Colombia and the IMF


Press Release: IMF Completes First Review of Colombia's Stand-By Arrangement, Approves US$274 Million Disbursement
June 11, 2003

Country's Policy Intentions Documents


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ColombiaLetter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding
Bogotá, Colombia, May 23, 2003

The following item is a Letter of Intent of the government of Colmbia, which describes the policies that Colombia intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Colombia, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

The government remains fully committed to its economic program for 2003-04, which is being supported by the Stand-By Arrangement (SBA) approved by the Fund in January 2003 In the attached Memorandum of Economic Policies (MEP) and Technical Memorandum of Understanding (TMU), we explain the policies we are implementing to ensure that we achieve the program's objectives for 2003. On this basis, we are requesting completion of the first review under the SBA. The second review under the SBA is expected to be completed by November 2003. In the context of this review, we will assess the need for any additional measures to ensure that the fiscal target for 2003 is attained. We will also present our program for 2004, and agree on the schedule and frequency of reviews for 2004. The government will continue to maintain a close policy dialogue with the Fund, and if the need arises, the government stands ready to take additional measures.

Sincerely yours,

 

s
 
s
Roberto Junguito
Minister of Finance
and Public Credit
  Miguel Urrutia
General Manager
Bank of the Republic


Memorandum of Economic Policies

I. Background

1. During the second half of 2002, the government developed an economic program for 2003-04 that is designed to promote more rapid economic growth by strengthening domestic security, improving the fiscal position so as to ease the public debt burden, and advancing structural reforms. The government remains committed to reducing the overall public sector deficit from 3.6 percent of GDP in 2002 to 2.5 percent of GDP in 2003 and 2.1 percent of GDP in 2004. This fiscal stance will halt the rapid increase in public debt, which reached about 52 percent of GDP at end-2002,1 and set the stage for its reduction in subsequent years.2 At the same time, the fiscal framework makes room for real increases in social spending of 8 percent in 2003 and 3 percent in 2004. In addition, the Banco de la República intends to reduce inflation, while maintaining net international reserves at comfortable levels.

2. Structural reforms aim to make the fiscal position sustainable and to strengthen further the financial system. Congress already approved in December 2002 several bold reforms under the program that strengthen tax revenues, reduce the actuarial deficit of the pension system, and diminish transaction costs in the financial system. It has also given the executive special powers to streamline the public sector. Congress also approved a labor market reform that makes it easier for Colombians to gain employment in the formal sector. In May 2003, a comprehensive reform of the teachers' pension system was approved by congress in the context of the National Development Plan. Several other fiscal measures have been included in a nationwide referendum, namely a two-year freeze on many components of public expenditure and the elimination of all nonmilitary special pension regimes (regímenes exceptuados y especiales) that fall outside of the general pension regime. The government is confident that the referendum enjoys popular support and will be approved, most likely later in 2003. A legal review of the referendum by the Constitutional Court is still pending.

3. This program rapidly gained the support from the international community. In mid-January 2003, the International Monetary Fund approved a two-year Stand-By Arrangement that makes available about US$2.1 billion of resources. The World Bank and the Inter-American Development Bank (IDB) are also backing the government's policies, and we expect these institutions to disburse over US$2.5 billion in 2003.

II. Recent Developments

4. Under the program, economic performance has been favorable, although inflation is a concern:

  • For 2002, the overall public sector deficit was limited to 3.6 percent of GDP, lower than the deficit of 4.0 percent of GDP that had been expected. However, inflation reached 7 percent during 2002, slightly above the Banco de la República's target of 6 percent.

  • All performance criteria and the structural benchmarks for end-December 2002 and end-March 2003 were observed (Tables 1 and 2).

  • Construction, manufacturing, energy consumption, loans disbursed by the financial sector and other indicators point to a recovery in economic growth.

  • The overall public sector deficit remains under control, as the central government's tax revenues are performing well, while its expenditures are rising as anticipated.

  • The government returned to international capital markets by issuing US$1.25 billion in bonds between December 2002 and April 2003, completing the public sector's external financing program for 2003. Colombia's EMBI+ yield spread fell from about 700 basis points in mid-February to about 425 basis points in mid-May.

