Colombia’s finance minister leaves the weakness of tax reform

Colombia’s finance minister resigned Monday after the government was forced to withdraw a highly unpopular tax reform law that had sparked six days of street protests in which 17 people were killed.

Alberto Carrasquilla said he was stepping down to allow the government to reach the consensus needed to push for a fiscal reform package through Congress. President Iván Duque dit Carrasquilla would be replaced by the Minister of Commerce, José Manuel Restrepo Abondano.

The government last month introduced the tax reform bill, which had been designed by the former finance minister. Its goal was to increase 1.4% of gross domestic product, or $ 4.1 million, by eliminating some exemptions and expanding the tax base, among other measures.

But within days, even the parties expected to support changes to the tax code rejected them. Duque’s right-wing Democratic Center party urged the president and his finance minister to amend the bill.

Last Wednesday, thousands of people were taken away the streets in protest. The size of the demonstrations seemed to surprise the Colombian government and encouraged the organizers, who extended them for several days. Protests have become increasingly violent and the government has deployed the army in some cities to restore control.

The state ombudsman’s office said Monday that 17 people, including a police officer, had died in the clashes and 846 more injured, including 306 civilians. The defense minister said the violence was “premeditated, organized and funded” by left-wing guerrilla groups.

Duke said Sunday his government would introduce an alternative tax bill to Congress and hinted at some of the measures it could contain.

These included temporary measures, such as a corporate tax surcharge and an increase in Colombia’s wealth and dividend taxes, as well as additional spending cuts. A plan to increase value added tax on goods and services will be rejected.

“The fact that the new bill would now be transitory … means that the country’s signaling about its commitment to adjustment is now weaker,” Citibank analysts wrote. “This will negatively affect the decisions of rating agencies.”

He tax reform is the most important legislation in Colombia this year. The state of investment quality of the country depends on it.

Both Fitch and Standard & Poor’s have rated Colombia triple B less with negative prospects for long-term debt issuance. This is just a notch above the non-investment or junk state. Moody’s has rated Colombia Baa2, two scales above the rubbish.

If the tax reform effort fails or is diluted, there is a strong likelihood that Colombia will be degraded from a small group of investment-grade Latin American countries that include Mexico, Chile, and Peru.

That would be a blow to a country that, despite its own long civil conflict and a very chronic illegality, has been presumed of fiscal rectitude. In contrast to most countries in the region, Colombia has not defaulted on its debt since the 1930s and has enjoyed investment status since 2011.

While the withdrawal of the tax bill and Carrasquilla’s resignation could ease tensions, protesters have vowed to return to the streets on Wednesday.