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August 5, 2020

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COLOMBIA: IMF backstop is positive but oil price vulnerability remains headache

BY Nicholas Watson

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Despite publicly contemplating a loosening of physical distancing measures, President Ivan Duque on 6 April announced that they would be extended until 27 April; the quarantine started on 25 March. The decision does not just reflect the World Health Organization (WHO)’s warnings about the premature and sudden lifting of lockdowns, but also comes down to local factors: namely, that local testing capacity remains limited and that the Covid-19 curve has not flattened sufficiently. As of yesterday, 8 April, there were 2,054 confirmed cases in the country, with 54 fatalities. The economic and social costs of a one-month quarantine will be significant, which is why on 7 April finance minister Alberto Carrasquilla confirmed that a petition had been submitted to the International Monetary Fund (IMF) for an extension to the existing Flexible Credit Line (FCL).

According to the Fedesarrollo thinktank, a one-month quarantine will cost from 4.5% to 6.1% of GDP. Of course, this explains why an “accordion strategy” of intermittent physical distancing and the progressive re-opening of business has been mooted – and is highly likely to come under even more serious consideration towards the end of April. Fedesarrollo (which is advocating what it dubs “differentiated containment”) estimates the cost of a two-month quarantine would essentially double. The dimensions of the crisis explain why the finance ministry has sought an FCL extension to the tune of USD 11.7bn; given that the Fund has been extending the arrangement for a decade already, it is safe to assume the petition will be granted. Note that a) the government says it does not intend to draw down the funds (yet) and that b) contrary to some initial reports, the government has not requested a Precautionary and Liquidity Line (PLL) from the IMF.

The FCL application marks out Colombia as having one of the region’s strongest policy frameworks (in Latin America, Mexico is the only other country to have an FCL). Colombia also comes to the crisis on the back of relatively strong growth in 2019 (3.3%), unlike many neighbors. The fiscal situation is also in better shape than in much of the region, with a fiscal deficit of 2.4% posted last year.

However, even for an economy in fairly good shape, there are frailties that – in the context of such a sharp shock – are cause for concern. The fiscal deficit is likely to go south of 4% of GDP as the government provides extraordinary stimulus measures. The oil price shock is the biggest challenge given crude’s importance to exports, fiscal revenues, and investment inflows. It will also affect the current account deficit (4.3% in 2019) for the worse, even with a likely drop in imports arising from a weaker COP. The government was already reliant on extraordinary dividends from state oil company Ecopetrol to balance the books last year – and cannot do so again in the current price environment. Even if sizeable global production cuts can be agreed – at OPEC’s meeting today, 9 April, or at a future point – the global drop in demand means that a price recovery that benefits Colombia is likely to be muted at best.

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