PGI INSIGHT: Colombia – May 2021

PGI INSIGHT: Colombia – May 2021

- Geopolitical Risk - Intelligence

14-05-2021


Unrest over tax reform, economic uncertainty to persist in near term

In brief

  • Violent unrest has persisted since breaking out over tax reforms in April.
  • Although President Iván Duque suspended the planned tax reforms, other key drivers of unrest, including police brutality and socioeconomic conditions, have sustained protests.
  • Duque is likely to continue to introduce altered tax reforms to reduce a fiscal deficit while sustaining social programmes amid a weakened economy.
  • Unrest may decline in the coming months, though repeated bouts of demonstrations are likely amid long-term socioeconomic uncertainty.

Background

Ongoing nationwide protests since 28 April have left at least 42 people dead and hundreds injured. Protesters have clashed with police in Bogotá, Medellín, Cali and tens of other cities and towns amid allegations of police brutality.

The protests broke out to denounce the government’s proposed tax reform programme. A tax bill, introduced by President Iván Duque on 15 April, would have increased VAT on goods and services, and reduced income tax exemptions to pay for the permanent rollout of a basic income support programme. Protesters claimed that the tax increases targeted the middle and working classes and would increase the cost of living amid an economic crisis linked in part to the COVID-19 pandemic.

The protests have continued despite the government withdrawing the bill on 2 May, sustained by wider concerns over social and economic instability and outrage over police brutality. Protesters have increasingly targeted police, with officials claiming protesters have targeted 25 police stations and injured 580 officers.

The latest protests are a continuation of 2019 anti-government unrest which was driven by a wide range of grievances. These include widespread corruption, increasing inequality, access to education and healthcare, indigenous rights, rising criminal violence, and the failure of the Duque administration to fully implement a 2016 FARC rebel peace agreement.

Taxation reform

Duque will continue to pursue fiscal reform to address a shortfall in government revenue to sustain key social programmes amid a worsening economic crisis. On withdrawing the bill, Duque said that he would seek political consensus on tax reform, though he has maintained that reform is necessary to stabilise the economy. The finance ministry has warned that a deficit could grow to 8.6 percent of GDP without tax changes.

Duque has abandoned his proposed VAT increase and reduction of income tax exemptions, for the time being. However, it remains unclear how he will generate revenue. It is unlikely that Duque, who is a strong ally of the private sector will target corporate income tax, which he reduced in 2019, as he may be reluctant to risk undermining any economic recovery by restricting the private sector.

The new finance minister has also suggested consensus and dialogue over any tax reform. The replacement for former finance minister Alberto Carrasquilla, who resigned a day after the cancellation of the tax bill, is former trade and tourism minister José Manuel Restrepo. He has promised to raise USD 3.7 bn in revenue without severe tax increases as part of a new programme, though details of the plan are not confirmed.

Outlook

Protests are likely to continue in the near term, sustained by public discontent over police violence and concerns over rising inequality and insecurity. It is unclear whether the government will sufficiently respond to protester demands. First round talks with the national strike committee went poorly, as the government allegedly refused to concede on any protester demands. Similar negotiations after unrest in 2019, also triggered by proposed tax changes, failed to result in any meaningful government concessions.

The government may take small steps to appease demonstrators, such as conducting an independent inquiry into protester deaths. However, significant police reforms, such as the dismantling of the riot police – ESMAD – are unlikely. Duque rejected calls to reform a militarised police force following mass unrest in 2019 and protests eventually subsided.

Colombia has faced repeated bouts of mass unrest over the last two years linked to insecurity and socioeconomic inequality, long-term challenges the government will struggle to address. The World Bank ranks Colombia as the second most unequal country in Latin America. Its economy has been hard hit by the pandemic, with employment and poverty rising sharply. GDP shrank by 6.8 percent last year. Despite forecasts for a recovery in 2021, the economic outlook has been undermined by a third wave of the virus, which further complicates efforts to stabilise the country’s worsening fiscal deficit. The prospect of repeated protests will remain in the long term amid a sustained deterioration in economic conditions.


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