THINKING

“Colombia Rebounds”: Strategy or Smoke Screen?

What does the Government’s strategy consist of?

In the midst of the political (corruption scandals), economic and social problems facing the country, which has just embarked upon its post-conflict period and begun the implementation of the Tax Reform, on 14 February the National Government launched its ‘Colombia Rebounds’ Plan, a strategy designed to strengthen economic growth.

The Government’s ambitious plan appears to be a new version of the so-called ‘Pipes’ or Plans to Drive Productivity and Employment, which sought to support the growth of several sectors of the economy by stimulating both the public and private sectors to generate resources and employment in housing, tourism, industry, civil works, agriculture and education.

‘Colombia Rebounds’ promises an investment of 40.3 billion pesos in strategic sectors with the objective of meeting the goal of 2.5 percent growth in Gross Domestic Product (GDP) through the following measures:

Generating 765,000 formal jobs through tax exemptions for small and mid-sized businesses. If an entrepreneur sets up a small business, they will pay ‘zero’ tax for 10 years.

Continuing with the growth of the construction sector through programmes such as ‘My House Now’ and similar as well as the stimulation of domestic and overseas investment in hotels in former conflict areas with a twenty year exemption on income tax in cities with fewer than 200,000 inhabitants.

Generating 3400 packages for the industrial and agricultural sectors, including the possibility of lowering VAT. The goods that will benefit from the measure include threshing and baling machines, tractors, electricity transformers, electric motors, measurement apparatus, laboratory equipment, supplies for the chemical and pharmaceutical industries, generators, valves and materials for housing construction, among others.

4 billion pesos have been set aside for the post-conflict process and of these at least 1.3 billion will be channelled through tertiary routes.

Eliminating tariffs on over 3 thousand products for the healthcare and agriculture industries, lowering business costs.

How will this be achieved?

Many of the measures that are outlined in the ‘Colombia Rebounds’ Plan were already included in the Tax Reform. For example, the 40 percent tariff on business profits in 2017 will be reduced by 3 percent in 2018, the full deduction of VAT from capital goods (raw materials and machinery) mentioned above, the unified tariff for free areas of 20 per cent with no payment of extras and the tax benefits for hotels and tourism in small cities and municipalities in order to encourage tourism.

Similarly, the 6.2 billion that is expected to be earned from the estimated increases in the tax reform for the development of social programmes (education, health, housing, etc.) were already planned.

The legal framework required to execute the Plan started to form last October with the procedures required by the Tax Reform. However, as ‘Colombia Rebounds’ includes many issues that specifically affect different areas of the economy, it will be up to different Ministries to implement the regulations through decrees.

Still, we mustn’t forget the warnings of the President of the Bank of the Republic, Juan José Echavarría, when he said “…there are challenges such as the need to save more, that require pension reform. It is also necessary to innovate more, which requires trade regulations.” This kind of reforms must clearly be addressed through laws approved by the Congress of the Republic which will start to be passed during the remaining legislative term 2016-2017.

What should productive sectors expect from ‘Colombia Rebounds’?

It is expected that the new economic reactivation plan will be even more effective than the results of ‘Pipe’ in 2013 and 2015 as the proposals are far more ambitious.

Pipe 2015 sought to generate 323,920 jobs, while Colombia Rebounds is aiming at more than 760,000, sharing its intention to increase public investment in educational infrastructure and roads, stimulate the agricultural sector and rural and urban housing and make better use of bonuses, but also including measures aimed at the industrial, commercial and tourism sectors making it, if not original, certainly more ambitious.

Evaluations of the results and impact of Pipe in 2013 indicate that a reduction in the price of industrial and imported goods was certainly achieved. Following the Pipe of 2015, meanwhile, ANIF indicated that the investment proposed at the time only resulted in a rearranging of budget priorities without generating an increase in resources for the different plans. It is expected that ‘Colombia Rebounds’ will meet the goals for investment and also an increase in fixed resources and thus achieve the goals for employment, education, housing, industry, commerce and tourism, which are the principal sectors.

It is a point of interest and curiosity that amid the political and social scandals caused by different instances of corruption, the Government is presenting an investment oriented strategy to encourage foreign participation, access to different markets and the growth of businesses without including an in-depth reform that will severely restrict corruption in the public and private sectors. The Government should not just set out a series of actions as part of the implementation framework for the Tax Reform as a tool that will make it possible to implement a large part of the measures included in ‘Colombia Rebounds’, it should also include mechanisms to reduce corruption.

The Government should not forget that the country is currently seeking to join the OECD, which would require making the issue of corruption a priority before proposing stimuli for investment in key sectors such as infrastructure, for which, for example, the OECD requires a regulatory framework that protects it from mala praxis.

Finally, it is worth noting that ‘Colombia Rebounds’ will become a new rallying cry for the National Government in a pre-election season when the first political alliances are being formed and economic issues are emerging as a threat to the continuity of Juan Manuel Santos’ political project.