Background

1. The introduction of the fiscal rule in 2011 further strengthened Colombia’s fiscal framework and has contributed to protect debt sustainability. The fiscal responsibility law of 2003 provides a qualitative anchor to fiscal policy including the publication of an annual medium- term fiscal framework compatible with debt sustainability for the broad public sector (NFPS). The fiscal rule law of 2011, added a quantitative anchor to the central government and, by focusing on a structural balance target (adjusted by GDP and oil prices), includes some degree of policy countercyclicality.

Fiscal Adjustment Since 2014

2. Colombia’s response to the 2014–15 large oil price shock has been guided by the fiscal rule and has combined revenue measures, expenditure restraint and some widening of the headline deficit. See table below.

• From 2013 to 2017, the fiscal cost of declining oil revenue (3.1 percent of GDP) was also compounded by an increasing interest rate bill due in part to the ensuing peso depreciation (0.6 percent of GDP) for a combined shock of 3.7 percent of GDP.

• The direct application of the structural balance formula (chart below), allowed the deficit to widened by about 1.7 percent of GDP between 2013–16; by the same logic, the rule already called for some narrowing of the deficit in 2017, so that the 2013–17 net impact is about a widening of 1.3 percent of GDP or about 35 percent of the oil revenue+interest bill combined shock.

• The combination of two tax reforms (2014, and 2016), as well as some tax administration gains provided about 1.3 percent of GDP of non-oil revenue, absorbing too about 35 percent of the shock.

• Despite such revenue measures, primary expenditure cuts of about 0.5 percent of GDP were required. Of which, capital expenditure was cut by 0.8 percent of GDP. Reliance on capital expenditure cuts reflect in part the limited expenditure flexibility in Colombia.

• It is relevant to note that the 2017 outturn benefited from 0.5 percent of GDP one-off telecom fine.

Recent Fiscal Adjustment and the Adjustment Ahead

Source: National authorities and Fund staff estimates

^1/Official estimate 0.7 percent of GDP; 0.4 pp revision in line with outturn

Recent Fiscal Adjustment and the Adjustment Ahead

			Response to the Oil Shock							Medium-Term Adjustment
			(pp of GDP vs 2013)							(pp of GDP vs 2017)
			2014	2015	2016	2017				2018	2019	2020	2021	2022	2023
Shock			−0.7	−2.5	−3.8	−3.7	Dividend			0.4	0.7	0.8	0.9	1.0	1.2
	Oil revenue		−0.7	−2.2	−3.1	−3.1		Oil revenue		0.4	0.7	0.7	0.8	0.8	0.8
	Interest expenses		−0.1	0.3	0.7	0.6		Interest expenses		0.0	0.0	−0.1	−0.1	−0.2	−0.4
Adjustment			0.7	2.5	3.8	3.7	Adjustment			−0.4	−0.7	−0.8	−0.9	−1.0	−1.2
	Non-oil revenue		0.5	1.5	1.4	1.9		Non-oil revenue		−0.8	−0.9	−0.3	−0.2	−0.2	−0.3
	Primary expenditure		−0.1	−0.3	−0.7	−0.5		Primary expenditure		−0.9	−1.6	−1.5	−1.6	−1.7	−1.7
		o/w fixed capital formation	−0.2	−0.5	−1.2	−0.9			o/w fixed capital formation	−0.4	−1.1	−1.0	−1.0	−1.2	−1.1
	Headline balance		−0.1	−0.7	−1.7	−1.3		Headline balance		0.5	1.4	2.0	2.3	2.5	2.5
Memo items:							Memo items:
	Revenue measures		0.5	1.0	1.0	1.8		Revenue measures		−0.4	−0.8	−0.3	−0.3	−0.2	−0.2
	2016 tax reform 1/					0.3		CREE expiration			−0.9	−0.9	−0.9	−0.9	−0.9
	One-off telecom fine					0.5		One-off telecom fine		−0.5	−0.5	−0.5	−0.5	−0.5	−0.5
	2014 tax reform			0.5	0.5	0.5		Tax administration		0.1	0.6	1.2	1.2	1.2	1.2
	Tax administration		0.5	0.5	0.5	0.5

Source: National authorities and Fund staff estimates

^1/Official estimate 0.7 percent of GDP; 0.4 pp revision in line with outturn

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Recent Fiscal Adjustment and the Adjustment Ahead

