Colombia Risks Recession Without Urgent Fiscal Adjustment, Government Warns

Colombia's government has warned that the country could face a recession if urgent fiscal adjustments are not made, as its public finances are reaching an unsustainable trajectory. Finance Minister Miguel Gomez Martinez addressed Congress, stating that the primary balance, which accounts for the difference between government revenue and spending, excluding debt service, has deteriorated significantly.

This deterioration is due to steadily increasing debt service obligations weighing on the economy. Without swift action, Colombia's debt level could become unsustainable, leading to a payment crisis, currency devaluation, and a recession. The government presented its 2027 budget proposal to Congress, but acknowledged that it only represents the first step in a broader adjustment process.

The executive branch is preparing a separate fiscal adjustment bill to be submitted to Congress within the coming weeks. However, the central bank warns that even after the proposed reduction in the primary deficit, Colombia's total fiscal deficit would still reach 7.2% of GDP in 2027, which is considered elevated and incompatible with the Fiscal Rule that will take effect in 2028.

The main obstacle to cutting public spending is the inflexibility of most public investment spending, which constitutes 84% of the investment budget. This means that only a small portion of investment spending can be redirected, making it difficult to achieve the necessary fiscal correction in a short period.