Expanded Flexible Line of Credit will help Colombia cope with COVID-19
September 25, 2020
Colombia, a country with solid economic fundamentals, has had a flexible credit line (FCL) with the IMF since 2009 and last extended it in May. On September 25, 2020, the IMF’s Executive Board approved an increase of around $ 6.2 billion to a total of $ 17.2 billion.
Due to the COVID19 pandemic, Colombia is facing its first recession in two decades – and the worst ever. In this context, the Colombian government has signaled its intention to use the FCL. It would be the first country to use these resources since the line was built in 2009.
IMF Country Focus spoke with the Fund’s Head of Mission for Colombia, Hamid Faruqee, about the country’s prospects and how the resources will help fight the pandemic.
Colombia’s flexible line of credit was extended in May this year. What has changed?
At the time of the renewal, the extent of the pandemic fallouts was unknown, and the economic contraction in May was deeper and more protracted than expected. The national lockdown required to contain the spread of the disease was much longer than expected at the time.
External risks are higher in view of the considerable uncertainty about the further course of the pandemic. At the time of the renewal, we forecast a 2.5 percent decline in GDP; Our growth forecast is now -8.2 percent.
The government reacted quickly to protect its people and economy from the effects of the shutdown. The central bank lowered interest rates and provided liquidity and credit. The fiscal rule has been suspended for two years to give the government more leeway to support vulnerable households and businesses. The central government’s budget deficit is projected to reach 8.2 percent of GDP (up from an estimate of 4.9 percent in May).
Why did Colombia need a larger line of credit instead of simply using the existing one?
Given the unforeseen impact of this pandemic, Colombia’s balance of payments needs are higher than expected. The larger credit line helps to counteract this. As a flexible instrument, the FCL will help meet both actual and potential balance of payments needs. In combination with Colombia’s comfortable currency reserves, it offers additional protection against increased external risks. Should the country decide to use them, these resources will also support the budget and help meet unforeseen external funding needs.
How will FCL resources help fight the pandemic?
If the country takes advantage of them, these funds will help finance a budget deficit that has almost doubled since May. Tax receipts fell sharply due to the decline in economic activity, while spending on financing health services and supporting vulnerable people and businesses increased. These funds will support the authorities’ health spending plans (e.g. more intensive care beds); support vulnerable households, the unemployed and informal workers; Support companies with payroll; and meet the country’s funding needs.
Does usage trigger a condition?
No. Conditions come beforehand. A country must pre-qualify by having a very strong track record in terms of politics and economic fundamentals. Once this is the case and the IMF Executive Board approves the line of credit, access to resources is unconditional. In this case, Colombia had to show that it would continue to qualify for a line raise.
Why is Colombia considering resorting to the FCL instead of going to the markets?
Colombia went public and was able to place 30-year bonds at reasonable interest rates in September, for example. It raised $ 4.3 billion overseas and about $ 10.5 billion domestically. However, due to the extent of the recession, funding needs have risen from an average of 8 percent of GDP in the last 5 years to around 13 percent in 2020 and are “crowding out” the private sector, which happens when investors prefer to lend the state (because it is safer) than funding private sector investments. In this case, too, the FCL is attractive because the interest rate is lower than what Colombia would have got on bonds.
What does it mean for the Fund that FCL funds may be used for the first time?
The FCL is designed for precisely this type of scenario: so that countries with strong fundamentals have upfront access to IMF resources both as insurance and as a backstop during a crisis. That is exactly the case with Colombia. So far, other countries have not used the line because they did not have to. But the resources were always available.
Colombia is also the first country to request a change in its credit line outside of the regular reviews (one year after approval or renewal after two years). It shows the agility of the fund to support a member country when the situation changes quickly. This process is a good example of how the “F” in FCL really stands for “flexible”.