  • The Banco de la República has remained focused on reducing inflationary pressures. In mid-January and late April its key intervention interest rate was increased by a total of 200 basis points. However, inflation through April stayed high at 7.85 percent year-on-year, reflecting in part the lagged effect of the sizable currency depreciation in 2002, the behavior of food prices, the impact of VAT reform, and other "supply" shocks. The inflation rate through April falls within the program's consultation band of plus or minus 2 percentage points. The Banco de la República has informed Fund staff on the reasons behind the inflation performance and its policy response.

  • The foreign exchange intervention that began in mid-February has been held within the program. Even though the Banco de la República has held auctions of one-month call options for US$200 million each at the end of February, March, and April, only US$145 million have been exercised through mid-May in a clear sign that stability in the foreign exchange market has been restored.

III. Program for 2003

5. The government remains fully committed to its economic program. Real GDP is projected to grow by 2 percent in 2003, while inflation is expected to decline. The external current account deficit is estimated to increase to 2.3 percent of GDP (instead of narrowing to 0.8 percent of GDP as originally envisioned), partly because of lower exports to Venezuela and higher imports of capital goods. Nevertheless, net capital inflows, especially to the public sector, are expected to be sufficient to allow the Banco de la República to meet its objective for net international reserves at end-2003. The performance criteria for net international reserves for June and September 2003 are presented in the attached technical memorandum of understanding (TMU) and are in line with the original program.

6. The overall public sector deficit will decline to 2½ percent of GDP in 2003, as planned. The performance criteria on the overall public sector deficit for June and September 2003 are presented in the attached TMU and are the same as the indicative targets presented in the December 2002 memorandum of economic policies. While fiscal policy faces some risks, the government is committed to achieving the fiscal target for 2003. For this reason it is studying the feasibility of several contingency measures that would safeguard fiscal policy were these risks to materialize. These measures include a rationalization of subsidies on gasoline, diesel, and electricity, a careful management of expenditure commitments in 2003, spending cuts, and bringing forward increases in current revenues scheduled for 2005. The spending cuts would be partly achieved through a decree that would freeze most central government wages. The government may also consider the possibility of issuing long-term bonds on concessional terms.

7. The composition of financing of the overall public sector deficit in 2003 will be prudent and consistent with a recovery of private credit demand. Net public external financing is now expected to amount to over 2 percent of GDP in 2003, compared with 0.3 percent of GDP originally envisaged in the program. The performance criteria on external borrowing for June and September are presented in the attached TMU and reflect this additional financing. As a result, net public domestic borrowing is projected to decline from 3 percent of GDP in 2002 to 0.5 percent of GDP in 2003. If market opportunities arise, the government may seek additional commercial external financing in anticipation of 2004 financing requirements or for liability management purposes.

8. Monetary policy will continue to be conducted within a framework of inflation targeting and a floating exchange rate. As envisaged in the December 2002 memorandum of economic policies, the target path for inflation is being revised upward by 0.4 percentage points to account for the first round effect of the VAT reform approved in December 2002. The Banco de la República remains committed to making the necessary policy adjustments to keep inflation within the targeted range.

9. The government is carrying out the structural reforms explained in the December 2002 memorandum of economic policies (see Table 2):

  • Pension reform. While the December 2002 pension reform represented a crucial step forward, the government intends to reduce the actuarial deficit of the pension system even further. As envisaged in the program, the referendum includes a proposal that requires all pension regimes to conform to the rules of the general pension system by 2008, which will effectively eliminate all nonmilitary special pension regimes (regímenes exceptuados y especiales). Moreover, the reform to teachers' pensions approved in May 2003 brings all new teachers under the general pension regime (which includes raising the retirement age for new teachers) and increases pension contributions of all teachers. This reform reduces the actuarial deficit of the teachers' pension system by one-fourth. The government also plans to take other steps on pension reform that are described in the attached table on structural benchmarks.

  • Public sector modernization. Drawing on the recommendations of the Fiscal Transparency Report on Standard and Codes (ROSC) the government has developed several draft laws, in many cases with technical advice from the Fund, the World Bank, and others, designed to make expenditure management more flexible and to enhance the efficiency and transparency of the public sector. The process of securing congressional approval of these laws is proceeding as we had envisaged in the program. However, the government plans to submit the draft budget code to congress by October, instead of by June as originally planned, in order to incorporate the recommendations of IMF technical assistance. This measure is a structural performance criterion. The government will continue to trim its expenditure by reducing its workforce gradually through an attrition process that includes explicit mechanisms to protect the most vulnerable groups.

