With a VAT rate of 18%, inflation in 2019 would reach 7% in Colombia Colombia

Since the financing law that will be discussed in Congress in the coming months is not the exception, both analysts and financial entities have predicted that a uniform rate of VAT of 18% to 80% of the products of the family basket will be used, including those which are currently exempt, excluded or have a rate of 5%, the consumer price index, CPI, could increase by up to 4 percentage points next year.

That situation would lead to 2019 Inflation could be set at 7% in one fell swoop, a projection far removed from the annual CPI of 3.33% in October or the 3% long-term goal that the Banco de la República maintains. What is the most worrying of this panorama for the analysts is the possible negative impact that would result from private consumption and thus the growth of the economy.

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"We calculate that the VAT on the family basket can have between 3 and 4 percentage points on inflation, which means that the CPI can rise to 6% or 7% in one go," said Luis Fernando Mejía, Fedesarrollo's new director for replacement from Leonardo Villar.

According to calculations by Bancolombia, without taking into account the additional impetus that could come next year as a result of the real adjustment of the minimum wage and the normal change in expectations, inflation could rise between 0.92 and 3, if the Finance Act is adopted 51 percentage points in 2019, which would lead to the placing of the annual CPI at 4.4% by the end of the year. In total, this financial institution projects this The growth of GDP in the following year would increase from 3.18% to 3.05%.

On this subject, Carolina Monzón, head of Itaú's economic analysis in Colombia, predicted that if the Finance Act is passed with VAT extension to the basic basket as proposed so far, the full impact on consumers will increase inflation by up to 200. basis points.

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"However, taking into account a potential growth scenario, the estimated impact would be half, close to 100 basis points, while maintaining our 3.2% estimate of the CPI, pending final approval of the articles. "said the expert.

Banco de Bogotá, for its part, estimates that the effects on inflation of the VAT correction may rise to 3.1 percentage points. However, with the exception of some foods, it would only be 0.6 pp. "The end result is likely to be an intermediate point between these estimates, because in addition to the products that are included, the effect of the lower demand for the price increase must also be taken into account," said Gustavo Acero Ramírez, an analyst at the financial institution.

In addition, the tax adjustment may have consequences for monetary policy and the Bank of the Republic would have to balance another year between inflation above the target range of 3% and an economy that could keep growth rates below the potential.

"We are still waiting for the first rate hike in April, because there is little information in the first quarter that the central bank would have to decide to move interest rates, which remains unchanged compared to the scenario without a financing law. increase of only 50 basis points in 2019 (and another 50 bps more in 2020), we now think that this adjustment could be in 2019 + 100-150bp, ie a path of more accelerated adjustments, "suggested Steel.

Read also: Farmers rejected the VAT on the family basket

Fiscal deficit target

In addition to covering the deficit of $ 14 billion in the Budget 2019, the Iván Duque government funding law is necessary to achieve the deficit target set in the budget rule, a necessary condition for the major risk rating agencies such as Fitch Ratings. , Moody & # 39; s and Standard & Poor & # 39; s maintain the investment rate to Colombia.

After looking at the articles of the proposal that the government had instituted in Congress, two of them told him that this project would meet the set goals. Recall that the medium-term budgetary framework foresees a total national government deficit of 3.1% of GDP for 2018 and 2.4% in 2019. Furthermore, it notes that the total and the structural needs to converge in 1%. that of from 2027.

"We think that the government can achieve the budget deficit target with this reform. I would have to cut back on the budget. As far as the inflationary effects of VAT are concerned, this will be negative but transient, as was the result of the tax in 2016, "said Richard Francis, director responsible for the Sovereign rating of Colombia.

Also read: Federation of coffee farmers rejected the Finance Act

Samar Maziad, vice president of the rating agency Moody's, said that lowering the budget deficit without additional revenue would be a challenge. "The increase in VAT on foodstuffs is likely to lead to some inflationary pressures in the next 12 months The central bank's decision to raise interest rates depends on inflation expectations and inflation expectations." There are other factors that influence on the forecast of inflation, such as the pace of economic growth and the movement of the exchange rate, "he said.

Although the rating agencies do not look bad, according to Anif, the implementation of the legislative initiative would not have a decisive influence on the increase of the Nation's collection. Moreover, it would not increase its revenues in 2020 and by 2021 the government would start losing 0.7% of the collection.

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