Explainer-Why did the IMF block Colombia’s access to a credit line?
By Rodrigo Campos, Nelson Bocanegra
NEW YORK/BOGOTA (Reuters) -The International Monetary Fund said on Saturday it had set conditions for Colombia’s access to its $8.1-billion Flexible Credit Line, a precautionary tool for crisis prevention and mitigation, effectively cutting access for the country from that cash.
Colombia had access to a similar tool since 2009, but only made use of it once in 2020 when the pandemic wreaked havoc on the global economy. But the IMF move shines a fresh light on the country’s fiscal issues, which have been troubling financial markets for months.
Analysts said the implication of losing the FCL access was a rise in borrowing costs, which was already seen in an April 15 Eurobond offering.
WHAT IS AN FCL?
The FCL is a fund program that requires the applicant country to have strong economic fundamentals and institutions, and a willingness to keep both. It can last for one or two years and has no preconditions once triggered.
To qualify for continued access to the program, a government needs a "very positive assessment of the country’s policies" in a yearly visit by the IMF to check on policy and economic direction - internally called an Article IV Consultation, according to the fund’s website. Countries should also follow criteria that include a track record of capital market access at favorable terms, have low and stable inflation, and data transparency.
WHAT IS COLOMBIA’S FCL?
The IMF approved Colombia’s current FCL in April 2024. The South American country has had access to that type of program since 2009, tapping it once in 2020 with a then $5.4-billion draw to cover budget needs during the pandemic.
Colombia’s current $8.1-billion FCL was approved to replace the 2022 one.
Bogota said it would treat the arrangement as "precautionary," meaning it does not expect to draw unless there is an unforeseen situation.
WHY WAS COLOMBIA’S ACCESS CONDITIONAL?
The two-year arrangement requires an Article IV visit that results in a report followed by a midterm review to make sure access to the facility remains uninterrupted.
However, Colombia did not finalize an Article IV report with the fund.
In visits to Bogota in mid-February and early April, engagement has been "close," according to the IMF. Between those visits, German Avila was sworn in as new finance minister. His predecessor resigned after three months amid clashes over budget cuts, and hours after a labor reform championed by President Gustavo Petro was rejected by lawmakers.
"Engagement continues as the authorities work on plans to reduce the fiscal deficit this year and going forward," an April 18 IMF staff statement said, adding the government was working on the policies underpinning projected revenue gains and necessary spending adjustments to meet the overall fiscal deficit target.
The government announced this year it would cut its 2025 budget by 12 trillion pesos ($2.85 billion) to 511 trillion pesos, but an independent office said this month an additional adjustment of some 46 trillion pesos ($11 billion) is needed to meet the fiscal rule.
While the government said it had complied with the fiscal rule last year citing technicalities, analysts and experts said that was not the case.
WHAT NEXT?
The IMF and Colombia remain engaged in Article IV consultations but until those are completed, there will not be an FCL midterm review. It is unclear whether Colombia’s fragile fiscal situation would allow it to pass the review.
Colombia’s spreads to comparable U.S. debt have widened some 100 basis points to nearly 400 bps over the past 12 months, sharply underperforming regional peers Chile and Peru.
Colombia’s midterm fiscal framework, a roadmap for the country’s indebtedness for this year and next, must be published by the government by mid-June.
