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Following a very brief respite, economic
activity appears to be moderating again, as domestic demand slows amid
fiscal adjustment and a weaker exchange rate. The government’s ambitious
fiscal agenda is unlikely to reverse the current slowdown, as spending
freezes and higher taxes promise to curtail domestic demand further.
Meanwhile, lower interest rates may provide some upside benefit to the
deceleration in economic activity. |
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Growth decelerates in third quarter
Gross domestic product (GDP) expanded 1.9% in the third quarter over the
same quarter last year. The third quarter GDP figure which was virtually
on target with the Consensus of 1.7% and confirms that economic activity
has begun to slow in the second half of the year, as the third quarter
figure was down from a 2.2% expansion in the second quarter.
Most sectors exhibited a slowdown over the previous quarter. Construction,
electricity/gas/water and transportation/communications drove economic
growth in the third quarter with expansions of 6.3%, 3.2% and 2.8%
respectively over the same quarter last year. The only sector to
experience a contraction was mining, where activity dropped 10.0% over the
same quarter last year. Key behind the contraction was a notable decline
in coal, oil and natural gas output, while nickel and construction
materials production developed favourably. The continued healthy
performance in the labour intensive construction sector is likely to be
particularly welcomed by the government, which continues to battle adverse
employment conditions. Unemployment still remains high relative to other
countries in the region but is recently showing trends of improvement. In
October, unemployment in the thirteen largest cities declined to 16.1%
from 17.8% in September.
Participants do not expect economic activity to pick up in the final
quarter of the year with the Consensus seeing activity decelerating
further to 1.7% growth. The declining second half performance will drag
down the annual growth rate, which is seen reaching 1.5% this year,
unchanged from last month’s forecast and just below the government’s
estimate of 1.6%, according to the National Development Plan for 2002 –
2006, published on 15 November. The growth forecast for next year has been
lifted a notch to 2.3%, which is above the government’s conservative
estimate of 2.0%.
Fiscal balances deteriorating amid
lower tax take
According to the finance ministry, the central government deficit
increased strongly in the first eight months of this year to 7.24 trillion
pesos from 4.21 trillion pesos over the same period in 2001. The sharp
August increase in the central government's deficit of 595 billion pesos
(Aug 2001: 100 billion pesos) was a key driver behind the strong
deterioration this year. According to government officials higher
transfers to regional and municipal governments and lower-than-anticipated
tax revenues were the key determinants in the rise of the deficit. The
August figure brought the central government deficit to 55% of the annual
central government deficit target of 6.2% of GDP agreed to with the
International Monetary Fund (IMF) under the terms of the existing US$ 2.7
billion stand-by agreement, which expires this month and is set for
renewal.
The government is currently negotiating a new US$ 2.0 billion stand-by
agreement with the IMF and is committed to make substantial progress in
lowering the fiscal deficit via tax and spending reforms. Tax measures
currently under debate in Congress include: limiting deductions of local
income taxes to 50% a year, levying a 10% surcharge on net annual taxes,
expanding the coverage of the sales tax, raising the sales tax levy on
goods and services currently taxed at 10% to 16%, generalizing the sales
tax discount on capital goods and a host of measures ranging from higher
gasoline taxes and modifications to the financial transactions tax. The
government estimates that the tax reform will help raise government income
from tax collection by an average of approximately 1% of GDP annually
through 2006. On the spending side, the government has proposed a national
referendum that would freeze the government’s operational spending, social
security and regional outlay as well as public enterprises for the next
two years. The government estimates that the measures would save an
average of an estimated 0.6% of GDP in annual spending. Furthermore, the
Uribe administration plans to press forward on a pension reform that would
raise contributions, increase the retirement age and restrict state
pensions. The measures would help lower the pension related indebtedness
from 207% of GDP to 153% of GDP. Congress is anticipated to complete
deliberations over the government’s fiscal agenda by the end of December
with only labour and administrative reforms postponed until next year.
Consensus Forecast participants appear to have factored the poor fiscal
performance in the first eight months of the year into their forecasts for
the non-financial public sector deficit, which is anticipated to reach
3.8% of GDP this year, up from the 3.2% of GDP expected last month but
still below the 4.4% of GDP anticipated by the government. Participants
appear to remain sceptical about the government’s ambitious fiscal agenda
for the coming two years, as this month’s fiscal deficit for 2003 has been
revised upward from 2.6% of GDP to 3.2% of GDP, well above the
government’s 2.4% of GDP objective.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Colombia. For more details please click here.
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