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Colombia Fiscal and Monetary Policy
Unavailable
Figure 6. Gross Domestic Product (GDP) by Sector, 1987
Source: Based on information from Colombia. Departamento Nacional de
Planeación, Plan de Economía Social, Agosto, 1987, Bogotá, 1987, 190.
To realize the ambitious goals of his economic program,
Barco
initiated coordinated fiscal and monetary policies that he
hoped
would influence major macroeconomic variables, including
GDP,
interest rates, and price levels. His primary goals
included
reducing real interest rates to encourage business
investment and
economic expansion, stabilizing the inflation rate at 20
to 25
percent, and redirecting public resources to help the
poor.
The administration embarked upon a restrictive fiscal
scheme
designed to reduce deficit spending. Whereas the previous
administration's annual deficits averaged nearly 5 percent
of GDP,
the Barco plan called for reducing deficit spending to
less than 3
percent of GDP. To meet his spending goals, Barco counted
on solid
growth of GDP as well as a new budget approach that would
redirect
funds away from infrastructure to social programs. The tax
burden
was also shifted slightly from businesses to individuals.
Planners
had anticipated that the combined effects would allow the
administration to meet spending levels within deficit
guidelines,
but by early 1988 it appeared that the deficits would
exceed
initial estimates.
One of the first steps taken by the Barco
administration to
implement the deficit reduction policy was to alter the
tax
structure. Principal changes included reducing the
corporate tax
rate to 30 percent of revenues, eliminating double
taxation,
phasing out tax deductions related to inflation
adjustments, and
increasing personal income taxes. The government assumed
that an
energized business sector would bring growth to other
areas of the
economy.
The Barco administration outlined a strict budget to
curtail
deficits. Preliminary estimates of the 1988 budget
indicated that
income tax and indirect taxes, such as customs, gasoline,
and sales
duties, would be the primary revenue sources. Additional
income,
constituting 20 to 30 percent of total revenue, would be
earned
from capital receipts, including long-term debt, and
various nontax
income. Expenditure targets were more difficult to meet;
approximately 57 percent of all expenses were absorbed by
operational expenditures of the government with 29 percent
allocated to foreign and domestic debt service and 14
percent to
public investment. This deviated from initial budget
projections,
which had indicated slightly higher allocations to debt
service and
public investment. Seventy-five percent of the deficit was
to be
financed from domestic sources; the remainder was to be
financed
from foreign borrowing.
Although expenses exceeded budget projections, revenues
often
failed to meet expectations as well. For example,
President Barco
inherited a budget of dwindling revenues, reflecting in
part the
reduction in gross tax receipts consistent with the
economic
downturn earlier in the 1980s. Colombia's public finances
depended
on coffee taxes, including a
value-added tax (see Glossary) on
coffee exports, customs duties, and profits from central
bank
exchange operations, all of which suffered in the
mid-1980s. In
1986, however, receipts rebounded sharply because of the
coffee
boom, which yielded greater import receipts based on
additional
sales abroad. Publicly managed enterprises that operated
at a loss
also contributed to budget deficits. Improving management
and
budgetary control in these organizations was outlined as
another
specific way to reduce public costs.
Like the budget process, public investment was seen by
the
Barco administration as an important means by which to
re-order
priorities. In the early 1980s, for example, at least 55
percent of
all public investment funds had gone to physical
infrastructure,
with the sole exception of 1982, when 43 percent of public
investment was so allocated. Money was concentrated in
power,
transportation, and communications projects, in that
order. Social
infrastructure, including water, education, and health
projects,
absorbed 7 to 13 percent of public investment during these
years,
with 10 to 25 percent going to the productive sector,
primarily to
expand agriculture and mining. Any remaining funds went
unallocated
until the next fiscal year.
By contrast, the Barco government planned to change the
composition of public investment by increasing the
allotment to the
social sector while reducing funds previously directed
toward
physical infrastructure projects. This was consistent with
his
administration's long-term goal of alleviating poverty so
that
social discontent and widespread violence might be
defused. By
early 1988, however, the fiscal deficit exceeded earlier
estimates,
which forced the government to reduce some of the planned
increases
in social programs in order to meet other obligations,
such as
interest payments on the national debt.
The Barco government also adjusted monetary policies to
meet
program goals. Monetary policy was coordinated under the
Monetary
Board (Junta Monetaria), which by the 1980s had
responsibility for
policy development; specific directives were carried out
by the
Bank of the Republic (Banco de la República). As the
central bank,
the Bank of the Republic issued currency, sold or
purchased
securities in the open market, set reserve requirements
for the
banking system, and acted as the "lender of last resort."
In 1986
the government also controlled Colombia's money through
numerous
public sector saving institutions responsible for
funneling credit
to specialized projects such as housing and agricultural
development.
The government implemented monetary policy by
traditional
methods, such as adjusting lending rates to banks,
controlling
monetary growth, setting reserve requirements, and
determining
exchange rate policy in the belief that, under certain
circumstances, inflation and interest rates could be
controlled.
The Barco government, however, demonstrated a clear
preference for
allowing the money supply and interest rates to float
relatively
freely, provided that prices remained within certain broad
limits.
Government bodies sometimes have intervened in money
markets,
however, in an attempt to influence price levels. Fearing
that the
money supply's relatively quick expansion in 1987 would be
too
inflationary, the government chose to raise reserve
requirements.
By early 1988, this tactic was considered inadequate, and
the
central bank turned to
open market operations (see Glossary) to
reduce the money supply.
Managing exchange rates was another form of monetary
control,
and it too contributed to economic expansion. The Barco
administration continued with the
"crawling peg" (see Glossary)
devaluation system begun in 1967. This policy succeeded in
keeping
prices of Colombian goods attractively low in the external
market.
It also drove the prices of imported goods up, improving
the trade
balance and foreign exchange reserves
(see Balance of Payments
, this ch.).
By early 1988, the Barco administration's moderate
approach
toward economic management appeared to be working. A
cautious
fiscal policy combined with a free monetary policy seemed
to help
real interest rates fall from about 10 percent in 1985 to
a little
over 5 percent in 1987. Private investment grew during
this same
period from slightly less than 8 percent to over 10
percent of GDP,
with aggregate economic growth reaching an average of
approximately
5 percent for the two-year period. Inflation remained
within the
prescribed 20 to 25 percent range.
Colombia, however, was a relatively small economy by
world
standards, and its interest rates tended to follow those
of the
major world economies. Because global interest rates also
fell
during the late 1980s, it was likely that any success
attributed to
Colombia's macroeconomic policies in meeting stabilization
and
growth goals was assisted, at least in part, by similar
trends in
the international economy.
Data as of December 1988
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