Expanded Flexible Credit Line Will Help Colombia Cope with COVID-19

IMF News, September 25, 2020

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Colombia has maintained a Flexible Credit Line (FCL) arrangement with the IMF since 2009 and renewed it most recently in May.
On September 25, 2020, the IMF Executive Board approved a request to increase it:
- "about US$ 6.5 billion, to a total of US$ 17.3 billion."
- (Elsewhere in the same text the increase is reported as) "about US$ 6.2 billion, to a total of US$ 17.2 billion."

Colombia is facing its first recession in two decades, and "the worst on record" due to the COVID19 pandemic.
At the time of the May renewal, GDP was projected to shrink by 2.5 percent; the updated growth forecast is "-8.2 percent."
The national lockdown was "much longer than expected" and external risks are higher given substantial uncertainty about the pandemic’s future course.
The central government’s fiscal deficit is expected to reach "8.2 percent of GDP" (from "4.9 percent estimated in May").
Financing needs rose from an average of "8 percent of GDP in the last 5 years" to "about 13 percent in 2020."

The larger credit line addresses higher-than-expected balance of payments needs arising from the pandemic.
As a flexible instrument, the FCL can address both actual and potential balance of payments needs and, combined with Colombia’s international reserves, provides added insurance against heightened external risks.
If used, the resources will:
- finance a budget deficit that "has almost doubled since May";
- support spending on health (for example, more intensive care beds);
- support vulnerable households, unemployed and informal workers;
- help firms with payroll support;
- meet the country’s financing needs.
The FCL interest rate is noted as lower than what Colombia would have gotten with debt issuances.

Conditions come beforehand: a country must pre-qualify by showing a very strong track record of policies and economic fundamentals.
Once approved, access to resources is unconditional; usage does not trigger ex-post conditionality.
For the increase, Colombia had to show it continued to qualify to have the line increased.

Colombia continued to access markets in 2020:
- placed "30-year bonds" in September;
- "issued US$4.3 billion abroad and about US$ 10.5 billion domestically."
Reasons for considering drawing on the FCL rather than relying solely on markets:
- diversifying financing sources to avoid putting excessive pressure on domestic markets and "crowd out" the private sector;
- the FCL offers lower interest rates compared with potential market debt issuances.

The FCL was designed to provide upfront access to IMF resources for countries with strong fundamentals as insurance and backstop during crises—exactly the circumstances in Colombia.
Other countries have not used the line so far because they did not have to; the resources have always been available.
Colombia is the first country to request a change to its credit line outside of the regular reviews (one year after approval or renewal after two years), illustrating the IMF’s agility and the "flexible" nature of the FCL.

Source: IMF news article "Expanded Flexible Credit Line Will Help Colombia Cope with COVID-19", September 25, 2020.