Colombia pledges to respect fiscal rule despite falling oil revenues

Q: The Colombian government has just revised the GDP growth estimate for 2016 downwards to 2.5% from 3%. How will you diversify the economy away from commodities?

A: We are convinced that the economy has to be revitalised to shift away from the commodity sector. We have to promote a new economy giving leadership to sectors such as manufacturing, agriculture and tourism. It’s a paradigm shift.

During the commodity boom, we had big projects by large companies generating big money for the government to handle. Now we want the economy to be driven by the private initiative of SMEs, focusing first on the domestic market – which is a big market of 48 million people, many of whom belong to the middle class – while the external markets normalise and Colombia can return to exporting goods.

Q: How are you going to achieve it?

A: We are working at fiscal reform, which will make the private sector more competitive as fiscal pressure on companies will reduce. At the same time, we are investing in improving national infrastructure through a programme of concessions for our main highways. We are also investing in education and in the development of a strategy to promote productive development by making the most of local production that has high potential. 

Q: Are you considering any special incentives for foreign investment?

A: Foreign investors are treated the same as local investors, with the exception of portfolio investment, where they are subject to a 14% profit tax. We are discussing cuts to the portfolio profit tax, but are still in early-stage talks.

Q: Are these efforts tailored to promote import substitution where possible?

A: We are willing to substitute what we can, and we have already substituted many imports. Industrial production in sectors such as petrochemicals, beverages and clothes production has been shoring up economic growth in recent years. Thanks to import substitutions, Colombian industry has been growing at about 6%.

Looking forward, we will also support exports with higher value added. Our traditional markets, such as Ecuador and Brazil, have become difficult to access these days. But we have free-trade agreements with 60 countries and we have to make the most of them, particularly countries such as the US and the EU, where we can sell products in the light industries, such as clothing, heavy industries, such as plastics, and processed food. These products have found their niche in the international markets.

Q: The government had committed to keep the budget deficit within certain levels [3.9% of GDP in 2016, 3.3% in 2017] to gradually limit it to 1% in 2022 – the so-called fiscal rule. Are you going to rethink these parameters?

A: Although there have been rumours that we will relax the fiscal rule, we are totally committed to it, and the whole discussion around the new budget fits the framework set by the fiscal rule. It’s clear to the government that the fiscal rule gave it credibility and created trust among investors. If Colombia has been able to handle it during a war, we must do so during an environment of peace.

Q: How are you going to comply with the fiscal rule now that revenues generated by the oil industry have basically zeroed?

A: We have had to cut expenditure and look for other sources of income, as we are not expecting oil revenues to recover. We lost 3% of GDP in revenues and we have managed to recover half of them [through new sources revenues]; the other half has been expenditure cuts.