EXCLUSIVE: ‘Structural Reforms Are Always Attacked with Irrationality in Colombia’: Iván Duque

By Andrés Garibello/Bogota — President Iván Duque enters the last year of his administration, a tenure marked mainly by the ravages of the pandemic, which has already left more than 125,000 dead in Colombia, and has unleashed a growing poverty affecting 42% of the population, a figure not seen for more than a decade in the country.

The country also suffers from high unemployment, which exceeds 14%, with women and young people being the most affected. Finally, a mixture of factors, derived from the coronavirus and unresolved historical debts, which have unleashed protests throughout the country.

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Looking ahead, 2021 is a key year for the country in economic matters, especially when two rating agencies have downgraded the country’s investment grade. The long-awaited projected rebound of more than 6% of the GDP for 2021 is expected, as well as a plan for fiscal stability in order, according to the Government, to guarantee programs such as the Solidarity Income until the end of next year and to subsidize part of the companies’ payrolls, among others.

Duque spoke with Bloomberg Línea a few days ago, at the presidential house of Casa de Nariño, about his plans for his last year in office and about the issues to be faced by his successor, to be elected next year. He also talked about why the tax reform of former Finance Minister Alberto Carrasquilla failed, the call for attention and the proposal for risk rating agencies, and how he sees himself when he leaves office.

Duque in 5 phrases:

• “Colombia has had a great advantage: it has always known how to reject populism, demagogy and has rejected extreme positions. Therefore, I believe that this criterion will prevail in the elections of 2022, when those who want to divide us and fracture with hatred and extremes will be greatly defeated”.
• “(As per) the concepts of the exempted and excluded ones... That issue will not enter in this reform as well as the issue of the taxable income base, but I hope that the country will have in the future, hopefully immediately, sufficient maturity from the political point of view so that those two aspects are corrected”.
• “Colombia has to correct a reality that is already endemic and that is that only 4% of the population pays income tax. No country can achieve a sustainable and growing social investment when only 4% pay income tax. A structural reform that will have to be advanced in the future will always have to start from the basis of that reality to correct it.”
• “While some seek to set fire every day and act as electoral arsonists and who also want to generate class rupture, class hatred and divide, there also appear figures who have had experiences in governorships and mayorships that have proven results, with a clear vision, that invite them to build”.
• “Rating agencies cannot judge emerging markets with prepandemic eyes when the pandemic has not ended. Colombia is going through this now, and other emerging markets will experience it as well, and the only thing it will lead to is to make more expensive for emerging markets to get debt at a time when the world average debt levels (...) are above 98%.”

The Duque Administration’s goal is to grow more than 6% this year, while international organizations believe it could be above 6% or 7%. For the president, the growth of 1.1% in the first quarter of the year and 28.7% in April are two indicators that the proposed goal could be achieved this year.

“I am optimistic. I believe that our second quarter of the year is going to have very positive figures and what we need is for the third and fourth quarters to not only maintain but also improve our pace,” Duque said.

However, there are risks that, in his opinion, are based on two factors: first, the pandemic and the new variants that have been spreading, and second, the political environment.

“As long as there are no people interested in sabotaging this reactivation, the country will move forward. Because peaceful protests are one thing, which are respected, but we clearly saw blockades that sought to affect the pace of growth, the pace of vaccination and we have also been able to warn in many places that what was behind those blockades is of political intent, obviously because there are sectors that want to ride towards their elections in 2022 with the flag of chaos and that is simply a stateless way of conceiving politics”, warned Duque.

Bloomberg Línea: President, the social protest in the country has demonstrated the government’s inability to address the real problems of young people and it is accused of disconnection with citizens....

“Let’s talk about what you call disconnection. This is the government that has invested the most in the youth in Colombia. TThis country had never before achieved free tuition in public universities and technical and technological training centers for the 1st, 2nd and 3rd classes. Also, this government implemented an employment subsidy program for youth. For the first time, the State subsidizes 25% of the social security equivalent for hiring young people between 18 and 28 years of age, while also having implemented the VAT refund to 2 million households.

“Yes we are living in a world of fake news, of algorithms of hatred and polarization. But beyond the noise, what is important are the facts and, in the face of the facts, this government is the one that has invested the most in social issues in Colombia”.

