After one of the strongest recoveries among OECD countries from the COVID-19-induced recession, Colombia's economic activity has slowed. While effective management of fiscal and monetary policies was key for driving the recovery, a comprehensive reform agenda is needed to enhance long-term growth, according to the latest OECD Economic Survey of Colombia.
The Survey highlights the need for prudent fiscal policy and to boost investment to unlock the country's economic potential. Economic growth is expected at 1.8% in 2024, after 0.6% in 2023, reflecting the lingering impacts of high inflation, tight macroeconomic policies and modest global growth. The OECD projects GDP growth to increase to 2.8% in 2025 as the effects of policy easing and improving global economic conditions take hold. However, investment is expected to remain weak. Colombia's growth potential is estimated to be below 3%, making it essential to increase investment and productivity growth, both of which are key for continued convergence with other OECD countries.
"Colombia needs to revitalise investment to boost productivity and to unlock its potential for strong and sustainable growth," OECD Chief Economist Alvaro Santos Pereira said, presenting the Survey in Bogotá alongside Colombia's Minister of Finance and Public Credit Ricardo Bonilla. "Colombia has many advantages, its geographical location, natural wealth, a young population, and a strong potential for renewable energy. The time is now to implement a broad and ambitious reform agenda to enhance growth and equality of opportunities."
Reducing business informality and regulatory barriers could boost private investment and improve Colombia's growth potential. This requires comprehensive reforms, including lowering the corporate tax rate, facilitating access to affordable credit, and fostering a stable and predictable policy environment. Expanding the coverage of simplified tax and insolvency regimes to more firms and online one-stop shops would reduce regulatory compliance costs. Additional measures that would help decrease business and labour informality include reducing social security contributions for lower-income workers, better enforcing labour and tax laws, and improving skills.
The government should continue fiscal consolidation and comply with the fiscal rule to help reduce public debt financing costs, thereby supporting public debt sustainability. Improving spending efficiency and implementing a comprehensive, gradual, and well-communicated tax reform would create fiscal space for social and productive investments. Such a tax reform requires rebalancing the tax burden from corporate to personal income, reducing tax expenditures, and tackling tax evasion.
Enhancing equality of opportunities requires action across different policy areas, including expanding the coverage of child and elderly care services to boost female employment and improving the quality of education. Combined with reducing informality, these reforms would lead to a more equitable distribution of opportunities, while also bolstering economic growth. To promote regional convergence, Colombia should develop interconnected road, rail, sea and river transport infrastructure, strengthen subnational government capacities, and improve equalisation mechanisms in the fiscal transfer system.
Colombia's rich natural resources and renewable energy potential position it to lead the global shift towards sustainability; however, substantial reform is needed. Accelerating renewable energy generation, supported by a stable regulatory framework, and enhanced efforts in climate adaptation, are key to building a climate-resilient economy. Aligning the carbon tax rate with Colombia's emissions reduction targets would support diversification away from fossil fuels and drive sustainable growth.
See the Survey Overview
