Colombia Faces $6.2 Billion Budget Cut to Meet Fiscal Rule

The Colombian government faces a significant challenge as it approaches the end of 2024. With only six weeks left in the year, financial analysts estimate that a budget cut of 31 trillion pesos ($6.2 billion) is necessary.

This adjustment is needed to meet the established fiscal targets. The Autonomous Fiscal Rule Committee (Carf) has raised a new alert.

They warn the government that another budget adjustment is needed to reach the proposed goal. This comes in light of the decline in tax collection and other factors.

According to Carf, the government must set aside 56.2 trillion pesos ($11.24 billion), equivalent to 3.2% of GDP, to comply with the fiscal rule in 2024.

However, this figure is substantial and requires immediate action. Carf estimates that this year’s revenue will be 74.1 trillion pesos ($14.82 billion).

This amount is less than what was initially programmed in the 2024 National Budget. The government announced a cut of 25 trillion pesos ($5 billion), but this may not be enough.

Colombia’s Fiscal Challenges

Juan Sebastián Betancur, technical director of the committee, explains the situation. He states that to comply with the fiscal rule in November and December, the government would need to spend about 16 trillion pesos ($3.2 billion) per month on average.

The current monthly spending from January to September has been around 27 trillion pesos ($5.4 billion). This illustrates the challenging nature of the measures required to meet the fiscal rule this year.

The research team at Banco de Bogotá has made a similar warning. They consider that the lack of execution has benefited public finances as spending has decreased. However, they suggest that the problem is far from over.

The fiscal margin for 2024 and 2025 remains very narrow. A simple error, even one representing less than 1 trillion pesos ($200 million), could mean the difference between complying or not complying with the fiscal rule.

Spending Challenges and Risks to Credit Ratings

Some analysts suggest that the strategy to meet the goal would be to slow down execution. José Ignacio López, president of Anif, states that the government must maintain its current spending pace.

If the government accelerates execution or fails to make the announced cuts, compliance with the fiscal rule would be at risk. This situation could have serious implications for the country’s financial stability.

Carf warns that alternatives such as those discussed in the financing law would not alleviate the pressure. These include suggestions to make the fiscal rule more flexible or to advance it.

Such measures could generate more debt, which would have other adverse effects on the National Central Government’s finances. This scenario could potentially impact the country’s risk ratings.

Some analysts warn that the fiscal situation could be reflected in the evaluations of rating agencies. There are projections that S&P Ratings and Fitch Ratings could lower the country’s rating at the end of the year.

This scenario is already being discounted by the markets through risk premiums. The situation underscores the urgency for the government to balance spending and meet its fiscal targets for 2024.