Press Release No. 10/186

Press Release: IMF Executive Board Approves US$3.46 billion Arrangement for Colombia Under the Flexible Credit Line

May 7, 2010

The Executive Board of the International Monetary Fund (IMF) today approved a successor one –year, SDR 2.322 billion (about US$3.46 billion) arrangement for Colombia under the Flexible Credit Line (FCL). The Colombian authorities have stated they intend to treat the arrangement as precautionary and not draw on the line. This arrangement succeeds the previous one-year FCL agreed by the Executive Board in May 2009 (see Press Release No. 09/161).

The FCL is available to countries, such as Colombia, that have demonstrated a very strong track record of sound macroeconomic policies and institutional frameworks. Colombia is the second country to formally request a successor FCL arrangement, following Mexico (see Press Release No. 10/114).

The FCL was established on March 24, 2009 as part of a major reform of the Fund’s lending framework (see Press Release No. 09/85). The FCL is designed for crisis prevention purposes as it provides the flexibility to draw on the credit line at any time. Disbursements are not phased nor conditioned on compliance with policy targets as in traditional IMF-supported programs. This flexible access is justified by the very strong track records of countries that qualify for the FCL, which gives confidence that their economic policies will remain strong.

Following the Executive Board discussion, Mr. John Lipsky, First Deputy Managing Director and Acting Chair, made the following statement:

“Colombia’s solid macroeconomic performance in recent years has been underpinned by a very strong policy framework. Before the global crisis, inflation was brought down to low single digits under the inflation targeting regime and the medium-term fiscal framework allowed for a substantial reduction in debt ratios, while a flexible exchange rate and prudent debt management helped to reduce vulnerabilities. At the same time, strong prudential supervision and regulation have kept the financial system sound.

“The strong policy framework allowed the authorities to conduct countercyclical monetary and fiscal policies in response to the global crisis. In addition, the authorities secured official external financing (including a one-year FCL for about US$10.5 billion) and took further steps to strengthen financial regulation. In the event, the domestic financial system did not experience major strains and the government of Colombia maintained access to international capital markets at favorable terms.

“Appropriate economic policies and the improvement in global financial conditions led to resumed growth in mid-2009. The exchange rate has strengthened and equity prices have recovered from troughs seen at the height of the crisis, and sovereign risk premia have declined. Looking forward, the outlook for 2010 is generally positive, with output growth expected to exceed 2 percent. Policies will remain underpinned by the rule-based macroeconomic framework, and the authorities will remain vigilant to any future shock.

“While global conditions have vastly improved since early 2009, the authorities recognize that downside risks remain. The strength of the global recovery remains uncertain and the stimulus measures in advanced economies have not yet produced strong private sector demand. It is against this background that, at the authorities’ request, the Executive Board today approved a one-year arrangement under the FCL for 300 percent of quota; which the authorities intend to treat as precautionary.

“Colombia’s strong economic fundamentals and institutional framework, its proven track record of sound macroeconomic policies, and the additional insurance provided by the new FCL arrangement, give confidence that the authorities are well prepared to manage risks and pressures in the event that the global environment deteriorates” Mr. Lipsky said.