The economy will grow by 1.8% this year, with a gradual recovery to 2.7% in 2025 and 2.9% in 2026. Investment will continue recovering as financial conditions ease, though uncertainty will keep it below pre-pandemic levels. Consumption will grow moderately and export growth will remain solid. Inflation will continue to decline slowly, given high price indexation, returning to the 3% target by end-2026. Vulnerabilities from increasingly large fiscal and current account deficits are the main risks.

Monetary policy easing should continue cautiously. Given high planned fiscal deficits, which do not leave margin for risks, and recent revenue shortfalls, fiscal prudence and compliance with the fiscal rule is required. In the medium term, reducing budget rigidities and a comprehensive tax reform are needed to rebalance the tax burden from corporate to personal income, reduce tax expenditures, simplify the tax system, and tackle tax evasion.

Output rose at an annual rate of 1.6% between January and September 2024, after a sluggish 0.6% in 2023, with annual growth rising to 2% in the third quarter. After four quarters of consecutive declines, investment has started growing again, although the investment rate remains low. The labour market has been resilient, with unemployment around 10%, a low for Colombia. The strong labour market has been supporting consumption. Disinflation continues gradually with headline inflation reaching 5.4% in October.

Lower oil prices continue to subdue export and budget revenues, although the latter might see a small boost due to the recent implementation of an extractive resources surtax. Remittances are strong, due to a booming economy in main diaspora destinations, such as Spain and the United States, supporting consumption and the current account. Electricity markets remain tight due to adverse weather conditions.

The headline fiscal deficit will widen from 4.3% in 2023 to 5.6% in 2024 and stay above 4% until 2026, according to government plans. While these plans are in line with the fiscal rule, there is a risk for 2025 that revenue shortfalls will force the government to make ad-hoc spending cuts which would hurt already weak public investment spending. As in recent years, planned revenues are partly based on unlegislated measures or rely on significant improvements in tax administration that so far have not materialised. Monetary policy remains restrictive with the policy rate at 9.75% in November. The central bank is expected to continue its gradual easing cycle. The real neutral rate, estimated around 2.5%, should be reached in late 2026 when inflation returns to its 3% target.

Growth is expected to recover in 2024 and reach its potential of just under 3% in 2025 and 2026. As financial conditions normalise and past temporary shocks to the housing and infrastructure construction sectors dissipate, investment will partially recover from a historical low of 17% of GDP to around 19% in 2026, still below the pre-pandemic average of 21%. Consumption will remain moderate after its post-pandemic surge, held back by high indebtedness and slow credit growth. With growth around its potential, the unemployment rate will stay around its current level. Exports will grow moderately given external demand and low oil prices, while investment goods drive higher import growth, widening the current account deficit. Greater domestic and global uncertainty could exacerbate pressures on the exchange rate and on interest rate spreads, while higher oil prices due to geopolitical tensions would boost export and fiscal earnings. The twin fiscal and current account deficits increase vulnerability to external shocks. A reform in Congress seeks to significantly increase the share of tax revenues that goes to subnational governments, generating a fiscal imbalance and risks unless subnational governments improve their capacity and take responsibility for implementing a higher share of spending. Faster implementation of the reindustrialisation and energy transition policies could boost investment more than anticipated.

Fiscal prudence is required to maintain the planned path of fiscal consolidation, ensure debt sustainability, and comply with the fiscal rule. Compliance with the fiscal rule and avoiding cuts in public investment could be achieved by gradually phasing out diesel subsidies, as commendably done with petrol subsidies in 2023, distortive and ill-targeted public utilities subsidies and improving the targeting of social spending. In the medium term, fiscal space needs to be rebuilt. Spending efficiency could improve based on systematic spending reviews. A comprehensive tax reform would reduce tax exemptions, shift the tax burden from corporate income taxes to a broader personal income tax base, tackle tax evasion and reduce budget rigidities. This would increase revenues, stimulate investment, and promote progressivity in the tax system. Expanding access to early childhood education, especially in rural and vulnerable areas, and increasing elderly care services would help increase Colombia’s low female labour force participation rate and thus increase the utilisation of all talents in the labour market.