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On 25 October, Colombians will go to the
polls to vote on important economic and political reforms. The reforms put
to vote are considered vital to secure a more sustainable longer-term fiscal
setting. Meanwhile, the economy is developing favourably but at a more
moderate pace than observed earlier in the year, as investment activities
are trailing off and the external sector continues to suffer from meagre
demand in key export markets. |
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Referendum considered vital for
fiscal stability
On 25 October, Colombians will go to the polls in a nationwide referendum
over key questions regarding the country’s political and fiscal regime.
The referendum addresses essentially three core issues, namely political
reform, corruption and fiscal adjustment. A positive vote in support of
the government’s initiative would help provide not only a more stable
footing for fiscal accounts but would also bolster the Uribe
administration’s mandate to proceed with its current political agenda that
has been focused on strengthening security and advancing on essential
economic reforms. The key focus of the referendum from an economic
standpoint has been the approval of items that will affect the
government’s fiscal agenda.
Question 14 of the referendum suggests a two-year freeze on operational
spending in addition to a cap on public sector pension and salary outlays,
which exceed two minimum wages. Furthermore, Question 8 of the referendum
seeks to limit public sector salaries and pensions at a maximum of 25
minimum wages; would phase out special pension regimes for the military,
oil workers and teachers in 2007 and set the retirement age at 55.
Finally, Questions 6 and 9, which would reduce the number of Congressmen
and do away with local auditing authorities, are also expected to improve
the fiscal setting in terms of potential savings generated. If all of the
aforementioned referendum items are approved, the total fiscal savings
could reach an estimated 1.2% to 1.4% of GDP this year and 2.3% to 2.5% of
GDP next – the lion share being generated by the fiscal spending freeze.
The recent September Gallup poll indicates that all four measures are
likely to be approved by more than the required simple majority vote. The
government has been focusing its efforts at campaigning to increase voter
participation, as a minimum 25% voter turnout is required for the
referendum approval. In the event that the referendum should not be
approved, the government could implement the fiscal measures via decree
but not without political costs of a backlash from sectors affected.
Consensus Forecast participants appear to confide in the government’s
fiscal commitment, as this month’s estimate for the fiscal deficit, at
2.8% of GDP, is on target with the government’s projection. However,
panellists remain sceptical about the fiscal setting for next year, as
rising debt service outlays and increased military spending are likely to
bring the fiscal deficit to 2.9% of GDP instead of the government’s
estimate of 2.5% of GDP.
Inflation continues to abate amid
more stable exchange rate
Consumer prices rose 0.22% in September, which was slightly below market
expectations of 0.32% and also lower than the 0.31% rate observed in
August. The September figure lowered the annual inflation rate to 7.1%
from 7.3% in August. Education and housing prices experienced the
strongest monthly increases, while food and clothing price increases were
subdued. The September result also brings accumulated inflation for this
year to 5.4%, which is above the 5% central inflation target agreed to
with the IMF but still falls within the +/- 2 percentage point target
band. Subdued consumption and high unemployment should help to avert a
renewed surge in consumer prices. Additionally, the moderate appreciation
of the currency and increased stability in exchange rate movements this
year, provided for by Central Bank intervention and a more propitious
environment in international markets, are containing inflationary
expectations. In fact, Consensus participants expect inflation to moderate
further through the end of the year with the year-end rate reaching 6.7%,
down a 0.1 percentage point from last month. The moderate pick up in
economic activity next year will exert some pressure on consumer prices.
In fact, Consensus panellists anticipate that the annual inflation rate
will reach 5.9%, which exceeds the Central Bank’s 3.5% to 5.5% target
range.
Central Bank keeps monetary reins
loose
As a result of the improved inflationary setting, the Central Bank has had
to adjust monetary reins only very moderately this year. The benchmark DTF
rate has remained virtually unchanged throughout the year and at 7.7% at
the end of September was just 7 basis points above the end of December
2002. According to the Consensus, the DTF rate will be raised to 8.5% by
the end of this year, which is down a 0.1 percentage point from last
month. Participants expect monetary authorities to raise interest rates
further next year, amid the pick up in economic activity, with the DTF
rate seen rising to 9.3%.
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