Tax Reform 1.0 and 2.0

The Duque government presented four reforms in four years. The third was in April of this year, when Minister Alberto Carrasquilla proposed to Congress an ambitious reform that sought to collect 23 trillion pesos in the midst of strong fiscal and social pressure and under the gaze of risk rating agencies, which requested the deepening of the tax apparatus to avoid a loss of investment grade.

In the end, the reform was the leitmotif that ignited the social protest and, incidentally, the violence of some actors in the main cities of the country. This situation led President Duque to withdraw it from Congress, Minister Carrasquilla to leave office and the unfavorable image of the president to grow by 76%, as revealed in May by the firm Invamer.

What is your analysis of what happened?

“He became politicized. Look at it. I thought that there were people who were protesting against the reform and I understand that. But who were those who were protesting against it? I was listening to people who were demanding free tuition, which was structurally funded. There were people who said that they were very hit by the pandemic, because it turns out that in the reform that was presented in April what it sought was to give income to Colombian households.

“So when I say that it was politicized it is because, first, those who were behind the strike had already called it two months before and for them it was important to demonize anything that was there and, in fact, they did so. Other sectors that, in order to protect their interests, also tried to exacerbate and inflame the discussion and unfortunately there were also pre-electoral political elements that came into play. That, obviously, led to the project ending up being converted into a kind of factor to call for violence and that is why we withdrew it. But it was clearly a project whose objective was to eradicate extreme poverty in Colombia in less than 36 months”.

Regarding the new reform proposal presented in July to Congress, Duque stated that this reform intends to maintain the Solidarity Income program to more than 3.5 million families until December 2022; free tuition for strata 1, 2 and 3; benefits for companies that hire young people between 18 and 28 years old; maintain the subsidy to the payrolls of MSMEs until December of this year. For companies, a corporate income tax surcharge is generated and the ICA deduction on income tax that was planned to reach 100% would remain at 50%.

“The measures contemplated do not touch the pocket of any natural person, neither of the middle class nor of the vulnerable sectors. At this moment they may represent about 15 trillion pesos. That would be around 1.5% of the GDP. It would mean the largest reform that Colombia has ever made in terms of increased collection so that with that social investment we protect the most vulnerable”.

There has always been talk that the country needs a structural tax reform... Is this the one?

In Colombia there is a lot of talk about structural reforms and the problem we have is that in this country structural reforms, unfortunately, always end up being attacked quite irrationally. Let us be very clear: Colombia is a country that has made great social transformations, but if the country wants in the medium and long term to improve its social investment, Colombia has to correct a reality that is already endemic and that is that only 4% of the population pays income tax. No country can sustain a growing social investment where only 4% pay income tax, so a structural reform that will have to be carried out in the future will always have to start from the basis of this reality in order to correct it. The other thing is that it is also very important to dismantle many aspects in terms of comfort or tax benefits that are not well focused and structured.

Such as which benefits?

They have to do with the concepts of exempted and excluded. This issue is not going to be included in this reform, as well as the issue of the taxable income base, but I hope that in the future, hopefully in the immediate future, the country will have enough maturity from the political point of view to correct these two aspects. We tried to do it in our government, we tried to do it with a great social vision, but unfortunately we cannot move forward with those aspects and we must recognize it. Today we are presenting a social investment law with stabilization of public finances based on the elements I mentioned, but I believe that the need to address those structural aspects will also be raised for the future.

If we are going to talk about structural reforms, will the pension and labor reforms be left to the next government?

This government has taken out many important reforms such as justice, royalties, contracting, anti-corruption, health, entrepreneurship. And you say pension reform and talk about labor reform. If you realize that the most important reform we need in Colombia is first the formalization and detonation of employment levels. To make a pension reform in the middle of a pandemic is clearly not the right thing to do.

So, will it be up to the next government to take it on?

Surely.

The loss of investment grade

The April tax reform was launched with the objective, among others, of preventing the country from losing its investment grade rating. However, by withdrawing it in May, both Fitch and Standard & Poor’s downgraded the country in recent weeks. “The downgrade reflects deteriorating public finances with large fiscal deficits in 2020-2022, a rising debt level, and reduced confidence in the government’s ability to credibly put debt on a downward trajectory in the coming years,” Fitch said at the time.