  • Financial sector. The financial position of the banking system has continued to improve, as banks' profitability, capital, and provisioning strengthened in 2002. The establishment of loan-loss provisions according to Basel 2 will be phased in during 2003 and 2004, somewhat later than originally expected, because of the complexity of this new approach. The government adopted provisions for the legal defense of supervisors in January 2003 and will present legislation to allow full budgetary autonomy of the superintendency of banks by end-2003. The banking superintendency will continue to enforce the restructuring plans for weak banks.

  • Public health system. As envisaged in the program, CONPES (the national social and economic policy council) approved in March 2003 a plan to put the finances of the health service of ISS (the Social Security Institute) on a sustainable footing. The government will begin to carry out this plan before end-June 2003, with a view to fully implementing it by September 2004 as envisaged in the program. The government is developing a new proposal to make the public hospital network financially viable by 2007, with support of a loan that is being discussed with the IDB. The fiscal implications of restructuring the ISS health service and the public hospitals will be considered during subsequent reviews of the Fund-supported program.

10. The government is preparing a timetable to remove remaining exchange restrictions in connection with its acceptance of the obligations under Article VIII under the Fund's Articles of Agreement. To that end, the Banco de la República recently reached agreement with China to eliminate the bilateral payments agreement between these two countries on June 30, 2003. Specific dates for beginning to phase out the remaining restrictions will be established during subsequent program reviews.

11. The safeguards assessment was very favorable, calling for few recommended adjustments to the accounting practices of the Banco de la República. The Banco de la República already has a strong financial control environment and complies with most of the International Accounting Standards (IAS). However with a view to enhancing international transparency, it intends to fully adopt IAS, to the extent that these do not conflict with established accounting regulations and the law. The Banco de la República also intends to adopt as a more permanent feature the requirement for an annual external audit conducted by an external audit firm, with international experience and exposure.

Table 1. Colombia: Performance Criteria 1/
  Performance
Criteria
2003
Performance Criteria
Indic. Target
Dec. 31, 2002 Mar. 31     Jun. 30 Sept. 30 Dec. 31

Cumulative flows from beginning of calendar year
(In billions of Colombian pesos)
 
 
Overall balance of the combined public sector
Floor -8,350 -1,590 -3,240 -3,315 -5,490
Outturn -7,371 -1,121 . . . . . . . . .
Margin (+) or shortfall (-) 979 469   . . . . . . . . .
 
Inflation rate 2/
(12-month inflation rate)
 
Inflation - Consultation band
Upper limit 8.0 8.1   8.3 8.1 7.9
Target 6.0 6.1   6.3 6.1 5.9
Lower limit 4.0 4.1   4.3 4.1 3.9
Outturn 7.0 7.6   . . . . . . . . .
 
(In millions of U.S. dollars)
 
Net international reserves of the Banco
de la Republica
Floor 10,300 10,215 3/   10,420 10,480 10,540
Outturn 10,507 10,316   . . . . . . . . .
Margin (+) or shortfall (-) 207 100   . . . . . . . . .
 
Cumulative net disbursement from beginning of calendar year
(In millions of U.S. dollars)
 
Net disbursement of medium- and long-term
external debt by the public sector
Ceiling 1,100 650   1,250 1,850 1,850
Outturn 274 296   . . . . . . . . .
Margin (+) or shortfall (-) 826 354   . . . . . . . . .
 
Change in the outstanding stock of short-
term external debt of the public sector
Ceiling 375 300   200 200 100
Outturn 195 3   . . . . . . . . .
Margin (+) or shortfall (-) 180 297   . . . . . . . . .
 

 
Sources: Ministry of Finance; Banco de la República; and Fund staff estimates.

1/ Definitions of concepts and adjustments to the performance criteria are explained in the technical memorandum of understanding attached to the staff report for Colombia's request for a Stand-By Arrangement (EBS/02/210).
2/ Deviations from the quarterly path for inflation will trigger consultations with the Fund, as set out in the technical memorandum of understanding.
3/ The target for March has been adjusted by US$144.6 millions to account for the effect of foreign exchange intervention.

