Plan to decentralize the Colombian economy risks unsustainable debt growth – BNN Bloomberg

On October 23, 2024By Yukito

(Bloomberg) — Colombia’s congress is discussing a proposal that would nearly double central government transfers to regions, potentially increasing public debt by almost 15 percentage points of gross domestic product over the next decade.

The bill would require the government to transfer 46.5% of its revenues to cities and states by 2036, up from the current 26%. According to official estimates, it would cost the central government 327 trillion pesos ($76 billion) over the period.

The reform aims to strengthen regional economies and provide the nation with a less centralized growth model. However, government economists from the finance ministry and planning departments have published studies concluding that the proposal is fiscally unsustainable, while a senior policymaker has described it as reckless.

At a business forum on Tuesday, central bank deputy director Roberto Steiner warned of a “fiscal catastrophe” if the bill is implemented.

“This would put us in a completely different scenario that would pose enormous risks to macroeconomic stability and monetary policy,” Steiner said.

The constitutional reform proposal has already been adopted in five of the eight debates necessary for its entry into force. If it is adopted as expected, it will likely be challenged before the Constitutional Tribunal.

The full Senate will debate the bill this week. If approved, it is likely to be passed because the government has a clear majority in the lower house.

Bogota-centric

Interior Minister Juan Fernando Cristo said criticism of the bill comes from officials who are overly focused on Bogotá.

“Some sectors look inward and see the issues of Bogotá, not the regions, as if it was just a money problem,” Cristo said during Tuesday’s congressional debate.

Cristo said the government is open to some changes, but will continue working on the bill despite the fiscal warnings.

Colombia’s fiscal situation has been steadily deteriorating since it lost its investment-grade rating in 2021, when it recorded a budget deficit of more than 7% of GDP. Since then, the government has failed to bring this rate back to its pre-pandemic level below 3%.

More debt

A technical study sent by the Ministry of Finance to lawmakers concluded that the reform would be unsustainable and would threaten public finances. The planning department also warned that the functioning of the country would be at risk as the government would have to seek more financing in the form of additional debt or higher taxes.

The commission that oversees the country’s fiscal rules projects that the debt-to-GDP ratio will be almost 70% by 2035, up from 55% this year, assuming the law comes into force.