A medium-term fiscal framework with many assumptions

The Medium-Term Fiscal Framework is based on an international context, in which assumptions are made about the possible evolution of the international economy and the oil market, both of which are used as inputs to make projections for the Colombian economy.

The Fiscal Framework projects the Colombian economy from 2023 to 2034, that is, eleven years, which, as an econometrician, I consider to be a very risky bet in a world as volatile as that of 2023 and the following years.

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If making one-year projections is already a problem, it is almost a guessing game when we go beyond three to four years.

On the other hand, when projections are made for any variable, alternatives to the assumptions are used to establish a band of possible values, a band that establishes minimum and maximum values.

This does not appear in the Medium Term Fiscal Framework, which is a supremely serious error because it does not give any reliability to the projections presented there. And in the Colombian situation this is very relevant in everything that has to do with oil, coal, gold, silver and platinum.

Oil assumptions

Table 3.1 of the Medium Term Fiscal Framework document presents the main macroeconomic and fiscal variables for the period 2023 to 2034.

Interestingly, from 2026 onwards, GDP [gross domestic product] growth rates for Colombia and trading partners and external interest rates are held constant, which is an error.

That is why I affirm that placing projections after 2026 does not make econometric sense and is a very serious flaw in the document.

Colombia’s oil production projections are not explained, it is not known where these data came from.

If the sum of the production estimates from 2023 to 2030 is made, it gives a figure of 6,704 million barrels that have no relation whatsoever with the data known today.

There is a very high overestimation that has no reality with the reserves at the end of 2022 of 2,074 million barrels, nor with the possibilities of new production with existing contracts and what the government is playing with so much in terms of recoveries or secondary recovery (Table 1).

Table 1. Projections of oil production and GDP growth in Colombia and trading partners

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The new contracts signed in 2022 will only start production between 7 and 14 years, i.e. between 2030 and 2037. In other words, they cannot be considered for production prospects until 2030.

Only the old contracts in operation count, which I have calculated at 1.88 billion barrels, and I foresee about 1.2 billion barrels of secondary recovery for a total of 5.07 billion barrels of total reserves, but it must be taken into account that the production of the current fields is decreasing.

It is surprising how production of 754 million barrels in 2022 jumps to a maximum of 825 million barrels in 2026, for a total of 3175 million barrels from 2023 to 2026, that is, it implies that at least 2 billion barrels of reserves should appear in these four years, assuming a decline rate of 10% of the current fields in production, which has never happened in the period 2007 to 2022.

The average of reserves discovered from 2008 to 2022 was 362 million barrels and from 2019 to 2022 318 million barrels, compared to 500 million on average that should appear from 2022 to 2026, according to the Medium Term Fiscal Framework.

These are fictitious projections, overestimated, to imply that no new oil exploration is needed, which seems to me to be intellectual dishonesty without a name.

If these production figures are wrong, all the results presented in the Medium Term Fiscal Framework in terms of economic growth, fiscal revenues, trade balance, fiscal balance, in short, all the variables fall down.

Conclusions

There is much doubt about the assumptions of the Medium Term Fiscal Framework, especially in the assumptions for the oil sector.

The government should be asked to explain where the figures for future oil production come from, which are not consistent with what is known about reserves, possibilities of finding oil with existing contracts and assumptions about secondary recovery.

On the other hand, the projections from 2027 to 2034 do not make any sense, there is no reason for the variables of external interest rates, growth of trading partners and GDP growth to remain constant.

It is a document with so many assumptions that a broader discussion is required to analyze them. I repeat, it does not work with bands, which is the correct thing to do when there are so many alternatives in the assumptions, which leaves many doubts about the reliability of the document.

Odebrecht, Zuluaga and Santos