Colombia mulls IMF credit line extension

21/03/2010 | Lucien Chauvin, Sid Verma

Colombia is considering renewing its flexible credit line with the IMF, its finance minister said last night

Colombia is considering a renewal of its flexible credit line (FCL) with the IMF to insure itself against abrupt capital flows, its finance minister has said.

Oscar Zuluaga told Emerging Markets: “The flexible credit line with the IMF expires in May, so we are studying what we should do.”

Asked whether stigma attached to IMF loans by markets and the public would affect the decision, Zuluaga said: “This is not a problem in Colombia. The markets have seen this [flexible credit line access] in a positive light.”

Colombia secured a one-year precautionary credit line with the IMF last year. Zuluaga’s comments come after Mexico on March 10 asked the IMF to renew a $48 billion line, to boost market confidence in the country’s liquidity position and to stem the threat of dollar capital flight once US interest rates are hiked.

The FCL was set up in early 2009 to help well-managed emerging market countries weather the global crisis. FCL standards are “too stringent” for most Latin American countries, IDB economist Eduardo Fernandez-Arias said.

As the prospect of volatile capital flows in the medium term looms large, it is vital for the IMF to be seen as an effective liquidity-lender of last resort for both middle and low-income countries, he added.

But concerns that latching onto the IMF swap line could breed dependence and undermine market confidence about a country’s liquidity position is still deterring Latin clients, Morris Goldstein, a senior fellow at the Peterson Institute said.

Fernandez-Arias advocates a tiered system of contingent credit lines, whereby countries, judged to have sound policies, would be granted large and quick access to IMF emergency credit lines. While weaker countries could be provided with limited access and would have to enact IMF conditions after accessing the FCL.

“This has the advantage of providing breathing space to countries,” which require immediate liquidity assistance. For these countries, Fernandez-Arais says IMF conditions imposed after access would be weaker than a normal balance-of-payments program if the shock was exogenous, such as the sudden collapse in the terms of trade.

But IMF Western Hemisphere director Nicolas Eyzaguirre told Emerging Markets that the institution was limited in extending the FCL. “It does not make sense to treat some countries [in Latin America] as equal [to the likes of FCL-recipients Mexico and Colombia] because they are not seen as safe by the market.” In addition, those countries that are perceived to have weak policies by the IMF could not receive the FCL, in order to “safeguard” the institutions’ resources.

Nevertheless, Eyzaguirre said he agreed with the logic of providing tailored liquidity facilities to weaker economies, in some cases – but no new lending instruments were being considered.

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