Ballooning fiscal confusion and too little economic support
For the first time since 2012, Colombia is living without a fiscal rule. Prior to the crisis, this year's national central government deficit was expected to fall from 2.5% of GDP in 2019 to 2.3% of GDP in 2020, based on 16.7% of GDP 2020 revenues and 19% of GDP of expenses.
Under the new COVID scenarios, 2020 revenues are expected to close at 15.6% of GDP. Looking only at “regular” spending appropriations contemplated in February 2020, NCG “regular” spending should rise from 19% of GDP to 21%. The NCG, excluding crisis-related spending, is expected to rise from 2.3% to 5.4% of GDP. But this year's deficit includes crisis-related spending worth 2.8% of GDP, which raises the deficit for 2020 to 8.2% of GDP, in line with the MTFF.
Waters grow even murkier for 2021. The 2021 numbers are consistent with a 5.1% of GDP NCG deficit. However, you only get to the 5.1% of GDP deficit after subtracting the appropriations related to the crisis included in next year's budget; i.e. the 5.1% of GDP deficit would not result if Congress approves the budget. With crisis-related spending of 0.4% of GDP, the deficit for 2021 should reach 5.6% of GDP.
Since both the 2020 and the 2021 NCG deficits will likely exceed the government's targets, the role of the external committee of the fiscal rule as overseer is extremely important. The budget discussion in Congress should include statements by this external committee discussing the complete budget implications. Especially with Colombia under close scrutiny by the rating agencies.
Dismally, less than 30% of budgeted resources for Coivd-19 support programs have been allocated or transferred. The money allocated to 4.8 million families averages 88,500 pesos per month, or less than $25. Colombian economic authorities pulled the handbrake in order to contain expenditure, deficits and public debt. But that cruelly leads to suffering for millions of poor families showing their hunger and anguish by hanging red flags or clothes outside doors and windows.
On July 31st, the Central Bank magnanimously cut the intervention interest rate by 25 bp. Facing the worst recession in its recorded history, record unemployment and the threat of collapse of thousands of firms, maintaining interest rates above 2% when inflation is plunging defies the laws of gravity. This is a new definition of staff technical arrogance, and board indecisiveness. The CB is adding to the “too little too late” mantra of the executive response to Covid-19, oil price collapse and now political crisis. We expect the intervention interest rate to reach 1.5% before yearend.
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