Colombia pursues new initiatives to lower fiscal deficit

Colombia pursues new initiatives to lower fiscal deficit

Corporate & Sovereign Strategy Economy & Policy Andean Colombia

Colombia is pressing ahead with a raft of measures – including privatizing state companies worth up to $50 billion – in order to boost government revenues following a tax reform earlier this year that analysts say isn’t enough to meet the country’s fiscal deficit targets.

The initiatives, which will be published in the government’s medium-term financing plan in June, could add the equivalent of at least 1% of GDP to overall output, deputy minister of finance Luis Alberto Rodriguez told LatinFinance. 

The government estimates 2019 GDP at 3.6%, although Rodriguez said that number could “easily be 4% if the external environment improves.”  

The tax reform, enacted in December 2018, compels authorities to cut the fiscal deficit to 2.4% of GDP this year, from 3.1% in 2018, then gradually reduce it to 1% of GDP by 2027.  

 To help meet those goals, the government is evaluating more than 100 state-owned companies to determine which ones to sell. The proceeds from such a sale could total roughly $50 billion. Rodriguez said authorities had identified up to 2% of GDP in assets to sell, and he expected at least 0.6% of GDP to come from privatizations in 2019.  

Other measures under consideration include investments in new technology and an overhaul of the tax agency to improve collection methods. Stamping out tax evasion could add 1.2% to GDP “in the next two to three years,” Rodriguez said.  

 “We could use these resources that would allow us to maintain our tax reform instead of having to tax corporates again,” he said. “Summing up all these numbers we see an increase of at least 1% of GDP in revenues, whereas the average of the last 30 years has been 0.6% of GDP from [tax] reforms alone.” 

Moody’s Investors Service, which put its Baa2 rating for Colombia on negative outlook in 2018, said in report in February that the government would need to take more measures to meet its fiscal targets. 

Alejandro Werner, head of the IMF’s Western Hemisphere department, also raised concern about the tax reform. In a note, he said that Colombia’s tax reform “is expected to help achieve the fiscal target for 2019” but warned that “a lower corporate tax burden, while potentially boosting investment and growth, may result in weaker tax revenues from 2020 onwards.” 

Rodriguez said the government was also contemplating additional buffers – including a strengthening of the government’s deposit insurance agency – to defend against potential external shocks, such as a worsening of the economic and social crisis in neighboring Venezuela, or a drop in the oil price.