Colombia’s Finance Minister Warns Tightening Could Bring Economy to a Standstill

Ricardo Bonilla told Bloomberg Línea that the central bank’s bid to cool demand implies significant risks, while he also urged discussions around the minimum wage hike to be realistic

Colombia’s Finance Minister Warns Tightening Could Bring Economy to a Standstill
03 de diciembre, 2023 | 04:00 AM

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Bogotá — Just how much Colombia’s minimum wage will increase in 2024 will remain an uncertainty at least for another two weeks, with discussions having started on November 30. Finance Minister Ricardo Bonilla, who also called for the central bank to begin easing its monetary policy, urged the parties involved in those negotiations to be realistic in their demands.

The official told Bloomberg Línea in an interview that he expects Banco de la República (Bank of the Republic) to bring down interest rates in its December meeting. Moreover, he referred to the potential impact of the Constitutional Court’s ruling on the country’s finances.

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Bloomberg Línea: Colombia’s third-quarter growth data was poor. Do you think that will be enough to convince the Board of the Bank of the Republic to start lowering interest rates? By how many basis points, if so?

Ricardo Bonilla: What we have told the Bank’s Board is that we run the risk of going from an attempt to tighten demand, i.e., cool the economy, to the economy coming to a standstill. So, in trying to control inflation due to excess demand, we may end up with a shortage of supply, causing prices to rise due to scarcity. We are at the point where we need to balance these two conditions. The third quarter’s balance is a clear warning that we may move towards a process of paralyzing the productive apparatus, and that is the worst-case scenario. In this sense, the bet is that in the December meeting, the bank will start to lower rates. The bank’s expectation remains the same: “when can we return to 3% inflation.” We have been telling them for several months that we won’t reach that 3% in 2024 but in 2025, and all projections indicate that inflation will continue to decline, though not at the desired pace due to the lingering impact of fuel prices. However, what is clear is that we closed the gasoline gap this year, and we know how much it impacted inflation. The gasoline gap, with the monthly increases, gives us between 1.5% and 1.6% inflation, so it’s not much, and indeed, we have it under control. The gasoline gap will close this year, and the diesel gap remains, and we are working to negotiate with transport guilds to avoid the expansion of other processes. Although, for transportation, this enters the Producer Price Index (PPI), not the Consumer Price Index (CPI). They magnify the cost a lot, and discussions began with an argument that is not true: that diesel increased its share in the cost basket. How come diesel has been frozen for 4 years, and its share is going to increase? It can’t be because it should decrease as other prices have gone up, and it hasn’t. We have started some technical discussions about what each party is seeing. What does that mean? Along with the toll issue the minister is talking about, we will be updating tolls, but to avoid impacting inflation, for now, inflation is 10.48%, and we expect it to end the year in single digits. We expected 9.2%, but it may end up at 9.5%, and for 2024, it will continue to decline but will close between 4% and 5%, not at 3%. That’s what we tell the bank, and the market expects the rate to drop by 50 basis points. It’s not a significant decrease; by December, we should have between 325 and 360 basis points difference between inflation and the intervention rate.


BL: Do the COP$8,000 that diesel must increase by remain unchanged, or has that gap widened or decreased?

RB: That gap depends on the international price. Unfortunately, in the international market, diesel has increased more than gasoline because there is a scarcity in the market due to wars and the lack of supply from Russia, the main diesel producer. This has caused a shock in the markets where the diesel price is rising a bit more, but it is still foreseeable that the gap we have is around COP$16,000 versus the COP$9,500 we have today. That’s what we have to keep reviewing, but what we have to consider is not the consumer price but the producer price, and in that case, the gap can be COP$4,000 to COP$4,500.

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BL: In 2022, with an inflation rate of 13.1%, the minimum wage negotiation was 16%, and some at the bank say that did not help with the inflation issue. Do you think this year it is necessary to be more cautious about how much the minimum wage increases, or do you think it still needs to be a few points above inflation?


RB: I think this year we need to be clear about the precedent we have, which is that the minimum wage increased by 16%, but inflation will end up at 9.6% or thereabouts. That is, this year there was a gain in purchasing power. This gain in purchasing power needs to be taken into account in the adjustment needed for 2024. The Constitutional Court, in any case, set a floor for that negotiation, and the salary cannot increase below the caused inflation, and if it ends at 9.6%, that will be the floor. What I believe needs to be examined is how much productivity has increased or not amid an economy that had a negative third quarter.

