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No good deed goes unpunished

9 October 2015 By Martin Langfield

Colombia’s government may be about to discover that peace and fiscal virtue don’t necessarily mesh. The Andean state is on the verge of ending a half-century-long war with leftist FARC rebels that has killed 220,000 people and displaced millions. Recovering from the conflict may cost up to $3 billion a year. That would not have posed that much of a dilemma for Latin America’s fourth-largest economy – until recently.

The plummeting oil price over the past year has taken its toll. Crude is the country’s biggest export, accounting for roughly a fifth of the government’s budget. Its contribution in 2015, though, is set to more than halve to $3.2 billion from $6.6 billion, according to finance ministry data. As a result, the economy has slowed. The central bank now estimates GDP will grow by 2.8 percent this year, compared to the annual expansion of at least 4 percent since President Juan Manuel Santos took office in 2010.

Santos has developed a deserved reputation for being careful with the country’s purse strings. His administration has already responded to this year’s oil-driven slowdown by cutting $2 billion from spending.

The pledge that he and top FARC commander Rodrigo Londoño made last month to end their country’s war within six months comes with a price, though. Minefields will need clearing. Widespread mental trauma will need proper treatment. Former fighters will need help to avoid being sucked into gangs and crime.

The overall cost of war’s end could hit 90 trillion pesos ($30 billion) over 10 years, one Colombian senator said last year. Somewhat more sober estimates cited by Itaú Unibanco put it at 0.5 percentage point of GDP a year for several years – $1.9 billion a year, using 2014’s GDP of about $380 billion.

Santos reckons the cost of a lasting peace will be “minimal,” as his government already funds some reparations and programs to rehabilitate ex-combatants. Much-needed infrastructure investment to boost productivity and fight poverty will be funded by public-private partnerships that won’t directly affect the country’s budget. Some may come from abroad, as his finance minister says he will seek “significant” international contributions to pay for peace.

There would be some justice in asking for reconstruction help from countries whose citizens buy another of Colombia’s exports – cocaine, which helped fund FARC. But that may end up being more hope than substance. Failure to get it could leave Santos and his self-described “very strict” approach to fiscal discipline in a dilemma.


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