			Response to the Oil Shock							Medium-Term Adjustment
			(pp of GDP vs 2013)							(pp of GDP vs 2017)
			2014	2015	2016	2017				2018	2019	2020	2021	2022	2023
Shock			−0.7	−2.5	−3.8	−3.7	Dividend			0.4	0.7	0.8	0.9	1.0	1.2
	Oil revenue		−0.7	−2.2	−3.1	−3.1		Oil revenue		0.4	0.7	0.7	0.8	0.8	0.8
	Interest expenses		−0.1	0.3	0.7	0.6		Interest expenses		0.0	0.0	−0.1	−0.1	−0.2	−0.4
Adjustment			0.7	2.5	3.8	3.7	Adjustment			−0.4	−0.7	−0.8	−0.9	−1.0	−1.2
	Non-oil revenue		0.5	1.5	1.4	1.9		Non-oil revenue		−0.8	−0.9	−0.3	−0.2	−0.2	−0.3
	Primary expenditure		−0.1	−0.3	−0.7	−0.5		Primary expenditure		−0.9	−1.6	−1.5	−1.6	−1.7	−1.7
		o/w fixed capital formation	−0.2	−0.5	−1.2	−0.9			o/w fixed capital formation	−0.4	−1.1	−1.0	−1.0	−1.2	−1.1
	Headline balance		−0.1	−0.7	−1.7	−1.3		Headline balance		0.5	1.4	2.0	2.3	2.5	2.5
Memo items:							Memo items:
	Revenue measures		0.5	1.0	1.0	1.8		Revenue measures		−0.4	−0.8	−0.3	−0.3	−0.2	−0.2
	2016 tax reform 1/					0.3		CREE expiration			−0.9	−0.9	−0.9	−0.9	−0.9
	One-off telecom fine					0.5		One-off telecom fine		−0.5	−0.5	−0.5	−0.5	−0.5	−0.5
	2014 tax reform			0.5	0.5	0.5		Tax administration		0.1	0.6	1.2	1.2	1.2	1.2
	Tax administration		0.5	0.5	0.5	0.5

Source: National authorities and Fund staff estimates

^1/Official estimate 0.7 percent of GDP; 0.4 pp revision in line with outturn

Baseline Adjustment Outlook

3. The authorities’ medium-term fiscal consolidation path aims to gradually reduce the structural deficit. The structural deficit would decline gradually from 1.9 percent of GDP in 2017 to 1 percent of GDP by 2022. The headline deficit will have to decline by 2.5pp of GDP by 2022. In particular:

• In a partial reversal of the 2014–17 shock, one half (1.2 pp of GDP) of this narrowing of the headline deficit will come from higher oil revenues and lower interest expenses. The increase in oil revenue builds on the better-than-expected Ecopetrol’s profitability in 2017.

• Non-oil tax revenue will decline over the medium-term as the expected gains in tax administration and formalization from the 2016 tax reform, are more than offset by the combined impact of the expiration of the corporate surcharge CREE and the one-off proceeds from the telecom fine in 2017.

• In consequence, primary expenditure cuts of about 1.7 percent of GDP will be required by 2022. Lower transfer expenses (some of them linked to the expected benign outlook for inflation and GDP growth), will limit but not exempt further cuts in fixed capital formation which will amount to 1.1 percent of GDP.

Central Government: Medium-Term Fiscal Adjustment

(in percent of GDP)

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Sources: National authorities and Fund staff estimates

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Central Government: Medium-Term Fiscal Adjustment

(in percent of GDP)

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Sources: National authorities and Fund staff estimates

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Central Government: Medium-Term Fiscal Adjustment

(in percent of GDP)

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Sources: National authorities and Fund staff estimates

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4. Under the current medium-term fiscal framework path, public debt to GDP ratio will steadily decline over the medium and long-term below the emerging market average. Gross public debt will decline by about 9 pp of GDP between 2018 and 2023 to about 40 percent of GDP a level 15 pp below the emerging market average (55 percent of GDP).

5. The authorities medium-term fiscal plan will entail a front loading of the fiscal adjustment with most of the negative fiscal impulse taking place by 2020 and hence coincide with a negative output gap. Measured by the change in the non-oil primary structural deficit, the negative fiscal impulse stemming from the Central Government will amount to 0.5 percent of GDP in each 2019 and 2020. In combination with the rest of the CPS, this will imply a negative impulse of about 0.4 and 0.9 percent of GDP, respectively. In contrast, for 2021 and 2022 the fiscal stance will imply a small positive impulse (0.1 percent of GPD) at the CPS level. Colombia’s output gap is expected to only gradually close and will average about 1.3 percent of potential GDP during 2018–20.

