Credit, investment and inflation are the most affected by changes in the fiscal rule.

The Colombian government's decision to temporarily suspend the fiscal rule has raised alarms among analysts, businesses, and citizens. Although the executive branch insists that this measure seeks to guarantee social spending and reactivate the economy, the impact on credit, investment, and the cost of living will be unavoidable.

This is according to a recent report by the firm Russell Bedford Colombia, which suggests that the suspension sends signals of uncertainty to the markets and, in the medium term, will have direct consequences for Colombians' pockets.

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For these experts, the fiscal rule, in simple terms, acts as a limit imposed by the country on its spending and borrowing capacity and is similar to a family that defines how much it can spend without disrupting its finances, in the interest of maintaining fiscal balance and confidence in the economy. "By suspending it, the government gains freedom to spend more, but it also loses the framework of discipline that has given it credibility for more than a decade and puts the image of security and stability that the country has built over the past few years on the ropes," they indicated in a recent report.

More debts and more doubts

The Executive's argument is that it needs to expand its spending margin to meet commitments such as public works, social programs, and investment plans that boost growth at a time of lower-than-expected revenue. However, the measure comes without an extraordinary emergency, such as the pandemic in 2020, which, according to several experts, weakens its technical legitimacy.

“These types of decisions, although legally possible, should be reserved for truly exceptional times,” says Olga Viviana Tapias, Tax partner at Russell Bedford Colombia, who emphasized that “today we are not facing a situation as alarming as the COVID-19 health emergency; on the contrary, this decision calls into question the soundness of the country's finances.”

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This analyst recalled that the announcement alone quickly resonated with the markets. For example, the price of the dollar soared on Wednesday, June 12, reaching $4.189, almost $100 above the previous week's average. Although it corrected slightly to $4.183 the following day, the message was clear and underscored that investors interpreted the measure as a sign of increased fiscal risk.

They also highlighted that the drop in the price of Brent crude oil to US$68.70, one of the country's main sources of external income, worsened the outlook; therefore, with cheaper crude oil and a more expensive dollar, pressure on inflation and imports is imminent.

Harmful effects

One of the first consequences Colombians could feel is an increase in the cost of credit. Tapias believes that "Colombia is seen as a country with less control over its spending. Interest rates on government loans could rise, and if banks have a harder time getting money, the rates on loans ordinary citizens apply for for their homes, consumer goods, or businesses could also increase."

This domino effect could impact both households and businesses, limiting access to financing just when consumption and investment are needed to revive. Furthermore, if additional public spending fuels demand without income support, the risk of inflation also increases.

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"When the government spends more without clear support, at some point someone will have to pay the bill. This could be through higher taxes, higher prices due to inflation, or cuts in social programs," warns the analyst.

The report also suggests that, while increased spending may have an immediate positive impact on sectors such as infrastructure and services, the outlook becomes more complicated in the medium term. If investor confidence declines, businesses will find it more difficult to access credit, and investment conditions will deteriorate.

Furthermore, a temporary break with fiscal discipline could damage the country's image in international markets. According to a spokesperson for Russell Bedford, "Colombia has built its reputation on fiscal responsibility. Breaking with that tradition, even temporarily, could generate caution among foreign investors." This caution could translate into less investment, which implies less job creation and less economic dynamism. Ultimately, the effects affect household income, family consumption, and the recovery of lagging sectors.

So far, the government has not revealed a clear plan for how and when it will resume the fiscal rule, so it is expected that the Medium-Term Fiscal Framework, to be presented this Friday, will include a timeline or at least a more robust justification. But until that document arrives, the message sent to the markets is one of uncertainty.