Colombia’s presidential elections in June 2022 resulted in a victory for Gustavo Petro of the leftist coalition Pacto Historico. The Petro administration's main priorities are consolidating peace, social justice, environmental justice, and change for women.
Colombia has a track record of prudent macroeconomic and fiscal management, anchored on an inflation targeting regime, a flexible exchange rate, and an upgraded rule-based fiscal framework, which provide a good foundation to secure macroeconomic stability, a key ingredient for poverty reduction.
GDP strongly grew at 7.5 percent in 2022, but the economy overheated with activity above the potential, an accelerated inflation, and a high current account deficit. As the unwinding of repressed consumption comes to an end, continued monetary and fiscal tightening continues, and external demand remain subdued, GDP is projected to grow by only 1.1% in 2023 with the economy headed towards a soft landing, which is needed to correct emerging domestic and external imbalances. Growth is projected to stabilize at 2.8 percent in 2024, as external demand resumes, and inflation and interest rates come down.
Inflation reached 13.1 percent at end-2022, driven by strong demand, inflation inertia, indexation of rents, crop losses due to heavy rains, and currency depreciation.
Only a modest reduction in poverty is estimated for 2022, as inflation -especially food- eroded labor income gains, offsetting an estimated 5 percentage points of growth driven reduction in the national poverty rate. The strong La Niña phenomenon has affected over 750,000 people and damaged dwellings, as well as health, education, road infrastructure, and crops. Poverty is projected to stagnate in 2023, as lower growth hampers the recovery in labor incomes.
Colombia continues to face important structural challenges. First, the rate of potential growth is insufficient to secure a convergence in income per capita to high-income countries.
Second, Colombia remains one of the most unequal countries in the world. Economic growth alone has not been sufficient to reduce inequality, as barriers to economic opportunities persist for certain groups (including by gender, ethnicity, and geography), limiting socioeconomic mobility. Reducing poverty durably and increasing resilience among the non-poor will require expanding the coverage and adaptiveness of the social security system, reducing rigidities in inclusion to social programs, making labor markets more efficient and inclusive, and improving the level and quality of education, health, and infrastructure.
Third, a high (although declining) debt-to-GDP ratio reduces the fiscal space to respond to aggregate shocks or increase spending sustainably without additional resources.
Finally, Colombia needs to transition to net zero emissions; to a climate-resilient economy; and to a world that require less oil and coal. In addition to substantial investment and mobilization of financing, this will require stepping up productivity and technology adoption, managing the job transition, diversifying exports, reversing deforestation, and greening the energy, infrastructure, and transport sectors. Recent reforms (for example to taxes and green finance) tackle some of these issues, but further actions are needed to navigate these transitions while addressing the social and fiscal consolidation demands.
Last Updated: Apr 04, 2023