6. The near-term adjustment will substract from growth, in particular through lower investment. Amid limited budget flexbility most of near-term expenditure restraint will take place through lower investment. Public investment at the CPS level will decline by about 1 percent of GDP between 2017 and 2020. Recent estimations suggest a fiscal multiplier of capital expenditure in Colombia between 0.15 and 0.46 (e.g. Rincon, et al., 2014). Hence, the expect decline in investment could subtract about 0.3 percentage points of GDP growth.

Composition of Public Sector Fiscal Impulse

(in percent of GDP; impulse measured as the change in the non-oil structural primary deficit)

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Sources: National authorities and Fund staff estimates and projections

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Composition of Public Sector Fiscal Impulse

(in percent of GDP; impulse measured as the change in the non-oil structural primary deficit)

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Sources: National authorities and Fund staff estimates and projections

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Composition of Public Sector Fiscal Impulse

(in percent of GDP; impulse measured as the change in the non-oil structural primary deficit)

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Sources: National authorities and Fund staff estimates and projections

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CPS and CG Investment

(in percent of GDP)

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Source: National authorities and Fund staff estimates and Projections

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CPS and CG Investment

(in percent of GDP)

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Source: National authorities and Fund staff estimates and Projections

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CPS and CG Investment

(in percent of GDP)

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Source: National authorities and Fund staff estimates and Projections

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Alternative Fiscal Adjustment: Shifting Some of the Consolidation to 2021/2022

7. A scenario in which reductions in the structural deficit were shifted to 2021 and 2022 will better time the fiscal restraint with GDP’s convergence to its potential level. There is some room to reduce the fiscal drag over the next few years while still comply with the fiscal rule and protect a declining path for the public debt to GDP ratio. A scenario in which the structural deficit was kept constant during 2019 and 2020 (at 1.9 percent of GDP) will create space for 0.2–0.5 percent of GDP of additional room for primary expenditure to protect key investment and social programs. In this scenario gross public debt ratio will increase by about 0.8 pp of GDP by 2020 vis-à-vis the baseline but will remain in a declining path.

Illustrative Fiscal Rule Scenarios

(in percent of GDP)

Sources: National authorities and Fund staff estimates

Illustrative Fiscal Rule Scenarios

(in percent of GDP)

	2017	2018	2019	2020	2021	2022	2023
Structural deficit (official parameters)
Baseline	−1.9	−1.9	−1.7	−1.4	−1.3	−1.0	−1.0
Flat structural deficit	−1.9	−1.9	−1.9	−1.9	−1.5	−1.0	−1.0
Primary expenditure
Baseline	16.3	15.4	14.7	14.8	14.8	14.6	14.7
Flat structural deficit	16.3	15.4	14.9	15.3	14.9	14.5	14.6
Gross Debt
Baseline	50.2	49.9	48.7	46.5	44.4	42.3	40.4
Flat structural deficit	50.2	49.9	48.9	47.2	45.2	43.1	41.2
Fiscal impulse CG (change in the non-oil primary structural deficit)
Baseline	−0.5	−0.2	−0.5	−0.5	−0.1	−0.1	0.2
Flat structural deficit	−0.5	−0.2	−0.3	−0.2	−0.4	−0.3	0.2

Sources: National authorities and Fund staff estimates

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Illustrative Fiscal Rule Scenarios

(in percent of GDP)

	2017	2018	2019	2020	2021	2022	2023
Structural deficit (official parameters)
Baseline	−1.9	−1.9	−1.7	−1.4	−1.3	−1.0	−1.0
Flat structural deficit	−1.9	−1.9	−1.9	−1.9	−1.5	−1.0	−1.0
Primary expenditure
Baseline	16.3	15.4	14.7	14.8	14.8	14.6	14.7
Flat structural deficit	16.3	15.4	14.9	15.3	14.9	14.5	14.6
Gross Debt
Baseline	50.2	49.9	48.7	46.5	44.4	42.3	40.4
Flat structural deficit	50.2	49.9	48.9	47.2	45.2	43.1	41.2
Fiscal impulse CG (change in the non-oil primary structural deficit)
Baseline	−0.5	−0.2	−0.5	−0.5	−0.1	−0.1	0.2
Flat structural deficit	−0.5	−0.2	−0.3	−0.2	−0.4	−0.3	0.2

