efforts to enhance resilience of the economy; eventual exit from the Flexible Credit Line arrangement supported once external risks recede.
- Comprehensive tax reform recommended to simplify the tax structure, increase progressivity, broaden the tax base, and improve tax administration.
- Strengthen supervision of complex financial conglomerates and further improve risk-based supervision.
- Enhance regional cooperation primarily in Central America, deepen the capital market, and promote financial inclusion.
- Priorities for inclusive growth: reduce informality, improve competitiveness and infrastructure, foster social mobility through better education and health care.
- Support for the fourth generation road investment program—implemented with appropriate funding and safeguards—and initiatives to promote private participation, including divestiture of a public utility company.

### Key statistics (select figures preserved exactly)
- Real GDP: 4.9 (2013), 4.6 (2014), 3.4 (2015 proj.)
- Consumer price index (period average): 2.0 (2013), 2.9 (2014), 3.9 (2015 proj.)
- Consumer price index (end of period): 1.9 (2013), 3.7 (2014), 3.6 (2015 proj.)
- GDP deflator: 1.9 (2013), 1.8 (2014), 1.0 (2015 proj.)
- Terms of trade (deterioration -): -4.1 (2013), -3.2 (2014), -18.0 (2015 proj.)
- Real effective exchange rate (depreciation -): -3.3 (2013), -5.3 (2014), -14.3 (2015 proj.)
- Central government balance (percent of GDP): -2.3 (2013), -2.6 (2014), -2.6 (2015 proj.)
- Combined public sector balance (percent of GDP): -1.1 (2013), -1.6 (2014), -3.4 (2015 proj.)
- Public debt (percent of GDP): 35.6 (2013), 38.7 (2014), 39.7 (2015 proj.)
- Current account (deficit - percent of GDP): -3.3 (2013), -5.2 (2014), -5.9 (2015 proj.)
- External debt (percent of GDP): 24.2 (2013), 29.3 (2014), 30.9 (2015 proj.)
- Gross international reserves: 47 billion (year end 2014)
- Credit to the private sector (12-month percentage change): 12.1 (2013), 14.7 (2014), 11.9 (2015 proj.)
- Broad money (M2) (12-month percentage change): 13.4 (2013), 10.0 (2014), 13.0 (2015 proj.)
- Interest rate (90-day time deposits; nominal percent per year): 4.1 (2013), 4.3 (2014), n.a. (2015 proj.)
- Peso depreciation: 20 percent vis-à-vis the U.S. dollar since mid-2014
- Central government announced expenditure reduction: 0.7 percent of GDP (2015)

*International Monetary Fund staff report for the 2015 Article IV Consultation (based on information available on May 1, 2015).*

### 7.      From position of strong growth, Colombia confronted a severe oil price shock in the

### _cr15142 - 7.      From position of strong growth, Colombia confronted a severe oil price shock in the

### Macroeconomic shock and near-term effects
- Oil prices plummeted by about 40 percent during the second half of 2014.
- The economy was operating slightly above potential in mid-2014; inflation expectations were anchored near the center of the central bank’s 2−4 percent target band.
- Sharp peso depreciation: 17 percent during Q4 (later described as 20 percent against the U.S. dollar and 14 percent in real effective terms estimated on average for 2015).
- Inflation accelerated to 3.7 percent at end-December; a temporary upsurge in inflation reached 4.6 percent y/y in March and is projected to ease to 3.6 percent y/y by end-December.
- Staff projects growth to slow to 3.4 percent in 2015, with private investment decelerating, especially in the oil sector, and a negative fiscal impulse. Growth is projected to boost to about 4¼ percent by 2018.

### External position and reserves
- Current account deficit widened to 5.2 percent of GDP in 2014, reflecting strong import demand and the temporary shutdown of the Cartagena oil refinery.
- Portfolio inflows (net 3.1 percent of GDP) and inward foreign direct investment (net 3.2 percent of GDP) more than financed the current account deficit.
- Gross international reserves rose by US$3.7 billion in 2014, reaching US$47 billion at end-2014.
- Reserves represented 131 percent of the reserve adequacy metric for commodity exporters.
- Total external debt remained low at 28.6 percent of GDP.
- Oil production was above 1 million bpd in the first quarter of 2015 and is projected to remain high throughout the year.

### Financial sector and corporate sector health
- Financial soundness indicators remained strong following implementation of new enhanced capital standards in August 2013; capital adequacy declined marginally but stayed above the regulatory limit.
- Growth in credit to the private sector: 14.7 percent (nominal y/y).
- Vulnerabilities from cyclical house price increases remained contained due to low household leverage, a low share of mortgages in banks’ portfolios, and conservative forward-looking loan-loss provisioning.
- Corporate debt increased to some 29 percent of GDP, with over 2/3 due to domestic banks; total leverage remained modest by international standards and within historical norms.
- Share of corporate debt in firms with weak debt servicing capacity (interest coverage ratios less than 2) declined during 2010–14 by about 15 percent points to 1 percent.
- Central bank stress tests (June 2014) indicate corporate sector resilience to an interest rate shock.

### 4G PPP program and infrastructure
- The 4G PPP program was launched; first wave of projects awarded.
- The program aims to attract private investment to reduce the infrastructure gap, especially in transportation and roads.
- First and second wave of projects constitute about US$14 billion out of a total program of US$25 billion (about 6.2 percent of 2014 GDP over 2014−22); construction expected to commence in 2016.
- Official timetable: project awardees would arrange financing in the year of the report and start building in 2016.

