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Economic growth is projected to rise to around 3% in 2018 and 2019. Reduced corporate taxation, the historic peace agreement, better financing conditions and new infrastructure projects will boost investment. Private consumption will gain momentum as the labour market strengthens. Increasing activity and a stable exchange rate will put an end to the inflation slowdown. Inequalities and informality will remain key social challenges.
As inflation stabilises within the target range of 2-4%, monetary policy is projected to remain broadly neutral. The progressive fiscal consolidation path in line with the fiscal rule is broadly appropriate. Policies to make growth more inclusive, via better education and public infrastructure, and informality reduction with lower non-wage labour taxes, will be partly financed by the 2016 tax reform, but more revenues will be needed over the medium term.
Sizeable, but moderating, external financing needs expose Colombia to global financial volatility. Household and non-financial corporate debts are historically high. However, the financial system has been broadly resilient to the past growth slowdown. The ongoing adoption of Basel III capital standards and the strengthening of the regulation and supervision of financial conglomerates will help manage risks.