The International Monetary Fund (IMF) has approved a $11.5 billion USD credit line for Colombia. According to the Washington-based bank, the Colombian government has no current plans to draw on the credit line but wanted an increase from the previously available $5.4 billion USD as a precautionary measure amid low oil prices, the devaluation of the peso, and the ongoing economic slowdown throughout the region. The arrangement is a renewal of the “flexible credit line” (FCL) that Colombia has maintained with the IMF since 2009.
In addition to being a rainy day source of revenue for a government that has seen revenues drop dramatically over the past two years, this increased sum is expected to ease the minds of international investors who may have lost some confidence in the nation.
“Global risks have risen with the potential to increase the severity of shocks that Colombia could suffer, despite the strength of its fundamentals and policy frameworks,” said Mitsuhiro Furusawa, the IMF’s deputy
managing director. “The new arrangement under the ‘flexible credit line,’ with higher access, will provide added buffers and continue to play a significant role in supporting the authorities’ policies in the presence of these increased downside risks. It will also provide policy flexibility and serve as a temporary insurance that reinforces market confidence. The authorities intend to continue to treat this facility as precautionary and to phase out its use as risks to the global outlook and commodity prices substantially recede.”
In announcing its approval of the credit line, the international bank praised Colombia for its monetary policy frameworks. It specifically mentioned the strength of the country’s inflation-targeting regime, flexible exchange rate, financial sector regulation, and fiscal policy. The IMF also cited Colombia’s long track record of stability — along with authorities committed to maintaining current policies as they look to improve competitiveness and chase growth — as a reason it is comfortable offering such a large line of credit.
“Colombia’s macroeconomic policies have provided flexibility to deliver a coordinated and gradual response to the large decline in oil prices,” said Furusawa. “Exchange rate flexibility continues to be the main shock absorber, while the fiscal rule allows for a smooth adjustment of expenditure to a weaker medium-term oil outlook. The ongoing monetary policy tightening cycle will gradually bring inflation back to the target range, and the banking and corporate sectors remain in good financial health. International reserves are adequate for normal times.”
Despite the acclaim awarded the fiscal policies of President Juan Manuel Santos’ administration and the central bank, the plummet in oil prices has come at a difficult time for Colombia. The nation is reportedly in the final stages of a peace deal with the the Revolutionary Armed Forces of Colombia (FARC). When an accord is signed, reintegrating the former guerrillas into society, in addition to the many other reforms already negotiated by the two sides in Havana, Cuba, will not be cheap.
Colombia is also in the midst of a massive infrastructure project designed to overhaul the nation’s notoriously poor roads. Billions are being invested in highways, bridges, and tunnels in Santos’ “4G’ project. But with royalties from oil exports slumping and the government operating under a new austerity budget, paying for all this has become more challenging. The president reportedly sold public electricity utility Isagen to a Canadian firm in January in order to use the $2 billion USD in proceeds for his infrastructure endeavor.
So while Colombia is on solid footing and has outperformed most of its regionals peers in establishing policies to withstand a downturn, it never hurts to have something to draw on if a real crisis does strike.
This marks the fifth time Colombia has renewed its “flexible credit line” since the IMF began the initiative in March 2009. The credit line began at $10.5 billion USD and was renewed in 2009, 2010, 2011, 2013, and 2015. The IMF designed the FCL for crisis prevention, and the credit line can be drawn on at any time. The repayment period is for up to five years.
Photo: International Monetary Fund headquarters in Washington, D.C. (Credit: AgnosticPreachersKid)