### Outlook and key risks
- Negative terms-of-trade shock from oil price decline is a strong headwind; partial offsets include the 4G infrastructure program and a slight improvement in external demand.
- Oil companies’ cutbacks in investment may limit sector growth despite a partial recovery of oil prices by 2020.
- Current account deficit projected to widen in 2015 but gradually narrow with recovery in oil prices and trading partner growth.
- Large downside risks highlighted:
  - Further declines or volatility in energy prices (Likelihood: High; Impact: High). Policy advice: Use the exchange rate and international reserves as shock absorber.
  - Protracted slower growth in advanced and emerging economies (Likelihood: Medium; Impact: Medium). Policy advice: Use monetary policy to support growth; speed up execution of capital projects in the public sector.
  - Persistently low oil prices triggered by supply factors or weaker demand (Likelihood: Medium; Impact: High). Policy advice: Use the exchange rate and international reserves as shock absorber.
  - Global financial volatility from U.S. monetary exit or Euro Area sovereign stress, and growth slowdown/financial risks in China (varied likelihoods and impacts).
  - Country-specific risks: economic distress in Central America affecting Colombian banks’ subsidiaries (Low/Medium); political/economic distress in Venezuela (High likelihood; Medium/Low impact).
  - Delay in PPP implementation due to financing or obstacles (Low likelihood; Medium impact). Policy advice: Re-prioritize projects, develop new financing instruments while avoiding increased government exposure.
  - Continued high credit and house price growth (Low likelihood; Low impact). Policy advice: Adopt prudential measures tailored to risk profile of financial institutions.

### Policy framework and near-term policy stance
- Authorities and staff agreed macro framework provides buffers and flexibility: strengthened fiscal framework (new royalty system; structural fiscal rule), moderate public debt, flexible exchange rate, inflation targeting, comfortable FX reserves, and FCL from the Fund.
- Exchange rate adjustment: depreciation supports non-resource exports and partially offsets lower oil revenue in domestic currency terms.
- Monetary policy rate at 4.5 percent, described as near neutral; scope for easing if growth slows more than expected and inflation expectations remain anchored.
- Central bank suspended foreign currency purchases during the first quarter of 2015; pace of reserve accumulation likely to abate.

### Fiscal policy response and medium-term adjustments
- Structural fiscal rule includes adjustment for deviation of actual oil price from the long-term price set by expert committee in spring 2014, helping protect the 2015 expenditure envelope.
- Headline deficit would widen to about 3.4 percent of GDP and gross public debt increase to 40 percent of GDP under the shock.
- Government enacted a tax reform in late 2014 targeting corporations and announced a reduction in planned expenditures of about 0.7 percent of GDP for 2015 to comply with the fiscal rule target ex post.
- Decree-based expenditure adjustment confined to central government, slightly more tilted toward investment spending, and implies unspecified across-the-board cuts in current outlays, possibly excluding education and compensation of civil victims of the conflict.
- Authorities estimated fiscal multipliers in Colombia could be low (between 0.4 and 1).
- The central government’s negative fiscal impulse will be partly offset by strong subnational expenditure execution ahead of elections.
- Medium-term fiscal framework implies a 1½ percent of GDP reduction in the structural deficit between 2015 and 2020 with structural oil revenues declining as a percent of GDP.
  - Average fiscal impulse projected at -0.3 percent of GDP.
  - Under unchanged tax policy, consolidation would require primary expenditure cuts of about 1½ percent of GDP, leaving limited room for social and infrastructure spending.
- Authorities and staff agreed the oil shock experience provides an opportunity for the fiscal rule committee to revisit the operation of the fiscal rule and sensitivity of fiscal revenue to oil shocks.

*Source: COLOMBIA — INTERNATIONAL MONETARY FUND (chapter excerpt).*

### 38.7 percent of GDP—due to the widening of the central government deficit and the valuation

### _cr15142 - 38.7 percent of GDP—due to the widening of the central government deficit and the valuation

### Debt outlook and fiscal trajectory
- Total public gross debt projections (percent of GDP): 35.6, 38.7, 39.7, 39.3, 39.2, 38.8, 38.2, 37.3 (2013–2020).
- Total public net debt projections (percent of GDP): 24.8, 28.4, 30.5, 30.8, 31.3, 31.5, 31.4, 31.0 (2013–2020).
- Staff note: debt rises to 38.7 percent of GDP—due to the widening of the central government deficit and the valuation effects of the peso depreciation—but will gradually decline and remain in line with other investment-grade countries and sustainable (Table 8 and Figure 8).
- Risk factor: Additional downward revisions to the oil price outlook would further constrain expenditure plans and increase debt levels.

### Medium-term macro and fiscal projections (selected indicators)
- Real GDP (percent): 4.9, 4.6, 3.4, 3.7, 4.0, 4.2, 4.3, 4.3 (2013–2020).
- Consumer prices (end of period): 1.9, 3.7, 3.6, 3.2, 3.0, 3.0, 3.0, 3.0 (2013–2020).
- External current account balance (percent of GDP): -3.3, -5.2, -5.9, -5.0, -4.4, -4.2, -4.0, -3.7 (2013–2020).
- Combined public sector balance 1/ (percent of GDP): -1.1, -1.6, -3.4, -2.8, -2.7, -2.4, -2.1, -1.9 (2013–2020).
- Overall balance of payments balance: 1.8, 1.2, -0.3, -0.1, 0.4, 0.4, 0.4, 0.4 (2013–2020).

