OECD Economic Outlook, Volume 2022 Issue 2

Colombia

GDP growth is projected to slow sharply from 8.1% in 2022 to 1.2% in 2023, and then edge up to 1.7% in 2024. Consumption and investment will remain subdued as households and firms cope with high inflation and interest rates and uncertainty about the economic outlook and economic policy. Inflation is set to exceed 10% this year but is projected to gradually return to the 2-4% target range by 2024.

Monetary policy is expected to remain tight, with policy rate increases stopping once inflation stabilises, and some policy easing starting in 2024. Boosting public revenues will lower the budget deficit under current spending plans, which include a necessary increase in social expenditure. Widening social protection coverage and simplifying the corporate tax regime are needed for stronger and more inclusive growth.

The economy is cooling down

The economy expanded by more than 10% year-on-year during the first half of 2022, mainly driven by vigorous private consumption on the back of a strong employment recovery and consumer credit growth. The recovery of investment also picked up its pace. In September, the unemployment rate stood at 10.7%, only marginally above pre-pandemic levels. Wages in manufacturing and retail trade were up 10‑11% year‑on‑year in August, slightly above the 10% minimum wage increase in 2022. Consumption fell in the third quarter, and consumer confidence deteriorated further in October. Annual consumer price inflation reached 12.2% in October and is becoming increasingly entrenched, with the core measure at 8.4%. Prices have risen particularly steeply for food and energy, as well as for manufactured goods. One-year ahead inflation expectations are around 7%, and two-year expectations are 4.8%. The depreciation of the peso, which declined almost 10% against the US dollar in October alone, has increased the cost of imports and inflation. Sovereign risk premia have risen significantly since 2021.

Colombia

Source: DANE; BRC; CEIC; and OECD Economic Outlook 112 database.

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Colombia: Demand, output and prices

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Colombia’s gas and electricity markets are decoupled from Europe. Regulated prices of electricity, most of which is produced from hydropower, will be cut by 4-8% in 2023. The energy crisis is impacting Colombia mainly through the price of oil (which makes up a third of its exports), boosting exports and fiscal revenue. This revenue will help replenish the accumulated deficit of the fuel price stabilisation fund (2% of GDP in 2022 and 1.5% in 2023), a pre-existing scheme which is now used to limit the pass-through to domestic fuel prices. In addition, small gradual increases in the regulated petrol price have taken effect from September.

Fiscal and monetary policy will remain tight

Monetary policy has been significantly tightened during 2022, with seven consecutive increases of at least 100 basis points each. The Central Bank of Colombia is expected to continue raising policy rates by an additional 150 basis points until early next year and then maintain them unchanged until mid‑2024. Improving fiscal outcomes will shore up confidence, after several years of large fiscal deficits. Public debt reached 61% of GDP in 2021, above the medium-term debt anchor of 55% stipulated in the fiscal rule. Central government expenditure will increase by 15% in value terms in 2023, due to welcome increases in social spending. Boosting revenues would enable gradual fiscal consolidation while keeping space to support the most vulnerable. Two tax reforms, one approved in 2021 and one passed by Congress in October, are expected to bring close to 3% of GDP of additional revenue once fully implemented by 2024.

Growth is projected to weaken

The economy will slow significantly in 2023 and 2024. Domestic demand will weaken in 2023, as high inflation, interest rates and uncertainty weigh on consumers and investors. Exports will keep growing albeit more slowly, benefitting from improved competitiveness and the demand in advanced economies for non‑Russian oil. Import penetration will decline towards its pre-pandemic level. Consumption and investment will pick up during 2024 when inflation declines more markedly and monetary policy starts to ease. Inflation will fall to the upper limit of the target band (4%) by the end of the projection horizon. Slower disinflation, or a stronger-than-expected rise in interest rates in advanced economies, would prompt the central bank to push interest rates higher and for longer. On the upside, higher oil prices would bring additional fiscal and export revenues.

Streamlining the tax and benefit system and supporting the green transition

Increasing the coverage and amount of cash benefit and pension programmes would reduce poverty and inequalities. There is further scope to improve the design of the tax and social protection system by replacing social security charges on formal sector wages with general tax revenues to reduce informality. Reducing tariff and non-tariff barriers to trade, starting with those items where the current barriers are highest, would boost productivity. Gradually reducing dependence on oil and gas is needed for the green transition. It would need to be accompanied by more investment in renewables and the phasing out of fossil fuel subsidies to lower domestic consumption. This would help lower emissions and diversify the economy. Defining a timeline for raising and expanding the carbon tax, while channelling part of the revenues towards low-income households, would also support the green transition.