You have criticized the role of the rating agencies in relation to the situation of the countries...

“More than criticizing, what I have done is to make an observation. How Colombia was before the pandemic. Colombia had grown in 2019 above 3%, above the regional average. In 2019 it registered the lowest fiscal deficit since the fiscal rule was created and for the first time since the fiscal rule was created it achieved a primary fiscal surplus, in addition to increasing collection of more than 10 %. If one looks at these conditions compared to the years prior to the arrival of our government where the situation is even more critical, we see a much more condescending attitude from the rating agencies, even before the pandemic.

“Colombia has done its homework. So, what I am saying is that rating agencies cannot judge emerging markets with pre-pandemic eyes when the pandemic is not over and Colombia is experiencing this today and other emerging markets are going to experience it and the only thing it will lead to is to increase the indebtedness of emerging markets at a time when the world average debt levels, as I have said the International Monetary Fund is above 98%. Moreover, with an aggravating factor, as Nuriel Rubini has said: we will surely see in the next two or three years a great stress due to the search for resources, especially when many countries are going to delay fiscal reforms. Colombia is a country that has been doing its homework and is also going to discuss a social protection policy with fiscal stabilization and that is why it seems to me that the approach of judging a country with pre-pandemic eyes is wrong”.

So what is your proposal to the rating agencies?

I think that first they have to change their reading, because if before the pandemic, for example, the risk criterion was debt levels above 50 percent and today the world average is above 98 percent, then clearly they can establish a new threshold and they can do it in a transitory way and they can do it especially while the world is coming out of the pandemic, recovering growth and allowing emerging markets to improve their fiscal revenues. What this does is to put additional pressure at a time when we have to take care of the most vulnerable, when we have to generate growth. This seems to me to be absolutely wrong and it seems to me that what it will end up doing is doing more harm than good to many countries.

About the 2022 election

In Latin America, there are signs of a shift to the left in some countries such as Peru, with the rise of Pedro Castillo, who has appointed a representative of the extreme left as chief of cabinet. On the other hand, in Chile, a Constituent Assembly born of social protest was initiated and today Gabriel Boric, who represents a moderate left and the student movement, is leading in the first polls for the presidential elections in November of this year.

“I am a democrat and I believe in democracy. I also believe that Latin America has already seen the ravages of the 21st century socialism model. Anyone who wants to know what 21st century socialism is like should look at Venezuela, where they annihilated business development, institutions, freedom of the press, and which has generated the greatest migratory crisis in the history of Latin America. So I believe that Latin America may have political nuances, there may be parties of the left, right or center, but the only certainty is that progress is only made to the extent that it grows and that it grows with equity and to grow with equity we need a good dynamism of the private sector, clear rules, legal stability and we also need to understand that social investment has to be sustainable and well focused or else it becomes bread for today and hunger for tomorrow.

“Chile is a country with solid institutions. It seems to me that the discussion of the Constituent Assembly will be very interesting because Colombia had such a discussion 30 years ago. Let it serve not to be a Constituent Assembly of a sector imposing its criteria on the rest of society or on other sectors, but to be an opportunity for a great national consensus as it was achieved in Colombia”.

Do you think that this turn to the left will be seen in the 2022 elections in Colombia?

Rather than defining the world between left and right, I see very positive things in Colombia today. While some seek to set fire every day and act as electoral arsonists and also want to generate class rupture, class hatred and divide, there are also figures that have had experiences in governorships and mayorships that have proven results, with a clear vision, that invite them to build. So I believe that Colombia has been a country that has had a great advantage: it has always known how to reject populism, demagogy and has rejected extremes. Therefore, I believe that this criterion will prevail in the elections of 2022, where those who want to divide and fracture with hatred and extremes will be the great defeated.

How do you see yourself as a former president?

Working with love for Colombia, for the issues in which I have had very clear convictions. I would continue to defend migration, to defend environmental issues, to defend democracy and I will continue to participate actively. I am absolutely clear that my participation as former president will only be exercised to collaborate and contribute, never to divide and much less to polarize.