## 1. Recent Trends in Poverty Reduction ## Source details **Canonical URL:** [1. Recent Trends in Poverty Reduction](https://www.imf.org/-/media/files/publications/cr/2025/english/1colea2025001-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1colea2025001-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1colea2025001-source-pdf.pdf.json) --- ### Context - Colombia enters a pre-electoral year with: - Strengthened economic growth, gradually falling inflation, and improved reserve coverage. - Mounting fiscal pressures: deficit widening and public debt up by almost 10 p pt of GDP since 2019. - Elevated sovereign spreads and policy uncertainty weighing on private investment. - External headwinds from stricter trade and immigration policies elsewhere. ### Recent developments — real sector and demand - Real GDP: - Expanded by 1.6 percent in 2024 (compared to 0.6 percent in 2023). - Grew 2.4 percent y/y in 2025H1. - Output gap described as virtually closed. - Demand and supply composition: - Private consumption expanded by 1.2 percent in 2024 and is now 6 percentage points above the level implied by the pre-pandemic trend. - Investment recovered somewhat from its trough in 2023 but remains well below pre-pandemic levels. - Services remained the key engine of growth; construction and manufacturing continued to lag. ### Labor market, wages, and poverty - Labor market and wages: - Unemployment rate reached 8.6 percent in June 2025. - Female unemployment: 10.8 percent. - Real wages up 6 percent since January 2024. - Minimum wage increases: 12.1 percent in 2024 and 9.5 percent in 2025. - Poverty outcomes (Box 1 key findings): - Monetary poverty fell to 31.8 percent in 2024 (lowest since series began in 2012), down from 43.1 percent in 2020. - Over 2 million people lifted out of poverty since 2022. - Extreme poverty declined from 17.3 percent in 2020 to 11.7 percent in 2024. - Nearly 900,000 people escaped extreme poverty during this period. - Multidimensional poverty index (MPI) fell from 18.1 percent to 11.5 percent. - Social transfers benefited more than 4.5 million households in 2024; Renta Ciudadana (introduced in 2024) reached 2.9 million households—over 70 percent headed by women. - Distributional challenges: poverty concentrated among indigenous communities, the unemployed, informal workers, and women; extreme poverty exceeding 30 percent among the unemployed and 14 percent among women (compared to 10 percent among men). ### Inflation and monetary policy - Inflation: - Headline inflation: 9.3 percent (y/y) in December 2023 → 4.8 percent in June 2025 → 5.1 percent in August 2025. - Core inflation: 8.8 percent (y/y) in December 2023 → 5.4 percent in August 2025. - One- and two-year ahead inflation expectations have declined toward the 3 percent target and are within the tolerance band. - Monetary policy stance: - Banrep reduced the policy rate by a cumulative 350 basis points in 2024, then by 25 basis points year to date (2025). - Real ex-ante policy rate remains about 280 basis points above the estimated neutral rate. - Slower pace of cuts reflects higher-than-expected inflation outcomes, elevated sovereign risk premium, and fiscal policy uncertainties. ### External sector, current account, and reserves - Current account and external balances: - CAD narrowed from 2.3 percent in 2023 to 1.7 percent in 2024; widened to 2.2 percent of GDP through end-June 2025. - Improvement driven by lower dividend payments, higher remittances, and a sharp increase in the private sector’s S-I balance offsetting a public sector S-I decline. - REER fell by about 3.7 percent in 2024, e.o.p. - Financing and flows: - 2024 CAD more than financed by FDI inflows; overall financial account fell as residents increased net asset positions abroad and nonresidents reduced holdings of local currency bonds. - International reserves: - Banrep completed US$1.5 billion reserve accumulation plan in 2024. - Reserves: US$61.9 billion by end-2024; US$64.6 billion by end-June 2025. - Reserves at 131 percent of the ARA metric by end-June 2025. ### Fiscal developments and pressures - Fiscal stance and outcomes: - Fiscal policy turned expansionary in 2024 amid higher interest payments and erratic budget planning. - Tax revenues fell nearly 4 ppt of GDP short of budget projections, and 2.2 ppt of GDP below the 2023 outturn. - Windfall taxes fell by 1.2 percent of GDP due to a drop in coal prices; lower VAT on imports reduced revenues by 0.6 percent of GDP. - Central Government (CG) primary expenditures broadly unchanged relative to 2023 but with deterioration in composition. - Late-2024 spending cuts of 1.7 percent of GDP concentrated in already-low capital expenditures. - Budgetary backlogs accumulated to 3.0 percent of GDP. - Diesel price efforts reduced FEPC deficit by 0.4 percent of GDP. - Interest payments and debt: - CG interest payments rose to 4.3 percent of GDP (0.4 ppt higher than in 2023). - Gross public debt reached 61.2 percent of GDP by end-2024. - Net CG debt reached 59.3 percent of GDP—4 ppt above the fiscal rule anchor of 55 percent of GDP. - Deficits: - CG overall deficit widened to 6.7 percent of GDP in 2024 (from 4.2 percent in 2023), exceeding the 2024 MTFF target by 1.1 percentage points. - Combined Public Sector (CPS) deficit rose from 2.6 percent of GDP in 2023 to 5.8 percent of GDP in 2024. - 2025 fiscal developments and MTFF: - Congress did not approve the 2025 budget law. - H1 2025 total revenues fell short of February Financing Plan projections by about 0.5 percent of GDP. - Primary cash expenditures grew faster due to repayment of 2024 backlogs and civil servant wage increases (0.4 percent of GDP). - MTFF invoked the escape clause to suspend the fiscal rule through 2027. - 2025 MTFF projects CG primary and overall deficits of 2.4 and 7.1 percent of GDP respectively—roughly 2 percentage points higher compared to February FP projections. - Net CG debt projected to reach over 61 percent of GDP by end-2025, exceeding the debt anchor by 6 percentage points. - Financing needs for 2025 estimated at around 10.6 percent of GDP: domestic financing 8.4 percent of GDP; external bond issuances 1.4 percent of GDP; development partners 0.5 percent of GDP. - MTFF envisages substantial consolidation in 2026-28 and return to fiscal rule deficit target by 2028 but provides limited details. - By end-2028 net CG debt projected to reach 63 percent of GDP (7 percentage points above last year’s MTTF projection). - Staff assessment: fiscal stance and policies weakened considerably relative to commitments at the time of the 2024 FCL request. ### Sovereign spreads and market access - Spreads and issuance: - Sovereign spreads rose since mid-2024, widening gap relative to regional peers. - April 2025 issuance: US$3.8 billion global bonds (5- and 10-year) at fixed rates of 7.50 and 8.75 percent; spreads over U.S. treasuries rose by close to 100 basis points vs October 2024 issuance. - September 2025 issuance: euro-denominated global bonds for €4.1 billion to extend maturities. - Yields on 5- to 10-year government peso-denominated bonds (TES) have risen by over 200 basis points since last October. - Risk premium divergence attributed to rising fiscal risks and policy uncertainty following the 2021 sovereign rating downgrade. ### Financial sector resilience and developments - Banking sector metrics (through May/2025 where noted): - Liquid assets to total assets ratio: 19.7 percent. - Capital adequacy ratio (CAR): 18.6 percent. - Provisioning levels at 114 percent of nonperforming loans (NPLs); NPLs declined to about 4.4 percent through May 2025. - Household debt service to income ratio fell from 37.1 percent in 2022 to 31.9 percent in 2024. - Overall bank profitability remains below historical average; big banks reported improved earnings. - Nonbank financial institutions (NBFIs): - NBFIs now represent 57 percent of financial sector assets and 114 percent of GDP (up from around 90 percent of GDP in 2018). - NBFIs invest heavily in TES, certificates of deposit, and collective investment funds. - As of March 2025: TES represented 30.6 percent of AFPs’ investment portfolio; for SFD and SCB, TES represents 16.9 percent and 11.3 percent respectively. - NBFIs hold 13.6 percent of the liabilities of banks, mainly through certificates of deposits. - Additional figure: 40.7 percent of investment portfolio of SFD and SCB respectively (source line present in text). - Regulatory actions: - Strengthened oversight and regulations of banks and NBFIs, including new framework for risk concentration and large exposure, and extending large exposure regulation to all financial institutions regulated by SFC. ### Outlook and macro projections - Baseline growth: - Growth projected to reach 2½ percent in 2025, supported by easing fiscal policy and recovery in private investment as monetary policy normalizes. - Growth expected to slow to around 2¼ percent in 2026-27, then gradually converge to potential. - Potential growth and inflation: - Potential growth estimated at 2¾ percent—¼ ppt lower than earlier projections and below the past two decades average of 3.8 percent. - Inflation projected to gradually fall to around 4½ percent by end-2025 and reach the 3 percent target by early 2027, conditional on tight monetary policy and fiscal consolidation. - External balance: - CAD expected to rise to around 2½ percent of GDP in 2025, converging to 3½ to 4 percent of GDP by 2030 under projected trends. - Impact of U.S. tariffs on Colombia expected to be limited due to trade diversion effects; remittances projected to grow in line with U.S. growth but subject to uncertainty. ### Downside risks and policy imperatives - Key downside risks: - External: tighter global financial conditions, increased trade barriers, stricter immigration policies (remittance slowdowns), geopolitical tensions, disruptions to FDI and supply chains, higher borrowing costs. - Domestic: delays in fiscal consolidation, unanchored fiscal expectations, higher sovereign risk premia, market financing complications, potential sudden stop in capital inflows, rising political uncertainties, intensification of violent crime and insecurity. - Policy imperatives and recommendations: - Contingency planning and agile policymaking as external uncertainty intensifies. - Proceed with fiscal consolidation to contain public debt and sovereign spreads; consider frontloading adjustment if downside risks materialize. - Calibrate monetary policy normalization to preserve disinflation and anchor expectations. - Accelerate productivity-enhancing reforms, export diversification, and labor force participation measures. - Maintain flexible exchange rate as key shock absorber. - Preserve central bank independence and implement robust governance and prudent investment principles for the new public pension savings fund (FAPC). ### Fiscal policy: immediate needs and medium-term consolidation - Immediate needs (2025): - MTFF includes up to 0.5 percent of GDP in unidentified revenue measures; primary expenditures of 19.5 percent of GDP (3.8 ppt above pre-pandemic levels). - Meeting projected CG overall deficit of 7.1 percent of GDP (primary deficit of 2.4 percent of GDP) would require discretionary spending cuts of a similar magnitude. - Possible immediate actions: - Streamline discretionary transfers: 0.3 percent of GDP. - Limit recent wage bill expansion: 0.2 percent of GDP. - Reduce planned capital expenditure outlays if necessary (up to 0.5 percent of GDP). - Replenish CG peso-denominated cash buffers from 0.2 to 1.1 percent of GDP. - Reduce budgetary backlogs via prompt cancellation of discretionary primary expenditures not yet committed. - Medium-term consolidation (2026-28): - A fiscal package of about 3.2 percent of GDP over the next three years recommended, with a balanced mix of expenditure and revenue measures and clear intermediate fiscal targets. - Fiscal multipliers estimated in the range of 0.2-0.3. - Contingency planning: full-fledged plan warranted; budget laws should include buffers given historical underperformance of tax reforms. - Potential measures and indicative yields (2026-28; aggregate total 3.2 percent of GDP): - Revenues (total 1.0 percent of GDP): - Reduce VAT exemptions and de minimis import thresholds: 0.5 percent of GDP. - Taxes on online gambling platforms: 0.2 percent of GDP. - Oil & coal surcharges: 0.1 percent of GDP. - Higher stamps and excise: 0.1 percent of GDP. - Higher carbon taxes: 0.1 percent of GDP. - Expenditures (total 2.2 percent of GDP): - Eliminate fuel subsidies: 0.5 percent of GDP. - Bring wage bill back to historical norms: 0.5 percent of GDP. - Rationalize current transfers and reduce budget rigidities: 0.6 percent of GDP. - Reduce healthcare subsidies by lowering thresholds for employer contributions: 0.4 percent of GDP. - Enhance procurement efficiency: 0.2 percent of GDP. - Scenarios and debt implications: - Partial consolidation (only revenue measures): public debt-to-GDP breaches 70 percent legal ceiling by 2033. - If primary deficit remains at 2.4 percent of GDP over medium term: 70 percent ceiling could be breached by 2028. - Full adherence to fiscal rule from 2029 requires CG headline primary surpluses around 1.1 percent of GDP consecutively. - To prevent upward debt trajectory after consolidation, implicit real interest rate on public debt needs to decline at least 120 basis points relative to baseline to average 2½ percent (“Fiscal R-star”). ### Structural reforms and sectoral considerations - Budget rigidities and legal reforms: - Mandatory spending should be delinked from non-structural revenue growth; subnational transfers currently tied to 4-year moving average growth of CG net current revenues. - Spending rigidities represent around 90 percent of all CG spending in 2025. - Social and structural reforms with fiscal implications: - Decentralization (SGP reform): gradual increase in CG transfers to local governments up to 39.5 percent of net current revenues (1.8 percent of GDP) over 12 years starting in 2027; ensure fiscal neutrality. - Pension reform: consolidation into mostly public three-pillar system may increase CG spending up to 0.3 percent of GDP annually for solidarity pillar and up to 0.8 percent of GDP for semi-contributory pillar over next decades; costs uncertain and should be incorporated into MTFF and offset by cuts in discretionary transfers. - Healthcare reform: preliminary estimates suggest total health spending could increase by 1 percent of GDP within a decade; financing clarity required. - Energy transition: consider fully eliminating diesel subsidies (savings up to 0.5 percent of GDP per year) and continue clearing past FEPC deficits. ### Financial sector policies and pension reform implications - Supervision and macroprudential recommendations: - Continue implementing FSAP recommendations; strengthen systemic risk monitoring and risk management framework under Basel III. - Reintroduce Net Stable Funding Ratio with transition plans; consider countercyclical capital