### Central government fiscal details (selected)
- Central Government headline balance (percent of GDP): -2.6, -2.6, -2.6, -2.2, -2.0, -1.7, -1.4, 1.2 (2014–2020 and 2020-2015 entry).
- Central Government expenditure (percent of GDP): 19.7, 18.3, 18.1, 17.6, 17.5, 17.0, 16.7, -1.6.
- Primary expenditure (percent of GDP): 17.3, 15.7, 15.6, 15.2, 15.2, 14.7, 14.4, -1.3.
- Investment (percent of GDP, o/w): 3.8, 2.1, 2.1, 2.0, 2.0, 1.8, 1.6, -0.5.
- Structural balance (staff estimate, percent of GDP): -3.2, -2.8, -2.1, -2.0, -1.9, -1.6, -1.4, 1.4.
- Structural primary non-oil balance (percent of GDP): -3.2, -1.4, -1.2, -0.8, -0.6, -0.2, 0.1, 1.5.
- Fiscal impulse: 0.0, -1.8, -0.2, -0.4, -0.2, -0.4, -0.3.
- Memo: Output gap (percent of potential GDP): 0.4, 0.0, -0.2, -0.2, -0.1, 0.0, 0.0.
- Brent price (US dollars per barrel): 98.9, 61.5, 68.9, 72.0, 74.5, 76.6, 78.5 (2014–2020).
- Long-run oil price (Brent; US dollars per barrel) 1/: 87.5, 87.1, 83.5, 79.8, 76.4, 75.4, 76.0 (2014–2020).

### Revenue mobilization and tax reform
- Authorities established an independent expert commission in early 2015 to advise on tax reform options to mobilize revenue and protect social and infrastructure spending given falling oil revenues.
- Short-term pragmatic step considered: revamping the tax system for non-profit organizations to boost revenue in time for the 2016 budget.
- Staff and authorities agreed revenues should:
  - Simplify the existing tax structure.
  - Increase progressivity.
  - Broaden the tax base.
  - Facilitate private investment by ensuring international competitiveness.
- Staff advice and options:
  - The current system imposes a comparatively high burden on companies; the burden will continue as the wealth tax on companies is phased out and replaced by higher corporate income taxes.
  - Options include strengthening the income tax system and increasing the VAT rate and base (Box 5).
  - If sufficient revenue gained, reduce non-conventional taxes (e.g., personal wealth tax, financial transaction tax, VAT on capital goods) to foster investment and growth.
- Authorities’ views:
  - Personal wealth tax seen as important for progressivity.
  - Large gains in revenue could be achieved via improved tax administration, including imposing criminal penalties for tax evasion, increasing staff, and strengthening tax administration information technology.

### Expenditure framework and consolidation
- Baseline scenario does not assume new tax measures; gradual decline in central government revenues as a fraction of GDP is due to reduced oil-related revenues.
- Outlook for expenditure in baseline broadly based on the 2014 Medium-Term Fiscal Framework (MTFF), which includes a plan for achieving consolidation mandated by the fiscal rule through reductions in expenditure, including a moderation in investment (about ½ percent of GDP between 2015 and 2020).
- Staff projections guided by authorities’ MTFF and include expected outlays related to PPP investment program, existing pension programs, and some programs to compensate victims of civil conflict (e.g., Victims’ Law; Law 1448 of 2011).

### Infrastructure program and financing
- Authorities confident in the infrastructure program; significant road infrastructure deficit exists.
- Fourth generation (4G) road concessions implemented with strengthened risk framework: framework Law, standardized PPP contracts, contingency planning, and ex-post financing of functional units.
- Efforts underway to develop alternative financing options and risk hedging instruments, including amending financial regulatory framework for institutional investor participation.
- Colombian banks and pension funds showing strong interest despite limited project financing experience.
- Authorities expect contractors to establish financing agreements by year end for first set of road concessions.
- Authorities intend to use proceeds from prospective sale of power company Isagen to increase development fund resources.
- Infrastructure investment estimated to raise long-run potential growth by about 0.7 percent (estimate of the national planning department, DNP).

### Fiscal impact of a potential peace agreement
- Possible fiscal expenditures included in MTFF; likely manageable:
  - Re-integration of demobilized combatants: up to 0.1 percent of GDP.
  - Victims’ reparations: 1 percent of GDP.
- Additional outlays for health and education benefits for victims likely reflect programs already included in MTFF.
- Financing options: redistribution of government assets through land and rural development reforms, and partly financed through lower military spending.
- Any additional peace dividend for growth likely to materialize beyond the medium-term horizon due to long implementation lags for land reform and rural development.

### External stability and current account adjustment
- External Balance Assessment (EBA) methodologies show:
  - A current account gap of around 2 percent of GDP (adjusted for potential oil reserves).
  - EBA REER methodology estimates the exchange rate fully in line with fundamentals.
- REER depreciation: 18 percent at end-2014.
- Current account developments:
  - Projected widening in 2015 due to oil price shock, but expected to be predominantly financed by FDI inflows.
  - FDI inflows expected to moderate from 4.2 percent of GDP in 2014 to 3.3 percent by 2020, financing about 80 percent of the current account deficit over the medium-term.
  - Over the medium term, current account deficit expected to narrow as peso depreciation supports non-traditional exports and reduces capital and consumer imports after a lag; improvement partly offset by higher cost of external debt.
  - Oil export receipts projected to increase as prices partly recover and help offset some decline in oil production (Box 3).
- Reserves and central bank actions:
  - As of end-2014, international reserves covered approximately 7 months of imports and about 100 percent of 2015 gross external financing needs.
  - Central bank halted foreign exchange purchases in 2015 after reserves increased and peso depreciation aligned with fundamentals.

