Fiscal rule suspended

COLOMBIA - In Brief 16 Jun 2020 by Andrés Escobar Arango

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The government formally asked the external committee of the fiscal rule to suspend the rule in 2020 and 2021. During a meeting that took place on June the 15th, the committee unanimously voted in favor of the government’s request. Its members consider the leeway given by the parametric deviations and the countercyclical spending clause to be insufficient under the current circumstances.This is not the first time the parametric approach has been temporarily suspended. Back in 2016, the committee suspended it for 2017 and 2018, asking the government to produce a deficit smaller than the one warranted by the parameters, in order to help curb the current account deficit. This time around, however, and for obvious reasons, the suspension will allow for a larger fiscal imbalance, higher than the 6.1% already approved by the committee. How much larger? Hard to say. We will have to wait until the Medium-Term Fiscal Framework (MTFF) is published at the end of June to have official numbers, but we think it could in the 6.8%-7.3% of GDP range.Was the decision to suspend the rule a sensible one? The fact that the committee, made up of independent and intelligent people, voted unanimously, should not be taken lightly. In addition, GDP contraction makes the deficit a moving target of nightmare proportions. Also, without a doubt, the need for fiscal flexibility is key right now..However, the decision taken by the committee implies paying a cost: losing the one fiscal anchor we have. Even though the press statement released by the external committee calls for returning to the parametric approach in 2022, the MTFF has to give an outline of how this will take place, and the committee ha...