buffer. - Reduce rigidity of CCyP and consider countercyclical capital buffer scheme. - Pension reform and FAPC considerations: - Approximately 75 percent of participants currently in AFPs expected to switch to public defined-benefits system. - FAPC managed by Banrep; governance requirements: - Clear division of roles between Banrep and fund management. - Transparent investment policy consistent with objectives and risk tolerance. - Manage FAPC to minimize short-term liquidity pressures on private pension funds and mitigate volatility in local FX and TES markets and wholesale funding for banks. - Financial stability implications (Annex VIII figures): - Private pension fund assets: total assets 31.5 percent of GDP (deposits 0.6; bonds and CDs 11.2; shares 16.8; other assets 2.8). - Liabilities equal 31.5 percent of GDP (insurance claims 31.1; loans 0.0; equity and other liabilities 0.4). - Annual contributions to AFPs expected to fall from around 2 percent of GDP to 0.7~0.9 percent of GDP; FAPC balance sheet will increase concomitantly. - Liquidity channel and portfolio reallocation channel pose risks to capital flows, exchange rate, bond and equity markets, and wholesale bank funding. ### Governance, structural policies, energy transition, and labor participation - Long-term growth strategy: - Raise productivity, boost labor force participation, and diversify the economy. - Reforms: reduce barriers to entry, lower intermediation costs, boost nontraditional exports, and prioritize horizontal reforms subject to cost-benefit analysis. - Labor force participation (LFP): - LFP has declined for men and women since 2012. - Raising participation to pre-2012 levels or to a gender gap of 10 percent could boost growth by as much as 0.5 ppt per year. - Labor reform approved in June aims to strengthen worker protections but may raise unit labor costs and increase informality; supporting policies needed to boost female participation (childcare, parental benefit symmetry, flexible work). - Energy transition: - Projected steep decline in oil and coal: royalties and income tax revenues could fall by 1.6-1.9 ppt of GDP per year by 2030. - Oil, gas, and coal in 2023: around 10 percent of fiscal revenues, 35 percent of exports, and around 4 percent of GDP; employed 105 thousand workers directly. - Staff analysis: sharp reduction in fossil fuel production could result in job losses of about 100 thousand over next ten years; renewable-driven expansion could offset if projects completed. - World Bank estimate: over US$90 billion (22 percent of the 2024 GDP) in gross investment needed over next 25 years for energy transition. - Recommendations: assess and disclose transition-related financial risks; develop tailored financial instruments; use PPPs with regulation and targeted incentives to attract investment. - Governance and security: - Strengthen beneficial ownership access, income/asset declaration disclosure, and whistleblower protection enforcement. - Rising violence could undermine investment and growth; coordinated security and inclusive job creation policies recommended. ### Risk assessment and scenario analysis - RAM likelihood categories: “low” <10 percent, “medium” 10–30 percent, “high” 30–50 percent. - Selected high-likelihood/high-impact risks and advice: - Trade, immigration, and investment shocks: Likelihood: High; Impact: High. Advice: use policy space, support vulnerable groups, flexible exchange rate. - Sovereign debt distress: Likelihood: High; Impact: Medium. Advice: urgent credible fiscal adjustment. - Tighter financial conditions and systemic instability: Likelihood: Medium; Impact: High. Advice: flexible exchange rate, targeted liquidity interventions, tighten monetary policy if inflation affected. - Disorderly energy transition and social unrest: Likelihood: Medium; Impact: High. Advice: reprioritize reforms, protect fiscal credibility, advance social reforms with broad support. - Annex IV GIMF scenario (global shocks) projected impacts: - Real GDP growth deviation from baseline: decline by 0.5 percentage points in 2025; decline by 0.2 percentage points in 2026. - Channels: reduced investment and consumption, tighter global financial conditions; limited overall impact on inflation and REER. ### Staff appraisal and recommendations - Staff appraisal: - Macroeconomic landscape complex: improved growth momentum and falling inflation but rising public debt and policy uncertainty have eroded credibility. - Repeated fiscal slippages and temporary suspension of the fiscal rule undermined policy credibility relative to 2024 FCL assessment. - Key recommendations and near-term priorities: - Meet the 2025 deficit target—immediate spending cuts of about ½ percent of GDP required. - Develop a credible fiscal plan for 2026 with concrete measures, clear intermediate targets, and contingency planning. - Deliver structural adjustment of at least 3.2 percent of GDP over 2026-28, balanced between revenues and expenditures. - Maintain Banrep’s tight monetary stance and preserve central bank independence. - Continue to strengthen foreign exchange reserves and use flexible exchange rate as primary shock absorber. - Continue FSAP implementation, strengthen macroprudential toolkit (including NSFR reintroduction and possible countercyclical capital buffers), and establish robust governance and investment framework for FAPC. - Prioritize reforms to boost productivity, raise labor force participation (especially for women), diversify exports, and manage energy transition prudently. *Source: IMF staff report chapter "1. Recent Trends in Poverty Reduction" (Colombia).* ### 1. Recent Trends in Poverty Reduction ___________________________________________________________ 25 ### 1. Recent Trends in Poverty Reduction ### Context - Colombia enters a pre-electoral year facing a complex economic landscape. - Economic growth has strengthened somewhat, inflation has continued to gradually fall, and reserve coverage has further improved. - Fiscal pressures are mounting, with the deficit widening and public debt up by almost 10 percentage points (p pt) of GDP since 2019. - Elevated sovereign spreads and lingering uncertainties over the direction of policies continue to hold back private investment. - External headwinds from stricter trade and immigration policies elsewhere are adding to Colombia’s challenges. ### Recent developments — real sector and demand - Real GDP: - The economy expanded by 1.6 percent in 2024 (compared to 0.6 percent in 2023). - Real GDP grew 2.4 percent y/y in 2025H1. - Output gap is described as virtually closed. - Demand composition: - Private consumption expanded by 1.2 percent in 2024 and is now 6 percentage points above the level implied by the pre-pandemic trend. - Investment recovered somewhat from its trough in 2023 but remains well below pre-pandemic levels. - Supply composition: - Services remained the key engine of growth. - Construction and manufacturing continued to lag. ### Labor market, wages, and poverty - Labor market: - Unemployment rate reached 8.6 percent in June 2025—well below the 2001-19 average. - Female unemployment remains high at 10.8 percent. - Real wages: - Real wages have risen by 6 percent since January 2024, outpacing most regional peers (except Mexico). - Minimum wage increases: 12.1 percent in 2024 and 9.5 percent in 2025. - Social outcomes: - Expansion of social assistance, together with labor market and wage developments, have supported further declines in poverty (see Box 1). ### Inflation and monetary policy - Inflation: - Headline inflation declined from 9.3 percent (y/y) in December 2023 to 4.8 percent in June 2025, followed by a slight uptick to 5.1 percent in August 2025. - Core inflation declined from 8.8 percent (y/y) in December 2023 to 5.4 percent in August 2025; sticky services inflation and widespread indexation (e.g., for school tuition) persist. - One- and two-year ahead inflation expectations have continued to decline toward the 3 percent target and are now within the central bank’s tolerance band. - Monetary policy stance: - Banrep reduced the policy rate by a cumulative 350 basis points in 2024, then by only 25 basis points year to date (2025) due to persistent inflationary pressures. - Banrep’s policy stance remains tight, with the real ex-ante policy rate still above (about 280 basis points) the estimated neutral rate. - The slower pace of cuts reflects higher-than-expected inflation outcomes, elevated sovereign risk premium, and fiscal policy uncertainties. ### External sector, current account, and reserves - Current account: - CAD narrowed from 2.3 percent in 2023 to 1.7 percent in 2024—the lowest in nearly two decades. - Improvement driven largely by lower dividend payments, higher remittances, and a sharp increase in the private sector’s S-I balance which more than offset a decline in the public sector’s S-I balance. - REER fell by about 3.7 percent in 2024, e.o.p. - Through end-June 2025 the CAD widened somewhat to 2.2 percent of GDP. - Financing and flows: - 2024 CAD was more than financed by FDI inflows, though overall financial account balance fell as residents increased net asset positions abroad and nonresidents reduced holdings of local currency bonds. - International reserves: - Banrep completed its US$1.5 billion reserve accumulation plan in 2024. - Reserves reached US$61.9 billion by end-2024 and US$64.6 billion by end-June 2025. - Reserves are at 131 percent of the ARA metric by end-June 2025. ### Fiscal developments and pressures - Fiscal stance: - Fiscal policy turned expansionary in 2024 amid higher interest payments and erratic budget planning compounded by overly optimistic tax revenue projections. - Revenue performance: - Tax revenues fell nearly 4 ppt of GDP short of budget projections, and 2.2 ppt of GDP below the 2023 outturn. - Windfall taxes fell by 1.2 percent of GDP due to a drop in coal prices. - Lower VAT on imports reduced revenues by 0.6 percent of GDP. - Expenditures and backlogs: - Central Government (CG) primary expenditures remained broadly unchanged relative to 2023 but with a deterioration in composition. - Late-2024 spending cuts of 1.7 percent of GDP were highly concentrated in already-low capital expenditures. - Liquidity constraints contributed to an accumulation of large budgetary backlogs of 3.0 percent of GDP. - Efforts to hike diesel prices reduced the Fuel Price Stabilization Fund (FEPC) deficit by 0.4 percent of GDP. - Interest payments and debt: - CG interest payments rose to 4.3 percent of GDP (0.4 ppt higher than in 2023). - Gross public debt reached 61.2 percent of GDP by end-2024. - Net CG debt reached 59.3 percent of GDP—4 ppt above the fiscal rule anchor of 55 percent of GDP. - Deficits: - CG overall deficit widened to 6.7 percent of GDP in 2024, up from 4.2 percent of GDP in 2023, exceeding the 2024 MTFF target by 1.1 percentage points. - Combined Public Sector (CPS) deficit rose from 2.6 percent of GDP in 2023 to 5.8 percent of GDP in 2024. - 2025 fiscal developments: - Congress did not approve the 2025 budget law, citing unfunded spending plans. - In H1 2025 total revenues fell short of the authorities’ February Financing Plan projections by about 0.5 percent of GDP. - Primary cash expenditures grew faster than expected due to repayment of 2024 backlogs and wage increases for civil servants (0.4 percent of GDP). - By end-2025 budgetary backlogs could be as high as those in 2024. - Medium-Term Fiscal Framework (MTFF) and escape clause: - Government invoked the escape clause in the June MTFF to suspend the fiscal rule through 2027. - 2025 MTFF projects CG primary and overall deficits of 2.4 and 7.1 percent of GDP, respectively—both roughly 2 percentage points higher compared to February FP projections. - Net CG debt projected to reach over 61 percent of GDP by end-2025, exceeding the debt anchor by 6 percentage points. - Financing needs for 2025 estimated at around 10.6 percent of GDP, to be covered mostly with domestic financing (8.4 percent of GDP), including sizeable short-term treasury operations; external financing expected from external bond issuances (1.4 percent of GDP) and development partners (0.5 percent of GDP). - MTFF envisages substantial consolidation in 2026-28 and a return to fiscal rule deficit target by 2028, but provides limited details on measures. - By end-2028 net CG debt projected to reach 63 percent of GDP (7 percentage points above last year’s MTTF projection). - Staff assessment: fiscal stance and policies have weakened considerably relative to commitments at the time of the 2024 FCL request. ### Sovereign spreads and market access - Sovereign spreads rose since mid-2024, widening the gap relative to regional peers and countries with similar credit ratings. - April 2025 issuance: - Authorities issued US$3.8 billion in global bonds with 5- and 10-year maturities at fixed rates of 7.50 and 8.75 percent, respectively. - Spreads over U.S. treasuries rose by close to 100 basis points compared to a similar issuance in October 2024. - September 2025 issuance: - A euro-denominated global bonds issuance for €4.1 billion aimed at extending debt maturities. - Domestic yields: - Yields on 5- to 10-year government peso-denominated bonds (TES) have risen by over 200 basis points since last October. - Overall: - Colombia’s risk premium has diverged further relative to peers since the sovereign rating downgrade of 2021, largely due to rising fiscal risks and policy uncertainty. ### Financial sector resilience and developments - Banking sector metrics: - Liquid assets to total assets ratio: 19.7 percent. - Capital adequacy ratio (CAR): 18.6 percent. - Ratio of liquid assets to short-term liabilities is adequate but somewhat lower than regional peers. - Provisioning levels at 114 percent of nonperforming loans (NPLs), with heterogeneity across banks. - NPLs declined to about 4.4 percent through May 2025, near pre-pandemic levels. - Household debt service to income ratio fell from 37.1 percent in 2022 to 31.9 percent in 2024. - Profitability and earnings: - Overall bank profitability remains below historical average, though big banks have recently reported improved earnings. - Nonbank financial institutions (NBFIs): - NBFIs (SFD, SCB, AFPs, life insurance companies) have been growing rapidly and now represent 57 percent of financial sector assets and 114 percent of GDP (up from around 90 percent of GDP in 2018). - NBFIs invest heavily in TES, certificates of deposit, and collective investment funds. - As of March 2025, TES represented 30.6 percent of the AFPs’ investment portfolio; for SFD and SCB, TES represents 16.9 percent and 11.3 percent of their investment portfolios respectively. - NBFIs hold 13.6 percent of the liabilities of banks, mainly through certificates of deposits which represents 27.3 percent (context truncated in source). - Regulatory actions: - Steps continue to strengthen oversight and regulations of banks and NBFIs, including a new regulatory framework for risk concentration and large exposure, and extending large exposure regulation to all financial institutions regulated by SFC. ### Outlook and risks - Baseline outlook (conditional): - Growth is projected to reach 2½ percent in 2025, supported by easing fiscal policy and a recovery in private investment as monetary policy gradually normalizes. - Growth is expected to slow to around 2¼ percent in 2026-27, before gradually converging to potential as drags from expected fiscal consolidation are partially offset by positive factors. *Source: IMF staff report chapter "1. Recent Trends in Poverty Reduction" (Colombia).