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A Fiscal Rule to Achieve Debt Sustainability in Colombia

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  • Arbeláez, María Angélica
  • Benítez, Miguel
  • Steiner, Roberto
  • Valencia, Oscar

Abstract

In order to enhance fiscal sustainability and regain “investment grade” credit rating, in 2011 Colombia implemented a fiscal rule (FR) on the Central Government's structural balance. Investment grade was rapidly attained, and FR targets were complied with, until 2019. Using the Synthetic Control Method, we provide evidence that the FR promoted fiscal discipline. Nevertheless, public debt has increased continuously and is now expected to exceed 60 percent of GDP, in large part driven by the pandemic. We argue that the FR should be reformed so as to incorporate a debt anchor. Using a regime change model and the IMFs buffer risk methodology, we show that the prudent debt level should not exceed 48 percent of GDP and that in order to achieve this in the medium term, a policy mix increasing revenues to 17.8 percent of GDP (from 15.5 percent during 2016-2019) and reducing primary expenditure to 15 percent (from 16 percent during 2016-2019) is required. FR's performance would also benefit from changes in its institutional design.

Suggested Citation

  • Arbeláez, María Angélica & Benítez, Miguel & Steiner, Roberto & Valencia, Oscar, 2021. "A Fiscal Rule to Achieve Debt Sustainability in Colombia," IDB Publications (Working Papers) 11040, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:11040
    DOI: http://dx.doi.org/10.18235/0003048
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    1. Jorge Toro & Aarón Garavito & David Camilo López & Enrique Montes, 2015. "El choque petrolero y sus implicaciones en la economía colombiana," Borradores de Economia 906, Banco de la Republica de Colombia.
    2. Raúl Alberto Chamorro Narváez & Andr�s Felipe Urrea Berm�dez, 2016. "Incidencia de las reglas fiscales en la sostenibilidad de la deuda pública territorial en Colombia," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, vol. 35(Especial ), pages 207-251.
    3. Mauricio Olivera & Monica Pachon & Guillermo Perry, 2010. "The Political Economy of Fiscal Reform: The Case of Colombia, 1986-2006," Research Department Publications 4674, Inter-American Development Bank, Research Department.
    4. Jorge Toro & Aar�n Garavito & David Camilo L�pez & Enrique Montes, 2015. "El choque petrolero y sus implicaciones en la econom�a colombiana," Borradores de Economia 13829, Banco de la Republica.
    5. Cristina Checherita-Westphal & Andrew Hughes Hallett & Philipp Rother, 2014. "Fiscal sustainability using growth-maximizing debt targets," Applied Economics, Taylor & Francis Journals, vol. 46(6), pages 638-647, February.
    6. Abadie, Alberto & Diamond, Alexis & Hainmueller, Jens, 2010. "Synthetic Control Methods for Comparative Case Studies: Estimating the Effect of California’s Tobacco Control Program," Journal of the American Statistical Association, American Statistical Association, vol. 105(490), pages 493-505.
    7. International Monetary Fund, 2010. "Fiscal Policy in Oil Producing Countries During the Recent Oil Price Cycle," IMF Working Papers 2010/028, International Monetary Fund.
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    Cited by:

    1. Jose E. Gomez-Gonzalez & Oscar M. Valencia & Gustavo A. Sánchez, 2024. "Debt affordability in developed and emerging market economies: the role of fiscal rules," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 48(2), pages 377-393, June.
    2. Andrián, Leandro & Hirs-Garzon, Jorge & Urrea, Ivan Leonardo & Valencia, Oscar, 2024. "Fiscal rules and economic cycles: Quality (always) Matters," European Journal of Political Economy, Elsevier, vol. 85(C).
    3. repec:avg:wpaper:es18070 is not listed on IDEAS

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    Keywords

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    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods

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