Table 2. Colombia: Structural Performance Criteria and Benchmarks Under the SBA1

Structural Performance Criterion
September 30, 2003 Submitting to congress a revision of the Budget Code (Ley Orgánica del Presupuesto). This revision will give the Ministry of Finance greater control over the expenditure level and budget execution with the purpose of achieving more transparency and higher budgetary flexibility. Specific measures will include (a) the adoption of budget classification according to international standards that fits into the context of Colombia's legal framework; (b) a requirement to include in the annual budget law information on tax expenditures, quasifiscal activities, subsidies, contingent fiscal liabilities, medium-term fiscal projections, and a fiscal sustainability analysis; (c) the establishment of a mid-year budget report to congress. Originally was structural benchmark for end-June 2003.
Structural Benchmarks
December 31, 2002 Issuance of a decree to eliminate existing vacancies in the public service with immediate effect, and also to close vacancies created by retiring staff. Done October 15, 2002
March 31, 2003 Approval by CONPES (Consejo Nacional de Política Económica y Social) of the Social Security Institute's financial sustainability plan for its health service. The plan will clearly identify the fiscal effect of each of its elements and be consistent with eliminating the deficit of the ISS health system by 2007. Done March 31, 2003
June 30, 2003

Congressional approval of the Fiscal Responsibility Law.

Presentation to congress of a revision of Law 80 to improve management of government contracts. The objective is to curb corruption in government procurement, improve transparency in public contracting, promote e-procurement, and design and implement a standard methodology specifying bidding terms and conditions for typical contracts.

Implementation of a reform of the special pension regime for teachers that reduces the actuarial deficit of the regime for teachers at least in a proportion similar to that proposed by the government for the special regime.

  

Done
December 3,
2002


Congress
approved law
in May 2003.

July 31, 2003 Implement reform of special pension regime for the military that will make the regime more equitable. Originally envisaged for end-June 2003.
December 31, 2003

Congressional approval of the changes to the Budget Code.

CONPES to finalize a plan to streamline the management of government property under which an asset management unit will be set up to define and implement a management plan based on consolidated inventories and develop a program for inventory assessment.

Congressional approval of the modifications of Law 80 to improve management of government contracts.

Divestiture of Bancafé.

 
March 31, 2004 Completion of a CONPES document to strengthen the government's legal defense service to take effect by 2005. The document will identify available data, establish case typologies, design and implement a national policy, and centralize the legal defense of the state.  
September 30, 2004

Full implementation of CONPES plan to eliminate the deficit of the ISS health system by 2007.

Implementation of the plan to strengthen the governments' legal defense services.

Restructure and bring Granahorrar to the point of sale.

 

1 New or revised measures or dates are presented in italics.

 


1 At end-2002, public debt amounted to 55 percent of GDP according to the IMF definition, which includes the financial public sector.
2 This IMF definition differs from data published by the authorities by including debt of the financial public sector.

 

Technical Memorandum of Understanding

1. This memorandum sets out specific performance criteria for June 30, 2003 and September 30, 2003, and the structural performance criteria and structural benchmarks for the remaining period of the program. This TMU supplements the TMU of December 2, 2002, which presents all the definitions of the variables used to monitor performance under the program.

I. Fiscal Targets

A. Performance Criterion on the Overall Deficit of the Combined Public Sector1


  Ceiling
(In billions of Colombian pesos)

Overall deficit of the combined public sector
     from January 1, 2002 to December 31, 2002 (performance criterion)
8,350
   
Overall deficit of the combined public sector
     from January 1, 2003 to:
March 31, 2003 (performance criterion) 1,590
June 30, 2003 (performance criterion) 3,240
September 30, 2003 (performance criterion) 3,315
December 31, 2003 (indicative target)1 5,490

1 Performance criteria to be specified at the time of the program review scheduled for November 2003.

2. Adjustment

(i) The quarterly ceilings on the combined public sector deficit will be adjusted upward (larger deficit), and the ceiling on net disbursements of medium- and long-term external debt of the public sector (see below) will be adjusted upward by the full amount of any concessional loan disbursements beyond what is currently envisaged under the program, up to a maximum of 0.5 percent of GDP or US$360 million for 2003 as a whole, in support of the government's domestic security program "Seguridad Democrática." A loan will be considered concessional if it has at least a 35 percent grant element at the time of loan approval using the commercial interest reference rate (CIRR) as discount rate.

(ii) The cumulative quarterly ceilings on the combined public sector deficit will be adjusted downward by 130 percent of the revenue (gross deposits) of the petroleum stabilization fund (FAEP), as currently defined in the law, in excess of the baseline set out in the table below.

