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Colombia’s economy has potential for sustained moderate growth in the long term, given its wealth of natural resources, relatively developed regulatory system, and stronger institutions compared to other Latin American countries. However, internal conflict since 1964 has fueled a large informal economy, hindering productivity growth. Nevertheless, the 2016 peace accord with FARC guerrillas has improved security conditions and attracted new foreign investment. Despite challenges, we would assume an annual GDP growth rate of 3.1% could be realized in the coming decade, basing on the IMF analysis. However, deteriorating demographic profile and limited efforts to catch up technologically with advanced economies is likely to dampen GDP growth in the long run.
Colombia faces challenges such as large poverty, limited access to financing, high competition from cheaper Asian goods, and high crime rates. Colombia’s GDP per head in 2021 was the lowest among the region’s six largest economies, and it is still a long way ahead to developed-income country status. Colombia’s economy relies heavily on a small number of commodities for export income, making it vulnerable to fluctuations in global demand and prices. Despite these challenges, future governments are expected to maintain orthodox policies and improve infrastructure to allow businesses to compete internationally.
The current president, Gustavo Petro, is anticipated to maintain a pragmatic approach to governance, enabling his administration to make progress on some of its agenda. Although the left-wing Pacto Histórico coalition is expected to fall apart prior to the October 2023 local elections, it is unlikely to put political stability at risk overall. However, economic policy under Mr. Petro is projected to be more state-led and interventionist than the previous government. In 2023, the economy will experience a slowdown, growing at just a third of that in 2022, and growth will continue to be modest after it due to political uncertainty and stricter regulation undermining business confidence, as well as a global economic downturn restricting exports in the near future.
Despite Colombia’s fiscal deficit expected to narrow only slightly in 2023-24, a tax reform bill approved in November 2022 will generate extra revenue for social spending. Gustavo Petro’s pledge to reduce the economy’s dependence on hydrocarbons will hinder private investment in the sector, although prospects for investment in renewables may improve under his administration. Currency volatility will persist amid investor concerns regarding economic policy direction and US monetary tightening, but foreign reserves will help offset external vulnerabilities caused by a relatively large current-account deficit.
Colombia’s long-term potential for growth depends on its ability to address structural factors such as corruption, drug-trafficking, and vested interests’ lobbying power, as well as its inadequate infrastructure. Demographic changes will decrease growth, making productivity improvements more important. While political instability and policy uncertainty pose potential risks, the Colombian government’s efforts to enhance trade integration, reduce poverty, and improve institutions should improve competitiveness and support long-term economic growth.
GDP Data is updated in January, 2023. Figures below represent GDP contribution with the expenditure approach by segment. Data is sourced from World Bank, IMF, and local government and refactored by our team. Forecasted data is from EIU.
Colombia is expected to enter a technical recession due to domestic monetary policy tightening and high inflation. Political stability is likely to be maintained due to Mr. Petro’s pragmatism, but the policy outlook is uncertain, which will keep investment subdued in 2023. External demand for Colombia’s exports will weaken due to a global economic slowdown, and the negative impact of monetary tightening and high inflation on private consumption will only be partially offset by increased social spending. As a result, GDP growth is expected to decelerate from 7.6% in 2022 to 2.2% in 2023, followed by a modest recovery starting in the second quarter of 2023.
Although the global and US economies are expected to recover modestly in 2024, weak private investment is likely to preclude a more robust recovery, and real GDP growth is expected to average 3.2% per year after 2023. Mr. Petro’s commitment to reducing Colombia’s dependence on oil and coal may involve stricter mining sector regulations, which could negatively impact economic growth.
GDP Data is updated in January, 2023. Figures below represent GDP contribution with the expenditure approach by segment. Data is sourced from World Bank, IMF, and local government and refactored by our team. Forecasted data is from EIU.
Mestizo and White 87.6%, Afro-Colombian (includes Mulatto, Raizal, and Palenquero) 6.8%, Amerindian 4.3%, unspecified 1.4% (2018 est. by CIA)
Spanish (official)
Christian 92.3% (predominantly Roman Catholic), other 1%, unspecified 6.7% (2020 est. by CIA)
Colombia has had a history of political violence since it became a republic in 1819. The power-sharing deals between liberals and conservatives in the 1960s were unable to address the country’s development needs, leading to the emergence of leftist rebel groups. Peace talks with the FARC guerrillas resulted in an agreement in 2016 and a revised agreement was approved by Congress in 2020. Talks with the Ejército de Liberación Nacional (ELN) guerrilla group, which were paused in 2019, resumed in November 2022. Colombia is a unitary republic with a president at the head of the executive branch and Congress comprising the Senate and the Chamber of Representatives holding legislative power. The judicial system includes several courts.
The new government under Gustavo Petro will focus on expanding the state’s role in the economy through increased social spending, greater state intervention, and increased protectionism. The government will prioritize compensation for poor families affected by high inflation rates, likely through raising the value of cash transfers. Although some uncertainty regarding the direction of policymaking persists, the president’s moderate stance is expected to prevent radical changes. The diluted tax reform that Congress approved in November 2022 and the preliminary discussions regarding the pension system reform suggest a pragmatic approach by the Petro government. However, the proposed measures against the oil industry may hamper investment and oil production, having significant repercussions for economic growth.
The fiscal consolidation under Mr. Petro is expected to be slow, and he has pledged to use the proceeds from the tax reform to boost social spending rather than strengthening the public finances. The president’s moderate stance has been reflected in the diluted tax reform that Congress approved in November 2022. Despite the inconsistent statements by members of the ideologically heterogeneous cabinet, the president’s campaign promises suggest that policy changes will be less radical. The government plans to reform the country’s mixed pension system to improve the sustainability of the deficit-saddled public-sector pillar and introduce a benefit for about 3 million elderly people who are not currently entitled to a pension. The original proposal by Mr. Petro, however, has raised concerns in financial markets regarding the viability of private pension operations and the government’s fiscal results. The mandatory contribution threshold for the public system may be lowered to reduce the strain on private funds.
The area of greatest concern regarding Mr. Petro’s economic policies is the changes in the oil industry. The hydrocarbons industry is the most affected by the recently approved tax reform and the possible suspension in the issuance of new contracts for oil exploration. These measures will hamper investment and oil production, with significant repercussions for economic growth. The president’s commitment to reducing Colombia’s reliance on oil and coal is expected to involve stricter regulations for the mining sector, risking weaker economic growth than currently forecasted.
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