The Colombian government’s inability to implement tax reforms with the hope of boosting economic growth and investor confidence, coupled with protests and widespread supply-chain disruptions, will likely sustain political and economic instability ahead of elections in 2022, writes Erin Drake.
Much like Colombia’s Latin American neighbours, 2021 has been a year of social and political turmoil exacerbated by the Covid-19 pandemic. Following a national strike on 28 April to denounce a controversial tax reform bill, unions, NGOs, indigenous groups and other activists have staged large protests across the country. President Iván Duque’s withdrawal of the bill on 2 May did little to assuage protesters’ frustrations, which include a wide range of socio-economic grievances, including longstanding and pervasive inequality. The government has struggled to bring unions and other stakeholders to the table to negotiate a new version of the bill, and the severe crackdown on protesters has escalated tensions. As of late June, clashes between protesters and security forces killed more than 60 people and injured at least 2,300 others.
Colombia’s finance ministry estimates that the protests have cost the country USD 2.68 billion. In late May, the country lost one of three investment-grades, and other rating agencies will likely follow this downgrade due to uncertainty over what the second iteration of the tax bill will hold. Even as the protest movement begins to lose steam, the delayed economic consequences continue.
Protests have affected multiple sectors of the economy. Road blockades, a commonly used protest tactic in Latin America, have been particularly damaging, causing bottlenecks that have resulted in massive supply chain disruptions. According to the finance minister, blockades are estimated to cost the economy up to USD 132 million a day.
The energy sector has been hardest-hit by the protests, with hydrocarbon operators estimating over USD 111 million in lost revenue. The roadblocks have forced Colombia’s state-controlled Ecopetrol to frequently suspend mid-stream pipeline operations as inventories build up at wholesale distribution hubs. One Latin American oil and gas company announced a reduction in their activities due to transportation, equipment, and personnel shortages, and forecast a drop in production of around 40 to 45 percent of its usual daily average. A Canadian oil company has also reduced its activities indefinitely, curtailing output by around 18 percent.
Exports have also been affected. In late-May, blockades at the major Buenaventura container port in Valle del Cauca – responsible for almost 32 percent of Colombia’s exports – prompted port authorities to suspend operations. With bulk storage capacity at 90 percent, the port was forced to hold back around 540,000 tonnes of export cargo and 242,200 tonnes of import cargo. Coffee exports, for example, declined by 52 percent in May compared to the same time in 2020 due to port blockades.
The agriculture industry has also suffered. With the majority of packaging manufacturing plants located near Cali, the city worst-affected by violent demonstrations, many agricultural producers have been unable to secure packaging in which to transport their crops. Road blockades have led to further supply-chain disruptions in the sector, as growers have fully-stocked inventories with little means of distribution.
Companies must navigate several uncertainties in the coming months and beyond. Even though protest leaders have recently vowed to suspend demonstrations, such promises typically do not last. Longstanding political and socio-economic grievances remain. The government’s inability to address these issues, and Duque’s call to violently crackdown on what was initially a peaceful protest movement, will likely to be the catalyst for further demonstrations in the coming months. Local and foreign companies operating in the agricultural and extractives sectors – particularly those reliant on local labour and logistics – will likely be significantly impacted by such incidents and their knock-on effects. Foreign companies’ concerns have also been compounded by the government’s lack of clarity over whether it will formulate any policies specifically to protect foreign investors. Rather, Duque has indicated that companies will likely be expected to pay higher taxes, indicating his plan to prioritise appeasing protesters rather than corporations ahead of Colombia’s upcoming general elections in 2022.
However, Duque seems to have exhausted his political capital due to his controversial response to the recent demonstrations. His government also has limited tools to address pervasive socio-economic grievances and related protests. These factors have increased the chances of one of his left-leaning political opponents winning the 2022 presidential elections. This will generate further uncertainty among investors, many of whom will wait to see whether a change in government leads to changes in foreign investment legislation.
"As the Duque administration struggles to walk the line between placating protesters and reviving the economy, Colombia’s commercial, political, and economic situation will remain volatile ahead of the May 2022 elections."
Colombia's tax reform bill
On 15 April 2021, the government submitted a tax reform bill, also known as the Transformación Social Sostenible, to parliament. The bill was intended to restore government revenues and investor confidence and address the increase in public spending prompted by the pandemic. However, the bill caused controversy among unions, opposition parties and civil society groups, who claimed that the reforms would disadvantage the lower and middle class by increasing the number of people required to declare income tax, and raising taxes on household goods.