The fiscal rule faces its great test in the Petro government.

The week begins with analysts, investors, and economic authorities focusing their attention on the Higher Council for Fiscal Policy (Confis), which will hold one of its most decisive sessions in recent years, given the topic to be discussed and the news that some are already taking for granted, while the future of the fiscal rule remains uncertain.

Amid an economic environment marked by the national government's cash flow constraints and growing pressure on public finances, the agency must decide whether to authorize the executive branch to activate the so-called "escape clause" of the fiscal rule, an extraordinary mechanism that would allow for the relaxation of the deficit limits established by law and give free rein to borrowing capacity.

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It's worth noting that the decision not only carries considerable technical weight, but also represents a moment of institutional disruption that could redefine the country's perception of fiscal responsibility. Until a few days ago, according to government sources, it was assumed that all Confis members would support activating the clause, and that President Gustavo Petro had endorsed it.

However, the noise this possibility generated in the markets and among analysts has raised last-minute doubts and cast doubt on the expected unanimous vote, while the Minister of Finance insists on the need for the country to adopt a fiscal pact focused on developing sustainable finance.

A minor change?

The fiscal rule, formalized in Law 1473 of 2011 and adjusted in Law 2155 of 2021 , establishes maximum limits for the central government's structural deficit and aims to prevent the country from incurring unsustainable debt levels, while providing confidence to markets and investors and serving as a reference for risk rating agencies and the cost of debt in Colombia.

Thus, the "escape clause," provided for in paragraph 2 of Article 60 of Law 2155, allows for the temporary suspension of the rule only in the event of extraordinary events that jeopardize the country's macroeconomic stability. Using this, the government argues that it faces a complex fiscal situation, but experts insist that the extraordinary conditions do not exist to apply this clause at this time.

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While the Ministry of Finance emphasizes that this is not an act of irresponsibility, the markets have already reacted with concern. Just this Friday, June 6th, after learning of the intention to activate the escape clause, Colombian public debt bonds suffered a sharp drop, making the country the worst-performing sovereign issuer in international markets that day, according to economist Jorge Restrepo. This behavior reflects a loss of investor confidence, not only due to the possible change in the rule, but also due to the lack of clarity regarding the medium-term fiscal plan. Analysts such as José Ignacio López, president of Anif, point out that merely mentioning the clause has already made state financing more expensive, and that suspending the rule without extraordinary events would compromise Colombia's fiscal credibility.

Among the most significant effects, analysts agree that such a decision could jeopardize the country's Flexible Credit Line with the International Monetary Fund (IMF), as well as affect its sovereign credit rating and impact the influx of foreign direct investment, especially in a context where other countries in the region are strengthening their fiscal discipline to preserve market access.

A necessary change?

Last week, during the Asobancaria convention, Finance Minister Germán Ávila Silva defended the need for structural fiscal adjustment, but stressed that it must be carried out gradually and responsibly, without paralyzing the economy or sacrificing social investment.

Ávila explained that the current deficit is not the result of excessive spending, but rather inherited obligations such as the debt to the Fuel Price Stabilization Fund (FEPC), the payment of loans acquired during the pandemic, and energy subsidies. Together, these commitments exceed $120 billion.

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The minister also criticized what he called a "dogmatic view" of the fiscal rule. "Follow-up as if it were a religion would paralyze the state," he said, while calling for a debate on the possibility of a national fiscal pact that would allow for redesigning the sustainability of public finances without slowing economic growth.

In response, Fedesarrollo's director, Luis Fernando Mejía, was adamant that "the economy is growing faster, unemployment is lower, and inflation is falling. There is no extraordinary event that justifies activating the escape clause," and he noted that doing so would send a negative signal to the markets and exacerbate risk perceptions.

The Javeriana University Fiscal Observatory offers a different view and, while acknowledging that the rule has been a pillar of sustainability, considers that the fiscal accounts were already being doctored, so "the escape clause is the only path left, but it must be accompanied by a credible fiscal consolidation plan." It warns that the deficit will be greater than projected and that the Medium-Term Fiscal Framework (MTFF) will be key to regaining credibility.

For its part, the Comptroller General's Office went further and directly questioned the legality of using this tool in the current situation, stating that "no facts are seen that jeopardize macroeconomic stability," according to Comptroller Carlos Hernán Rodríguez, who argued that activating it without justification would erode the rule's effectiveness and investor confidence.

Other experts, such as former minister Mauricio Cárdenas, raised the political tone and accused the government of trying to use public spending to influence elections, describing the decision as a way to "lose fiscal shame."

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D-Day

If the Confis approves the activation of the escape clause, the government will have a free hand to reformulate its fiscal plan without being bound by the traditional limits of the structural deficit. However, this does not exempt it from presenting a serious and verifiable Medium-Term Fiscal Framework, detailing the adjustment path and return to compliance with the rule. In this scenario, analysts and entities such as the IMF will closely monitor the quality of the new projections, the reduction of non-essential spending, and the possibility of a new tax reform in the second half of the year.

If, on the other hand, Confis does not approve the activation of the clause, the government would be forced to seek immediate spending adjustments or resort to extraordinary financing mechanisms, with more severe impacts on the economy. In any case, this Monday would mark a breaking point for the country's credibility.