Tendencia Económica. No. 211-212

Abstract

Editorial I: In order to enhance fiscal sustainability and regain the “investment grade” credit rating lost in 1999, Colombia implemented a fiscal rule (FR) in 2011 on the Central Government´s structural balance. Although investment grade was attained, public debt has increased continuously and is now expected to exceed 60% of GDP in 2020 as a result of the COVID-19 pandemic. We argue that although the FR has proved to be an important tool to promote fiscal discipline, it can and should be improved. We undertake several quantitative exercises in support of reforming the current FR so that it incorporates a debt anchor. First, using the synthetic control approach we show that, notwithstanding the observed increase in debt, the situation would have been worse in the absence of the FR. In the same vein, we show that despite the decline in public investment observed since the oil shock in 2014, the contraction would also have occurred in the absence of the fiscal rule. We then estimate a prudent debt level using a regime-change approach and the IMF´s buffer-risk methodology and simulate the trajectory of the FR in the medium term, incorporating a debt anchor and conditioned on different growth scenarios and additional expenditure related with the pandemic. We show that the prudent debt level should not exceed 48% of GDP and that in order to achieve this level in the medium term, a policy mix increasing fiscal revenues to 17,8% of GDP (from 15,5% during 2016-2019) and reducing primary expenditure to 15% (from 16% during 2016-2019) is required. Along with including a debt anchor, FR’s performance would also benefit from changes in its institutional design.

Actualidad I: The supply and demand impact generated by the pandemic, the lower oil prices and the lockdowns that took part since March, affected substantially the regional economic dynamic and in a distinctive way depending on the composition of the economy in each region. The second quarter was characterized by a generalized economic downturn, especially in commercial, tourism and industrial activities. Nonetheless, in the second half of the year the national local governments have brought reopening and recovery policies, which represent the start of a progressive economic recovery. In the third quarter the main economic leading indicators have shown signs of recovery, however, the extent of the crisis implies important challenges for the next years.

Editorial II: Updating poverty lines based on changes in spending structures and household consumption habits is necessary to improve the measurement of poverty. Given that the value of the lines is a determining factor of the percentage of the population living in poverty, it is also relevant to recognize the heterogeneity of the regions in their measurement, so that it is possible to design public policies that improve territorial equity in the country. In line with this, in 2020, the National Administrative Department of Statistics announced the methodological update of the monetary poverty and extreme monetary poverty lines based on the National Household Budget Survey (ENPH), with which it is possible to incorporate changes in the structure spending and household consumption patterns, as well as reaching a higher resolution for the analysis by cities, allowing the country to have a more precise measurement of the indicators of monetary poverty and extreme monetary poverty.

Actualidad II: The pandemic has developed one of the worst economic crises in the last century, according to the IMF this year the global growth will be around -4,4%. In 2021, is expected an economic recovery along with the production of the vaccine leading to a rebound of growth of 5,2%. The latter depends on the uncertainty coming from a “second wave” of increased cases, the effectiveness of the vaccine and the extent of the fiscal stimulus packages in different countries. However, in 2021 is expected a speed up growth and a firm recovery in the second half of the year. Additionally, low inflation levels allow some space for the central banks to continue an expansive monetary policy to guarantee financial stability and a less expensive public debt financing low inflation levels. In general, the economic rebound in Asia, along with the recovery in Europe and the end of the US-China trade war will lead to an impulse of the world trade in 2021.