OECD Economic Outlook, Volume 2025 Issue 1

Colombia

Growth will recover to 2.5% this year and 2.6% in 2026. Investment will continue growing as it recovers from a historical fall and as financial conditions ease, though uncertainty and a weak housing market will keep it subdued. Consumption and exports will moderate due to US tariffs and a global economic slowdown. The decline in inflation, temporarily interrupted in early 2025, will resume but inflation will stay above the 3% target throughout 2026.

Monetary policy should continue its data-dependent, prudent easing cycle to ensure durable disinflation towards target. The fiscal deficit is projected to remain high in 2025 and 2026, requiring additional fiscal consolidation to abide by fiscal rules, debt stabilisation, and a reduction of high debt servicing costs due to large risk premia. In the medium term, reducing budget rigidities and a comprehensive tax reform are needed to rebuild fiscal space. Easing administrative burdens and improving infrastructure would help revitalise productivity and investment growth.

Growth sustains its momentum

In 2024, growth averaged 1.6% year-on-year but picked up to 3.7% (saar) in the final quarter. This momentum was largely sustained in the first quarter of 2025. Investment continued to recover from its sharp fall in 2023 and remained a main driver of growth. Soft indicators give mixed messages, with business sentiment fluctuating around its slightly upward 12-month trend but consumer sentiment softening since February. The labour market remains strong, with unemployment at 9.1% in March. Inflation has hovered around 5.2% since November, although core inflation continued to fall. With a slower-than-expected path of disinflation, inflation expectations for end-2025 have increased, from 3.9% in October to 4.8% in May.

Colombia

1. EPU data represent 3-month moving averages and incorporate the domestic press coverage.

2. ICE BofA emerging markets USD-issued sovereign bond option-adjusted spreads are the yield difference over US Treasuries, in basis points. Embedded options are provisions included with some fixed-income securities that allow the investor or the issuer to do specific actions, such as calling back the issue. The OAS helps investors compare a fixed-income security's cash flows to reference rates while also valuing embedded options against general market volatility.

Source: OECD Economic Outlook 117 database; Bank of Spain; and OECD calculations.

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Colombia: Demand, output and prices

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The United States is Colombia’s main trading partner accounting for 28% of goods exports, the majority (60%) of which are minerals and oil products that continue to be exempt from tariffs, resulting in an effective US tariff rate on imports from Colombia of around 5%. Colombia has maintained its tariffs from the bilateral free trade agreement with the United States. The peso depreciated strongly (around 5%) in April but largely recovered in May. Lower oil prices will suppress exports and budget revenues, increasing pressures on an already tight fiscal position.

Fiscal deficits and monetary policy rates will remain higher for longer

The fiscal position has deteriorated sharply in 2024, with a 6.8% headline deficit and a 2.4% primary deficit. Deficits are projected to stay high at 6% in 2025 and 5.6% in 2026 based on current spending plans and medium-term revenues estimates. The government assumes a short-term increase in tax revenue of 2.4% of GDP from unidentified measures. Unless there is evidence that tax collection significantly exceeds its current level, spending cuts of at least 0.9% of GDP are needed to comply with the fiscal rule in 2025. The central bank paused its monetary easing cycle in the first quarter when inflation stabilised but resumed it with a 25 basis points cut in April. With a continuation of the cautious, data-dependent easing cycle, the policy rate is projected to decline to 7% by the end of 2026.

Growth will be moderate, but with increasing downside risks

The economy will grow at moderate rates of 2.5% in 2025 and 2.6% in 2026. Investment will continue its recovery from a fall to below 17% of GDP, but uncertainty and a housing market downturn will prevent a full return to the pre‑pandemic investment rate of 21%. Uncertainty will similarly subdue private consumption in 2025. With growth close to potential, unemployment will stay around its current level. Import growth will remain strong, driven by investment goods, but exports will moderate, given the high exposure to the United States and the global economic slowdown. Inflation will gradually slow to 4.5% year-on-year by late 2025 and 3.8% by the end of 2026. Strong remittances and reinvested profits will keep the current account deficit contained. Risks are tilted to the downside. Uncertainty has already put downward pressure on the exchange rate in recent weeks, which could intensify, adding to inflationary pressures. Larger fiscal deficits and a failure to comply with the fiscal rule would further increase risk premia and already high sovereign interest payments and dampen investor confidence.

Fiscal discipline would help mitigate uncertainty

Cuts to planned expenditure are required to intensify fiscal consolidation, comply with the fiscal rule, and ensure debt sustainability. Diesel subsidies could be removed, following earlier commendable measures for petrol, and social spending could be better targeted. Spending reviews could help identify further room for raising spending efficiency. A comprehensive tax reform, involving reductions in tax expenditures, a shift from corporate to personal income taxes, tackling tax evasion, and reducing budget rigidities, would also help increase fiscal space. Measures to restore investment and revitalise productivity growth include lowering administrative burdens on businesses, improving transport infrastructure, building subnational government capacities, and strengthening macroeconomic governance, transparency, and policy certainty.