By Nelson Bocanegra
BOGOTA, Oct 8 (Reuters) – Colombia would face major hurdles in meeting any commitments it makes under a prospective agreement with the International Monetary Fund, from which it is seeking billions of dollars amid a fiscal crisis, according to current and former officials and economists.
A team from the country’s finance ministry traveled to Washington this week to meet with the multilateral lender, at the direction of recently inaugurated President Abelardo De La Espriella, who is seeking a way out of a crisis marked by soaring debt and lower tax revenue.
According to 10 economists and current and former officials consulted by Reuters, Colombia could seek between $8 billion and $20 billion in assistance.
Most of them agreed the IMF instrument best suited to Colombia’s circumstances would be the Precautionary and Liquidity Line, a facility designed for countries with sound economic fundamentals and institutional frameworks but that face vulnerabilities.
Colombia’s government has projected a fiscal deficit of 7.2% of its gross domestic product this year and a record 9.4% of GDP next year. It has Special Drawing Rights equivalent to roughly $2.78 billion, allowing it to access about $16.6 billion over the lifetime of the SDR agreement.
While the Andean nation meets most of the criteria for a PLL, including a sound financial system, strong monetary policy framework and central bank independence, it would need to demonstrate progress on the fiscal sustainability of its debt to qualify. Repeated budget overruns have eroded confidence in its policy framework.
In its 2025 review, before Colombia’s fiscal outlook deteriorated further, the IMF said the country needed to cut its budget by at least the equivalent of 3.2% of GDP over three years.
A PLL could be less politically costly than a Stand-By Arrangement because it is intended for countries whose economic policies are already broadly sound, although it can still include fiscal targets and reform requirements.
The government should seek $20 billion in loans from the IMF with an average maturity of four years, former Finance Minister Mauricio Cardenas said.
“I think it is an amount that is proportionate to the size of our economy,” said Cardenas, who took part in previous IMF credit-line renewals. “An additional benefit is that it would allow us to prepay expensive debt and replace it with this cheaper debt.”
Several others said an IMF agreement would boost market confidence, lower Colombia’s risk premiums and help unlock additional funding from institutions such as the World Bank, the Inter-American Development Bank and other multilateral lenders.
“An agreement with the IMF expands confidence in that debt, and creditors could reduce the cost of Colombia’s existing loans. It would generate that positive effect, not immediately, but rather as commitments are met over time,” said Juan Carlos Ramirez, head of the autonomous committee that oversees compliance with the so-called “fiscal rule” meant to prevent a deterioration in government finances.
“But as long as the deficit persists year after year, it can only provide some relief over the coming years. It is not the solution to the problem,” he added.
DIVIDED CONGRESS
Colombia faces the challenge of setting achievable fiscal targets, several of those consulted said.
“The main risk is failing to comply with IMF requirements. The world will be watching Colombia, and if we fail to meet any of the targets the IMF sets, not only could a disbursement be withheld, but everyone would see that the country was unable to deliver,” said Munir Jalil, chief economist for the Andean region at BTG Pactual.
Analysts said a key commitment would be the so-called “Rescue Law,” a bill containing spending cuts equivalent to 2.2% of GDP, or about $14 billion, that De La Espriella’s government plans to propose to lawmakers in mid-October. The president faces a deeply divided Congress.
“There has never been a fiscal adjustment reform of that size in a single year (in Colombia),” said Andres Pardo, a former deputy finance minister and former head of macro strategy for Latin America at XP Investments. “That doesn’t mean it can’t be done, but frankly it seems difficult.”
“While the government has majorities, they are quite fragile and depend on coalition parties,” he added.
Colombia drew $5.4 billion from an IMF Flexible Credit Line to help address the COVID-19 pandemic, closing out the credit last year after it was fully repaid.
(Reporting by Nelson Bocanegra; Additional reporting by Rodrigo Campos; Editing by Julia Symmes Cobb and Paul Simao)
