MercoPress. South Atlantic News Agency

Colombia faces reconstruction with 96% of the year's debt quota already used

De la Espriella said the country is going through “the most complex fiscal crisis in its entire history” and announced that the emergency will allow the creation of the so-called Fondo Milagro

Colombian President Abelardo de la Espriella declared an economic emergency on Wednesday to address the consequences of Monday's magnitude 7.4 earthquake in the west of the country, against a backdrop of fiscal constraints that will shape how reconstruction is financed.

The outgoing government used 96% of the domestic debt issuance quota set for this year, an unprecedented proportion in a presidential transition, where the norm was to leave around 30% available for the successor, according to calculations by economist Alejandro Rojas of Banco de Bogotá. The current budget also faces a shortfall of more than 30 trillion pesos, some 9.375 billion dollars.

De la Espriella said the country is going through “the most complex fiscal crisis in its entire history” and announced that the emergency will allow the creation of the so-called Fondo Milagro, intended to channel domestic and international contributions towards rebuilding hospitals, schools, housing, roads and airports. “The emergency will have to include economic reactivation measures,” he said at his first press conference since taking office, at which he took no questions.

The measures announced include the state covering utility bills for affected families, rent subsidies, tax and financial relief, support for traders and small businesses, and assistance for the most vulnerable households. Finance Minister Miguel Gómez Martínez had told congressional economic committees of the possibility of taking out a World Bank loan of up to 450 million dollars and of postponing personal income tax payments by several weeks.

Wednesday's official toll stands at 265 dead, 3,494 injured, 496 missing and 25,872 families affected, with 1,136 homes destroyed, 8,357 damaged and 35 health centers hit. The figures are provisional.

The United States Geological Survey estimates the most likely losses at between one and ten billion dollars, although its upper range contemplates an impact of up to 7% of gross domestic product, equivalent to some 40.6 billion dollars. Gómez had set out to cut state spending by 20 trillion pesos this year, close to 6 billion dollars, a target reconstruction is likely to postpone. “Some of the tax cuts the government wanted will probably have to be put off, and a discussion about additional revenue may even have to be brought to the table,” said José Ignacio López, president of the think tank Anif.

A study by the International Monetary Fund covering 96 emerging economies between 2012 and 2023 concludes that markets do not penalize the earthquake itself but the institutional capacity to respond. Sovereign spreads tend to rise and stay elevated in countries with weaker state capacity, an effect that appears two months after the event and can exceed 60 basis points by the fifth month. In countries that respond effectively, the spread remains stable or even falls.

The declaration of economic emergency temporarily empowers the executive to issue decrees with the force of law and is subject to review by the Constitutional Court. In April the court struck down the emergency decreed by Gustavo Petro, though in different circumstances, after a tax reform failed in Congress. It has, however, upheld the mechanism following the 1999 Eje Cafetero earthquake, the 2010 floods and the 2017 Mocoa landslide.