### Financial system and macro-financial stability
- Financial system sound; exposure to oil sector is limited.
- Banks’ exposure to the oil sector: about 1–3 percent of assets.
- Financial sector institutions 13 exposure to the oil sector concentrated in Ecopetrol (97 percent).
- Exposure to Ecopetrol and Pacific Rubiales in standardized derivatives markets: Ecopetrol 1.2 percent; Pacific Rubiales 0.6 percent (end-December 2014).
- Household exposure to oil sector negligible: individual shareholders held 0.018 percent of Ecopetrol, 0.15 percent of Pacific Rubiales, and 19 percent of Canacol (end-2014).
- Central bank stress test (June 2014): banking sector would remain solvent under an extreme macroeconomic shock (combined shock: 8 percent decline in real GDP, increase in real interest rate to 12 percent, 17 percent fall in house prices, unemployment increase to 15 percent).
- Liquidity stress test: liquidity coverage ratio would remain well above regulatory minima of 100 percent for banks and non-banks.
- Financial sector vulnerability increased marginally above the “low” threshold in late 2014, reflecting recent pick-up in credit, but banking system balance sheets remain strong with ample buffers.
- Credit growth: 14.7 percent in 2014.
  - Drivers: replacement of foreign bank credit lines with domestic credit after exchange rate depreciation; ample liquidity from capital inflows and imperfect sterilization of reserve purchases; strong competition between banks; government housing subsidy program targeted to middle-income households.
  - Expected: credit growth to remain strong going forward, financing 4G infrastructure program; consumer lending for durable goods expected to slow, but total credit growth to outpace nominal GDP growth.
- Scenario analysis for 4G financing:
  - SFC scenario to gauge bank capacity to fund Col$14 billion (30 percent of total financial need) of 4G PPP road projects.
  - Scenario assumed staff baseline macro projections for 2016 and 2017 and normal growth of credit and provisioning.
  - Results: bank financing for 4G manageable without crowding out lending or unduly increasing concentration; banks could maintain strong capitalization.
  - Authorities optimistic about banks’ appetite given cooling consumer lending cycle and slowdown in other credit lines.

*Italic line: Sources: Colombian authorities; and Fund staff estimates.*

### 30.      Colombian banks' large presence in Central America continues to pose risks. Economic

### _cr15142 - 30.      Colombian banks' large presence in Central America continues to pose risks. Economic

### Cross-border banking risks and contagion
- Findings:
  - Colombian banking conglomerates are systemic for the region (including Central America and Panama) while they are not vulnerable to shocks on individual banks in other countries.
  - Banks’ capital, while currently above regulatory minima, could prove insufficient against risks run by banking groups in case of system-wide shocks.
  - Removing goodwill from banks’ capital results in a more negative scenario in which Colombia becomes significantly more contagious for the region and its banks more vulnerable to shocks.
  - Concerns persist over lower loan quality, higher FX exposures, and weaker prudential standards and AML/CFT framework in countries where Colombian banks expanded.
  - The absence of common regulatory and supervisory standards and confidentiality obstacles on information sharing create challenges for cross-border supervision, including for AML/CFT purposes.
- Policy recommendations:
  - Consider strengthening capital buffers further for Colombian banks to increase loss absorbency against cross-border and domestic risks.
  - Build a regional body in charge of financial stability to act as a forum for coordination of regional macro-prudential surveillance.

### Implementation of FSAP recommendations and regulatory reform
- Findings:
  - The Colombian authorities are making good progress in implementing FSAP recommendations that help address cross-border risks.
  - Draft laws granting independence and legal protection of the supervisor, and laws awarding regulatory powers over holding companies of financial conglomerates currently lie before Congress.
  - The SFC continues to move ahead with risk-based supervision to tailor prudential requirements to institutions’ risks.
  - Assessing risks from mixed conglomerates remains challenging given complex family ownership and offshore structures where SFC regulatory reach is limited.
- Policy recommendations and actions underway:
  - Approve laws to strengthen supervisory independence and regulatory powers over financial conglomerates; extended delays would weaken supervisory oversight.
  - Implement Basel III capital adequacy measure, Basel II (Pillar 2) buffers, the capital conservation buffers, and domestic systemically important banks’ (D-SIB) buffers for large internationally active Colombian banks.
  - Establish a clear timeline for implementation of Basel III for large internationally active banks.

### Nonbank financial intermediation and market infrastructure
- Findings:
  - Total nonbank financial system assets amounted to Col$532.2 billion in June 2014 (72.5 percent of GDP).
  - Credit growth outside the banking system has been robust and broker-dealers have been growing in size, with some large entities accounting for around 30 percent of key public debt and derivatives markets.
  - Since the collapse of a large broker-dealer, Interbolsa, in 2012, regulations (e.g., liquidity risk management for broker-dealers and investor protections) were strengthened.
  - Risks from a larger presence of systemic broker-dealers in capital markets require continued monitoring.
- Policy recommendations:
  - Continue risk-based supervision of broker-dealers and nonbanks to tailor prudential requirements and instill better risk management practices.
  - Monitor systemic risks arising from nonbank financial intermediation and expand supervisory tools accordingly.

