Colombia needs to win the peace
Colombia will elect a new president in the first half of next year and, if the urgency to address the country’s financial position wasn’t already clear enough, the country’s December downgrade by Standard & Poor’s to one notch above junk throws the need for fiscal reform into sharp relief.
|Colombia's president Juan Manuel Santos speaks in Bogota in November at the
first-anniversary celebrations of the peace signing
Should Colombia not take action to shore up its weakening public accounts, it would place its investment grade rating in jeopardy in doubt and risk the country becoming the only member of the Pacific Alliance to have this status.
When downgrading the country, Standard & Poor’s specifically highlighted Colombia’s “diminished policy flexibility” due to “weakened fiscal and external profiles”, as well as its climbing external debt.
The country has long struggled to widen its tax base. Successive finance ministers have struggled to combat widespread evasion and shift the high burden from its corporates. That failure has made the fall in oil prices since 2014 more of a problem. In 2016 the central government ran a financial deficit of 4.0% of GDP – well above its 2.0% structural target. For 2017 the target was an unambitious readjustment to 3.6% (especially given that tax changes have increased revenues by 0.7%).
Public debt is therefore rising steadily, albeit from comfortable levels, to 44.3% of GDP currently, from 32.0% in 2012.
Boost and broaden
The new president will therefore need to boost and broaden the base of Colombia’s tax revenues.