ONE OF THE Priorities that administrations have had in managing finances in recent years have been compliance with fiscal goals, mainly the rule that measures the level of government spending and indebtedness.
For this year, a goal of 4.3% was planned, but according to Fedesarrollo forecasts this figure will be higher and would reach 5.5%.
In an event at ANIF held last week on investment in the country, the director of Fedesarrollo, Luis Fernando Mejía presented the accounts on the fiscal deficit and estimated at 5.5% of GDP for 2023, which implies a risk of non-compliance with the Rule Fiscal.
The fiscal rule is a determining factor for investor confidence since it determines the sustainability of the debt, so its noncompliance could generate a rise in the risk premium and a decrease in the inflow of foreign capital.
However, according to what was presented by the director of Fedesarrollo, compliance with the fiscal rule is necessary, but not sufficient to promote investment in the country. As he well explained, “the objective of the fiscal rule is to lower the cost of financing for the national government and, therefore, for the rest of the agents of the economy, however, not much is done if the Fiscal Rule is complied with.” , but the financing rate is above 10% per year and the risk premium is above 230 basis points”, thus highlighting the importance of taking care of all macroeconomic factors.
These accounts contradict the calculations that the director of Public Credit of the Colombian Ministry of Finance, José Roberto Acosta, said regarding this when he pointed out that “the fiscal rule is quite draconian, but that is it and we want to comply with it and if things go well we can have more favorable data at the end of the year”.
Goals
On this basis, Acosta anticipated that the fiscal deficit figure could be better than the 4.3% estimated in the Medium-Term Fiscal Framework for the year 2023 thanks to factors such as the stable dollar and inflation and falling rates.
“The great zeal of the Ministry of Finance, said Acosta, was to guarantee the primary surplus in the accounts of the National Central Government as it was defined.”
Likewise, the official stressed that this government is not going to change the Fiscal Rule, this in light of announcements about modifications to what had been contemplated in 2022, when the government of Iván Duque presented a bill to change the rule to the Colombian Congress. prosecutor after overcoming the pandemic.
This was due to the inelasticity that fiscal rule reached after Colombia had to raise its debt to record levels to meet the needs in health and social issues.
By definition from its origin, the fiscal rule can only be changed in the Congress of the Republic and, therefore, that bill that is presented must pass four debates in the Legislature.
In the same way, in announcements by the Minister of Finance, Ricardo Bonilla, he recalled that the short-term strategy in fiscal matters has the task of financing reforms and social programs, the sustainability of the debt and the preservation of macroeconomic stability “within the strict compliance with the fiscal rule”.
Although the fiscal deficit in 2022 ended at 5.3% as a percentage of GDP, the projection for this year is 4.3%.
“The economic forecast said that we could have finished at 3.8%, but the behavior of oil prices, the reduction in imports, and therefore the collection, make us responsible for saying that 3.8% is impossible to achieve. comply and that means revising the fiscal deficit upwards”, explained the minister.
Settings
Despite this, he stressed that the fiscal deficit will be lowered by 100 basis points compared to 2022. And likewise, he indicated that by 2024 a slight increase in the fiscal deficit is expected to 4.5% of GDP, due to the commitments with the interest on debt payment.
“The country is not going to declare a moratorium or have a default, which does not mean that other financing possibilities will not be sought,” said the minister, mentioning proposals for new issues such as green bonds and social bonds.
Marco Fiscal
On the other hand, the Government presented the 2023 Medium-Term Fiscal Framework (MFMP) a month ago with fiscal projections for the 2023-2032 period. The Advisory Committee for the Fiscal Rule (CARF) ruled, in particular, on the fiscal targets for 2024.
According to a Corficolombiana report, “despite the two post-pandemic tax reforms approved and the extraordinary collection of the oil sector, the fiscal imbalance in Colombia is greater than in other countries in the region.”
However, the financial entity says that “we highlight the government’s effort to reduce the deficit associated with fuel subsidies through increases in gasoline prices. However, the Fuel Price Stabilization Fund (FEPC) would close 2023 with a deficit of 1.6% of GDP, some $26.3 trillion”.
It points out that “in 2024 the Government projects a higher deficit, of 4.5% of GDP, to the limit of what is allowed by the fiscal rule, putting Colombia on an even more expansionary fiscal path, with worse metrics compared to other countries in the region.” region and very limited room for manoeuvre.
The report maintains that “the most worrying thing is the increase in spending without interest or FEPC, from 17.6% of GDP in 2023 to 19.4% in 2024, some $47 trillion more. Compared to 2022, the Government would spend almost $100 trillion more next year, outside of interest and FEPC, setting up an excessively loose fiscal stance that may jeopardize fiscal sustainability.
The analysis describes that “in addition, the Government will face an interest payment of 4.5% of GDP in 2024, $7 trillion more than what was programmed this year. These accounts are even more worrisome if the fiscal effect of the reforms to be discussed in the legislature is included. Additionally, the CARF points out that the additional income of 0.8% of GDP for the DIAN’s management account and 0.9% of GDP for litigation in tax matters are assumptions that seem overly optimistic. If this is not the case, the country’s fiscal accounts would not be consistent with the fiscal rule”.
Box
Greater austerity by 2024
Corficolombiana warns that “Congress must demand from the Government a more austere spending budget for 2024, which is consistent with primary spending, not including the FEPC deficit, of less than 19.4% of GDP. A public deficit of 4.5% of GDP, such as the one established by the Mfmp, exposes the country to a high risk if unfavorable external scenarios materialize. In addition, it erases from the map the possibility of advancing in recovering the investment grade”.
It states that the Government presented that, in the Mfmp, the fiscal accounts are updated for this and next year, as well as for the following decade.
The CARF ruled on said document and made a series of warnings in relation to the fiscal programming presented, particularly on the numbers for 2024.
For 2023, the Government updated its projections of macroeconomic variables compared to the Financial Plan. The GDP growth rate expected for this year was revised upwards from 1.3% to 1.8% and the price of Brent oil downward from US$94.2 to US$78.6 per barrel. With these new assumptions, and after the approval of the budget addition to spending for this year, the Central National Government (GNC) deficit would be 4.3% of GDP in 2023, and not the 3.8% initially forecast in the Financial plan.