Coffee worker in a farm near Bogotá, Colombia. A drop in world commodity prices poses a risk to Colombia’s outlook, says the IMF (photo: José Miguel Gomez/Newscom)
Flexible Credit Line
The two-year successor arrangement is the third time Colombia has requested a Flexible Credit Line—an insurance option created in 2009 for the IMF’s strongest performing members. The credit line is available to countries, such as Colombia, that have demonstrated a very strong track record of sound economic policies.
The Colombian government has announced it intends to treat the credit line as precautionary, as before.
“In the authorities’ view, Colombia remains exposed to downside risks, including from severe commodity price fluctuations and other adverse external developments,” said IMF First Deputy Managing Director John Lipsky in a statement after the Board decision on May 6. “Under these circumstances, the authorities have requested a new Flexible Credit Line arrangement, which would provide appropriate insurance against shocks,” he added.
Solid performance
The country’s economic performance has been strong in recent years. Growth has averaged about 4 percent from 2004 to 2009, boosted by buoyant private investment and exports, especially of oil. The inflation targeting regime—adopted in the late 1990s—was successful in anchoring expectations and bringing inflation down to single digits, while a flexible exchange rate helped mitigate external shocks.
In addition, a rolling 5-year fiscal framework, which would be strengthened by the fiscal rule under discussion in Congress, has guided fiscal consolidation and enabled a decline in the public debt-to-GDP ratio of almost 7 percentage points from 2004 to 2009. At the same time, effective financial sector supervision and regulation protected the integrity of the financial system and maintained financial soundness indicators at solid levels.
The Colombian economy exhibited great resilience during the global crisis, and the output recovery is well entrenched. Following a short-lived contraction, economic activity started to recover in the second half of 2009, supported by a large fiscal and monetary stimulus. Activity gained further momentum in 2010 and real GDP grew by 4.3 percent, despite output disruptions late in the year caused by severe flooding.
The outlook for 2011 is generally positive. Growth is expected to exceed 4.5 percent, driven by still strong domestic demand.
Risks to the outlook
The authorities consider that the Flexible Credit Line arrangements in 2009 and 2010 allowed the country to maintain policy flexibility despite global and regional uncertainties. But in their view global uncertainties remain elevated and they believe that a new credit line would provide useful protection against continuing external risks.
• Colombia is particularly vulnerable to commodity price shocks. Commodity exports accounted for about 65 percent of export revenue in 2010 (up from 50 percent in 2007) and the bulk of foreign direct investment inflows are in commodity-related projects (mainly oil). As a result, an adverse shock to oil and other primary exports (for example, coffee) could result in a significant increase in Colombia’s financing needs.
• A sudden deterioration of external financing conditions would also affect Colombia. Tighter global financial conditions would lower the inflows of private capital and public external financing could also be affected, even if the government were to maintain access to international markets at favorable rates.
• A slower global recovery would also reduce remittances, which declined by almost one quarter during the global financial crisis.
Colombian response
The authorities have confirmed their continued commitment to maintaining strong policy and institutional frameworks. Their priorities are to support the ongoing recovery while maintaining economic and financial stability.
“The augmented duration and size of this successor Flexible Credit Line—new features made possible by the recent IMF facilities reform—will allow the Flexible Credit Line to play an even stronger role in insuring Colombia against external risks while continuing to support the authorities’ overall macroeconomic strategy,” said Lipsky.