Sources: National authorities and Fund staff estimates

Expert Commission Recommendations Regarding Institutional Framework

10. The commission proposes several amendments to the fiscal institutional framework including the budget process. Its recommendations include to unify the current expenditure and investment budget on a program-based fashion, to carry out a detailed evaluation of all the sources of budget inflexibility (such as legally-mandated expenses and transfers) and to improve the flexibility of the oil-royalty system. The commission also proposes the creation of a Fiscal Council to cost government initiatives and assess overall fiscal policy.

Expert Commission Recommendations Regarding Pension Expenditure

11. Diagnosis. Colombian pension system suffers from low coverage (24 percent of the elderly have a pension) and regressive distribution. Competition between the dual pillars (PAYG-DB, and Defined contribution) has created loopholes which lead to higher fiscal cost. Most of the fiscal cost (3.7 percent of GDP) stems from special sub regime (e.g. teachers, military, police). At the same time, low-income programs have been successful to reduce poverty but are underfunded (benefit per person only represents about 5 percent of GDP per capita).

Pension coverage in LatAM

(Percentage of people aged 65+ with a pension)

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Source: OECD Economic Surveys: Colombia 2015

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Pension coverage in LatAM

(Percentage of people aged 65+ with a pension)

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Source: OECD Economic Surveys: Colombia 2015

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Pension coverage in LatAM

(Percentage of people aged 65+ with a pension)

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Source: OECD Economic Surveys: Colombia 2015

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12. Reform options. A pension reform would include both parametric changes (retirement age; contribution rate; etc.) and structural changes. Parametric changes would include an increase in the retirement age and link it to life expectancy changes; increase the number of years used to compute pension benefit (from 10 years to 20 years); increase pension contribution (18 percent); tax high pension benefits. These parametric changes could create the resources to strengthen non-contributory programs (such as BEPS and Colombia Mayor). Structural reform options include to phase out the PAYG system entirely or to transform it in a small pillar 1 which will complement the defined-contribution system. The retirement age and benefits in special sub regimes (e.g. teachers) should be homogenized with the general system’s. Further, efforts to further increase labor formality will also contribute to expand the coverage of the pension system.

Social pensions in Latin American countries

(Average pension benefit to income per capita (%))

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Source: OECD Economic Surveys: Colombia 2017

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Social pensions in Latin American countries

(Average pension benefit to income per capita (%))

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Source: OECD Economic Surveys: Colombia 2017

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Social pensions in Latin American countries

(Average pension benefit to income per capita (%))

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Source: OECD Economic Surveys: Colombia 2017

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13. Expert commission’s recommendations also focused on other areas of expenditure:

• Health. Despite important gains in coverage, affordability and progressivity, the system could focus more on prevention and provide more incentives for the correct quantification of cost and benefits of medical services. Drugs costs could be reduced by tackling monopolistic structure of part of the industry. Revenue from a remaining payroll tax (cajas) could be redirected to fund health services.

• Education. For early education, coverage has improved in recent years, but access to quality education remains limited. The lack of a clear agency overseeing the education system is also an obstacle. Education funding should be stable and not linked to a particular tax revenue; and funding from local government could be strengthened. For middle-level education the distribution of federal resources to local governments can be made more efficient which would contribute to less quality dispersion across the country. For higher education, the distribution of fiscal resources to public universities should be linked to quality and efficacy.

• Subsidies. There is very limited data on the actual amount of fiscal resources used for subsidies and their targeting can be improved. The government current efforts to revamp the subsidies system could lead to additional overhead costs. Reform options include to focus on fewer better monitored subsidy programs and strengthen the evaluation of the largest programs in particular.

Out-of-pocket health expenditure

(As percentage of total expenditure on health)

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Source: OECD Economic Surveys: Colombia 2017

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Out-of-pocket health expenditure

(As percentage of total expenditure on health)

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Source: OECD Economic Surveys: Colombia 2017

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Out-of-pocket health expenditure

(As percentage of total expenditure on health)

Citation: IMF Staff Country Reports 2018, 129; 10.5089/9781484357743.002.A003

Source: OECD Economic Surveys: Colombia 2017

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