Baseline Assumption for Oil Stabilization Fund Revenue (FAEP)

  Revenue
(In millions of U.S. dollars)

 
 
From January 1, 2003 to June 30, 2003 0
From January 1, 2003 to September 30, 2003 0
From January 1, 2003 to December 31, 2003 0

II. Monetary Targets

3. Reflecting the BR's inflation targeting framework for monetary policy, quarterly targets for 2002 and 2003 have been established for the 12-month rate of consumer price inflation, measured by the Indice de precios al consumidor (IPC) compiled by the Departamento Administrativo Nacional de Estadisticas (DANE). The authorities will complete consultations with the Fund (Executive Board) on the proposed policy response before requesting purchases from the Fund in the event that the observed quarterly inflation were to deviate from the programmed quarterly baseline target by 2 percentage points or more, as set out in the table below. In the event that the actual inflation deviates significantly from the programmed target within the 2 percentage points margin in any calendar quarter, the BR staff will report to the IMF staff on the reasons for the deviation and the policy response adopted, if any. The BR will provide Fund staff with monthly information and analysis of inflationary developments and forecasts, and keep the staff informed of all policy actions taken to achieve the inflation objectives of the program.

4. Adjustment. The inflation targets for June, September, and December 2003 have been adjusted upward by the direct effect of the VAT reform estimated at 0.4 percentage point.

Performance Criterion on Inflation1

  Inflation
(12-Month Percentage Change)

 
September 30, 2002 (actual) 5.9
December 31, 2002 (performance criterion) 6.0
March 31, 2003 (performance criterion) 6.1
June 30, 2003 (performance criterion) 6.3
September 30, 2003 (performance criterion) 6.1
December 31, 2003 (indicative target)2 5.9

1 These performance criteria trigger consultations with the Fund, as noted above.
2 Performance criteria to be specified at the time of the program review scheduled for November 2003.

III. External Targets

A. Performance Criterion on NIR of the BR


  Target1
(In millions of U.S. dollars)

Outstanding stock as of:
     September 30, 2002 (actual) 10,352
     December 31, 2002 (performance criterion) 10,300
     March 31, 2003 (performance criterion) 10,360
     June 30, 2003 (performance criterion) 10,420
     September 30, 2003 (performance criterion) 10,480
     December 31, 2003 (indicative target)2 10,540

1 Minimum quarterly levels of NIR of the BR based on a projected annual accumulation for 2002 of US$318 million.
2 Performance criteria to be specified at the time of the program review scheduled for November 2003.

5. Adjustment. The quarterly NIR targets may be adjusted downward by up to US$2.0 billion to help secure orderly foreign currency market conditions consistent with transparent rules used by the central bank for foreign exchange intervention. In the event that NIR declines by US$1.0 billion during any 30-day period, the authorities will complete consultations with the Fund (Executive Board) on the proposed policy response before requesting purchases from the Fund.

B. Performance Criterion on the Net Disbursement of
Medium- and Long-Term External Debt of the Public Sector


  Ceiling
(In millions of U.S. dollars)

Cumulative net disbursement of external debt by the public
     sector from January 1, 2002 to December 31, 2002 (performance criterion)
1,100
   
Cumulative net disbursement of external debt by the public
     sector from January 1, 2003 to:
          March 31, 2003 (performance criterion) 650
          June 30, 2003 (performance criterion) 1,250
          September 30, 2003 (performance criterion) 1,850
          December 31, 2003 (indicative target)1 1,850

1 Performance criteria to be specified at the time of the program review scheduled for November 2003.

C. Performance Criterion on Net Disbursement of
Short-Term External Debt of the Public Sector


  Ceiling
(In millions of U.S. dollars)

Cumulative net disbursement of short-term external debt of the public
     sector from January 1, 2002 to December 31, 2002 (performance criterion)
375
   
Cumulative net disbursement of short-term external debt of the public
     sector from January 1, 2003 to:
          March 31, 2003 (performance criterion) 300
          June 30, 2003 (performance criterion) 200
          September 30, 2003 (performance criterion) 200
          December 31, 2003 (indicative)1 100

1 Performance criteria to be specified at the time of the program review scheduled for June 2003.

IV. Structural Performance Criteria

6. These are described in the Table 2 of the Memorandum of Economic Policies.

 


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