* ### 40.7 percent of investment portfolio of SFD and SCB respectively. ### 1colea2025001-source-pdf - 40.7 percent of investment portfolio of SFD and SCB respectively. ### Outlook and Macroeconomic Projections - Potential growth is estimated to be 2¾ percent—¼ ppt lower than earlier projections and well below the average growth rate of the past two decades (3.8 percent), reflecting declining labor force participation and productivity. - Inflation: - Projected to gradually fall to around 4½ percent by end-2025. - Expected to reach the 3 percent target by early 2027, provided that tight monetary policy is maintained and the fiscal consolidation proceeds as planned. - External Balance: - Current account deficit (CAD) expected to rise to around 2½ percent of GDP in 2025, primarily driven by less favorable terms of trade and stronger domestic demand. - CAD expected to converge gradually to its medium-term level of 3½ to 4 percent of GDP by 2030, consistent with some recovery in private investment and declining extractive exports, while net FDI inflows continue to dominate the financial account. - Impact of the introduction of U.S. tariffs on Colombia expected to be limited due to trade diversion effects; remittances projected to grow in line with U.S. growth but are subject to important uncertainties. ### Downside Risks and Policy Implications - Key downside risks: - External: tighter global financial conditions, increased global trade barriers, stricter immigration policies leading to remittance slowdowns, heightened geopolitical tensions, disruptions to FDI and supply chains, and higher borrowing costs. - Domestic: further delays in fiscal consolidation, unanchored fiscal policy expectations, higher sovereign risk premia, market financing complications, potential sudden stop in capital inflows, rising political uncertainties, and intensification of violent crime and insecurity. - Policy imperatives: - Contingency planning and agile policymaking are essential as external uncertainty intensifies. - Fiscal consolidation should proceed as planned to contain a further rise in public debt and sovereign spreads and secure rolling over of debt services. - If downside risks materialize and/or financial conditions tighten sharply, consideration should be given to frontloading the fiscal adjustment. - Pace of monetary policy normalization should be carefully calibrated to preserve the disinflation process and prevent a de-anchoring of expectations. - Accelerate efforts to boost productivity, increase export diversification, and enhance labor force participation. - Flexible exchange rate should remain the key shock absorber. - Preserve central bank independence and implement robust governance and prudent investment principles for the new public pension savings fund. ### Authorities’ Views - Authorities broadly agreed with the staff’s assessment of risks to the outlook. - They expect growth momentum to be maintained in the near term, supported by robust domestic demand and non-mining exports, while inflation continues converging toward the target. - They concur that major uncertainties are mainly external (escalating geopolitical tensions, increased trade barriers, global trade disputes, tighter global financial conditions) which could reduce exports, trigger commodity price volatility, decrease remittances, and raise borrowing costs. ### Fiscal Policy: Current Assessment and Immediate Needs - Since 2019, current expenditure as a share of GDP has increased by more than 4 ppt, led by higher interest payments and current transfers (about 2 percent of GDP each). - “Other” transfers more than tripled since 2010-11, absorbing about 45 percent of tax revenues in 2023-24, compared with less than 20 percent in the early 2010s. - The rise in current expenditure, budget rigidities, and liquidity constraints have led to under-execution of public investment and abrupt end-of-year cuts. - Immediate fiscal needs: - Immediate spending cuts are needed to meet the 2025 deficit target and avoid further fiscal slippage. - For 2025, the MTFF includes up to 0.5 percent of GDP in unidentified revenue measures, along with primary expenditures of 19.5 percent of GDP (3.8 ppt of GDP above pre-pandemic levels). - Meeting the projected CG overall deficit of 7.1 percent of GDP (consistent with a primary deficit of 2.4 percent of GDP) would require discretionary spending cuts of a similar magnitude. - Possible immediate actions include: - Streamlining discretionary transfers (0.3 percent of GDP). - Limiting the recently announced wage bill expansion (0.2 percent of GDP). - Reducing planned capital expenditure outlays if necessary (up to 0.5 percent of GDP in discretionary spending). - Planned replenishment of CG peso-denominated cash buffers from 0.2 to 1.1 percent of GDP this year is essential to reduce liquidity risks. - Reduce volume of budgetary backlogs via prompt cancellation of discretionary primary expenditures not yet committed. ### Medium-Term Consolidation Strategy (2026-28) and Scenarios - Delivering the MTFF consolidation path would require a concrete, comprehensive and appropriately balanced adjustment plan. - Consideration should be given to a fiscal package of about 3.2 percent of GDP over the next three years, with a balanced mix of growth-friendly expenditure and revenue measures and clear intermediate fiscal targets. - Fiscal multipliers are estimated to be in the range of 0.2-0.3. - Contingency planning: - A full-fledged contingency plan is warranted to safeguard consolidation outcomes and address fiscal slippages. - Budget laws should include buffers relative to fiscal balance targets given that tax reforms historically delivered only about half of projected revenue yields. - Debt and consolidation scenarios: - If only the revenue measures illustrated below are implemented (“partial consolidation” scenario), public debt to GDP ratio would breach the 70 percent legal ceiling by 2033. - If the primary deficit remains at 2.4 percent of GDP over the medium term, the 70 percent ceiling could be breached by 2028. - Full adherence to the fiscal rule from 2029 onwards requires CG headline primary surpluses at around 1.1 percent of GDP for consecutive years. - A long-lasting conservative fiscal strategy is essential; even returning to near zero primary balances by 2030 would require the implicit real interest rate on public debt to decline at least 120 basis points relative to the baseline—to an average implicit real interest rate of 2½ percent (“Fiscal R-star”)—to prevent an upward debt trajectory after the consolidation period. ### Potential Fiscal Measures and Yields (2026-28) - Aggregate indicative package: Total 3.2 percent of GDP over 2026-28 (Total by column: Revenues 1.0; Expenditures 2.2; Grand total 3.2 percent of GDP). - Revenue measures (roughly 1 percent of GDP total): - Reduction of VAT exemptions and de minimis thresholds on imports: 0.5 percent of GDP. - Taxes on online gambling platforms: 0.2 percent of GDP. - Oil & coal surcharges: 0.1 percent of GDP. - Higher stamps and excise: 0.1 percent of GDP. - Higher carbon taxes: 0.1 percent of GDP. - Expenditure measures (roughly 2.2 percent of GDP total): - Eliminating fuel subsidies: 0.5 percent of GDP. - Bringing the wage bill back to historical norms: 0.5 percent of GDP. - Rationalizing current transfers and lessening budget rigidities: 0.6 percent of GDP. - Reducing healthcare subsidies by lowering thresholds for employer contributions: 0.4 percent of GDP. - Enhancing efficiency of the procurement system: 0.2 percent of GDP. - Legal/implementation instruments indicated in the source: - Some measures via Law, others via Decree (as noted in the source table). ### Risks to 2026 Budget and Longer-Term Fiscal Pressures - The authorities’ proposed 2026 budget carries serious implementation risks: - Draft budget assumes modest improvements relying mostly on a new tax reform proposal and interest savings from new debt management operations. - Proposed 2026 primary deficit target is up by 0.6 ppt to 2.0 percent of GDP relative to the June MTFF, with primary spending up by 1.2 ppt to 20.6 percent of GDP. - Proposed overall deficit target unchanged at 6.2 percent of GDP as interest payments are estimated to fall by 0.6 ppt of GDP from liability management operations. - Realism of the budget and ability to secure approval of another tax reform ahead of elections remain in question; a more ambitious adjustment in the 2026 primary balance may need to be considered. - Sustained fiscal restraint beyond 2026-28 is warranted: - Given absence of identified measures and implementation risks, considerable efforts are needed to bring down net CG debt decisively toward the 55 percent of GDP anchor. - Under the 2021 fiscal rule framework mechanics described, net CG debt would not reach the anchor until the 2040s under the acknowledged MTFF path. ### Structural Reforms with Fiscal Implications - Reduce budget rigidities: - Legal reforms should be pursued to delink mandatory spending from non-structural revenue growth (subnational transfers currently tied by law to the 4-year moving average growth of CG’s net current revenues). - Spending rigidities represent around 90 percent of all CG spending in 2025. - Social and structural reforms must be fiscally consistent with MTFF consolidation targets: - Decentralization (SGP reform): gradual increase in CG transfers to local governments up to 39.5 percent of its net current revenues (1.8 percent of GDP) over 12 years starting in 2027; critical to ensure fiscal neutrality and improved coordination and monitoring across government levels. - Pension Reform: consolidation into a mostly public three-pillar system may increase CG spending by up to 0.3 percent of GDP annually for the solidarity pillar and up to 0.8 percent of GDP for the semi-contributory pillar over the next decades; costs are uncertain and should be fully incorporated in the medium-term budget and fiscal frameworks and offset through cuts in discretionary current transfers. - Healthcare Reform: preliminary government estimates suggest total health spending could increase by 1 percent of GDP within a decade; clarity needed on financing. - Energy Transition: consider fully eliminating diesel subsidies (savings of up to 0.5 percent of GDP per year) to support fiscal consolidation and green energy investments; continue clearing past deficits of the fuel price stabilization fund (FEPC) and ensure timely payment of electricity and gas subsidies. *Source: Excerpt from 1colea2025001-source-pdf (IMF staff country report content provided in the source PDF).* ### 24. The authorities concurred on the need for sustained fiscal adjustment over the ### The authorities concurred on the need for sustained fiscal adjustment over the medium term ### Fiscal policy: near-term outturn, rule suspension, and adjustment needs - Authorities attributed the 2024 fiscal outturn to one-off revenue shortfalls; Consejo Superior de Política Fiscal (CONFIS) verified compliance with the fiscal rule after deducting 1.8 percentage points of GDP in one-off transactions from the structural primary balance target. - Authorities explained the suspension of the fiscal rule during 2025-27 (as provided for under the legal framework) was necessary to avoid “imposing extreme restrictions to the State’s capacity to fulfill its functions as economic stabilizer and provider of goods and services.” - Authorities emphasized need for sustained fiscal adjustment over the medium term and the importance of passing tax reforms; they see limited room for spending cuts in the near term due to budget rigidities. - The proposed tax reform is expected to deliver most of the adjustment necessary to meet the 2026 deficit target; congressional approval is required. - The increase in the primary deficit target from 1.4 percent of GDP in the MTFF to 2.0 percent of GDP in the 2026 draft budget was explained by anticipated interest savings from active debt management operations. - The overall deficit target remained unchanged at 6.2 percent of GDP. - Authorities agreed on the importance of contingency planning to address revenue shortfalls and the need to ensure social reforms are consistent with fiscal plans over the medium term. - On pensions: execution of the solidarity pillar will be subject to the availability of budget resources. - On healthcare reform: the reform addresses bottlenecks and inefficiencies that would limit social and fiscal costs. ### Monetary and exchange rate policies: stance, goals, and interventions - Tight macroeconomic policies remain essential to sustain progress in further reducing inflation; headline inflation remains above the 3 percent target and services inflation pressures persist. - Banrep’s tight monetary policy stance remains appropriate; with the economy operating near potential, monetary easing should continue with caution to ensure inflation converges firmly to the target and inflation expectations remain anchored. - Risks cited: easing of fiscal policy this year, risks of fiscal slippages going forward, and a “higher-for-longer” global rate environment. - Close monitoring of wage developments remains essential, especially following implementation of the labor reform. - The pace of monetary easing should continue to be carefully calibrated to address persistent inflation pressures and upside risks, including those from expansionary fiscal policy and external conditions. - Targeting a return of inflation to 3 percent by early-2027 is presented as the appropriate balance between safeguarding the disinflationary process amid risks, preserving credibility, and supporting economic activity. - Policy guidance should continue focusing on the 3 percent target rather than on the +/-1 percent range to better anchor expectations. - Maintaining the central bank’s independence is essential to ensure credibility and effectiveness of the monetary policy framework. - Exchange rate policy: the flexible exchange rate should continue to act as a shock absorber; foreign exchange market intervention (FXI) should be used only if large shocks lead to destabilizing premia in FX markets, risk de-anchoring inflation expectations, or if there are FX mismatches that pose significant risks to financial stability (in line with Integrated Policy Framework guidance). - Authorities should continue to strengthen FX reserve buffers in line with the approach in recent years. Authorities’ views: - Banrep