The International Monetary Fund (IMF) agreed to extend a $10.8 billion flexible credit line (FCL) to Colombia’s central bank to bolster its reserves while coping with the economic impact of the coronavirus crisis.
The IMF’s loan is slightly less than the $11 billion requested by Finance Minister Alberto Carrasquilla last month.
In a press release, the IMF said that “Colombia qualifies for the FCL by virtue of its very strong institutional policy frameworks and track record of economic performance and policy implementation.”
The arrangement should boost market confidence, and combined with the comfortable level of international reserves, provide insurance against downside risks.
International Monetary Fund
According to the IMF’s First Deputy Managing Director Geoffrey Okamoto, Colombia’s relatively strong performance compared to the region ahead of the crisis “served as a basis for the economy’s resilience prior to the Covid-19 pandemic.”
“In the wake of the pandemic, Colombia’s economy is expected to contract for the first time in two decades. Consistent with their very strong track record of economic management, the authorities’ early actions to mitigate the spread of the pandemic, monetary and macroprudential policy responses, and fiscal plans—including the creation of a crisis mitigation fund to support health spending, vulnerable households and businesses—will help the economy through recession,” said Okamoto.
The IMF executive warn, however, that “the balance of risks to the economy is sharply skewed to the downside and an exceptionally weak external environment raises Colombia’s vulnerability to still lower commodity prices, additional financial market volatility, and a further deterioration of Venezuela’s crisis.”
The new arrangement under the FCL will help Colombia manage heightened external risks, protect ongoing efforts to effectively respond to the pandemic, integrate migrants, foster inclusive growth, and reduce external vulnerabilities. Despite higher external vulnerabilities, risks, and stress, the new arrangement can be maintained at the same access level because the authorities have built higher external buffers by accumulating significant additional reserves since the 2018 FCL request. The arrangement should boost market confidence, and combined with the comfortable level of international reserves, provide insurance against downside risks.
IMF’s First Deputy Managing Director Geoffrey Okamoto
According to the IMF’s preliminary projection, Colombia’s GDP will contract 2,4% this year, considerably more than projected by Carrasquilla, who lowered the growth projection from 3.7% to between -1.5% and 2%.
According to local economic think tank Fedesarollo, the extension of the crisis, and particularly the lockdown that is currently in place, could in the worst case scenario result in a 7.9% drop, which would be the biggest in history.