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Colombia to lift VAT as domestic consumption founders

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Colombia to lift VAT as domestic consumption founders

 

Colombian pesos
Photo: The Bogota Post

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.

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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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