shared staff’s view on maintaining a cautious monetary policy stance, noting headline and core inflation have eased but the decline has been slower than last year and projections; one-year-ahead inflation expectations remain above target and have risen relative to end-2024 levels. - Central bank authorities noted inflation risks from wages, some regulated prices, and global financial conditions; external conditions are challenging due to global trade tensions, geopolitical uncertainties, and slower than expected normalization of U.S. monetary policy. - Banrep reaffirmed that the exchange rate should retain its role as a shock absorber and that foreign exchange intervention should be limited to addressing market failures; current level of international reserves remains adequate to address shocks. ### Financial sector policies: monitoring, reforms, and the pension savings fund - Continued close monitoring of financial sector soundness remains critical amid rising uncertainty and still-elevated real interest rates. - Short-term liabilities have been growing faster than assets in the context of tight monetary conditions; while liquidity remains adequate, close monitoring of liquidity risks should continue. - Declines in NPLs for consumer credit are welcomed; enhanced monitoring of corporate credit (especially in construction, manufacturing, and trade sectors where profitability has fallen) and mortgage credit (which has accelerated at the margin) is required, including efforts to expand data collection on household debt and repayment capacity. - Colombia’s financial system is dominated by large, complex financial conglomerates with growing cross-border exposures; enhanced oversight of group-wide risks is essential to monitor contagion channels across banks, NBFIs, and foreign operations. - Rapid growth of NBFIs, including rising TES holdings and increased interconnections with banks (e.g., through common asset exposures), warrants continued close monitoring and strengthening of regulations. - IMF technical assistance recommends reducing liquidity risks in open-ended investment funds (OEFs) by strengthening supervisory powers, reforming money market fund regulations, clarifying the use of liquidity management tools, and coordinating reforms through a cross-agency working group. - Progress on implementing the 2022 FSAP recommendations should continue: - Further strengthen the role of the regulator in systemic risk monitoring and the risk management framework under Basel III (Annex VII). - Work closely with banks on transition plans for the reintroduction of the net stable funding ratio to avoid market disruptions (like the bunching of maturities observed in 2023) or potential dislocations arising from the implementation of the pension reform. - Steps should continue to reduce the rigidity of the countercyclical provisioning scheme (CCyP) and consideration should be given to introducing a countercyclical capital buffer scheme, consistent with best practices. - AML/CFT: notable progress has been made—including stronger customer due diligence and beneficial ownership requirements, and enhanced transparency of legal entities—but Colombia continues to face related challenges especially from cross-border illicit activities; Colombia should sustain and deepen reforms, maintain momentum on AML/CFT risk-based supervision, and take actions to ensure effective international financial intelligence exchange. - Public pension savings fund (Fondo de Ahorro del Pillar Contributivo, FAPC) following pension reform: - Approximately 75 percent of participants currently enrolled in the defined-contribution private pension funds are expected to switch to the public defined-benefits system. - Contributions to the public scheme will be managed by a newly established public savings fund, the FAPC under Banrep management. - Governance framework requirements: (i) a clear division of roles and responsibilities between Banrep and the fund’s management; and (ii) an investment policy that is transparent, consistent with the fund’s objectives/risk tolerance, and aligned with best international practices. - FAPC’s investment mandate and portfolio structure should seek to minimize short-term liquidity pressures on private pension funds and pre-emptively mitigate volatility in the local FX and TES markets and wholesale funding for banks, particularly given the anticipated large-scale asset reallocation. Authorities’ views: - Authorities concurred on the need to closely monitor financial sector risks amid heightened uncertainty, particularly given the increasing exposure to public debt. - They stressed the financial sector remains resilient, supported by strong capital buffers and adequate liquidity, and noted a gradual recovery in credit growth as credit demand recovers and underwriting standards ease. - Authorities highlighted improvements in banking sector profitability driven by higher investment income and lower provisioning expenses and emphasized that recent stress testing indicated the financial sector would maintain adequate capital buffers to absorb external shocks. ### Structural policies: diversification, labor participation, energy transition, and governance - Long-term growth requires a broad-based strategy centered on raising productivity, boosting labor force participation, and diversifying the economy. - Reforms to enhance market competition (e.g., reducing barriers to entry and thus markups in the tradable and non-tradable sectors), lower intermediation costs and external financing premia (e.g., by reducing verification costs and borrower riskiness), and boost Colombia’s nontraditional exports can support diversification and development of higher value-added sectors, including tourism and other service industries. - Horizontal structural reforms should be prioritized; sector-specific policies should be time-bound, targeted to address market failures, and subject to robust cost-benefit analysis. Labor force participation (LFP) - Colombia’s LFP has steadily and gradually declined for both men and women since 2012, in contrast to peer trends. - Raising overall participation rates to pre-2012 levels or to levels consistent with a gender gap of 10 percent could offset projected negative demographic effects and boost economic growth by as much as 0.5 ppt per year (see Selected Issues Paper, Chapter 3). - The labor reform approved in June aims to strengthen worker protections but may raise unit labor costs and increase informality. - Supporting policies to boost female participation include improving availability and affordability of childcare, eliminating asymmetries in parental benefits, and promoting flexible work. Energy transition - A well-designed and executed energy transition can support long-run economic sustainability and resilience, but must preserve macroeconomic and fiscal stability. - Projected steep decline in oil production and coal mining and associated impact on exports and fiscal revenues (taken together, royalties and income tax revenues would fall by 1.6-1.9 ppt of GDP per year by 2030—see Selected Issues Paper, Chapter 2) requires a carefully calibrated and comprehensive energy transition strategy that phases out energy subsidies, reviews carbon pricing, promotes export diversification and productivity, and encourages investment in alternative energy sources. - Special efforts over the transition: - Boost job creation: in 2023, the oil, gas, and coal sectors accounted for around 10 percent of fiscal revenues, 35 percent of exports and around 4 percent of GDP by value added, employing 105 thousand workers directly and more through related upstream and downstream industries. - Staff analysis suggests a sharp reduction in fossil fuel production could result in job losses of about 100 thousand over the next ten years; a renewable-driven electricity expansion could offset the impact if planned renewable projects are completed (see Selected Issues Paper, Chapter 2). - Mobilize private financing: The World Bank estimates meeting Colombia’s energy transition goals would require over US$90 billion (22 percent of the 2024 GDP) in gross investment over the next 25 years. - Recommendations: enhance assessment and disclosure of energy transition-related financial risks; develop financial instruments tailored to varying investor risk/return profiles; use public private partnerships with strong regulation and targeted incentives to attract private and international investment. Governance and security - Further strengthening governance and transparency is essential to improve the business climate: strengthen access to beneficial ownership data, ensure regular disclosure of income and asset declarations, and accelerate enforcement of the whistleblower protection law. - After years of progress in reducing homicides, Colombia is now facing an increase in violence, which could undermine investment and growth; addressing security challenges requires coordinated policies combining strengthened security and justice institutions with measures to foster inclusive job creation and improve governance. Authorities’ views: - Authorities agreed with the three-pronged strategy of economic diversification, productivity enhancement, and labor force participation boost while keeping reforms within strong policy frameworks. - They highlighted economic policies have supported sturdy growth of non-traditional economic sectors such as tourism and entertainment, and a marked reduction in poverty to its lowest level on record. - They stressed the forthcoming labor reform aims to enhance workers’ rights while promoting labor force participation and reaffirmed commitment to keep reforms within strong policy frameworks that have helped achieve macroeconomic stability. - On energy transition, authorities welcome staff analysis and reiterated their National Development Plan envisages an urgent but prudent reduction of dependence on fossil fuels; they remain committed to relying on existing contracts while further enhancing recovery for oil and coal production. - They clarified tax reform plans include carbon taxes to reduce fossil fuel demand. ### Staff appraisal: macroeconomic landscape and credibility concerns - Colombia faces a complex macroeconomic landscape requiring strong and credible policy adjustments. - Growth momentum has improved and inflation is gradually declining, supported by prudent monetary policy amid a renewed easing of fiscal policy. - Rising public debt and uncertainties over policy direction have dampened market sentiment, widened sovereign debt spreads (well above peer countries), and limited private investment. - Repeated fiscal slippages and the temporary suspension of the fiscal rule, a key macroeconomic policy anchor, undermined policy credibility. - Compared to the 2024 FCL request—when policies and policy frameworks were deemed very strong—fiscal policies have weakened considerably; significant adjustments are needed to safeguard stability, restore credibility, and strengthen investor confidence, especially amid rising external risks. *IMF staff report excerpt.* ### 39. Meeting the near-term deficit targets will be an essential first step to restoring ### Meeting the near-term deficit targets will be an essential first step to restoring ### Near-term fiscal stance and credibility - Large deficits in 2024–25, combined with elevated borrowing costs, have reversed earlier debt gains and increased refinancing risks. - Meeting the revised 2025 deficit target will require immediate spending cuts of about ½ percent of GDP. - The authorities’ proposed 2026 budget relies on: - an ambitious tax reform, and - interest savings from debt management operations, - which may not materialize and would then require significant spending adjustments to meet the announced target. - Recommendation: Continue to develop a credible fiscal plan for next year and implement immediate spending consolidation. ### Medium-term consolidation: 2026–28 MTFF - A structural adjustment of at least 3.2 percent of GDP over the next three years is needed to: - stabilize debt, - rebuild fiscal policy space, and - improve the policy mix. - Required features of the consolidation path: - concrete revenue and spending measures, - clear intermediate targets, and - robust contingency planning. - Debt dynamics sensitivity: - Even with the 3.2 percent of GDP adjustment, debt dynamics remain sensitive to interest-growth differentials, implying a need for sustained fiscal restraint beyond 2028 to meet the debt anchor over the long term. - Structural and legal reforms needed: - legal reforms to address budget rigidity, - policies to contain fiscal costs of social and structural reforms, - careful calibration of composition and phasing of adjustments guided by market developments. ### Monetary policy and central bank stance - Banrep’s tight monetary policy stance remains appropriate and should continue. - Inflation context: - Inflation has declined significantly from its peak but remains above the 3 percent target amid persistent services inflation and inflationary pressures stemming from fiscal policy. - Policy guidance: - Normalization of monetary policy should proceed cautiously and remain data dependent to avoid costly policy reversals. - Maintaining central bank independence is essential to safeguarding credibility and effectiveness. ### External position, reserves, and exchange rate policy - Colombia’s foreign exchange reserves have remained adequate. - The flexible exchange rate should continue to serve as a key shock absorber. - Banrep’s reserve accumulation program in 2024 further strengthened the country’s external position. - FX intervention guidance: Reserve interventions should remain limited to episodes of market dysfunction or disorderly conditions. ### Financial sector resilience and supervision - System-wide assessment: - The banking sector is well-capitalized with declining NPLs and strong liquidity buffers. - Emerging risks: - Rising short-term liabilities and increased credit risks in specific sectors warrant continued close supervisory oversight. - The growing systemic footprint of financial conglomerates and NBFIs increases monitoring needs. - Policy recommendations: - Continue progress on implementing FSAP recommendations. - Enhance the macroprudential toolkit, including: - reintroduction of the Net Stable Funding Ratio, and - possible adoption of counter-cyclical capital buffers. - Establish a sound governance and investment framework for the new public pension savings fund to safeguard financial stability and mitigate transition risks. ### Structural reforms and governance - Priority areas: - boost productivity, - raise labor force participation, - enable a smooth energy transition, - strengthen governance and transparency. - Specific measures: - remove barriers to competition, - reduce labor market rigidities, - support female labor force participation through childcare and flexible work arrangements, - phase the authorities’ proposed energy transition carefully