Colombia - Economic Briefing January 2003

Government Makes Progress on Economic Plan and Towards IMF Endorsement

The Uribe administration has received a major endorsement of its economic programme from Congress. In December, the legislature approved major government initiatives, which included reforms to existing pensions, labour and tax laws. The approval was considered crucial for the conclusion of negotiations with the International Monetary Fund (IMF) over a new support package.

Congress approves key reforms to pave way for more sustainable fiscal policy
In December, Congress approved key legislative initiatives introduced by the Uribe administration. The congressional endorsement is considered crucial for the conclusion of negotiations for the US$ 2.0 billion stand-by agreement with the International Monetary Fund (IMF), which would help open the way for some US$ 9.8 billion in loans from multilateral institutions over the next four years. Key legislative proposals approved include:

- Taxes. The value added tax (VAT) of 7% was extended to goods and services that were exempt in the past, ranging from food items such as oats, corn and rice to services such as private security and business rentals. Other products and services, which so far enjoyed lower VAT rates, will receive a levy ranging from 16% to 25%. The 7% VAT rate will remain effective through 2004 and will be raised thereafter to 10%. Furthermore, the gasoline surcharge levied by municipalities will be raised by 5% to 25%. Finally, the government raised the annual income tax by 10%, which will boost the maximum income tax rate from 35% to 38.5%. Beginning 2004, the income tax rate will be lowered by 5%, bringing the levy back to 36.75%.

- Labour. The government has reduced the amount of family subsidy payments available to employees earning more than three times the minimum wage and lowered the age of dependents claimed from 25 to 18 years. Moreover, hours worked by state employees on holidays will no longer be paid triple but double and only if the day is considered overtime. Finally, the amount of compensation available for employees dismissed without justification was reduced and the terms for student apprenticeship employment modified to limit businesses contractual obligations.

- Pensions. The retirement age has been set at 55 for women and 60 for men but will increase by two years in 2014 and by five years in 2018. Furthermore, the rate of the basic pension contributions will be raised in 2004 to 14.5% and increase up to 15.5% in 2006. Finally, workers will only receive pension benefits, if weekly payments exceed a minimum 1,300 pesos (up from 1,000 pesos previously).

- Constitutional referendum. The government has also been authorized to call for a national referendum of constitutional reform. The referendum would seek approval for the elimination of substitute deputies in Congress; the strengthening of terms under which public service officials can be removed from office or lose immunity; separate administrative functions of Congress and set a maximum amount for public service pensions. In addition, the government hopes for public support to freeze the government’s operational spending, social security and regional outlays as well as public enterprises for the next two years. Finally, the administration will submit a request to extend the current term of mayors and governors.

- State restructuring. The Congress has also granted the president extraordinary powers for a six month period to merge and eliminate existing ministries. The law will enable the government to merge the ministries of Interior and Justice, Labour and Health as well as Development and Trade. The restructuring is expected to release some 10,000 public employees and to retire 30,000 others.

Fiscal balances to improve amid new legislation
The government is confident that the bills passed by Congress will improve state finances by more than US$ 4.0 billion over the next four years. According to the Consensus, last year’s poor fiscal performance is likely to have brought the fiscal deficit to 4.0% of GDP, which is up from 3.8% of GDP expected last month but remains below the 4.4% of GDP anticipated by the government. Consensus Forecast participants appear to be convinced that the government’s fiscal restructuring will lower the deficit in 2003, since the deficit figure of 2.6% of GDP this month has been revised downward significantly from 3.2% of GDP expected last month and is now just 0.2 percentage points above the government’s 2.4% of GDP target.