### Derivatives market regulation and supervision
- Findings:
  - The derivatives market has grown in recent years; the regulatory regime is complex and fragmented.
  - The current framework has provided clarity and allowed a large scaling up of derivatives transactions.
  - The risk-based approach to supervision currently addresses counterparty risk, including risks flowing from institutions' regional exposure.
- Policy recommendations:
  - Simplify the regulatory framework for derivatives to reduce complexity and fragmentation.
  - Upgrade supervisory tools to monitor concentration risk, leverage, and collateral quality in the OTC derivatives market.
  - Develop analytical and supervisory tools for on-site and off-site surveillance of derivatives transactions.

### Capital markets, liquidity, and money markets
- Findings:
  - Liquidity in interbank money markets (e.g., repo) tends to be concentrated at overnight maturities; money markets at maturities beyond overnight are illiquid.
  - This limits Colombian capital markets’ ability to provide liquidity management and financial intermediation services across a variety of maturities.
- Policy recommendations:
  - Further develop money markets by imposing a higher cost of overnight credit.
  - Increase issuance of short-term government securities to deepen and enhance liquidity in money markets.

### Financial inclusion and structural reforms (summary of linked sections)
- Findings and measures:
  - Authorities launched the electronic money issuers license and implemented a centralized electronic movable property registry.
  - The regulatory framework is being set up to operationalize electronic deposit taking institutions.
  - Household surveys could be expanded to better capture the role of informal finance.
- Policy recommendations:
  - Continue regulatory work to operationalize electronic deposit-taking institutions and improve movable property registry regulations (e.g., shorter execution periods and improved asset valuation).
  - Promote financial education, competition in the banking sector to lower costs, and measures to shorten the period for guarantees on movable property to foster financial inclusion.

### Key macro-financial statistics and projections cited
- Real GDP grew by 4.6 percent in 2014.
- Real GDP growth ebbed to 3.5 percent y/y in the fourth quarter of 2014.
- Growth is expected to slow to 3.4 percent in 2015.
- Total nonbank financial system assets: Col$532.2 billion in June 2014 (72.5 percent of GDP).
- Mortgages growth: 17.3 percent in real terms in September 2014.
- Mortgages stock: about 10.5 percent of total loans.
- Household debt: 17.5 percent of GDP and 28 percent of disposable income.
- Household debt service-to-disposable income: 9 percent.
- Loan-to-value ratios (LTVs): 52 percent.
- Infrastructure program: Col$48 trillion (US$25 billion, about 6.2 percent of 2014 GDP) over 2014–22.
- Fiscal outlays for 4G program: around 0.4 percent of GDP per year.
- Target financing structure for 4G projects: local banks―30 percent; foreign banks―26 percent; equity of concessionaries―20 percent; private capital funds―14 percent; multilateral institutions (FDN)―10 percent.

*Source: _cr15142 (IMF staff report excerpt).*

### Box 3. Oil Sector Prospects

### Box 3. Oil Sector Prospects

### Overview
- Since 2006, an increase in investment supported a strong expansion in oil production.
- Oil production expanded by about 90 percent between 2006 and 2013, and surpassed one million barrels per day.
- The 2.5 percent decline in 2014 was due in part to security and other operational constraints but it has recovered in recent months.
- An important factor behind this expansion is the government’s measures to improve the investment climate for foreign oil companies. FDI and Ecopetrol investment more than tripled over this period.

### Investment, cash flow, and company responses
- While production costs remain competitive, cash flow constraints have driven oil companies to scale down investment plans.
- Oil companies are actively timing their capital expenditures, especially exploration-related, to revenue inflows; some companies are also considering divesting from non-core activities to finance capital expenditures.
- The two largest operators announced cuts to investment plans:
  - Ecopetrol: announced cuts of 25 percent.
  - Pacific Rubiales: announced cuts of 50 percent.
- Given competitive extraction costs and the operational need to keep wells active:
  - Extraction costs remain 30−40 dollars per barrel for 70 percent of Ecopetrol’s production.
  - Near-term oil production will be protected, but the fall in investment weakens the medium-term production outlook.

### Medium-term production outlook and targets
- The authorities’ draft development plan includes a 2018 oil production target of 980 kbpd―14 percent below the target announced in the 2014 medium-term fiscal framework.
- Oil production would decline by about 8 percent between 2015 and 2020.

### Policy measures in the draft development plan
- Targets measures to improve oil-contract flexibility to enhance competitiveness, especially for medium-size oil companies, amid lower oil prices.
- Includes measures to foster better recovery rates at existing fields.
- Includes tax incentives (expected to be included in the expenditure envelope of the next MTFF) for off-shore exploration and production.

*Source: Box 3, "Oil Sector Prospects" (content unit: _cr15142 - Box 3. Oil Sector Prospects).*

### Box 8. Summary of Progress with Implementation of FSAP Reforms

### Box 8. Summary of Progress with Implementation of FSAP Reforms

### Progress overview
- The authorities have made good progress in implementing recommendations of the 2012 FSAP Update.
- Gains achieved in a few high priority short-term reform areas, including independence and legal protection of supervisors, and supervision and regulation of holding companies of financial conglomerates.
- Some progress in bank regulation and money markets, but gaps remain and further effort will be necessary.

### Independence and legal protection of supervisors
- FSAP recommended strengthening independence and legal protection of supervisory staff.
- Specific recommendations included:
  - Include the requirement to appoint the superintendent for a fixed term―or require a public explanation of the reasons for dismissal.
  - Amend the legal framework to clarify that liability for failure to perform the regulatory mandate in good faith is equivalent to acting in bad faith.
- Authorities’ actions:
  - A draft law has been put before Congress which will strengthen independence of the Superintendent by requiring a clear fixed-term appointment and reasons for removal.
  - SFC staff will be provided legal assistance and protection from lawsuits when acting in good faith.
  - Expected effect: supervisory decisions to occur with greater autonomy and independence.
- Key implementation risk:
  - Ensure passage of draft law without extended delays.

