President Ivan Duque withdrew a plan to raise taxes on many Colombians after it triggered days of bloody street clashes and a political crisis.
Duque is giving up on some of the most unpopular ideas, such as extending the value-added tax to additional goods and services and making more people subject to income tax. Colombia needs to raise revenue to defend its investment-grade credit rating and address a surge in poverty caused by the pandemic by funding social programs and providing cash transfers for its neediest citizens.
The president on Sunday called on lawmakers to urgently reach consensus around a new proposal to help the country climb out of a worsening fiscal hole. The nation’s bonds and currency weakened in recent weeks after the government’s plans were rejected by virtually the entire political establishment, including Duque’s own party.
The decision to abandon the bill less than three weeks after it was introduced is another blow for Duque and undermines chances he’ll be able to pass other reforms before his term expires next year, said Sergio Guzman, director of Colombia Risk Analysis. The government was already under pressure from days of street protests that have left at least six people dead.
“The government overplayed its hand with the reform, lost, and now is left in a really bad position facing the electorate,” Guzman said. “It effectively makes Duque a lame duck.”
Read more: Colombia Sends Soldiers to Cities Amid Protests Against Tax Bill
Colombia is among the first major emerging markets to attempt to implement large tax increases to bring its ballooning debt burden back under control. Other countries in the region may face similar difficulties trying to boost revenue in economies that are still being ravaged by the pandemic, and nowhere near having recovered from last year’s slump.
Many Latin American nations are also grappling with deficits that expanded during the pandemic, but unlike Brazil, Mexico, Chile and Peru, Colombia’s deficit will widen rather than narrow this year, according to forecasts from the International Monetary Fund.
Street Protests
In an address to the nation on Sunday, Duque called for congress to quickly put together a new plan “and thus avoid financial uncertainty.”
“The reform is not a whim. The reform is a must,” he said.
A new bill should maintain measures that protect Colombia’s most vulnerable while raising taxes on the rich, Duque said. He vowed that no one will pay income tax that doesn’t already pay it.
Duque also called for a host of temporary taxes, including on corporations, the wealthy and dividends. He added that people with higher incomes should pay more and that the government needs to deepen austerity measures.
Investors have sold off Colombian assets since the bill’s introduction in mid-April as they increasingly price in the likelihood that the nation will lose investment-grade status. Both Fitch Ratings and S&P Global Ratings rate the country one notch above junk.
Markets are expected to remain volatile in the short term, with the bond yield curve steepening and the peso continuing to depreciate, at least until investors see the new tax proposal, Scotiabank Colpatria analysts wrote in a note Sunday. Colombia’s currency is the worst performer in emerging markets this year after the Turkish lira and Argentine peso, according to data compiled by Bloomberg.
The decision to drop the tax plan shows the weakness of the Duque government and its inability to gain consensus in the legislature, said Camilo Perez, head analyst at Banco de Bogota.
“Markets had already been pricing in Colombia’s loss of investment grade, but today’s news confirms that scenario,” Perez said.
— With assistance by Oscar Medina
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