Colombia Accused of Accounting Shenanigans to Hit Deficit Goals

(Bloomberg) -- Colombia is using questionable accounting practices to hit its fiscal targets, potentially undermining the country’s standing with investors, according to Guillermo Perry, a former finance minister who is one of the people responsible for setting the goals.

The government is putting its credibility at risk by saying it will include money from future sales of public assets as revenues this year, according to Perry, who sits on the fiscal rule committee, an independent ad hoc group that sets the nation’s deficit limits.

“It is worrying that fiscal rule commitments are being simulated with accounting tricks,” Perry said in a phone interview from Bogota. “Ratings agencies and many investors are going to realize what’s going on.”

Perry’s committee sets the annual targets under the so-called “fiscal rule” of 2011, which is intended to boost confidence in Colombia by limiting the government’s ability to run up debt. While the committee doesn’t have disciplinary power, the government has never breached the deficit limits since the rule took effect, and missing the targets would involve a loss of credibility.

Colombia is targeting a budget deficit of 2.4% of GDP this year, below the 2.7% limit that Perry and his colleagues set under the rule. To reach that goal, the finance ministry said this year that it expects to raise funds equivalent to 0.6% of gross domestic product from the sale of some government assets.

The government hasn’t sold anything so far this year, but began preparations for a possible divestment of its controlling stake in electricity transmission company Interconexion Electrica SA, worth about $3.3 billion at current prices. Colombia owns businesses which are collectively worth more than $40 billion, including an 88.5% stake in oil producer Ecopetrol SA, as well as electricity companies, banks, insurers and an airline.

In a reply to written questions, the finance ministry said it follows guidelines from the International Monetary Fund dating from the 1980s which allow privatizations used to fund public investments to be counted as fiscal revenue.

“We are convinced that the asset sale program will allow us to meet the deficit projected in the 2019 financial plan but will also help maintain levels of social investment in public goods which help to boost economic growth,” the ministry said.

To see the ministry’s full reply click here.

‘Room for Improvement’

The IMF, meanwhile, expects Colombia to breach the fiscal target by reaching a 3% deficit this year, attributing the difference to the Colombian government’s accounting methods.

“Using privatization proceeds as current income is not considered best practice in terms of accounting standards, but is not a violation in terms of fiscal reporting, where countries can adopt various practices,” the IMF said, in reply to emailed questions. “Having said that, Colombia has room for improvement on fiscal transparency in several areas, including with respect to its fiscal statistics and reporting.”

Asset sales don’t structurally alter the government’s fiscal position, since an asset can only be sold once, said Richard Francis, Latin America sovereign rating analyst at Fitch Ratings.

“This is part of the reason we changed the outlook on Colombia’s rating to negative back in May,” he said. Moody’s Investors Service was less worried, and moved the outlook from negative back to neutral.

A development plan approved by congress this year allows the government to use money set aside for infrastructure projects to invest in some public companies. Since the finance ministry doesn’t have time to push through significant privatizations in the remaining five months of the year, they’re likely to “buy” some government assets with money from this fund, said Camilo Perez, chief economist at Banco de Bogota.

This means the government would effectively be “passing money from one trouser pocket to the other”, which would hurt their credibility, he said.

To contact the reporter on this story: Oscar Medina in Bogota at omedinacruz@bloomberg.net

To contact the editors responsible for this story: Matthew Bristow at mbristow5@bloomberg.net, Juan Pablo Spinetto

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