### Supervision and regulation of financial holding companies (FHCs)
- FSAP high priority: approve a law that gives SFC supervisory and regulatory powers over the holding company of a financial conglomerate.
- Draft law provisions:
  - Defines a financial holding company (FHC).
  - Provides the SFC power to supervise FHCs with special powers to obtain information from domestic and foreign entities not currently subject to supervision.
  - SFC can order changes to conglomerates if any entity presents a risk to the group.
- Remaining gaps and concerns:
  - Prudential regulations are established by the government which could result in weaker enforcement actions for conglomerates.
  - The SFC has no enforcement powers over non-financial institutions that form part of mixed conglomerates, enabling unregulated entities to bypass prudential norms.

### Bank regulation and Basel II Pillar 2 / Risk Based Supervision (RBS)
- Adopting Basel II Pillar 2 supervisory framework to strengthen bank regulation was deemed a high priority reform.
- Progress:
  - Progress in this area is good but further developments are necessary.
  - RBS is being developed only for lending institutions and insurance companies; other non-banks are not yet covered.
  - The SFC has developed an integrated supervision framework to monitor risks on a forward-looking, granular, and at a business model level.
- Implementation timeline and effects:
  - RBS will take many years to be implemented fully.
  - Together with stress tests, RBS will facilitate tailoring capital requirements to concentration and country risks faced by large banking groups and conglomerates.

### Money markets and open market operations (OMOs)
- Recommendation: narrow the range of counterparties in OMOs.
- Actions and effects:
  - Authorities have limited access to OMOs by non-systemic counterparties, which should help enhance own liquidity risk management by broker-dealers and reduce moral hazard.
- Remaining issues:
  - RBS is still evolving, including for broker-dealers, some of whom could pose liquidity and contagion risks to the financial system.
  - It could be envisaged to widen the range of supervised counterparties temporarily in crisis times for financial stability reasons.
  - Development of longer-maturity money markets would be helped by increasing the cost of overnight credit and the issuance of short-term government securities.

### Information sharing and coordination
- Recommendation: sharing of supervisory data between the SFC and the central bank through MoUs.
- Purpose and expected effect:
  - Ensure confidentiality concerns do not limit exchange of information that is deemed essential for ensuring financial system stability.

*Source: Box 8. Summary of Progress with Implementation of FSAP Reforms*

### Box 10. Poverty and Income Inequality in the Last Decade

### Box 10. Poverty and Income Inequality in the Last Decade

### Overview
- During the last decade, strong growth and effective economic policies led to a remarkable decline in poverty and the revival of the middle class.
- After suffering its worst economic crisis in recent years at the end of the 1990’s, that increased the share of population living below US$4 per day (PPP) in Colombia to 60 percent, favorable economic conditions related to the commodity boom, improvements in the security environment, and several well-targeted social programs helped to almost halve poverty to 32.9 percent in 2012.
- The middle class (US$10–50 per day; PPP) also suffered with the reversal in growth shrinking by almost half to 11 percent of the population in 2000, while was on the rise among peer countries. Faster GDP growth by the end of the 2000’s pushed many people from poverty or vulnerable classes to a rising middle class of roughly 22 percent of the population in 2010, yet small compared to other countries in the region.

### Key statistics and recent trends
- Share of population living below US$4 per day (PPP): rose to 60 percent in the late 1990’s; fell to 32.9 percent in 2012.
- Middle class (US$10–50 per day; PPP): 11 percent of the population in 2000; roughly 22 percent of the population in 2010.
- Gini coefficient: 53.8 in 2014.
- Income growth for the poor: income of the poor grew at faster rates than average income in the last decade—particularly between 2008 and 2011 at 4 percent.
- Top 1 percent income concentration: the richest holding around 20 percent of the total national income.
- Small reductions in the Gini in recent years were related mainly to decreases in labor income inequality, demographic factors (decline in dependency ratios and increasing share of adults with labor earnings), and expansion in public transfers.

### Drivers of high inequality (as identified)
- Labor market:
  - Income inequality stems mostly from labor income inequality which arises in part from high wage-skilled gap and high levels of informality.
- Education:
  - Colombia has achieved important gains in primary and secondary enrollment; however access to high quality education is very uneven across income groups and tertiary education is completed mostly by the better-off.
- Pensions:
  - Pensions are an important contributing factor to overall inequality. Moreover, pension coverage is low by international standards, and also highly concentrated among the rich.
- Tax and transfers system:
  - Social transfers in Colombia have a limited impact on income inequality and the tax system is regressive and evasion is rampant especially among the better-off.

### Policy recommendations and implications
- A sustainable and steady reduction of income inequality will require coordinated efforts in the areas listed above (labor market, education, pensions, tax and transfers).
- Success in reducing inequality would in turn improve the prospects for achieving strong economic growth over the medium and long-term.

