Public Finances: What is Expected in 2021

After the Alvarado administration agreed to backtrack on the proposal to negotiate a $1.75 billion loan with the IMF, it is predicted that next year the government will depend on domestic debt to finance its expenditures.

Thursday, October 8, 2020

In mid-September, and in the context of a severe economic crisis that had been brewing before the pandemic, the Executive presented the plan with which it intended to mitigate the fiscal impact of the Covid-19 crisis, a proposal to negotiate an agreement with the International Monetary Fund (IMF) to obtain a $1.75 billion loan.

The plan was rejected by various sectors, because it proposed to tax financial transactions, increase income tax for companies and individuals, and increase property tax. In early October, the government decided to withdraw the proposal.

By 2021, it is expected that the government will be forced to turn to the local market to raise funds, through the issuance of more debt. This option would be more expensive, when compared to the financing conditions that the country could obtain from multilateral organizations.

Carlos Morales, director of sovereign ratings for Latin America at Fitch Ratings, told Nacion.com that "... depending on domestic financing will mean that the government will have to achieve an improvement in its fiscal position, given the increase in spending on debt interest payments. Delays in the IMF agreement would result in greater dependence on the local market during the first part of 2021."

For Lisa Schineller, managing director of sovereign ratings for the S&P agency, the government's main challenge is to achieve fiscal adjustment, in the challenging economic, political and social context in which the country finds itself.

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On average agencies provide a period of 12-18 months for the fiscal deficit and public debt to stabilize, while clarifying that "...

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