BL: One talks to businessmen, and they consider that the productivity for this year will probably be negative. If that is confirmed, do you think the minimum wage for 2024 would be very close to that 9.6%?

RB: It would be the CPI plus something. In the last 30 years, there has only been one minimum wage negotiation that was CPI plus 0. For the most part, except for the last few years, where it has been CPI plus 2 or 3 points, the adjustment has been CPI plus 1 point. I would believe that we could be closer to this average.

BL: Usually, the first year of the Government manages to reach an agreement, and then positions start to diverge between unions and employers. How do you see the atmosphere for this year with the unions? Because last year, the effort was from the business sector, and one would think that this year workers will be asked to contribute more to that negotiation.

RB: I believe that this year we need to ask both employers and unions to be realistic about what is happening in the economic space because the third quarter sent us a warning message, and we cannot turn that result into a more conflictive situation or one of greater difficulties. We need to be realistic with all actors. Concertation can continue as long as there is the perspective that this year there was a gain in purchasing power, and what we need going forward is to continue having a gain in purchasing power because the inflation expectation is lower.

BL: With the paragraph on royalties falling again, the State stops receiving payments from, among other companies, Ecopetrol. Still, in that case, it will receive it through dividends anyway; the president spoke of $6.5 trillion. Has it been calculated how much of that is covered by those dividends the company will give?

RB: That calculation has not been made yet, but due to the court’s decision, $3.8 trillion will stop being collected in 2024, and we have to anticipate that the withholding taxes collected this year will be included in the 2024 income tax declarations and will be lowered. That’s why we arrived at the estimate that we need to cut $6.5 trillion. Ecopetrol has royalty payments that were mostly in kind, and until that court decision, it was not clear what the difference between paying in kind or in cash was. In practice, those who filed the lawsuit were those who paid royalties in cash, as they could deduct it from income tax with that cash payment because it affected their accounting. When royalties are paid in kind, they do not enter the accounting, so at this moment, it is not very clear or precise to know how much Ecopetrol will pay.


BL: Several projects have been presented to Congress, the latest one to expedite disputes with the Dian. How much support do you see for its approval because the property tax made noise, and labor, pension, health reforms, etc., have also faced a lot of opposition? Could this one be more amicable in the debates?

RB: Both the property tax and this project have shown Congress’s interest in their development, and for us, it is clear that it is an additional instrument to strengthen the DIAN’s capacity. Predominates the capacity we have given to the entity to make technological improvements and to expand the staff. All of that is aimed at improving tax management, so what we say is that all these processes that are reaching the judicial stage can be handled administratively. The proposed project says that those that have already reached the judicial stage can be resolved more quickly in that way, but ideally, the processes should not reach that point; they should be resolved administratively. What we ask of the DIAN is to have greater management capacity. There are already 7,000 cases that have reached the judicial stage, and this project seeks a solution for those cases.

BL: The debate on health reform has risen again, and the argument of many who help break the quorum is that there is no fiscal endorsement. Will you present it, or is it definitely not necessary?

RB: It is not required until the end of the debates, in the third or fourth, but to eliminate that argument, which is nothing more than dilatory, next week we will present a document that is an approach to an impact issue because ultimately one does not know what will end up being approved, and those calculations need to be updated permanently according to how the debates progress.


BL: In the pension project, nothing was included regarding the treatment of special and exempt regimes. During the debates, will you try to include them?

RB: No, the pension project does not currently include special and exempt regimes because that is another type of discussion that we have to have. What is included is knowing what to do with the military, police, teachers; essentially, that is it. The special regimes are already withered; the most one can do is have higher pensions pay more taxes. You cannot change the conditions they have, so they do not enter there. The discussion remains about what to do with the general system, which is currently divided into two regimes, capitalization funds, and annuity. In competition, they are not the best result, and that’s why the basis of the project is to eliminate arbitrage and build a complementary system. Everyone agrees to build the complementary system; the discussion is in the threshold, in how the savings fund would work, and what is the transition period. We need to build a complementarity system; there is no discussion about that.