Colombia is confronting a severe fiscal challenge, with tax collection collapsing and raising concerns in financial markets. The government faces an estimated budget shortfall of approximately 27 trillion pesos ($6.9 billion) this year, driven by a significant drop in tax revenues and adverse judicial decisions affecting revenue streams.
Plummeting Tax Revenues
In April, tax collection fell by a staggering 40.9% to $4.83 billion, resulting in a cumulative shortfall of about $2.85 billion in the first four months of 2024 compared to targets. The DIAN tax agency has already acknowledged that the country will not meet its target of nearly $2.6 billion from arbitrations this year. Additionally, a court ruling allowing extractive companies to continue deducting royalties from their taxes is expected to further strain public finances.
Government Response and Market Concerns
Finance Minister Ricardo Bonilla has indicated that fiscal adjustments are planned for the fourth quarter. However, analysts argue that immediate action is necessary to prevent the country from missing its fiscal targets or drawing negative attention from ratings agencies. Andres Abadia, head economist for Latin America at Pantheon Macroeconomics, emphasized the urgent need for fiscal reform, stating, “The fiscal situation is worrying, both at the level of spending and of income. The economy will have to pay for it.”
The government’s options to address the shortfall are limited and problematic. It could either drastically reduce spending, take on additional debt, or a combination of both. Each option carries significant fiscal implications. Camilo Perez, director of economic studies at Banco de Bogota, expressed skepticism about the sufficiency of proposed changes, expecting spending cuts and increased issuance of peso-denominated TES bonds. Many analysts also predict that the government will continue with debt swaps to extend maturities.
Potential Consequences
An increase in debt would likely raise the fiscal deficit to about 5.3% of GDP, barely meeting the constraints of the 2011 fiscal rule designed to protect public finances. Such a deficit could lead to market volatility, with investors wary of the government’s ability to manage the fiscal imbalance, potentially resulting in higher risk premiums and financing costs. Mauricio Guzman, head of investment strategy at Sura Investments, noted the hesitancy among investors, saying, “Investors will be very reluctant to take on risk until there is more fiscal clarity.”
Outlook for 2025 and Beyond
Sergio Olarte, head economist for Colombia at Scotiabank, warned that drastic spending cuts could hamper economic growth, further complicating fiscal management in 2025. He suggested that the government might need to present an extremely austere budget next year or consider modifying the fiscal rule to navigate the crisis.
As the government prepares its mid-year fiscal plan, due in mid-June, the pressure to enact effective and timely measures is mounting. Failure to address the fiscal challenges promptly could result in a crisis of investor confidence, exacerbating Colombia’s economic woes.
