Macroeconomic policies strike an appropriate balance. Fiscal policy is expected to be moderately contractionary to reduce the structural fiscal deficit to 1% of GDP by 2022, in line with the fiscal rule. This strikes an appropriate balance between meeting social needs, supporting gradual recovery, the need to ensure debt sustainability and creating space for dealing with future shocks. Monetary policy remains moderately accommodative, as inflation is near the target and inflation expectations are anchored.

A key downside risk to the outlook is a spillover of financial volatility experienced by some emerging markets. International volatility driven by the trade and political tensions could impact growth. Stronger (weaker) oil or coal prices could boost (reduce) investment. The tourism sector holds potential for upside surprises.

The dependence on volatile revenues and exposure to global financial shocks requires putting debt on a declining path relative to GDP. Current fiscal plans are expected to achieve this, but the debt trajectory is highly sensitive to interest rates, growth, exchange rate and oil prices. Spending needs, such as those related to infrastructure gaps, social programmes or the peace process, are high. Further measures to improve spending efficiency and the tax mix are needed.

The tax mix could be further improved (Figure A) by broadening the bases of personal and VAT taxes, reducing the corporate tax rate and eliminating its numerous tax exemptions. Further revenue could come from environmental taxes and from strengthening tax administration to reduce tax evasion.

Social programmes and tax exemptions benefiting households and firms contribute little to boost equity or productivity. A spending review would help to identify inefficient programmes with lack of cost-effectiveness in terms of impact on equity or productivity. These should be reformed or phased out.

Growth potential has fallen substantially in the last decade, indicating that the traditional drivers of growth, largely capital-intensive extractive industries and favourable terms of trade, have reached their limits. Further advances in living standards will hinge on raising productivity, which in turn requires improvement in the business regulations, more competition and further openness to trade.

Labour productivity is low, even compared to other countries in Latin America (Figure B). Productivity is hindered by lack of competition in key sectors, such as transport or telecommunications. The competition framework has improved but would be reinforced with higher and more dissuasive sanctions against anti-competitive behaviours. Widening the scope of regulatory impact assessments and making a greater use of one-stop shops would reduce high regulatory burden.

Trade openness is low. Despite efforts to promote trade integration via trade agreements, exports remain low and large parts of the economy are shielded from international competition. The use of non-tariff barriers has increased. Tariffs have fallen but remain higher than in regional peers. There is room to diversify exports and make trade a source of growth and productivity enhancing competition.

Costs to exporting are high due to infrastructure gaps and weak logistics. Good progress is being accomplished to improve primary roads, via the 4G initiative. Yet, gaps in infrastructure remain large. Improving customs and ports logistics would improve competitiveness. Eliminating the trucks scrap scheme and improving regulations in freight transport are also priorities.

Innovation performance is hampered by low investment in R&D and complex support programmes. Additional funding has become available, but a large part remained unused due to weak governance. Efforts to simplify the innovation system and reduce the fragmentation of support programmes are warranted. Going digital, by promoting further adoption and use of ICT technologies, would also boost firms’ competitiveness and the connectivity of regions.

Access to finance has improved but financial markets are less developed than in other countries in the region. Domestic credit to the private sector has increased but interest rate margins are high. Inducing more competition in the banking sector, phasing out the financial transaction tax and reducing regulatory requirements for banks to hold certain instruments, would help to reduce the cost of bank finance.

Informality has been decreasing but remains high (Figure C). Actions are needed in several policy areas, including reducing non-wage labour costs, still one of the highest in Latin America. Decreasing firms’ registration costs and simplifying the registration of workers to social security would facilitate formalisation of firms and jobs. Reviewing the minimum wage to achieve a more job-friendly level and improving quality and relevance of education and training should be also part of the strategy.

Access to high-quality education and training is a powerful tool to increase access to high-quality jobs. While Colombia has made great progress in increasing attainment, there is still a long way to go to improve access and quality and reduce dropout rates, notably in rural areas.

There is a need to ensure that schools deliver high-quality education to those in need. The Government needs to prioritize increasing coverage and quality in early education to improve student performance and reduce gaps in learning achievement. Improving quality of basic education, especially in rural areas, is needed. Shaping the working conditions and professional opportunities in rural schools and providing adequate supply of high-quality initial teacher education is essential to attract high-quality teachers to rural areas.

Enhancing the vocational education and training system can improve skills and inclusiveness. Strengthening governance of the vocational and training system would increase quality and relevance. This implies reducing fragmentation and developing a single institutional framework with a coherent and transparent set of objectives. Strengthening quality assurance and accreditation, and implementing the national qualifications framework should also be priorities.

Despite progress, gender gaps at work and education remain sizeable. Actions to strengthen parental leave for mothers and fathers, flexible work arrangements and improving access to childcare, notably in rural areas, would support women to access high-quality jobs.

Social policy is not well targeted (Figure D). Cash transfers to the poor are low and a large share of subsidies, such as those related to pensions and housing, goes to the relatively rich. Coverage in rural areas is low. Higher equity could be achieved by reallocating more spending, such as higher cash transfers, towards vulnerable populations, with a focus on rural areas and ethnic minorities. Concentrating public resources into few well-evaluated programmes, would also help.

Reforming the pension system is urgent to reduce old-age poverty and ensure sustainability. Increasing the low retirement age, notably for women, and tying it to increases in life expectancy, would foster sustainability. Coverage and the level of benefits of Colombia Mayor, the non-contributory component of the system, should be increased. Raising the number of years of earnings on which pensions income are based would help to finance an increase in old-age income support.