*Source: Box 10, "Poverty and Income Inequality in the Last Decade" (extracted from the provided IMF content).*

### 2. Emerging market

### 2. Emerging market 
risks

### Risk dimensions (listed in source)
- 1. Macroeconomic risks
- 2. Inward spillover risks
- 3. Credit risks
- 4. Market and liquidity risks
- 5. Monetary and financial conditions
- 6. Risk appetite

### Visualization notes and axes
- Numeric axis labels shown: 0, 2, 4, 6, 8, 10
- Date markers shown: April 2014; April 2015
- Alternate date markers shown: 2013Q4; 2014Q4

### Interpretive caption text from figures
- "Away from center signifies higher risks, easier monetary and financial conditions, or higher risk  appetite"
- "Note: Away from center signifies higher risks, easier monetary and financial conditions, or higher risk appe tite ."

*Source: _cr15142 - 2. Emerging market*

### Appendix I. Colombia: Macro-Financial Stability Assessment

### Appendix I. Colombia: Macro-Financial Stability Assessment

### Macro-Financial Stability Map — Key Findings
- Colombia’s macro-financial system is stable on both microprudential and macroprudential dimensions.
- Compared with the same period a year before, the system remains stable albeit with some signs of increased macroeconomic risk reflecting:
  - an increase in bank credit, and
  - a rise in CDS spreads.
- The level of macroeconomic risk is consistent with the level reported in the April 2015 Global Financial Stability Report.
- Inward spillover risks have declined since end-2013 due to some improvement in the ratio of reserves to broad money.
- Reduction in risk appetite reflects recent increases in CDS spreads and heightened exchange rate and stock market volatility.
- Tightening in monetary and financial conditions reflects a decline in real broad money growth.

### Financial Sector Risk Assessment — Summary and Key Statistics
- Overall financial sector vulnerability risk: assessed as “medium”.
- Drivers of changed assessment:
  - The overall financial rating moved from “low” to “medium” vulnerability in the last quarter of 2014 because strong credit growth pushed the change in the credit-to-GDP indicator marginally above the threshold of 3 percent.
- Mitigating factors and balance sheet strength:
  - Non-performing loan ratios of deposit-taking institutions remain low.
  - Provisioning strong at 151.3 percent.
  - Capital adequacy ratio: 17.1 percent (above the minimum requirement of 9 percent).
  - Profitability: ROE 19.8.
  - Leverage: 14.9 percent (reported as leverage ratio (%)).
- Selected financial soundness indicators (as reported):
  - Change in credit / GDP ratio (pp, annual): 0.7 -1.2 2.4 2.6 3.0 1.8 1.8 1.8 1.9 3.1
  - Growth of credit / GDP (%, annual): 2.4 -4.0 8.1 8.1 8.5 4.8 4.6 4.7 4.7 7.7
  - Credit-to-GDP gap (st. dev): n.a. -1.9 0.3 1.1 1.5 -0.1 -0.7 -0.6 -1.0 -0.5
  - Deposit-to-loan ratio: 94.9 98.8 93.5 91.4 94.7 96.3 96.9 94.3 94.0 91.6
  - FX liabilities % (of total liabilities): 8.9 6.6 9.4 10.5 9.4 10.2 10.7 10.0 11.1 12.7
  - Leverage ratio (%): 12.6 14.2 14.2 14.3 14.7 14.8 14.7 14.7 14.8 14.9
  - ROA: 3.6 3.5 3.4 3.3 3.1 2.8 3.4 3.0 2.9 2.9
  - ROE: 28.1 26.2 23.7 23.0 21.2 19.5 23.5 20.2 19.8 19.8
  - NPL ratio: 3.9 4.0 2.9 2.5 2.8 2.8 3.0 3.0 3.1 2.9
  - NPL ratio change (%, annual): 21.8 2.0 -28.6 -12.8 10.5 0.5 -4.0 3.3 4.2 5.2

### Financial Sector Vulnerabilities and Resilience
- Vulnerabilities:
  - Strong credit growth pushing credit-to-GDP change slightly above 3 percent threshold.
  - Recent increases in CDS spreads and heightened market volatility.
- Resilience and buffers:
  - High provisioning (151.3 percent) mitigates credit risk from the pick-up in credit.
  - Capital adequacy ratio: 17.1 percent (regulatory minimum: 9 percent).
  - Low NPL ratios and strong profitability (ROE 19.8).
  - Banks exhibit low leverage (14.9 percent).
  - Low exposure to foreign currency and mismatches in banks and corporate sectors.
  - Loans associated with the oil sector account for 1.9 percent of the total portfolio; stress tests by the Financial Superintendency indicate limited impact on capital adequacy even under downgrades up to three notches.

### Economic Outlook — Staff and Authorities’ Projections
- 2014 growth: 4.6 percent.
- Growth projection:
  - 2015: projected to slow to around 3.5 percent.
  - 2016: expected to start recovering and converge in the next years to a long-term growth of around 4.5 percent.
- Current account:
  - 2014 current account deficit: 5.2 percent of GDP.
  - The deficit is expected to narrow gradually in dollar terms but remain close to 5 percent of GDP due to real depreciation effects on the dollar valuation of GDP.
- Inflation:
  - 2014 inflation: 3.6 percent.
  - Target range: 2-4 percent.
  - Headline inflation expected to finish the year in the upper part of the target range.
- Labor market and social indicators:
  - Unemployment declined from 12 percent in 2010 to 9.1 percent in 2014.
  - Between 2010 and 2014, 4.4 million people lifted out of poverty and 2.6 million out of extreme poverty.
  - Poverty rate declined from 37.2 percent to 28.5 percent; extreme poverty from 12.3 percent to 8.1 percent.
  - Government goals by 2018: poverty 25 percent, extreme poverty 6 percent.

