Colombia

The economy is expected to undergo another year of modest growth, projected at 1.2% in 2024, before picking up to 3.3% in 2025. Total investment is expected to recover partially as financial conditions ease, but uncertainty will continue to put a drag on private investment. Inflation is slowing gradually but remains high and will only fall within the target range in the latter half of 2025.

Given falling inflation and a negative output gap, monetary policy should continue its prudent and data-based easing cycle, ensuring a gradual return of real interest rates towards neutral levels. Fiscal plans foresee an increase of public debt in 2024, with several factors suggesting compliance with the fiscal rule might be a challenge. Adhering to the fiscal rule would ensure convergence to the debt anchor and avoid an increase in financing costs. Clearer incentives for investment would boost growth while supporting the green transition and strengthening productivity.

GDP grew moderately by 0.6% in 2023, partly due to a necessary normalisation from the rapid pace in earlier years. Consumption is 20% higher than in 2019 and remains resilient. By contrast, investment has plummeted from near 23% of GDP before the pandemic to below 18% in 2023, reflecting policy and regulatory uncertainty in key sectors, administrative changes that slowed the infrastructure and housing projects pipeline, and a high cost of credit. The labour market has mildly deteriorated in recent months. Consumer and business confidence remain weak. Restrictive monetary policy, with policy rates at 12.25% in March, is contributing to disinflation, with headline inflation falling to 7.4% in March.

Lower oil prices have led to a moderation of export and fiscal revenues. The welcome and necessary phasing out of petrol subsidies in 2023 temporarily slowed disinflation but removed distortions and future fiscal contingency risks. The current account deficit halved in 2023, increasing resilience to external shocks. Droughts caused by El Niño have resulted in low reservoir levels, increasing risks of electricity shortage. By contrast, El Niño’s expected positive impact on food prices has not materialised so far.

The Central Bank started its easing cycle in December 2023, cutting the policy rate by a total of 100 basis points since. Policy rate cuts are projected to continue through 2025, with real rates returning to a neutral stance from mid-2025. The authorities plan an increase in the headline fiscal deficit from 4.2% of GDP in 2023 to 5.3% in 2024, driving up public net debt from 53% to 57% of GDP, within the boundaries of the fiscal rule. Risks of non-compliance with the fiscal rule are high even though the government is strongly committed to it. The autonomous fiscal council warns that treating one-off revenues as permanent would result in non-compliance with the fiscal rule, which is based on a structural primary deficit target. Additionally, there are risks of revenue shortfalls from uncertain tax litigation and tax administration measures, which might require unplanned spending adjustments.

Growth is projected to remain modest in 2024 and strengthen in 2025. Private consumption will remain solid, supported by disinflation, monetary policy easing and significant remittances. Investment will rebound from the second half of 2024 as financial conditions gradually ease but will remain subdued. Exports will grow moderately, given subdued external demand and past declines in oil prices. Inflation will continue to fall and is projected to converge to the 2-4% target range by the second half of 2025. Risks around the outlook are substantial including greater uncertainty and prolonged tight global financial conditions, which might lead to a resumption of exchange rate volatility and higher risk premia. Earlier resolution of policy uncertainty regarding implementation and the funding needs of social reforms, establishing regulatory certainty about the energy transition, and a faster-than-expected implementation of the ongoing reindustrialisation policy could boost investment more than anticipated.

Maintaining fiscal consolidation and adhering to fiscal rules is needed to prevent rising debt levels and address investor concerns about fiscal sustainability. Revitalising investment is essential not only for short-term growth but also for enhancing Colombia’s growth potential, and is needed for accelerating income convergence to advanced countries and reducing poverty. The success of the government’s ambitious plans to boost productivity and usher in the green transition rests on the ability to crowd in private investment. A continued demonstrated commitment to the traditionally strong macroeconomic framework, including compliance with the fiscal rule, would reduce policy uncertainty and support the investment recovery. Lowering the cost of business formality, improving public infrastructure, improving access to finance and streamlining the fiscal transfer systems could boost growth in the medium term.

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