ADMINISTERING THE MONEY MEDICINE

Colombia 2020 | FINANCE | INTERVIEW

In line with the ministry's previously established goals, Colombia is to lower corporate tax rates to encourage foreign investment and boost the country's deficit.

Alberto Carrasquilla
BIOGRAPHY

Alberto Carrasquilla is an economist from Universidad de los Andes, with an MSc and PhD from the department of economics the University of Illinois. Between 2007 and 2017, he was the manager and partner of Konfigura Capital and professor of economics at the Universidad de los Andes. Carrasquilla served previously as minister of finance and public credit between 2003 and 2007. He has also served as president of the ministerial committee for development between 2005 and 2007 and chairman of the board for Colombia's central bank between 2003 and 2007. He has been a member of the Latin American Committee for Financial Affairs (CLAAF) since 2001.

What sectors currently drive the growth of the Colombian economy?
The main sectors driving the expansion of economic activity are public administration, educational and healthcare services, retail sales, manufacturing, and professional and scientific services. Public administration growth is explained by higher execution of local and regional public projects, the one-off shock brought by the national census conducted every 10-15 years and the presidential elections, and the progress made by investment projects financed with resources from royalties. In addition, retail sales also significantly contribute to economic growth. This sector's growth is driven by higher consumer confidence, which was extremely low in 2017, lower inflation, and the 2018 biannual vehicle fair. Manufacturing also had great expansion rates, driven in particular by higher household consumption on food and beverage, the external winds that favored the demand of textiles, and greater production of capital goods and oil-refined products.

The government has expressed its commitment to meeting the fiscal rule. How important is it for the economy to meet the target deficit of 2.4% as set out by the fiscal rule?
A sound Colombian macroeconomic framework has established important backing for economic prosperity and market credibility. Despite undergoing one of the largest terms-of-trade shocks in the region in 2014-2016, the economy maintained moderate growth rates. Our commitment to solid fiscal management, with revenue and spending adjustments, will continue, despite the challenges associated with the costs of Venezuelan immigration and budgetary rigidities. The reduction of fiscal deficit is consistent with the fiscal targets set by the Fiscal Rule, which will help stabilize and reduce the government's debt burden in the following years. In this context, the importance of complying with the Fiscal Rule—in general of a prudent macroeconomic policy framework—relies on the ability to maintain access to capital markets that underpin private and public investment to foster solid economic growth.

What major structural issues affecting the economy does the ministry plan to address through policy in the coming years?
One important challenge that has to be addressed is the Venezuelan crisis. The combination of an economic slump in the neighboring country affects Colombia negatively via weaker external demand and higher fiscal costs associated to migration flows. Meanwhile, Colombia remains on the front lines responding to the severe humanitarian emergency in Venezuela. Remarkably, more than 1 million migrants from Venezuela currently reside in Colombia, and many more have either transited through the country or crossed the border temporarily. Colombia has demonstrated an unwavering commitment to providing humanitarian support such as healthcare, education, as well as granting labor rights to migrants to integrate them into the economy. The associated fiscal costs are estimated to be around 0.5% of GDP in the near term. In addition to the migration issue, we highlight the importance of increasing the total factor productivity to narrow the negative output gap. A scenario of strong economic recovery in Venezuela, a lower tax burden for corporates from the Financing Law, and a more efficient public spending will foster productivity as well as medium and long-term economic growth.