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Controlling inflation, one of the challenges of the Colombian economy in 2022

Receiving the year 2022, the economic expectancies are still much greater than the experts projected in mid-2021. It is very important to know the year-end results of last year to establish forecasts of what the Colombian economy may expect in the short and long term. Therefore, for now, speculations are uncertain and based not only on the pandemic but also on the upcoming presidential and congressional elections.

 

In 2021, inflation was 5.62%, a figure that helps give an idea of how much several product and service prices can increase in different sectors of the economy.

 

If to the prior we add the pressure companies have in face of a 10% minimum wage increase, most certainly an inflationary burst will surpass the 2021 figure during the first, or second quarter of 2022, and although they’d expect it to be lower this year, the impact of the prices surge should not be taken lightly as it is an essential indicator of the economic future of the country.

 

Logically, people will have to expect price hikes for school registration and tuition as well as for leases and tollbooths, for the Compulsory Traffic Accident Insurance (SOAT, for its Spanish acronym), several products of the household basic food basket, and even for the property appraised value taxes.

 

Estimation of the Fiscal Observatory of the Pontificia Universidad Javeriana shows that the discount and exemption on the property tax for many companies surpasses Col $ 74B.

 

However, behind this inflationary scenario that is brought upon people, we will also see an increase in the collection levels for taxes such as for the Value-added tax (VAT). According to National Tax and Customs Administration (DIAN, for its Spanish acronym) figures, for 2020 the Government collected Col $146.2B, of which 27% was for VAT and 47% for income taxes.

 

Balance in the fiscal load

 

The Ministry of Finance and Public Credit claimed that in 2021 they would collect more on taxes, which would be an indicator of the recovery the economy of the country has had. Currently, they estimate that 2021 taxes would be Col $9 B more than expected.

 

We know of the discontent for the initiatives for incentivizing collection comes with the pressure they want to exercise over natural persons, who hardly can celebrate a significant increase of minimum wage as they will face inflationary and tax burden margins that will absorb this wage increase.

 

Many companies have a series of tax discounts and exemptions in income taxes which has the greatest participation in annual collection figures. Estimations of the above-mentioned Observatory have determined that these tax discounts surpass Col $74B.

 

Certain tax benefits for companies in several sectors have been maintained and also as support incentives for contributing to the socio-economic growth and development of the country. Some of these benefits translate into more jobs to contribute in areas such as research, development, and innovation to increase employability in young people, just to mention some examples, are measures that have a positive impact. The matter is to filter which organizations take advantage of these benefits without providing a beneficial result for the country and the Colombian economy.

 

On the corporate level, they maintain the expectations of assessing the tax burdens to not limit tax collection but also not to impose a weight to choke the company fabric of the country. The income tax rate for companies is 10 percentage points above the average tax rate of Organization for Economic Cooperation and Development (OECD) countries. The tax burden for companies in Colombian is without a doubt, very heavy.

 

Inflation hits the poor harder

 

In several surveys, it is not hard to find pessimistic results that speak of the dissatisfaction of people with their standard of life. It is logical that with the price hikes that are coming, as the public transportation ticket rise (such as TransMilenio in Bogotá), people start feeling a decrease in their buying power which worries them, especially in products like food.

 

Among the more recent figures, Invamer (a polling company) claims that 83% of the people say the economy is bad, a claim which would seem incoherent at first sight when recently the World Bank and the OECD increased their Colombian 2022 GDP growth projection to 9.9 and 9.5%. Another empirical example which is not very useful to measure economic welfare, so it is clear that economic growth does not mean economic welfare.

Inflation continues to exert high pressure since 2020 when it was deemed as a tax that most impacted the lower-income population. The greater the inflation, the less consumer purchasing power. Therefore, it is important to maintain it controlled.

Furthermore, the volatility of the Colombian currency through the first semester of the year will be the trend as now we can add the political tension coming from the upcoming elections.

The income tax rate for companies is 10 percentage points above the average tax rate of Organization for Economic Cooperation and Development (OECD) countries.

We mustn’t forget that the Colombian peso started the year as one of the most devalued currencies in the world. And if a crisis comes, our currency is highly volatile, and foreign investors are the first to get scared and flee.

In 2021, a Cifras y Conceptos survey showed that 82% of Colombians will not support a candidate that will perform a tax reform, a key point for presidential hopefuls for 2022 and 2026. This is one of the most sensitive matters and where people expect more innovative proposals to avoid thinking that tax reforms are only to take advantage and restrict, even more, their spending capacity.

Several international organisms improved their economic growth forecasts for 2021 while decreasing their projections for 2022 (from 4.1 to 3.7%) and 2023 (under 3.5%).

There are many criteria to consider but the inflationary burst and the devaluation of the Colombian currency will be two transverse axes that will have to be dealt with, not only in economic growth projections but also for unemployment.

The unemployment issue continues without structural solutions and although the unemployment rate continues to decrease, the figure continues to be high and informality is at the greatest levels, therefore the discontent of many for the lack of formal and quality employment opportunities that allow for sustained income for a greater portion of people. 

Consejo Editorial