to limit fiscal, external, and labor market disruptions, backed by targeted reskilling programs and private financing mobilization. - Governance and transparency improvements: - expand access to beneficial ownership information, - ensure regular publication of asset declarations, - enforce whistleblower protections to enhance institutional trust and support reform implementation. ### Recommendation on Article IV timing - Staff recommends that the next Article IV consultation take place on the standard 12-month cycle. ### Box 1 — Recent Trends in Poverty Reduction (key findings) - Monetary poverty fell to 31.8 percent in 2024, the lowest since the series began in 2012, and down from 43.1 percent in 2020. - Over 2 million people lifted out of poverty since 2022. - Extreme poverty declined from 17.3 percent in 2020 to 11.7 percent in 2024. - Nearly 900,000 people escaped extreme poverty during this period. - The multidimensional poverty index (MPI) fell from 18.1 percent to 11.5 percent. - Drivers: - Strong household income growth driven by rising employment and wages. - Social transfers benefited more than 4.5 million households in 2024 and prevented extreme poverty from being nearly 5 percent higher. - Distributional challenges: - Poverty concentrated in indigenous communities, the unemployed, informal workers, and women. - Extreme poverty rate: exceeding 30 percent among the unemployed and 14 percent among women (compared to 10 percent among men). - Policy implications: - Sustain income growth, strengthen labor market participation (especially among women), and implement targeted policies to reduce informality and support the most vulnerable. - Program note: - Renta Ciudadana, introduced in 2024, has reached 2.9 million households—over 70 percent headed by women. ### Box 2 — Fiscal Slippages in 2024-25 (key findings and indicators) - Historical context: - CG primary deficit averaged less than 0.5 percent of GDP during 2000-19. - CG primary deficit reached 4.9 and 3.7 percent of GDP in 2020 and 2021, respectively. - Public debt rose above 60 percent of GDP during the pandemic. - Reforms and outcomes: - Social Investment Law (SIL) in late 2021 introduced a revamped fiscal rule, a debt anchor, and a tax package to raise 1 percent of GDP in permanent revenues. - Second tax reform in 2022 aimed at raising an additional 1¼ percent of GDP in revenues, mainly from taxes on oil and coal. - CG primary deficit reduced to 1.0 and 0.3 percent of GDP in 2022-23, respectively; public debt fell to around 54 percent by 2023. - Structural expenditure increase: - Primary expenditures rose from a pre-pandemic average of 16.5 percent of GDP to over 19 percent of GDP, driven by higher mandatory transfers and permanent expansion in social assistance programs. - 2024 fiscal reversal: - Fiscal policy turned expansionary in 2024; lower revenues were not matched by spending cuts. - CG primary deficit rose to 2.4 percent of GDP. - Treasury cash buffers were depleted by end-2024. - Budgetary backlogs increased sharply to 3 percent of GDP. - Public debt rose back to over 61 percent of GDP. - In June 2025, CARF determined that the fiscal rule had been breached in 2024. - 2025 budget process: - Congress failed to approve the budget and the accompanying financing bill, prompting the first use of a presidential budget decree since the 1990s. - The overall CG deficit target was revised upward multiple times: - from 4.7 percent in the budget decree, - to 5.1 percent in the Financing Plan (FP) published in February, - and to 7.1 percent of GDP in the June MTFF, - as downward revisions to revenue projections were not offset by spending adjustments. - Selected central government fiscal indicators (2023-25, Percent of GDP) as reported: - Tax Revenues: 16.6, 18.6, 17.3, 15.4, 14.4, 17.8, 16.8, 15.5 - Primary Expenditures: 19.0, 20.6, 19.9, 18.0, 18.9, 19.3, 18.6, 19.5 - Primary Balance: -0.3, 0.2, -0.9, -0.9, -2.4, -0.1, -0.2, -2.4 - Overall Balance: -4.2, -4.4, -5.3, -5.6, -6.7, -4.7, -5.1, -7.1 ### Box 3 — Decoupling from Peers: Sovereign Risk Premium (key findings) - Since the pandemic, Colombia has faced a persistently higher sovereign risk premium than its peers. - In 2024, Colombia’s average CDS spreads were at levels consistent with countries with lower sovereign ratings. - As of end-June 2025, Colombia EMBI and CDS spreads exceeded regional peers (Brazil, Chile, Mexico, and Peru) by nearly 200 and 120 basis points, respectively. - Methodology: - A synthetic control method is applied to local currency 10-year sovereign bond yields and EMBI spreads, using a weighted combination of Brazil, Chile, Mexico, Peru, and South Africa as controls. - Controls include: real GDP growth, inflation, inflation expectation, policy rate, public debt, fiscal balance, exchange rate changes, economic policy uncertainty, and the lagged dependent variable. - Quarterly data from end-2010 to mid-2025 were used. - Results: - Colombia’s bond yields tracked the synthetic control until early 2022, then diverged—rising sharply after the global commodity price shock. - EMBI spreads aligned with the synthetic until late 2020, before increasing persistently after Colombia’s sovereign rating downgrades, while the synthetic reverted to pre-pandemic norms. - Improved fiscal policies and outcomes in 2023-24Q1 were accompanied by a marked reduction in risk premium gaps between Colombia and the synthetic control; the opposite has been observed since then. *International Monetary Fund — COLOMBIA (excerpt).* ### Box 4. Macro-Fiscal Impact of Unfunded Social Transfers Through the Lens of a DSGE ### Box 4. Macro-Fiscal Impact of Unfunded Social Transfers Through the Lens of a DSGE Model ### Model setup and key features - Small-open economy DSGE model tailored to the Colombian economy, including an estimated share of liquidity-constrained households. - Household types: households with access to financial markets and liquidity-constrained households. - Production side: differentiated labor, multiple types of goods producers, and an exogenous oil sector. - Fiscal framework: - Revenues from lump-sum and distortionary taxes on labor, capital, and consumption. - Current spending and public investment. - Fiscal policy governed by a forward-looking fiscal rule targeting primary surpluses responsive to debt deviations from the anchor. - Monetary policy: central bank targets inflation through a forward-looking interest rate rule. - Risk premium: modeled as a non-linear function of public indebtedness. ### Policy experiment and scenarios - Shock evaluated: government increases social transfers by 1 ppt of GDP during 2025-27 (i.e., while the fiscal rule is suspended). - Scenarios compared: - No consolidation (blue line): fiscal consolidation postponed during suspension and not offset. - Tax-based consolidation (red line): consolidation achieved through taxes during the suspension. - Expenditure-based consolidation (black line): consolidation achieved through spending cuts during the suspension. ### Key findings (model results) - Short run under no consolidation: - Nominal GDP and debt-to-GDP increase sharply initially. - Medium run under no consolidation: - After reactivation of the fiscal rule, nominal GDP and debt-to-GDP start to decline. - A rise in the risk premium and anticipation of future taxes to finance unfunded social transfers lead to a decline in private consumption and GDP over the medium term. - The debt stock is further away from the fiscal anchor, implying that compliance with the fiscal rule will require larger primary surpluses than in alternative scenarios. - Comparative outcome by end of projection period: - Outcomes under the no consolidation scenario are inferior to those from the tax-based consolidation and the expenditure-based consolidation scenarios, which attenuate the adverse impact of increased social transfers. ### Metrics and chart context - Charts illustrate dynamics for: - GDP (percent) - Primary Deficit (percent of GDP) - Public Debt (percent of GDP) - Scenario color coding referenced in analysis: - No consolidation — blue line - Tax-based consolidation — red line - Expenditure-based consolidation — black line *Source: IMF staff estimates* ### Annex I. External Sector Assessment, 2024 ### Annex I. External Sector Assessment, 2024 ### Overall Assessment - Staff assesses that the external position in 2024 was broadly in line with medium-term fundamentals and desirable policies. - Key offsets that narrowed the current account deficit: - Strength of tourism receipts. - Remittance inflows. - Reduction in profit transfers abroad. - Reduction in imports. - External position benefits: - Relatively stable and diversified capital flows with a high FDI component. - Favorable composition of external debt with long maturities. - Sizable peso-denominated debt for sovereign bonds. - High natural and financial hedges for corporates. - Exchange rate regime: - The flexible exchange rate has continued to serve as a key mechanism of adjustment to external shocks. ### Potential Policy Responses - Significant consolidation efforts needed over the medium term, including to reduce the burden on monetary policy in the ongoing disinflation process. - Complementary policies to improve the investment climate and encourage private investment, including: - Reforms to responsibly diversify the country’s export base. - Reduce barriers to entry. - Boost productivity. - Enhance governance and transparency. ### Foreign Assets and Liabilities: Position and Trajectory - Background and levels: - Colombia’s NIIP at end-2024 is estimated at -44.6 percent of GDP, 7.5 percentage points less negative than at end-2023. - Gross external financing needs stood at 12.7 percent of GDP, 2.0 percentage points lower than in 2023. - NIIP change driven by a decrease in FDI, portfolio and other investment liabilities relative to GDP, largely reflecting denominator effects of a significantly larger USD value of nominal GDP in 2024. - During 2019-24, marginal increase in liabilities (up 0.3 points of GDP, driven mainly by other investments) was more than offset by increase in assets (up 4.6 points of GDP, mainly driven by portfolio investment). - Excluding FDI, the NIIP stood at a positive 0.7 percent of GDP, above the 5-year average (-4.1 percent of GDP). - Considering only reserve assets and debt liabilities, the net position was -38.4 percent. - Assessment: - Colombia’s NIIP and its composition are sustainable, although efforts will be required to reduce fiscal deficits and sovereign spreads. - The estimated medium-term current account (CA) balance required to stabilize the NIIP at its end-2024 level is about -2.2 percent of GDP. - While this is slightly higher than the baseline CA balance over the medium term, the projected very large share of FDI (and its countercyclical valuation properties) allows some degree of flexibility. - 2024 (% GDP) headline figures (as reported in the Annex): - NIIP: -45 - Gross Assets: 65 - Reserve Assets: 14.9 - Gross Liab.: 110 - Debt Liab.: 53 ### Current Account - Background: - CA deficit fell from 2.3 percent of GDP in 2023 to 1.7 percent of GDP for 2024. - Deterioration in the trade balance was more than offset by improvements in the services, primary income and secondary income balances. - Both export and import values fell, in line with lower commodity prices and continued tight monetary policy and weak investment, with the drop in exports dominating despite slightly improved terms of trade (up 2.0 percent y/y). - Goods exports volumes fell by 1.7 percent (y/y) mainly reflecting lower oil and coal, while import volumes remained generally subdued (up 2.8 percent y/y). - Improvements in the CA were mainly driven by: - Tourism receipts (up 14 percent y/y). - Remittances (up 17 percent y/y). - Reduction in profit transfers abroad. - Assessment and model estimates: - Cyclically adjusted CA norm: -0.6 percent of GDP. - CA gap for 2024: -1.7 percent of GDP. - Identified policy gaps: 0.4 percent of GDP, with the fiscal gaps contributing 0.2 percent of GDP. - Colombia-specific adjustments applied to the norm: - (i) reduce the contribution of oil exports to the norm by 1.3 percent of GDP. - (ii) reduce the norm by an additional 0.5 percent of GDP to absorb the large stock of migrants from Venezuela. - The combined adjustments reduce the CAB gap to 0.1 percent of GDP, with a standard error of +/-0.6 percent of GDP. - 2024 (% GDP) reported CA metrics: - Estimated CA: -1.7 - Cycl., Adj. CA: -2.2 - EBA Cycl. Adj. CA Norm: -0.6 - EBA CA Gap: -1.7 - Other Adj.: 1.8 - Staff CA Gap: 0.1 ### Real Exchange Rate (REER) - Background: - REER depreciated 3.6 percent in 2024, following an appreciation of 28.0 percent in 2023 and an 8.5 percent depreciation in 2022. - The REER was 29 percent weaker than the 2010-14 average owing to generally lower terms of trade. - The average nominal effective exchange rate (NEER) depreciated 5.1 percent in 2024. - Assessment: - Staff judges the REER gap consistent with the staff CAB gap at -0.6 percent, with a range of uncertainty (+/- 3.5 percentage points). - Applying a semi-elasticity of -0.17 to the gap from the CAB approach suggests: - REER symmetric overvaluation: 4.1 percent. - REER symmetric undervaluation: 2.9 percent. - External Sustainability approach implied undervaluation: 1.8 percent. - EBA REER model (level method) undervaluation: 1.7 percent. - REER index method shows an undervaluation of 21.7 percent. ### Capital and Financial Accounts: Flows and Policy Measures - Background on flows: - In recent years the CA has been financed primarily by capital inflows in the form of FDI, complemented by portfolio inflows or foreign borrowing. - For 2024 net FDI liabilities (inflows) reached 2.3 percent of GDP, diversified across sectors. - Portfolio investment recorded net outflows of 0.6 percent of GDP: - Residents increased positions overseas by 1.3 percent of GDP. - Non-residents increased exposure to the domestic government debt market by about 0.7 percent of GDP. - Short-term debt, mainly private, represented 13.4 percent of external debt, slightly lower than its level in 2023. - The government issued sovereign bonds to partially pre-finance 2025 needs. - Assessment: - Relative stability of FDI flows, diversification of creditors, and uninterrupted market access have underpinned capital inflows, including during periods of stress. - Colombia’s attractiveness as an investment destination should continue to support external investment flows, particularly if uncertainties over the direction of policies dissipate and efforts to improve the investment climate take hold. ### FX Intervention and Reserves Level - Background: - Gross international reserves reached $61.9 billion at end-2024, $2.8 billion more than in 2023. - Reserve accumulation drivers: returns on reserve assets and valuation adjustments, combined with central bank purchases of $1.5 billion. - Assessment: - The flexible exchange rate has been the primary mechanism of adjustment to external shocks. - Depreciations