Subnational Capital Markets in Developing Countries: From Theory to Practice

By John Petersen; Mila Freire | Go to book overview
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Chapter 16
Latin America and the Caribbean
Colombia

Despite fiscal difficulties, the country has succeeded in using the
private market mechanism to raise funds while limiting
local borrowing
.

Rodrigo Trelles Zabala


Lessons

Colombia has made a significant shift—though with restric-
tions—toward decentralization, but the consequent shift to sub-
stantial transfers has caused fiscal imbalances for the central
government. Strong central control curbed an earlier accelera-
tion in subnational borrowing. Continuing deficiencies in the
regulatory framework surprisingly have not led to widespread
fiscal difficulties, though decentralization and mandated spend-
ing have continued to strain fiscal balances.

Use of credit by subnational governments grew sharply in the
1990s because of inflexibility in local expenditures. Borrowing
restrictions were lax because of legislated mandates to increase
central transfers to finance required expenditures, and private
banks, provided with an intercept mechanism, were content to
lend. As a result, subnational borrowing doubled relative to
GDR The substantial increase in debt led to enactment of a law

-279-

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