President Ivan Duque has withdrawn a plan to raise taxes for many Colombians after sparking days of bloody street clashes and a political crisis.
Duque is abandoning some of the most unpopular ideas, such as extending the value-added tax on additional goods and services and imposing more income-taxable people. Colombia needs to raise revenue to protect its investment grade credit rating and tackle the growing poverty caused by the pandemic by funding social programs and providing remittances to the most deprived citizens.
The president on Sunday called on lawmakers to urgently reach a consensus on a new proposal to help the country get out of the deteriorating fiscal hole. The country̵
The decision to abandon the bill less than three weeks after its introduction is another blow to Duque and undermines his chances of adopting other reforms before his term expires next year, said Sergio Guzman, director of Colombia’s Risk Analysis. The government has been under pressure from days of street protests that have killed at least six people.
“The government has replayed the reform, lost and now remains in a really bad position in front of the electorate,” Guzman said. “That effectively makes Duque a lame duck.”
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Colombia is among the first major emerging markets to try to apply large tax increases to regain control of its bubble burden. Other countries in the region may face similar difficulties in trying to boost revenues in economies that are still devastated by the pandemic and have barely recovered from last year’s downturn.
Many Latin American countries are also struggling with deficits that widened during the pandemic, but unlike Brazil, Mexico, Chile and Peru, Colombia’s deficit will increase rather than narrow this year, according to the International currency fund.
Addressing the nation on Sunday, Duke called on Congress to quickly draw up a new plan “and thus avoid financial uncertainty.”
“Reform is not a fad. Reform is mandatory, “he said.
A new bill should support measures to protect the most vulnerable Colombians, while raising taxes for the rich, Duque said. He vowed that no one would pay income tax who no longer paid it.
Duke also called host of temporary taxes, including on corporations, the rich and dividends. He added that people with higher incomes should pay more and that the government should deepen austerity measures.
Investors have sold off Colombian assets after the bill was introduced in mid-April, as they are increasingly likely to lose the nation’s investment class status. Both Fitch Ratings and S&P Global Ratings value the country one degree above garbage.
Markets are expected to remain volatile in the short term as the bond yield curve strengthens and the peso continues to depreciate, at least until investors see the new tax proposal, Scotiabank Colpatria analysts wrote in a note Sunday. The Colombian currency has the worst performance in emerging markets this year after the Turkish lira and the Argentine peso, according to data collected by Bloomberg.
The decision to abandon the tax plan shows the weakness of the Duke’s government and its inability to reach consensus in the legislature, said Camilo Perez, chief analyst at the Banco de Bogota.
“Markets have already assessed the loss of investment rating in Colombia, but today’s news confirms this scenario,” Perez said.
– With the help of Oscar Medina
(Adds an analyst comment in paragraph 4, market expectations in paragraph 13)