To incentivise consumption, Colombia will lift sales taxes today for the second time since the onset of the COVID-19 pandemic.
In late March, Colombia imposed one of the tightest lockdowns in Latin America. The strong measures of confinement had particularly adverse impacts on the country’s economy, resulting in a 20% GDP contraction in April. With rising unemployment and poor performance of extractive industries, retail and public services, Colombian authorities marked June 19, July 3 and July 19 to waive the official 19% value added tax (VAT).
Colombia has unveiled around $3.7 billion in measures to counter the effects of the pandemic and boost liquidity in financial and foreign exchange markets, including a temporary reduction of pension contributions, cash transfers for the most vulnerable, tax deferrals, new credit lines for companies and financial support for SMEs.
Considering the continued depreciation of the Colombian peso, a narrowing job market and a global change in trade and retail patterns, the VAT-free days are unlikely to boost domestic consumption in Latin America’s fourth largest economy. In a country with low levels of household savings and a high household consumption-to-GDP ratio, depressed consumption will stretch the time horizon for Colombia’s economic recovery, indicating a bearish outlook for a strong medium-term recovery.
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Bryan serves as a research analyst and editor on the Current Developments Team, focusing on economic trends, development and geopolitics in Latin America and the Caribbean.