Colombia requires additional measures to guarantee the sustainability of its public finances

This Thursday, the Autonomous Committee of the Fiscal Rule (Carf) made its first pronouncement and assured that the macroeconomic assumptions set forth in the review of the Financial Plan for 2022 are probable and, in general, are consistent with market expectations formed from the information available.

“The primary expenditure programmed in the Financial Plan is consistent with the Medium Term Fiscal Framework. No significant risks were identified on the fiscal scenarios associated with the assumptions of the Ministry of Finance”, assured Juan Pablo Córdoba, president of Carf.

In addition, he stated that the fiscal scenario presented for 2022 allows the Government to comply with the transition proposed by the Law for the Fiscal Rule. However, preliminary estimates show that, despite the effort to reduce the deficit in 2022, the Structural Net Primary Balance (BPNE) would close the year with a deficit between three and four percentage points of GDPgreater than that which would result from applying the formula for the Fiscal Rule, to which it must converge in 2026.

Consequently, according to Carf, in the short and medium term, additional income and expenditure measures will be requiredto those already contemplated in the Social Investment Law (tax reform of 2021), to reduce the primary deficit to levels compatible with the Fiscal Rule and achieve a permanent reduction in the debt-to-GDP ratio. “Only in this way can the sustainability of public finances and macroeconomic balance be guaranteed,” added Juan Pablo Córdoba.

Carf considers that an important element to achieve these objectives will be to find solutions to the combination of laws and institutional obligations that make public spending inflexible. For this, the conclusions of the missions and studies that have been carried out on fiscal issues could be used.

Additionally, the Carf highlighted the effort of the national government to improve fiscal results and projections in the face of a better perspective of income and economic performance, despite the greater spending pressure generated by interest on the debt and the pandemic. As well as the effort it has made to keep the primary spending figures unchanged in 2022 compared to 2021, in a context of higher inflation.

According to Carf, it is necessary to accelerate the fiscal adjustment to reduce the pressures of financing costs. Photo: WEEK – Photo: Photo: WEEK

For the Autonomous Committee of the Fiscal Rule, the 2022 Financial Plan, presented by the Ministry of Finance on February 4, shows a change of transitory capital income for current, more permanent income. “This gives greater certainty and credibility to the short-term fiscal strategy”, affirmed the president of the Carf.

It also highlights that the Government maintained the financing programmed in the Medium-Term Fiscal Framework for the year 2021, despite the reduction of the deficit by nearly 12 billion pesos, thus leaving a greater final availability of cash and reducing the pressure on the financing for 2022. Another noteworthy element of the Financial Plan is the reduction of debt as a percentage of GDP: gross debt falls from 2021 and net debt from 2022.

Despite this good news, according to estimates by Banco de la República, the current account deficit would have closed 2021 at 5.7% of GDP. This estimate shows that there are imbalances in the economy, to which the national government deficit has contributed.

The Carf did not identify significant risks on the fiscal scenarios associated with the assumptions of the Ministry of Finance. – Photo: Getty Images/iStockphoto

The imbalances between savings and investment are being reflected in the risk premiums faced by the Colombian economy. Indicators such as CDS and extends (spreads) of Colombian bonds, relative to our regional peers, reflect the greater risk that is being perceived on the financing capacity of the Government.

The foregoing occurs in a context of high uncertainty and a search to reduce the expansive monetary position, both in Colombia and globally, to anchor inflation expectations and contribute to the savings-investment balance.

Given the above, according to Carf, the need to accelerate fiscal adjustment to reduce financing cost pressuresof both the public and private sectors, and to contribute to the sustainability of the public debt and the consolidation of non-inflationary economic growth and recovery of employment.

Finally, the Autonomous Committee of the Fiscal Rule made a call so that, in a responsible manner, public policy proposals take into consideration the fiscal situation of the country and safeguard the sustainability of public finances.