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Agricultural sector and infrastructure left without fund for 2018

The proposal submitted by the Colombian government for Col $235.4 billion falls short of a quarter of the GDP (24.1 %), as opposed to last year which was 25.4% (a 1.3% reduction) therefore the contribution to economic reactivation will be minimum.

Furthermore, public investment will be paralyzed when the Ley de Garantías  (Colombian law that avoids state monies or direct government contracting to favor candidates) is applied between November 2017 and June 2018.

From the income point of view, the effect of the abrupt drop in oil exports is still being felt, passing from US $32,481 to $10,422 billion between 2013 and 2016 as a consequence of the drop in oil prices from US $100 to $47 a barrel.

Although 2016 saw a tax reform, revenue collection has been below the expected collection of 3.1% of the GDP.

The prior impacted the revenue of the government in more than Col $20 billion and although in 2016 the administration imposed a tax reform and spiking the VAT from 16% to 19%, improved revenue collection have been below the expected results (3.1% of the GDP). This is due to the impact of the drop in demand, which also impacts the income of natural individuals and legal entities.

The real increase in tax collection for the first two quarters of 2017 in comparison to 2016 was only 0.02 %, passing from Col $74,588 to $74,604 billion.

With respect with expenditures, Col $38.6 billion correspond to personnel and general expenditures (16.4 %), Col $108.5 billion to transferals (46%), Col $51.9 billion to pay debt servicing (22.5%), and 34.3 billion for investment (14.6%).

With this data, the flexibility resource data margin is excessively low and investment is where typically adjustment is applied more rigorously, with a drop of 16.8%.

This scenario can compel the government to look for more debt, increasingly risking the fiscal stability; if one takes into account the Col $51.9 billion will be destined to fulfill the commitments of the debt for next year. 

Macroeconomic assumptions

Based on estimations over the future of the economy, the national budget includes variables such as economic growth, exchange rate, and inflation among others.

The macroeconomic assumptions that the Ministry of Finance had to take into account for the 2018 budget considers that domestic inflation will be within the range determined by the Banco de la República (Bank of the Republic) (3.5%), devaluation which will be close to 1.5%, which will lead to an exchange rate of Col $3,027.4 per dollar

With this scenario, the expected import growth will be 2.6%, which is US $46,798 billion. In regards to the GDP, they expect a 3% growth.

The dynamics of expenses

Three great sectors have important expense growths:

  • The defense sector passes from Col $19.3 to $20.4 billion, a 6.1% growth

  • Pensions pass from Col $37.8 to $41.1 billion (4.2% of the GDP), a 8.5% growth
  • Debt servicing passes from Col $51.4 to $51.9 billion (5.8% of the GDP), a 1.1% growth.

Moreover, the fund from the Sistema General de Participaciones (General Fund Allocation System) (health, education, freshwater and general purpose) passes from Col $36.5 to $36.7 billion (3.8% of the GDP), a growth of 0.5%.

Management expenses (personnel and general expenses) grow from 6.1 % (from Col $36.4 to $38.6 billion), which is difficult to apply fiscal adjustments when the government income drops.

On the contrary, an aspect of general concern, the last three years there has been a repeated drop in public investment. For 2018 this reduction equals 1% of the GDP. (Col $9 billion) passing from 4.5% to 3.5% of the GDP. Also, the resources provided for the post-conflict will be impacted. For instance, the fund allocated to victims, vulnerable and ethnic group pass from Col $2.2 to $1.9 billion, a 14.5%.drop.

In this same scenario, rural development will only see Col $160.000 million investment.

The funds allocated to victims, vulnerable and ethnic groups pass from Col $2.2 to $1.9 billion, a 14.5% .drop.

The great infrastructure projects which had begun back in 2014 with great government propaganda will continue to be postponed, not only for lack of investment monies but also due to the corruption charges filed against these projects.

The future of public finances

The previous figures highlight the hardships the government has to comply with its fiscal objectives.

It is good to remember that the current methodology to estimate the fiscal regulation establishes deficit levels which cannot surpass 3.6% of the total and 2% structurally in 2017, nor 3.1% of the total and 1.9% structurally for 2018, included the effects of economic and mining-energy cycles.

During the last year, the fiscal maneuvering margin thinned, economic growth deteriorated and the fiscal policy did not contribute to change this scenario, creating a vicious circle, making experts cringe on the fact that credit rating agencies could lower the country credit rating, lose the investment levels and therefore limiting access to external credit and increased interest rates to obtain more credit.

The primary deficit of the government is still negative which could lead the debt balance to continue to increase and be over 45% of the GDP, producing concerning levels and restricting, even more, the availability of resources.

Therefore we can say the fiscal policy is characterized by a pro-cyclic, if the economy grows or if there are bonanzas, the government spends more, squanders money and saves less; but when the economy enters into a recession the public budget is reduced, hence the increased fiscal burden.

With this scenario, the next administration will face great challenges. Like all the previous administrations, it should tender a new structural tax reform, hopefully real, to reduce tax evasion and elusion, as well as rationalize tax exemptions and deductions.

In regards to the budget, they should look for greater flexibility in resource management and reduce administrative spending (personnel and general) for public investment not to be reduced in times of shortage.

Consejo Editorial