have cushioned export receipts (largely through local-currency prices owing to USD pricing of exports) and kept imports in check. - Reserve coverage for 2024: - 131 percent of the ARA metric. - 117 percent if the commodity buffer is included. - Further reserve accumulation, as conditions permit, would help insure against elevated external risks. ### Footnotes referenced in the Annex - The contribution of oil exports is adjusted downward to account for Colombia’s investment needs relative to the EBA sample, based on Colombia’s infrastructure gap relative to rivals in export markets, higher public fixed capital formation, and relatively efficient practices in public investment management. - The migration adjustment is the same as in the 2020–2024 Article IV consultations, consistent with a constant stock of migrants; it is lower than in the 2019 Article IV and conservative relative to the adjustment implied by the EBA model’s population coefficient. - To capture uncertainty in commodity prices, baseline oil export values are shocked by one standard deviation in the oil price (1980-2023), similar to the price volatility embodied in oil option prices. --- ### Annex II. Revisiting Medium-Term Growth Projections - Recent growth performance: - Colombia's average real GDP growth has fallen to around 2½ percent over the past decade (2015-2024), amid subdued private investment more recently. - Investment and productivity have been weaker than in most peer countries since the pandemic. - Staff’s medium-term growth projection evolution: - Staff gradually reduced the medium-term growth projection from 3½ to 3 percent over the last two AIV consultations. - Under current policies, investment is projected to gradually recover but expected to remain somewhat below pre-pandemic levels by 2030. - Demographic headwinds: - DANE population projections: population growth expected to decline from 1.1 percent in 2023 to 0.5 percent in 2030. - Potential growth and TFP requirements: - Growth accounting indicates average TFP would need to grow by 1.1 percent per year to support medium-term growth of 3 percent. - Historical comparisons: - Staff estimated average TFP growth of 0.9 percent over 2001–2019. - World Bank estimated average TFP growth of 0.7 percent over 2001–2019. - Given difficulty of achieving 1.1 percent TFP growth under current policies, a lower medium-term growth of 2¾ percent (based on TFP growth of about 1 percent) would be more consistent with historical data and expected trends under the baseline. ### Growth Accounting (reported aggregates) - Reported components (2001–2019 vs 2027–2030 averages in the Annex figure): - Capital, Employment, TFP, and Growth totals illustrated in the staff calculations (exact numeric breakdowns shown in the Annex figures). --- ### Annex III. Risk Assessment Matrix (RAM) — Selected Risks, Impacts, and Policy Advice - Methodology note: - Likelihood categories: “low” <10 percent, “medium” 10–30 percent, “high” 30–50 percent. - RAM reflects staff views as of discussions with authorities; risks may interact and materialize jointly. - Global risks - Trade, Immigration, and Investment Shocks - Likelihood: High. - Impact: High. - Assessment: Reduced external trade and remittances, disrupted FDI and supply chains, tighter financial conditions, higher inflation. - Policy advice: Use existing policy space; support vulnerable groups; consistent with IT regime and medium-term fiscal path; allow exchange rate to absorb shocks. - Sovereign Debt Distress - Likelihood: High. - Impact: Medium. - Assessment: Vulnerability to sudden exit of foreign investors due to large share of sovereign bonds held by non-residents; mitigated by policy buffers. - Policy advice: Use flexible exchange rate; urgent, decisive, and credible fiscal adjustment to re-anchor expectations and lower borrowing costs. - Tighter Financial Conditions and Systemic Instability - Likelihood: Medium. - Impact: High. - Assessment: Higher-for-longer rates and asset repricing could cause capital outflows and systemic instability, raising borrowing costs and harming growth. - Policy advice: Flexible exchange rate as first line of defense; targeted liquidity interventions including asset purchases and use of reserves; tighten monetary policy under IT if inflation is affected. - Commodity Price Volatility - Likelihood: Medium. - Impact: Medium. - Assessment: Volatility affects export and import prices, feeds into headline and core inflation, and pressures external and fiscal balances. - Policy advice: Use flexible exchange rate; tighten monetary policy if second-round effects materialize; reduce reliance on oil-related tax revenues; accelerate structural reforms for diversification. - Colombia-specific risks - Disorderly Transition towards Cleaner Energy - Likelihood: Medium. - Impact: High. - Assessment: Sudden stop in fossil fuel activity would significantly affect external and fiscal accounts. - Policy advice: Reprioritize structural reforms for competitiveness and export diversification; adopt more ambitious fiscal adjustment to protect fiscal credibility. - Social Unrest - Likelihood: Medium. - Impact: High. - Assessment: Persistently high inflation, slowing growth, unmet social demands, or constitutional reform could amplify unrest and weaken policymaking. - Policy advice: Advance reforms addressing social demands with broad political support; continue policies to achieve inflation target and fiscal sustainability while providing targeted support within fiscal rules. - Further Deterioration of Fiscal Outlook - Likelihood: High. - Impact: High. - Assessment: Failure to meet 2025 deficit target would complicate consolidation and raise borrowing costs. - Policy advice: Enact necessary adjustments to meet the 2025 target and start implementing MTFF consolidation measures promptly. - Monetary Policy Miscalibration - Likelihood: Medium. - Impact: Medium. - Assessment: Mistimed policy rate cuts could jeopardize credibility and require costly reversals. - Policy advice: Keep tight monetary stance until headline and core inflation and inflation expectations are in firm downward trajectories. - Tenser Relations between US and Colombia - Likelihood: Medium. - Impact: Medium. - Assessment: Direct U.S. tariffs on Colombian imports could harm external position, borrowing costs, and investment. - Policy advice: Implement structural reforms to enhance adjustment capacity, including infrastructure, rule of law, human capital, competition, and labor market reforms to reduce informality. --- ### Annex IV. Impact of Global Risks on Near-Term Outlook - Scenario description: - Uses IMF’s GIMF model incorporating four layers from the April 2025 WEO risk scenario: global growth divergence, trade war, tighter global financial conditions, and increased global uncertainty. - Impacts of tighter financial conditions and increased uncertainty based on Latin American averages; impacts of global divergence and trade war are country specific. - Scenario does not explicitly model commodity prices and remittances. - Projected impacts on Colombia: - Annual real GDP growth could decline in the near term: - Decline by 0.5 percentage points in 2025 (deviation from baseline). - Decline by 0.2 percentage points in 2026 (deviation from baseline). - Primary channels: - Higher global uncertainties reduce investment and consumption. - Tighter global financial conditions weigh on growth via domestic monetary tightening and international spillovers. - Modest positive offsets from global divergence and trade war via trade diversion effects. - Overall impact on inflation and REER is limited. *Source: IMF staff, Annex I. External Sector Assessment, 2024 (from the cited IMF document).* ### Annex V. Recommendations of the 2024 Article IV Consultation ### Annex V. Recommendations of the 2024 Article IV Consultation and Authorities’ Actions ### Monetary Policy - Fund recommendation: - Policy rate cuts should continue with caution with a backloaded pace aiming to bring inflation durably to the target by mid-2025. - Further strengthening communication can help more strongly anchor inflation expectations. - The exchange rate should continue to flexibly respond to shocks, unless disorderly market conditions arise, in line with the IPF. - A further gradual strengthening of international reserves would be appropriate as conditions allow. - Authorities’ actions and outcomes: - Following cumulative cuts of 350 basis points in 2024, the policy rate was reduced by only 25 basis points in 2025H1, as inflationary pressures persist in the context of fiscal easing. - In its November 2024 communiqué and through various monetary policy decisions in 2025, Banrep reiterated its commitment to the 3 percent inflation target. - Banrep completed its US$1.5 billion reserve accumulation plan over 2024. ### Fiscal Policy - Fund recommendation: - The planned increases in the overall deficit and debt pose fiscal risks. - Given revenue uncertainties, proactively scaling back expenditure plans would reduce the risk of needing to identify spending cuts later in the year to meet the fiscal rule. - Reorienting expenditures towards investment within this lower spending envelope could support energy transition and enhance growth potential. - Authorities’ actions and outcomes: - The 2024 primary deficit was 2.6 ppt of GDP larger than originally anticipated or budgeted, as expenditure cuts in late 2024 were insufficient to offset large revenue shortfalls. - These slippages reduced the credibility of the fiscal and budget framework, while late spending adjustments sacrificed growth-boosting public investment. - Poor liquidity management and sizable budgetary backlogs contributed to policy uncertainty. - Key fiscal risks and requirements noted in the DSA/comments: - Large budget cuts in 2025, fiscal measures (3.2 ppts of GDP) during 2026-28, and changes in the spending composition over the medium term will be required to lower spreads and promote a gradual convergence of public debt to the anchor. - Debt stabilization critically depends on the sustained implementation of the assumed fiscal consolidation and return to the fiscal rule by 2028. ### Financial Sector - Fund recommendation: - While the financial sector has been resilient, continuing to monitor rising NPLs and maturity risks will be important. - Progress should continue in implementing FSAP recommendations. - Thorough analysis of potential implications of the pension reform on financial stability should help inform reform discussions. - Authorities’ actions and outcomes: - The authorities have adopted several FSAP recommendations, including strengthening the risk management framework. - Measures were taken to reduce the rigidity of the countercyclical provisioning scheme (CCyP) and authorities are considering the merits of a countercyclical capital buffer scheme. - The supervisory agency has expanded the data collection on household indebtedness and debt burden. ### Social and Structural Reforms - Fund recommendation: - Reforms should fit within Colombia’s very strong policy frameworks, addressing problems in the current system while ensuring alignment of economic incentives and encouraging investment. - Clear communication on policy direction and broad political support is essential for the reforms to be durable. - Further advancing structural reforms to enhance productivity and diversify the economy remains essential. - Authorities’ actions and outcomes: - The pension reform was approved in mid-2024 but the Constitutional Court sent it back to Congress for further discussions, and the fiscal costs still need to be fully reflected in the MTFF projections. - The labor reform was approved in Congress in mid-2025, and it is expected to take effect later this year. - The healthcare reform continues to be discussed in Congress. - Implementation of energy transition policies (e.g., plans to sharply reduce fossil fuel exploration and production) has raised uncertainties on the direction of domestic policies. ### Governance - Fund recommendation: - Reform efforts should be complemented with a further strengthening of governance and transparency and reduction of corruption risks, including through: - (i) the development of a comprehensive risk-based anti-corruption strategy; - (ii) the continuous publication of comprehensive and easily accessible income and asset declarations of politically-exposed persons; and - (iii) public access to effective beneficial ownership information. - Authorities’ actions and outcomes: - The Financial Information and Analysis Unit (UIAF) will conduct a new National Risk Assessment during 2025–2026, per recommendations of the Financial Action Task Force (FATF). - Access to the Single Registry of Beneficial Owners (SRBO) has been granted to entities authorized by law. - About 95 percent of the obliged entities registered in the SRBO but DIAN has partial information on shareholders of sociedades anônimas, which hinders governance efforts. - To date, no risk assessment on the misuse of different types of legal entities for AML/CFT purposes has been conducted with the support of the SRBO. ### Public Debt Sustainability — Baseline Scenario and Key Medium-Term Findings - Debt sustainability summary: - Commentary: Colombia's gross public sector debt is assessed to be sustainable under a wide range of plausible shock scenarios, with moderate risks. - The planned consolidation and return to the fiscal rule are critical for debt stabilization. - Large budget cuts in 2025, fiscal measures (3.2 ppts of GDP) during 2026-28, and changes in the spending composition over the medium term will be required to lower spreads and promote a gradual convergence of public debt to the anchor. - The projected debt path is expected to remain stable over the medium term and GFNs to remain at manageable levels, conditional on the sustained implementation of the assumed fiscal consolidation and return to the fiscal rule by 2028. - Demographic headwinds and lower oil and coal production could affect long-term growth and fiscal sustainability. - Overall risk of sovereign stress: moderate. - Recent and projected debt levels and fiscal variables (percent of GDP unless indicated otherwise) — selected rows from the Baseline Scenario table: - Public debt: 61.2 (Actual 2024), 58.6 (2025), 61.4 (2026), 62.3 (2027), 61.6 (2028), 60.6 (2029), 59.5 (2030), 58.3 (2031), 57.2 (2032), 56.4 (2033), 55.7 (2034), 55.2 (2035) - Change in public debt: 5.8 (2024), -2.6 (2025), 2.8 (2026), 0.9 (2027), -0.6 (2028), -1.1 (2029), -1.1 (2030), -1.2 (2031), -1.1 (2032), -0.8 (2033), -0.4 (2034), 0.0 (2035) - Contribution of identified flows: 8.4 (2024), -0.4 (2025), 2.6 (2026), 0.9 (2027), -0.7 (2028), -1.1 (2029), -1.1 (2030), -1.2 (2031), -1.1 (2032), -0.8 (2033), -0.4 (2034), 0.0 (2035) - Primary deficit: 1.7 (2024), 1.9 (2025), 0.9 (2026), -0.6 (2027), -1.7 (2028), -1.8 (2029), -1.8 (2030), -1.5 (2031), -1.2 (2032), -0.9 (2033), -0.6 (2034), -0.2 (2035) - Noninterest revenues: 28.4 (2024), 27.5 (2025), 27.9 (2026), 28.5 (2027), 29.0 (2028), 29.3 (2029), 29.5 (2030), 29.5 (2031), 29.5 (2032), 29.5 (2033), 29.5 (2034), 29.5 (2035) - Noninterest expenditures: 30.1 (2024), 29.5 (2025), 28.8 (2026), 28.0 (2027), 27.4 (2028), 27.4 (2029), 27.6 (2030), 28.0 (2031), 28.3 (2032), 28.6 (2033), 28.9 (2034), 29.2 (2035) - Automatic debt dynamics: 7.1 (2024), 0.9 (2025), 0.7 (2026), 0.7 (2027), 0.6 (2028), 0.2 (2029), 0.5 (2030), 0.3 (2031), 0.1 (2032), 0.1 (2033), 0.2 (2034), 0.2 (2035) - Real interest rate and relative inflation: 5.1 (2024), 2.4 (2025), 2.0 (2026), 2.2 (2027), 2.3 (2028), 1.9 (2029), 2.1 (2030), 1.9 (2031), 1.7 (2032), 1.6 (2033), 1.7 (2034), 1.7 (2035) - Real growth rate: -0.9 (2024), -1.5 (2025), -1.3 (2026), -1.5 (2027), -1.6 (2028), -1.7 (2029), -1.6 (2030), -1.6 (2031), -1.6 (2032), -1.5 (2033), -1.5 (2034), -1.5 (2035) - Gross financing needs (GFN): 12.7 (2024), 8.6 (2025), 7.6 (2026), 6.6 (2027), 5.1 (2028), 4.5 (2029), 4.5 (2030), 4.6 (2031), 4.7 (2032), 4.9 (2033), 5.2 (2034), 8.8 (2035) - Of which: debt service: 11.0 (2024), 6.6 (2025), 6.7 (2026), 7.1 (2027), 6.7 (2028), 6.4 (2029), 6.3 (2030), 6.1 (2031), 5.9 (2032), 5.8 (2033), 5.8 (2034), 9.0 (2035) - Memo (key macro assumptions): - Real GDP growth (percent): 1.6 (2024), 2.5 (2025), 2.3 (2026), 2.5 (2027), 2.7 (2028), 2.9 (2029), 2.8 (2030), 2.7 (2031), 2.7 (2032), 2.7 (2033), 2.7 (2034), 2.7 (2035) - Inflation (GDP deflator; percent): 6.0 (2024), 4.9 (2025), 3.5 (2026), 3.0 (2027), 3.0 (2028), 3.0 (2029), 3.0 (2030), 3.0 (2031), 3.0 (2032), 3.0 (2033), 3.0 (2034), 3.0 (2035) - Nominal GDP growth (percent): 7.7 (2024), 5.7 (2025), 5.9 (2026), 5.6 (2027), 5.8 (2028), 5.9 (2029), 5.8 (2030), 5.8 (2031), 5.8 (2032), 5.8 (2033), 5.8 (2034), 5.8 (2035) - Effective interest rate (percent): 6.7 (2024), 8.2 (2025), 6.5 (2026), 6.3 (2027), 6.5 (2028), 5.9 (2029), 6.3 (2030), 6.0 (2031), 5.6 (2032), 5.7 (2033), 5.8 (2034), 5.9 (2035) - DSA commentary and risk messages: - The overall risk of sovereign stress is moderate. Gross public debt reached 61.2 percent of GDP by end-2024, reflecting higher deficit and weaker peso. - Given the absence of identified measures and sizable implementation risks, considerable efforts are needed to bring down net CG debt decisively toward the anchor. - Large budget cuts are warranted to meet the 2025 fiscal target. Measures adding to 3.2 ppts of GDP over three years are required by the consolidation plan. - Risks associated with GFN are moderate; commodity prices, exchange rate, and interest-growth rate differentials may pose medium-term challenges. - Debt stabilization critically depends on the successful fiscal consolidation and return to the fiscal rule by 2028. ### Medium- and Long-Term Risk Analysis — Highlights - Medium-term risk indicators and staff assessment: - Debt fanchart index (DFI): 1.4 (signal: Moderate) - Average baseline GFN: 6.1 (percent of GDP) - Initial banks' claims on the general government: 12.4 (pct bank assets) - GFN financeability index (GFI): 9.0 (signal: Moderate) - Final assessment: staff assesses medium-term risks as moderate, conditional on the assumed fiscal consolidation and meeting the 2025 MTFF targets. - Long-term considerations: - Demographic headwinds (health/demographics) and rising long-term amortization needs could increase long-run debt pressures if not addressed. - Long-term projections show scenarios for GFN-to-GDP and total public debt-to-GDP under alternative assumptions including demographics and health-related costs. *Source: IMF staff.* ### Annex VII . Implementation of the 2022 FSAP Key ### Annex VII . Implementation of the 2022 FSAP Key Recommendations ### Banking Supervision - Recommendation: Introduce necessary legal amendments to strengthen the independence of the SFC: (i) specify that the Superintendent is appointed for a minimum term and removed from office only for reasons specified in the law; and (ii) provide explicit legal protection to the SFC. - Update: The general rules governing the appointment and removal of the Superintendent are outlined in the National Constitution and Decree 1817 of 2015. However, certain aspects such as minimum periods, among others, still require regulation by higher legislation. - Time: MT - Recommendation: Develop more specific guidance/regulations on concentration, transfer and country risks, related party transactions, internal capital assessment and the IRRBB. - Update: - Concentration risk: Decree 1533 of 2022 establishes rules for managing concentration risk. In accordance with this decree, the SFC issued External Circular 003 of 2024, which directs entities (on an individual and consolidated basis) to implement both regulatory limits (25 percent of Tier1) and internal caps of exposure based on geographic criteria, industry, economic sector, and currency of exposure, among others. This circular does not recognize intra-group credit letters as permitted collateral; only the financial collaterals specified in the circular are deemed admissible. These regulations will come into effect in August 2025. - Transfer and country risk: External Circular 018 of 2021 sets the requirements for the management of transfer and country risk, including the risk arising from foreign currency transfers, sovereign risk (SR) and transfer risk (RT), among others. These instructions have been in force since June 2023. - Internal capital assessment: The SFC has released the draft regulation on ICAAP and ILAAP for the second public review. This regulation updates the stress testing framework in line with international best practices and requires supervised entities to develop and implement capital and liquidity self-assessment programs. The SFC expects to issue the final version in the first half of 2025. - IRRBB: External Circular 025 of 2022 provides instructions related to the "Interest Rate Risk Management of the Banking Book" and the "Interest Rate Risk Model of the Banking Book." The SFC has established a transition period with key application dates: (i) full management requirements effective on December 1, 2024; (ii) individual-level reporting for IRRBB effective on December 31, 2024; and (iii) consolidated-level reporting for IRRBB due by December 31, 2025. - Time: MT - Recommendation: Establish a consolidated body of requirements on related-party transactions. - Update: In accordance with the Basel Committee on Banking Supervision (BCP) Principle 20, Decree 1358 of 2024 establishes a consolidated regulation body applicable to related party transactions. The decree: - Defines what is considered a “related party” of banks. - Includes provisions for identifying and managing conflicts of interest in transactions and operations with related parties. - Sets a general limit of 25 percent of Tier1 capital to control the bank’s exposure to related parties. - Effective date: provisions of the decree will be effective from May 2026. - The SFC will issue instructions for the application of the Decree, including reporting standards within 12 months. - Time: ST - Recommendation: Readjust or determine some parameters used in the computation of the local LCR and NSFR ratios to further align with Basel III requirements and require the local NSFR ratio to be also calculated at a consolidated level. - Update: Same as 2024 SR. - Time: MT - Recommendation: Maintain a direct and intrusive supervision of banks by the SFC, including an adequate level of on-site inspections, and avoid over-reliance on external and internal auditors when performing supervisory tasks. - Update: Same as 2024 SR. - Time: ST ### Macroprudential Oversight - Recommendation: Strengthen the role of the central bank in systemic risk monitoring and of the Banco de la República (BR) and the Superintendency of Financial Institutions in macroprudential decision-making. - Update: Same as 2024 SR. - Time: ST - Recommendation: Expand LTV and DSTI tools to cover leasing products and the DSTI tool to include nonmortgage debt. - Update: Same as 2024 SR. - Time: ST - Recommendation: Close data gaps in the areas of cross-border exposures and household indebtedness. - Update: - Cross-border exposures: Following IFRS 9 standards, SFC publishes a quarterly report on portfolio information by stage/portfolio and economic sectors of entities with subsidiaries abroad. This report allows for calculation of key portfolio metrics such as growth, deterioration, and risk coverage, providing a comprehensive view of risks associated with cross-border exposure. - Household indebtedness: The SFC has been developing MURIC (Módulo Único de Reporte de Información de la Cartera de Crédito), a new monthly data report on loans. MURIC will provide supervisors with more granular data on household indebtedness, economic sectors, sociodemographic characteristics, credit conditions, forbearance measures, and payment behavior. MURIC will also cover corporate loans. An external circular was published for public comments in December 2024 and will be issued by the end of 2025. - Time: I ### Risk Analysis - Recommendation: Strengthen the ability to monitor cross-border exposures and conduct a fully consolidated stress-testing by filling data gaps on the exposures and risk metrics of ultimate subsidiaries. - Update: Same as 2024 SR. - Time: ST - Recommendation: Extend data collection to monitor liquidity risks by currency. Collect more granular data on assets and liabilities generating cashflows, including those related to cross-border exposures. - Update: Same as 2024 SR. - Time: ST - Recommendation: Develop network analysis tools and improve data coverage to bolster EWS for domestic and cross-border contagion. - Update: Same as 2024 SR. - Time: ST ### Climate Risks and Opportunities - Recommendation: Adopt a risk-based approach in supervision for climate-related risks and continuously improve information disclosures (both by nonfinancial corporates and by financial institutions) and data availability. - Update: - The SFC recently updated the methodology for assessing inherent risk by including sensibility to climate risk for the aggregated rating per institution. This new method is expected to be operational by April 2025. - In the second half of 2024, a transversal supervision exercise was conducted with a sample of entities from different industries to evaluate design processes, information disclosure practices, and compliance with the value proposition of ESG products. - March 2024: SFC issued External Circular 005, providing instructions for integration of ESG factors in disclosure mechanisms of Collective Investment Funds (CIFs), covering regulations, investment prospectus, and accountability reports. - External Circular 031 of 2021: transition period for largest issuers (Group A, companies listed in the Colombian Stock Exchange) to disclose social and environmental information, including climate-related issues, ended in 2024. Under off-site supervisory scheme for issuers, the SFC began monitoring disclosed information for sufficiency and quality and making follow-up requests when necessary. - SFC implemented the latest edition of the Biennial Survey on Climate-Related ESG Risks and Opportunities covering four pillars: (i) governance and strategic approach to ESG and climate issues; (ii) integration of ESG factors in risk management; (iii) development of green and sustainable financial products; and (iv) measurement and disclosure of ESG and climate-related information. The survey provides a comprehensive view supporting supervisory strategies and public policy on sustainable finance. - 2024 supervision program: a pilot test with entities from various industries evaluated ESG criteria integration, identified best practices, and assessed greenwashing risks. The program included monitoring compliance with External Circular 031 and exercises for financial products and services labeled as sustainable to monitor potential greenwashing. - Time: MT ### Resolution, Crisis Management and Safety Nets - Recommendation: Strengthen the operational independence of the Resolution Unit (GR). - Update: The structure of the SFC is currently being reviewed to determine whether the current location of the Resolution Unit, its operation, and mandate are properly established or need modification. - Time: ST - Recommendation: Make the financial institutions responsible for recovery planning, requiring use of a wide range of risk scenarios and identification of mitigating measures. Make the GR responsible for resolution planning. - Update: - Current regulations include specific provisions for resolution plans involving both the resolution unit of the SFC and FOGAFÍN, but do not require recovery plans. - The draft regulation on ICAAP and ILAAP introduces guidance on recovery activities, requiring supervised entities to design an internal recovery program using diverse risk scenarios and identifying mitigation measures. - Resolution Plans (RP), based on the North American model, were introduced in 2018. - June 2024: SFC, following analysis by the CIR, approved the first version of the RP for the four systemic entities, with two more entities beginning development. All six are expected to update their plans by 2026. - Observations: RPs provide deep insight into each entity’s structure and operations, support effective resolution implementation, and enable assessment of dismantling business lines, modifying contracts, and liquidating assets. Standardization work is underway on criticality, separability, and resolution triggers; resolution financing—especially internal funding—remains a challenge. - Time: ST - Recommendation: The mandates and tasks of the resolution unit and the deposit insurer (Fogafin) should be streamlined. - Update: Same as 2024 SR. - Time: MT - Recommendation: Strengthen resolution tools by: (i) giving Fogafin the flexibility to conduct purchase and assumption powers with only insured deposits; (ii) restrict the ability of Fogafin to be the shareholder of restructured or bridge banks; and (iii) consider establishing bail-in powers as a resolution tool. - Update: Same as 2024 SR. - Time: MT - Recommendation: Fogafin’s financing should be limited to resolution funding (i.e., financing that is used to support the use of resolution powers and achieve the resolution objectives). - Update: The institutional framework for financial stability defines each authority's role and provides tools to secure financial stability and public confidence. Entities in the financial safety net, and Fogafín in particular, have instruments that, under clear mandates and processes, can support implementation of mechanisms to preserve stability and protect depositors' confidence. - Time: ST - Recommendation: Establish guaranteed backup liquidity facility for Fogafin. - Update: - Fogafín is engaged in a technical assistance program with the World Bank to: 1) allow differentiated liquidity profiles to be set up as a function of crisis characteristics and probability; 2) include analysis of money-market instruments, derivatives and inter-institutional agreements with the Finance