[Later, finance minister Alberto Carrasquilla said that he expected the fiscal deficit to reach Col$3.3tn (US$1.15bn) next year -33% higher than Uribe's figure. This will jeopardise the IMF-set target for 2004 of a fiscal deficit worth no more than 2.1% of GDP.]
Uribe's announcement reveals what is essentially a simple miscalculation by Bogotá. To the surprise of economists, given the strong growth in the first part of the year, the government is now struggling to provide adequate funds for social security and defence.
A salary freeze for public sector workers and a temporary restructuring of pensions are among the options being considered by the president. Uribe is thought to favour two other solutions to deal with the forthcoming fiscal deficit. He wants either to issue new bonds or to bring forward an increase in Colombia's value-added tax, which was initially scheduled for 2005.
As Colombia has recently won plaudits from the IMF for its efforts in dealing with the debt burden, the government is unlikely to indebt itself further by issuing new bonds. This makes bringing forward the 2% VAT hike the more attractive option, despite the impact it will have on the consumer. Moreover, a jump in VAT will also have an inflationary impact at a time when Colombia's central bank appears to have got on top of the problem.
In June consumer prices fell 0.05% month-on-month -the sharpest drop since 1988. The drop, which was well below market forecasts for a 0.07%-0.37% rise, was due largely to a bumper harvest which brought food prices down 1.06% from May's figure.
The central bank's strategy appears to be paying off. Having raised interest rates by a single percentage point in late April, in an attempt to meet the 5.5% inflation target for this year, inflation for January-June stood at 5.01% -down from 5.06% in the first five months of the year.
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