Colombia: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, February 12, 2021
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- Published: February 12, 2021
Navigating the pandemic and macroeconomic outlook
- The pandemic led to the largest recession on record in Colombia; a quarter of total employment was affected.
- A gradual—albeit uneven—recovery is underway, driven by easing restrictions, improved labor force participation, and informal sector job growth.
- Mining and sectors most affected by lockdowns continue to lag; renewed local restrictions following a second wave have recently slowed momentum.
- Inflation remains subdued, falling below the 3 percent target.
- Staff expects a gradual economic recovery with 4½ percent growth for 2021.
- Activity is not expected to return to pre-pandemic levels until late 2022.
- The mission welcomes recently announced measures to integrate nearly two million Venezuelan migrants.
Near-term risks and vulnerabilities
- Key risks: vaccine supply, distribution, and effectiveness could lead to new infection waves and additional lockdowns that would hurt economic activity.
- Higher external financing needs increase vulnerability to a sharp rise in global risk premia and other external shocks.
- Uncertainty about the timing, size, and composition of a necessary fiscal reform is an important downside risk.
Policy responses to cushion the shock
- Timely, coordinated monetary, financial, and fiscal measures mitigated the fallout and laid the foundation for recovery:
- Monetary and financial policy easing: lower interest rates, liquidity provision to financial markets, macroprudential actions to support credit.
- Fiscal measures: payroll subsidies, expanded social transfer programs, public guarantees on loans for small businesses and independents.
- Healthcare capacity was critically strengthened.
- The central and subnational governments’ fiscal rules were relaxed for two years.
- A National Emergency Mitigation Fund (FOME) was established to facilitate the emergency response.
- Use of undisbursed FOME resources to fund vaccinations and healthcare will be critical; plans to vaccinate 34 million people starting this month are welcomed.
- Successful transfer programs targeted to poorer households could be extended.
Fiscal strategy: targeted support, then gradual consolidation
- Short run: continue fiscal support for lives and livelihoods; phase out certain emergency measures (e.g., payroll subsidies, credit guarantee programs) as the pandemic subsides to help ensure medium-term sustainability.
- With the recovery underway, the mission considers a smaller fiscal deficit relative to GDP than last year’s should be within reach unless activity falters.
- Medium term: gradual fiscal consolidation led by fiscal reforms to ensure a return to the fiscal anchor over the next five years.
- The mission recommends approving a gradual fiscal consolidation plan this year rather than returning abruptly to the fiscal rule in 2022, to avoid sharp fiscal tightening that could derail the recovery.
Durable elements the plan should include:
- Durable revenue mobilization:
- Central government tax revenues should be gradually but durably raised by at least 2 percent of GDP.
- Consider growth-friendly revenue measures focusing on tax efficiency, progressivity, sustainability, and fairness — including base broadening for personal income taxes and reducing VAT exemptions (with compensation mechanisms to protect the poorest households); elimination of preferential special regimes for businesses.
- Improve tax administration to reduce tax evasion and complement revenue measures.
- A credible commitment to reinstate and strengthen the fiscal anchor:
- Reinforce the MTFF’s robustness and oversight, better specify the escape clause duration and the correction mechanism.
- Consider creation of an independent fiscal council to oversee implementation and transition back to the fiscal rule.
- Longer term: complement the structural deficit rule with measures to contain central government public debt (debt ceiling or other stabilizing mechanisms).
Monetary and financial policy guidance
- Monetary policy accommodation should continue to support economic recovery.
- Given central bank credibility and available policy space, further monetary policy easing should be considered if subdued inflation remains well below target or downside risks to growth materialize.
- Exchange rate and reserves:
- Colombia’s flexible exchange rate should remain the first line of defense against external shocks.
- International reserve accumulation over time should continue to insure against external liquidity risks.
- Colombia retains precautionary access to the IMF’s Flexible Credit Line as added insurance.
- Financial stability and provisioning:
- Credit risk and loan quality are a concern given the gradual and uncertain recovery.
- As temporary relief measures unwind, authorities should encourage banks to use system-wide capital buffers as needed to absorb unavoidable credit losses while avoiding procyclical credit tightening.
- Measures on capital distributions (including dividend payouts) and retained earnings to strengthen bank capital remain important.
- Countercyclical provisions were released and temporary loan forbearance measures (including the Programa de Acompañamiento a Deudores (PAD)) were enacted.
- The Financial Superintendence (SFC) should continue to intensely monitor that potential credit losses are sufficiently provisioned in accordance with existing prudential rules.
- The SFC is considering ending the PAD program in June, which the mission would welcome.
- Credit exposures subject to pandemic-related relief measures should continue to be transparently reported so financial soundness indicators accurately reflect banks’ underlying situation.
- Basel III implementation continues as planned.
Structural reforms and inclusion
- Structural reforms remain crucial to raise inclusive growth and external competitiveness.
- Recommendations and priorities:
- Lower barriers to firm and labor formalization to reduce unemployment during the recovery and enhance productivity.
- The recent announcement to grant Temporary Protection Status (TPS) to nearly 2 million Venezuela migrants is commendable and should raise Colombia’s economic potential.
- Proceed with the infrastructure agenda and efforts to reduce logistics bottlenecks and trade barriers.
- Effectively implement the National Development Plan and Peace Accords to support regional, social, and economic inclusion.
Financial Sector Assessment Program (FSAP) and closing
- A joint IMF-World Bank team will soon commence a scheduled Financial Sector Assessment Program (FSAP) for Colombia.
- The previous FSAP took place in 2012.
- The mission thanks the Colombian authorities for their cooperation and open discussions throughout the virtual visit.
Source: Colombia: Staff Concluding Statement of the 2021 Article IV Mission (February 12, 2021).