Fiscal Rule under fire

COLOMBIA - In Brief 16 Nov 2023 by Andres Escobar

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Early on after taking office, President Petro said, “At some point, Colombia will have to choose between Peace and the Fiscal Rule”. Finance Minister Ocampo reacted quickly back then and calmed the waters, saying fiscal policy would be carried out unwaveringly within the limits of the Fiscal Rule. Recently, the National Planning Department Director, Jorge Iván González, said in an interview that the Fiscal Rule was too strict, and that spending related to the peace process and to the energy transition should be excluded from the limits imposed by the Fiscal Rule. Finance Minister, this time around Mr. Bonilla, reacted quickly and defended the integrity of the Rule once again. However, things might have taken a turn for the worse yesterday. Dane published Q3 GDP numbers. The Colombian economy contracted 0.3% but an even more worrisome number was published: domestic demand contracted 6.8%, driven by a spectacular contraction in investment; this is the worst downturn in domestic demand second only to the 1999 crisis and Covid. Domestic demand - annual growth (%)Seasonally adjusted national accounts (base years 1994 and 2015) Source: Dane, EConcept President Petro, desperate and irate that the Central Bank has yet to start the cutting cycle, claimed yesterday that public investment must be instrumental in boosting the economy when private demand is nosediving (for which the CB would be the only one to blame, according to the President’s worldview). He then went on to say that the capacity to shore up the economy through public investment is hindered by the limits imposed by the Medium-Term Fiscal Framework and the Fiscal Rule, which stem from outdated “fundamentalist neoli...