Ministry and the Central Bank. - November 29, 2024: The Central Bank modified the regulatory framework for the use of open market operations (OMAs), allowing Fogafín to function as Agent for OMAs in temporary monetary expansion operations. With this regulatory change, Fogafín now has access to all types of OMAs. This facility will serve as a contingent liquidity line when Fogafín lacks sufficient resources to meet its mandate. - Time: ST ### Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) - Recommendation: Ensure a swift implementation of the 2018 MER’s recommendations to strengthen the overall effectiveness of the AML/CFT regime. - Update: - Colombia decided not to request further re-assessments regarding the Fourth Round of Mutual Evaluations of the FATF but to prepare for the Fifth Round of Mutual Evaluations scheduled in 2028. - April 2024: first interinstitutional working group meeting coordinated by the Financial Information and Analysis Unit (UIAF). An initial work plan was defined; the SFC has significant leadership and coordination responsibilities. - 2025: SFC began to define a short- and medium-term work line with the UIAF to establish the strategy for the 2028 evaluation involving other supervisors (Superintendency of Solidarity Economy, National Tax and Customs Directorate, Ministry of Information Technologies and Communications). - August 2024: XLIX Plenary of GAFILAT Representatives and its five working groups was held in Bogotá. The SFC presented research on risks faced by the Colombian financial sector related to clients from DNFBP sectors, specifically notaries. - 2023–2024: Colombia assessed in the second round of peer reviews on compliance with the OECD standard on exchange of information on request (EOIR). Satisfactory results obtained regarding regulatory requirements, supervisory processes, and compliance with requirements related to identification of ultimate beneficiaries and effective use of this information in MLTF prevention. - November 2024: XLI regular session of the Interinstitutional Coordination Commission for the Control of Money Laundering; a proposal for a government strategy against Money Laundering Professionals was presented with SFC participation. - Time: MT - Recommendation: Continue efforts to enhance sanctioning practices so that effective, proportionate, and dissuasive sanctions are applied for AML/CFT breaches. - Update: - 2024: SFC, through the Department for MLTF Risk, imposed five (5) institutional and financial penalties totaling COP1,295,000,000 on banks, financial cooperatives, trust companies, and special official entities; issued six (6) administrative orders and four (4) adjustment plans due to non-compliance with SARLAFT regulatory requirements. - 2025 (so far): one administrative order issued to a trust company. - 2023–2024: Preparation of Compliance Officers and Responsible Officials' reports continued to provide feedback and deterrence. - Time: MT - Recommendation: Address ML/TF risks associated with crypto assets and ensure virtual asset service providers are properly licensed, monitored and supervised for AML/CFT compliance. - Update: - SFC worked on multiple initiatives regarding regulation and supervision of Virtual Asset Service Providers (VASPs), including a drafted bill on virtual assets developed with the Ministry of Finance between 2023 and 2024. - SFC collaborated with the Central Bank of Colombia (BR) on new approaches. The Department for MLTF Risk participated in 2024 working groups coordinated by the Financial and Technological Innovation Group (Innova), discussing VASPs’ challenges in accessing financial products, formal complaints, supervisory positions, and market products related to virtual assets. - SFC developed a pilot project in the sandbox (la Arenera SFC) testing supervised entities’ risk management and consumer protection measures for linking VASPs to the financial system via deposit product. - Pilot concluded in June 2024. - Participants: seven VASP–supervised entities alliances and 4,098 individuals through cash-in or cash-out operations. - Average ticket for deposit operations: US$134. - Average ticket for withdrawals: USD83 (calculated with the average exchange rate of June 2024: USD1 = COP4,043). - Pilot recorded 40 suspicious operations and 820 unusual operations, provided 1,340 advisory services, and addressed 546 complaints. - During the pilot, supervised entities effectively managed risks inherent to providing financial services to VASPs; participants complied with ML/FT risk management measures required for the pilot. - Post-pilot: SFC organized meetings between VASPs and supervised entities; guilds are coordinating meetings between financial institutions and VASPs’ compliance officers to explain VASPs’ AML/FT risk management systems. - Supervision example: A financing company was supervised for MLTF risk when linking with clients dedicated to virtual asset arbitrage without adequate due diligence; the process resulted in a precautionary measure of special surveillance in place for seven (7) consecutive months (Resolution 1571 of August 12th, 2024). - Existing circular letters informing consumers about risks: Circular Letters 29 of 2014, 78 of 2016, and 52 of 2017 remain in effect regarding "Electronic Currencies - Cryptocurrencies or Virtual Currencies." - Time: ST *Annex VII . Implementation of the 2022 FSAP Key Recommendations (source content).* ### Annex VIII. Financial Sector Implications of the Pension Reform ### Annex VIII. Financial Sector Implications of the Pension Reform ### Overview of the reform - The pension reform will shift approximately 75 percent of participants from the defined contribution private pension funds (AFPs) to the public defined benefits system. - A new public savings fund (FAPC), managed by the central bank, will be created to manage contributions to the public scheme while AFPs will continue to manage pre-reform contributions and new contributions for earnings above 2.3 minimum wages. ### Role and exposures of AFPs - AFPs are systemically important for the Colombian financial system: - Total assets around 30 percent of GDP as of 2023. - Allocating nearly 30 percent of their total assets to the government debt. - Provide wholesale long-term funding for the banks. - Significant foreign currency exposures, with about 50 percent of total assets being offshore and in foreign currency. ### Expected balance-sheet and flow implications - The balance sheets of AFPs will gradually decline following implementation of the pension reform. - Annual contributions to AFPs: - Will fall from around 2 percent of GDP to 0.7~0.9 percent of GDP. - FAPC’s balance sheet will increase concomitantly. - Smooth asset reallocation is critical to maintain macro-financial stability. - Two particularly important transmission channels: - Liquidity Channel: - AFPs would receive fewer pension contributions, while their outflows, including pension obligations and portfolio shifts to the public scheme under the transitional regime, are expected to be around 1.7 percent of GDP annually. - In the event of a liquidity crunch, AFPs may need to repatriate foreign assets or liquidate government bonds, which could affect capital flows, the exchange rate, and/or the bond market. - Portfolio Reallocation Channel: - As a defined benefit pension plan, FAPC may prioritize stability over short-term returns, potentially leading to a more conservative asset allocation concentrated on fixed income assets such as domestic government bonds. - The change of the investment mandate and portfolio structure of FAPC from those of AFPs could generate effects on the exchange rate through portfolio flows, the local government bond and equity markets, and available wholesale funding for banks. ### Private Pension Fund balance sheet (in percent of GDP) - Assets - Deposits: 0.6 - Bonds and CDs: 11.2 - GenGov: 9.4 - Banks: 1.0 - NFC: 0.7 - Foreign: 0.1 - Shares: 16.8 - NFC: 1.3 - Banks: 0.9 - Foreign: 14.7 - Other assets: 2.8 - Total assets: 31.5 - Liabilities - Insurance claims: 31.1 - Loans: 0.0 - Equity and other liabilities: 0.4 - Total liabilities: 31.5 - Source of balance-sheet figures: BanRep and staff calculation *Source: Annex VIII. Financial Sector Implications of the Pension Reform (from the provided IMF staff report content).* ### 4.5 million households, complemented by investments in higher education and digital ### 4.5 million households, complemented by investments in higher education and digital ### Social programs, pensions, health care, and regional human capital - Social programs have contributed to a reduction in poverty to historical lows, as noted by the staff report. - Targeted measures: - Support for 4.5 million households. - Investments in higher education and digital connectivity to reduce regional gaps in human capital. - Structural reforms under way: - Pensions reform (subject to Constitutional Court review that may require adjustments to projected impacts). - Health care reform (projected increase in health spending reflects existing system pressures rather than reform-driven costs). - Reforms to the General Participation System (SGP) to improve coverage and efficiency. - Implementation approach: - Reforms are designed to be implemented gradually to ensure consistency with consolidation targets. - Strategy focuses on sustainability and progressive improvements. - Policy objective: - Address regional development gaps and sustain social cohesion and inclusive growth. ### Fiscal policy and Financing Bill - Authorities remain committed to an agenda of fiscal and structural reforms. - A Financing Bill was submitted to Congress to improve tax revenues, consistent with the adjustment outlined in the MTFF. - The reform explicitly: - Outlines measures to broaden the tax base. - Protects key public investment and social spending. - Seeks to build a consensus for a fiscal pact to address structural tax and spending challenges. - Policy intent: - Commitment to strong public finances through concrete and credible actions, while safeguarding macroeconomic and social stability. ### Monetary policy, exchange rate, and external buffers - Monetary framework: - Inflation-targeting regime with a flexible exchange rate, anchoring convergence toward the 3% target. - Framework is described as fully fledged and well established. - Effects reflected in lower inflation expectations and a reduction of the output gap. - Pace of disinflation has recently slowed, limiting the scope for further short-term policy easing. - Policy rate history and stance: - Policy rate was reduced by 350 basis points between December 2023 and December 2024. - Since then, there has been only one cut of 25 basis points. - The policy rate stands at 9.25% and remains highly restrictive. - The central bank intends to maintain a data-driven and cautious approach given the gap between inflation, inflation expectations, and the 3% target amid uncertain domestic and external conditions. - Exchange rate movements: - COP appreciated by 21% in 2023 (end-of-period), supported by high domestic interest rates and fiscal adjustment. - Since 2024, it has depreciated in the second half of the year amid a strong U.S. dollar and lower oil prices. - In recent months, it has appreciated in the context of a weaker US dollar. - International reserves and external buffer: - Reserve accumulation by the central bank from December 2023 to October 2024 added USD 1.5 billion with minimal impact on the exchange rate. - Strong returns on the reserve portfolio in 2024-2025 contributed an additional USD 4.5 billion. - International reserves reached USD 65.5 billion, which is at the higher half of the range recommended by the IMF’s ARA metrics (around 1.3). - Monetary authorities remain committed to maintaining solid external buffers to face external shocks and ensure continued market access. ### Financial sector resilience and regulation - System performance: - Liquidity and solvency indicators are solid. - Profitability has recovered after a period of weakness, driven by higher investment, moderate loan portfolio growth, and improving delinquency indicators. - Housing, microcredit, and commercial loan portfolios have posted positive real growth in recent months. - Consumer credit continues to recover, with already positive nominal growth. - Stress tests by the central bank confirm robust capital buffers and the sector’s capacity to absorb shocks. - Non-banking financial institutions: - Pension funds, trust funds, and insurers now account for a larger share of the assets of the financial system. - IMF technical assistance provided recommendations to strengthen the regulation of open-ended funds; authorities are committed to taking those recommendations as the basis for decisions in the near future. - Regulatory framework: - Prudent regulation and Basel III implementation underpin financial stability. - Measures introduced to mitigate liquidity risk include the implementation of the Net Stable Funding Ratio. - To facilitate the transition and support liquidity, the Financial Superintendency extended last August the full implementation deadline by 14 months. ### Climate strategy - Authorities are advancing a credible and responsible climate strategy. - Key elements: - Commitment to reducing reliance on oil and coal. - Expanding renewable energy. - Protecting vulnerable groups during the transition. - Approach: - A gradual and well-sequenced transition, embedded in a sustained reform agenda, is needed to mitigate the transition’s impact. - Authorities remain committed to integrating the consequences of climate change into the design of medium-term fiscal policies and ensuring careful implementation of policies. ### Final remarks and institutional engagement - Authorities reaffirm commitment to strong economic fundamentals and institutional policy frameworks. - Note on IMF assessment: - Authorities take note that the staff report does not include the “very strong” language consistent with continued qualification for the Flexible Credit Line (FCL). - Authorities consider it important that the Fund adequately communicates the implications of this assessment to the public. - Continued policy direction: - Authorities will continue to implement policies aimed at preserving macroeconomic stability, safeguarding financial resilience, and ensuring social cohesion. - They remain committed to the pillars that have long anchored policy credibility in the country. - International engagement: - Authorities value their longstanding and constructive relationship with the Fund and intend to maintain close engagement through surveillance, technical assistance, and an open policy dialogue. - Authorities welcome Directors’ feedback and anticipate continued collaboration to support effective policymaking and Colombia’s effort to achieve sustained and inclusive growth. *Authorities value their longstanding and constructive relationship with the Fund.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1colea2025001-source-pdf.pdf_