OECD Economic Outlook, Volume 2025 Issue 2

Colombia

The economy will grow by 2.8% this year, 2.8% in 2026, and 2.9% in 2027. Investment will resume its gradual and partial recovery as financial conditions ease, but uncertainty will keep it muted. Private consumption will be sustained by lower inflation, a strong labour market and robust remittances. The external sector will contribute less, as oil and mining exports are constrained by domestic production and low oil prices, and imports are strong. Inflation is expected to fall but remain above the 3% target through 2027.

Monetary policy is projected to be tight to ensure a return of inflation to target. While fiscal consolidation will resume, fiscal deficits are projected to remain well above 4% of GDP as the fiscal rule remains suspended. To stabilise debt and restore investor confidence, a more ambitious consolidation strategy is needed, including a comprehensive tax reform and reducing budget rigidities. A return to the fiscal rule and the re‑establishment of a credible medium-term debt anchor will also be key.

Growth has been sustained, inflation is rising again

In the third quarter, the economy grew by a seasonally adjusted 3.4% year-on-year (and 5% in annualised quarterly rates) led by buoyant private consumption and government spending and a continued, though volatile, recovery of investment. This was a further improvement from the 2.5% year-on-year growth in the second quarter. Consumer sentiment for October suggests this momentum has been sustained. The labour market remains strong, with unemployment at or below 9% since March. Headline inflation remains high at 5.5% in October, increasing for a fifth consecutive month. Price increases are broad-based, with core inflation at 5%.

Colombia

1The horizontal dashed black line indicates the target inflation rate (3%), and the shaded area the tolerance band around the target.

Source: Central Bank of Colombia; DANE; and OECD Economic Outlook 118 database.

Statlink

Colombia: Demand, output and prices

Statlink

Goods exports to the United States (28% of total) are subject to an effective tariff rate of around 5% (and a statutory rate of mostly 10%), with so far limited impact although trade policy uncertainty remains high. The peso has appreciated against the US dollar, by about 7% since early September. While adequate international reserves and a flexible exchange rate provide buffers, the cancellation of the Flexible Credit Line with the IMF heightens vulnerability to global risks. The country risk premium remains elevated relative to regional peers.

Monetary policy is restrictive and fiscal consolidation is planned, but deficits are very high

In 2024 the deficit rose to 6.7% of GDP and in June 2025 the government invoked the escape clause to temporarily suspend the fiscal rule to preserve spending on social programmes and public investment amid weaker revenues and lower-than-expected growth. Headline deficits are projected to reach 7.1% of GDP in 2025, 6.2% in 2026 and 4.9% in 2027, in line with the government medium-term fiscal plans of a return to the fiscal rule in 2028. However, deficits will remain large over 2026-27, and there are significant risks of fiscal slippage, as the government plans require immediate spending cuts, revenue performance is uncertain, and recent debt management operations have increased currency risk. The central bank has reduced the policy rate once this year, by 25 basis points in April to 9.25%. Monetary policy is expected to remain appropriately restrictive, as inflation is projected to stay above target throughout 2026-27, and there are risks from expansionary fiscal policy and a significant increase of the real minimum wage leading to higher inflation. Further policy rate reductions are projected from mid-2026 when inflation is on a sustained downward path, with the rate declining to 6.5% by the end of 2027.

The economy will grow at a moderate pace, but risks abound

The economy will grow at a moderate pace, close to its potential. The gradual recovery of investment will continue but remain partial and significantly below the pre-pandemic investment rate of 21-22% of GDP, reflecting uncertainty and poor performance of the construction sector. Private consumption will remain solid, and exports subdued, due to supply constraints and high international uncertainty. Fiscal consolidation will be felt in subdued government consumption and investment. In 2027, the effects of monetary easing and a normalisation of trade will support growth. Risks are tilted to the downside, including continued fiscal slippages, which would further raise borrowing costs and dampen business and consumer confidence. Persistently large fiscal deficits also heighten vulnerability to shifts in global financial conditions, which could trigger capital outflows, higher risk premia and exchange rate pressures. Further changes in US trade policy could weigh on exports. Domestic policy uncertainty might increase in the lead‑up to the 2026 general elections. Higher oil prices would support export and fiscal earnings and might incentivise additional investment in production.

Restoring fiscal discipline is essential to sustain growth

Given the substantial increase of the fiscal deficit and the suspension of the fiscal rule, decisive and credible fiscal consolidation over 2025-27 is needed to stabilise debt and preserve the credibility of the fiscal framework and investor confidence. Consolidation could be achieved through higher and more efficient revenue mobilisation and better spending prioritisation, including by phasing out low‑impact subsidies and improving the targeting of social programmes, while protecting public investment. A comprehensive tax reform, gradually implemented to improve predictability, would include reductions in inefficient tax expenditures, a shift from corporate to personal income taxes, tackling tax evasion and reducing budget rigidities, including by reforming the fiscal transfer system. The tax bill debated in Congress goes in the right direction by eliminating distortive tax expenditures and exemptions, expanding carbon taxes, slightly broadening personal taxation and strengthening the tax administration. Reducing the cost of doing business through simpler business registration procedures, tax, and insolvency regimes for small businesses, would reduce informality and foster productivity.