The Choice of Peace

COLOMBIA - Report 30 Aug 2016 by Veronica Navas and Mauricio Santa Maria

After almost six years of intense waiting, a peace deal between the government and FARC-EP guerillas was reached in Havana on August 25th. Congress is expected to give it its blessing, and to authorize putting it to a national plebiscite, planned for October 2nd. Despite increased divide between those in favor and against the deal, we expect it to be ratified – as success requires just over 4 million votes, which polls show should be achieved.

The deal is being called “the complete and definite agreement to end armed conflict in Colombia.” The last five sticking points were the most contentious: transitional justice, political participation of FARC members, amnesty, economic integration of FARC troops and surrender of weapons and victims’ reparation.

The fiscal situation for 2017 meanwhile remains quite uncertain, a condition likely to persist until at least the end of October. The Ministry of Finance has presented its 2017 budget, calling it a “Budget for the New Economy.” This hopeful title refers to what the government expects to be the new drivers of economic activity, after the recent hard times for the oil sector: that is, with a focus on agriculture, tourism and manufacturing. Though the proposed COP 224 trillion plan requests a 6.7% increase in spending from 2016, it doesn’t request additional tax revenue. The government argues that additional tax revenue is only indispensable in 2018, and that it could meet the fiscal rule target of 3.3% of GDP in 2017 by cutting investment by 0.8% of GDP. This is wishful thinking.

Essentially, though, the message to Congress is that if it wants higher investment, it must approve the tax reform. This seems like a bold strategy for a government widely unpopular at the moment, and it could easily backfire. Congress might balk at raising taxes if they are supposedly not needed in 2017. Needless to say, this would be a very bad outcome for the government, and would certainly anticipate a sovereign debt downgrade. So the final budget is likely be significantly different from the proposed version. And if the peace deal is executed, we’ll be in new financial world entirely, with higher expenditure, and most likely higher taxes.

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