### Fiscal Policy — Assessment and Policy Directions
- Fiscal framework:
  - Fiscal stance embedded in the Medium-Term Fiscal Framework is anchored by the fiscal rule.
- Fiscal outcomes and projections:
  - Central Government structural deficit (new data as of May 19): 2.30 percent of GDP (smaller than 2.32 percent in 2013).
  - Headline deficit: 2.43 percent (similar to 2.36% in 2013).
  - Combined Public Sector deficit: 1.8 percent of GDP due to reduced surplus of sub-national governments from political cycle and higher investment.
  - 2015 outlook more challenging due to expected drop in oil-related revenues and increased debt service from exchange rate depreciation.
- Policy response and reform:
  - Fiscal rule allows for a higher total deficit in 2015 owing to smoothing of mining and economic cycles.
  - Adjustment to rely on increasing revenues from the tax reform approved in December 2014 and budget cuts while protecting social spending.
  - Under a new normal of oil prices, further revenue mobilization will be needed to comply with the fiscal rule.
  - Government commissioned independent experts to design a comprehensive tax reform; the final blueprint to be submitted by end of October 2015, with earlier deliverables on specific areas for timely legislative consideration.

### Monetary Policy and External Position — Analysis
- Monetary framework:
  - Inflation targeting functions well; inflation expectations firmly anchored.
  - Monetary policy stance remained supportive amid an expected slowdown and near-full utilization of productive capacity.
  - Room for monetary easing depends on: magnitude of slowdown, inflation expectations, and pass-through of depreciation to inflation.
- Reserve and FX operations:
  - Banco de la República continued to build international reserves in 2014 and stopped its FX purchase program by end-2014 as reserve buffers became broadly adequate for normal times.
- Exchange rate:
  - Exchange rate flexibility has been the main shock absorber; the peso depreciated quickly and strongly but is broadly aligned with fundamentals.
- Capital flows and external financing:
  - Reduction in dollar terms of the current account deficit will be mirrored by declines in FDI and portfolio inflows.
  - Decrease in FDI will be especially felt in the oil and mining sectors.
  - 2014 record inflows of Colombian local public bonds linked to increased weight in Emerging Economy benchmark indices are expected to reverse.

### Financial Sector Policy Recommendations and Actions
- Authorities’ commitments and actions:
  - Maintain good macroeconomic policies and strong fundamentals, floating exchange rate, adequate international reserves, and close monitoring of banks, corporate and household balance sheets.
  - Continue strengthening financial institutions’ capital and move toward adoption of best practices in line with Basel III and Pillar 2 of Basel II.
  - Monitor and adopt regulatory measures where necessary and implement strict vigilance to prevent spillovers from lower growth, depreciation, and lower oil prices.
- Specific supervisory actions:
  - Financial Superintendency conducted stress tests on oil-sector linked loans (1.9 percent of total portfolio); results indicate limited impact on capital adequacy even under downgrades up to three notches.
- Observed debt metrics and vulnerabilities:
  - Household debt: historically high at 30 percent of disposable income; financial burden has risen but remains below IMF risky thresholds.
  - Corporate private debt: 37 percent of GDP, with low share of foreign currency-denominated debt at 11 percent of GDP and no evidence of large currency mismatches.
  - Banking sector foreign currency regulation is strict, containing exposures and mismatches.

### Structural Reforms and Growth Enhancers
- National Development Plan (El Plan Nacional de Desarrollo 2014-2018 “Todos por un nuevo País”) under discussion in Congress with three pillars: peace, equity and education.
- Cross-cutting strategies include:
  - Improving competitiveness and infrastructure, social mobility, and rural transformation.
  - Infrastructure: 4G package of projects beginning construction in 2016, estimated to add around 0.7 percentage points to potential output.
  - Re-entrance into operation of the Cartagena oil refinery late in the year expected to bolster manufacturing.
  - Measures to enhance urban transportation, broaden access to information and communication technologies, and bolster social housing.
  - Social mobility: improving education, early childhood attention, health care services delivery, and labor market initiatives.
  - Agricultural sector reform, institutional redesign, and land management modifications.
- Authorities emphasize structural reforms to boost non-traditional tradable sectors and leverage US recovery and free trade agreements.

### Data and Statistical Capacity — Surveillance Adequacy
- Data provision: assessed as adequate for surveillance.
- Institutional responsibilities:
  - DANE: national accounts and price statistics (CPI, PPI).
  - Banco de la República (BdR): financial accounts, balance of payments, international reserves, and monetary statistics.
  - Ministry of Finance and Public Credit (MFPC): public revenue, expenditure, and financing data; GAO maintains single accounting framework based on IPSAS.
  - Financial Superintendence (FS) and Superintendence of Securities: sectoral financial data.
- Methodology and coverage notes:
  - National accounts reference year: 2005; compilation conforms to 1993 SNA and some 2008 SNA recommendations.
  - BdR adopted BPM5 standard in 1998 for balance of payments; quarterly data since 1994.
  - BdR has reclassified some FDI equity to portfolio equity and adjusted investment income series accordingly.
- Reporting and standards:
  - Colombia subscribes to the Special Data Dissemination Standard (SDDS); metadata posted on DSBB.
  - Data ROSC published October 2006.
  - Colombia reports annual GFS to STA on accrual and cash bases; reporting of high-frequency data to IFS is being addressed by an action plan.
  - FS reports 11 of the 12 core FSIs and 10 of 13 encouraged FSIs for deposit takers monthly.

*Source: IMF staff report material contained in "Appendix I. Colombia: Macro-Financial Stability Assessment."*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15142.pdf_