Colombia is confronting a budget deficit of close to $7 billion.

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Colombia is grappling with a looming budget shortfall, with Finance Minister Ricardo Bonilla projecting necessary fiscal adjustments in the fourth quarter. However, analysts caution that action must be taken sooner to prevent missing fiscal targets or drawing attention from ratings agencies.

In April, tax collection plummeted by 40.9% to $4.83 billion, contributing to an overall deficit of approximately $2.85 billion in the first four months of the year compared to the set target. The DIAN tax agency has already conceded that Colombia will fall short of the nearly $2.6 billion targeted collection from arbitrations in 2024. Additionally, a court ruling permitting extractive companies to continue deducting royalties from their taxes will further strain public finances.

Andres Abadia, Pantheon Macroeconomics’ head economist for Latin America, expressed concern over the fiscal situation, emphasizing the need for corrective measures to address both spending and income issues. He warned that the economy may bear the brunt of the consequences.

Analysts argue that the government must enact adjustments in its mid-year fiscal plan by mid-June to avert a crisis in investor confidence. However, the finance ministry has not yet responded to requests for comment on the matter.

Market sources consulted by Reuters outlined a dilemma faced by the government in responding to lower-than-expected income: whether to significantly curtail spending, increase debt, or pursue both options concurrently. Each choice carries fiscal implications, complicating the decision-making process.

Camilo Perez, director of economic studies at Banco de Bogota, voiced skepticism regarding the adequacy of proposed changes. He anticipates that the government will implement spending reductions alongside heightened issuance of peso-denominated TES bonds.

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