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Colombia is right to lean on the IMF

By Oliver West
01 Oct 2020

Colombia will become the first country to ever draw funds from an IMF flexible credit line (FCL), the Fund’s facility for its star pupils. In these exceptional times, Colombia should ignore any stigma associated with tapping IMF funding and be applauded for healthy pragmatism.

The FCL was created in 2009 to provide countries with strong policy frameworks with unconditional funding in cases of emergency. The idea was to guard against balance of payments crises. Colombia, however, will draw $5.3bn from its FCL to support budgetary spending.  

Macroeconomic management is one of Colombia’s strongest policy suits. Authorities are proud of the country’s standing in bond markets, and deciding to tap the IMF for funding — more usually the move of weaker borrowers — is not a decision to take lightly. 

Yet it is the right decision. There is no doubt over Colombia’s access to markets, so drawing on IMF funds is not a sign of desperation. The sovereign’s January 2026s yield just 2.2%, meaning Colombia could probably achieve record pricing if it were to issue. 

Rather, it is a sign of pragmatism — and an important acknowledgment of the gravity of the crisis, as Latin America suffers harsher Covid-19 consequences than anywhere else. At all-in cost of around 1.1%, the FCL is far cheaper than bond markets. Why should Colombia throw away more on interest payments than it needs to, when every peso of government spending is vital? 

The finance ministers of Chile, Peru and Mexico — which also have FCLs — may sleep soundly knowing that they have the facility in their back pockets. But a contingent liquidity line will do little to reactivate economies if it sits unused.

Colombia has earned the right to cheap on-demand cash through years of prudent policies. The FCL exists to ensure good borrowers can get through tricky times, and they do not come trickier than today. 

By Oliver West
01 Oct 2020