Terror 102
As the New Year begins, our assessment of the Colombian economy is mixed. Economic activity continues to pick up, consumer sentiment is recovering and, while inflation and monetary policy face some challenges, they’re nothing out of the ordinary. But there will be serious fiscal issues, both for this year and for years to come.
The fiscal plan calls for cutting the deficit to 2.4% of GDP this year, from 3.1% in 2018. But with regional elections looming in October, we foresee cuts amounting to 0.3%-0.4%, at most. We have argued that President Iván Duque could eventually be forced to ask Congress to amend the targets in the 2011 fiscal rule law. It seems we were partially right, and that he’ll ask for a reprieve of about 0.3% this year.
The outlook for the rest of Duque’s term (2020-2022) seems challenging: the fiscal rule will continue to call for fiscal consolidation. Pensions are the only other major pending reform issue, and that plan won’t be submitted to Congress until next year, in spite of the urgency to modify the system which currently seems to be benefitting the rich only. This along with other needed reforms in the subsidies front entail significant pressures for the road ahead of Duque’s Administration.
Finance Minister Alberto Carrasquilla has proposed the government sell 8.5% of its stake in Ecopetrol, which could generate as much as COP 10 trillion (1% of GDP). Several key questions stand out: Why 8.5%? How much revenue would the government get, and when? And how will the money be spent?
Under Law 549, the government does not get to keep all the money from a privatization, but must spend 10% on projects in the areas where Ecopetrol has influence. Nor can this mainly be treated as current revenue. Given the need for Cabinet approval for the sale, the hiring of investment banks to value the shares, an initial sale to the sector solidario and finally sale to the general public, the sale might not be executed before yearend. Since this is one-off revenue, using it to finance the budget would be unwise.
On the political side, why did the ELN load a car with 80 kilograms of pentolite and attack a police school, killing 20 students? Weren’t they in the midst of peace negotiations with the Colombian government? Precisely. The FARC agreement advanced through such attacks. Every time there was a stalemate, they’d revert to bombing, killing and kidnapping, to show their capacity for terror. Reliably, the press was outraged, the public intimidated and the government would give in, and return to the negotiating table. The ELN’s “Terror 102” has both similarities with and differences from the negotiations with the FARC, which we call “Terror 101.” This time Duque has taken a hard line, pursuing extradition of ELN leaders from Cuba -- and Colombians have applauded that. If the military inflicts serious defeats on the ELN, and kills or captures its leaders, we might see light at the end of this tunnel. Otherwise, prepare for a new brand of terror. Though this might seem like Terror 102, it still looks like Colombia 101.
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