Colombia - Economic Briefing August 2002

Uribe Assumes the Presidency with Challenges Ahead (continued)

Outgoing government submits 2003 budget to Congress
The outgoing Pastrana administration submitted the 2003 budget to the legislature on 29 July. Next year’s budget is anticipated to reach 66.9 trillion pesos (US$ 25.9 billion) or 3.0% of GDP – a nominal increase of 7.3% over this year and up from the 2.6% of GDP fiscal deficit projected for this year. Of the total budget, some US$ 13.1 billion (50.2%) will be used for operational spending and regional transfers, US$ 9.9 billion (38.4%) for debt servicing with the balance allocated to public investment. The underlying budget assumptions see inflation reaching 5% and an average peso depreciation rate of 9.9%. The incumbent government consulted with the new economic team in drafting the budget but changes are likely to be implemented in the coming weeks. The incoming government is likely to seek authorization from the International Monetary Fund (IMF) to change the current fiscal arrangements to allow for some US$ 2.3 billion in additional spending – principally military - without corresponding cuts to social outlays. In order to finance the new spending, the Uribe administration is anticipated to push for broad-scale tax reform, to limit public sector salary increases and strive for legislative approval of war bond issuance. Participants do not anticipate the government’s fiscal initiative to stem deterioration in the fiscal balance, which is seen well above the IMF target. Next year, however, participants appear confident that the new administration will progress on fiscal discipline with this month’s fiscal deficit forecast for 2003 on target with the government’s objective.

New president sworn in and promise increased military intervention
On 7 August, Álvaro Uribe Vélez was inaugurated as Colombia’s new president. Uribe, the former Liberal Party member turned independent, won the presidency in the first round on 26 May with a landslide 52.9% of the vote. The new administration is firmly committed to increasing the battle against the Revolutionary Armed Forces of Colombia (FARC, Fuerzas Armadas Revolucionarias de Colombia) and is expected to move quickly to increase military spending. Even though Uribe’s political movement scored high in the recent congressional elections, the president’s forces lack a majority in Congress. As such, the administration’s legislative initiatives will rely on the ability to sustain its alliances with Conservative Party legislators.

The new finance minister, Roberto Junguito Bonnet, is a seasoned political player and has strong ties to the International Monetary Fund (IMF). His experience in multilateral institutions should facilitate negotiations for the renewal of the US$ 2.4 billion Extended Fund Facility (EFF) expiring in September. IMF support is vital for continued access to multilateral funds, which are expected to help finance increased public sector spending.
 

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Colombia.  For more details please click here.

For five-year forecasts, please click here.