Colombia: Staff Concluding Statement of the 2020 Article IV Mission

IMF News, February 21, 2020

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Colombia’s economy expanded by 3.3 percent in 2019.
Forecast to grow by 3.4 in 2020 led by internal demand.
Domestic demand—including from substantial migration inflows from Venezuela—lifted growth while the external deficit widened, largely financed through stable FDI.
Current account deficit widened to an estimated 4.4 percent of GDP in 2019.
Lower commodity prices, partly attributable to the Novel Coronavirus outbreak, are expected to keep the external deficit at around this level in 2020.
The IMF’s Flexible Credit Line (FCL) provides additional buffers.

Over 2 million arrivals from Venezuela in recent years.
Estimated annual fiscal costs of around ½ percent of GDP in the near term.
Migrant inflows boosted economic growth by around ¼ percent in 2019.
Migrants have largely been absorbed by the informal sector with little evidence of labor displacement thus far.
Potential gains from migration depend on the speed of migrant integration into the formal economy.
Promoting formal employment remains a priority given high structural unemployment, informality, and migration inflows.

Strong internal demand and lackluster exports widened external imbalances.
Higher remittances and tourism receipts partly offset the worsening trade balance.
The external deficit should continue to be comfortably financed by buoyant FDI and relatively resilient portfolio inflows given very favorable global financial conditions.
Vulnerabilities: increased external financing needs raise exposure to downside scenarios (steep fall in commodity prices, sharp rise in risk premia, renewed trade tensions, prolonged Coronavirus outbreak, regional tensions, spillovers from Venezuela).

Business credit is recovering; consumer credit is rapidly expanding.
Financial system solvency and liquidity have remained strong; NPLs have declined since their peak in 2018.
Mission supports additional provisioning requirements to mitigate risks associated with consumer loans, currently being considered by the SFC.
Continued vigilant and proactive supervision recommended to ensure problem assets remain sufficiently provisioned and to monitor risks of overborrowing and potential future NPL build-up.

Headline inflation is projected to end 2020 near the 3 percent target.
With economic slack, core inflation close to target, and well-anchored inflation expectations, monetary policy can remain moderately accommodative.
Accommodation can be gradually withdrawn as the recovery materializes and if downside risks to growth recede.
While it was operating, the central bank’s reserve accumulation program purchased USD 2.8 billion and accumulated returns of USD 2.3 billion in 2019, enhancing reserve adequacy.
Further reserve accumulation should be considered, market conditions permitting.
Exchange rate flexibility should remain the first line of defense against external shocks.

Authorities’ 2020 target reduces the headline and structural deficit and saves some space provided by the Fiscal Rule Consultative Committee.
Planned reduction of the 2020 headline deficit target to 2.2 percent of GDP is appropriate given robust domestic demand and a wider external deficit.
Over the medium term, fiscal adjustment beyond the 2019 Medium Term Fiscal Framework will be required to adhere to the fiscal rule.
Increasing structural revenues by 2-3 percent of GDP would help meet future deficit targets, as well as growth and inclusiveness challenges.
Mission welcomes recent tax collection improvements and authorities’ focus on spending efficiency, including better targeting of subsidies.
Further measures could include elimination of preferential regimes for particular sectors and broadening of the tax base while protecting vulnerable groups.
Authorities recognized previously unrecognized public expenditures under the 2018-2022 National Development Plan and put in place a strategy for clearing arrears through a combination of cash deposits and issuance.
Authorities plan to strengthen provisioning and spending mechanisms: managing legal claims, auditing and control of health expenditures, and improved fiscal accounting by subnational governments and state-owned enterprises.
Public debt, including recognized arrears, should decline as a share of GDP if fiscal targets are met.

Regulations under the Conglomerates Law go into effect starting in early 2020, including added resources for SFC oversight and implementation of Basel III definitions of capital ratios in 2020.
Maintaining heightened supervisory vigilance is appropriate during the transitional period.
A Financial Sector Assessment Program (FSAP) will be undertaken later this year to review financial frameworks, oversight, and soundness.
Growth Law and national consultations aim to address inequality concerns; deeper inclusion challenges require more fundamental structural reforms.
Priority reform areas: tackling regional disparities, boosting inclusive growth under the NDP and the Peace Agreement, meaningful pension reform (including expansion of the social pillar Colombia Mayor and removing regressive subsidies for higher-income pensions), and reducing non-tariff barriers.
Civil works execution and 4G infrastructure investments should reduce transportation costs and help boost exports, especially if complemented with a reduction in non-tariff barriers.

Downside risks have risen: steep commodity price falls, sharp rise in risk premia, renewed trade tensions, more widespread Coronavirus outbreak, Venezuela crisis spillovers, regional social tensions.
Domestic risks: renewed strikes and work stoppages, deterioration of labor market conditions, shortfalls in mobilizing revenue that could force large cuts in social and infrastructure spending.
Policy mix recommendations:
- Maintain moderately accommodative monetary stance while monitoring inflation and labor market recovery.
- Preserve and consider further reserve accumulation; keep exchange rate flexibility.
- Anchor fiscal policy to the fiscal rule, pursue revenue-enhancing measures and spending efficiency reforms to increase structural revenues by 2-3 percent of GDP.
- Strengthen financial supervision, provisioning for consumer credit, and implement Basel III definitions and Conglomerates Law regulations with vigilance.
- Advance structural reforms to enhance external competitiveness, formal employment, and inclusion.

Colombia: Staff Concluding Statement of the 2020 Article IV Mission, February 21, 2020 — International Monetary Fund.