Colombia is living beyond its means

Colombia enters 2026 with an economy that looks stable at first glance: growth has avoided a hard landing, the peso has surprised on the upside, and consumption remains resilient. However, these headline outcomes broadly overstate the economy’s strength. Fiscal accounts are deteriorating, security conditions are worsening in large parts of the country, and political fragmentation is complicating decision-making. The coming election cycle is unlikely to resolve these tensions on its own. At best, it will determine how they are managed.

A budgetary straitjacket

Colombia is running a total fiscal deficit of roughly 6.2% of GDP. Public debt stands near 57% of GDP, lower than once feared, but that is partly thanks to favourable currency moves and accounting operations. Primary spending exceeds the fiscal rule by around 0.6% of GDP, and closing the gap would require an adjustment of roughly 4.5% of GDP over time.

The main problem is that most government spending cannot easily be changed. About 85% of the budget is essentially pre-decided: transfers to regions are mandated by law, pensions and public wages are indexed, and ring-fenced social programmes limit flexibility. In practical terms, even a new government coming in with fresh ideas would discover that only a small part of the budget is actually adjustable unless parliament rewrites major laws.

Another problem lies in what the government defines as ‘investments’. On paper, investment spending looks high, which is normally seen as positive because it suggests more money is being put into infrastructure and other projects that support long-term economic growth. In reality, Colombia’s fiscal watchdog estimates that only about one third of it goes into real investments, such as roads, schools, or infrastructure. The rest consists of cash handouts and subsidies, which are counted as investments even though they do not build lasting assets. These payments are politically difficult to reduce and contribute far less to long-term economic growth than genuine capital spending.

Revenue has also disappointed. Tax collections are running roughly 0.5% of GDP below expectations, reflecting weaker compliance and slower-than-projected economic activity in taxable sectors. This shortfall compounds the difficulty of fiscal consolidation.

The Colombian state is further constrained by its liquidity management. It has accumulated a large stock of unpaid obligations that are carried over from previous budgets. As a result, each new budget begins with commitments already in place. This reduces the room to cut deficits, even if a government is willing to do so, because a significant share of spending is effectively pre-committed before new policy choices are made.

Debt management tactics have bought time but fail to address the underlying fiscal imbalance. Swaps, buybacks, and changes in issuance strategy have lowered the reported debt stock and interest bill by about 1.4%. Many of these operations are one-off. Transparency has also eroded, with limited disclosure even to domestic fiscal institutions. A large share of foreign currency exposure is assumed to be unhedged, adding vulnerability if global conditions turn.

Concerns over cash availability are increasingly explicit. When liquidity appears, it is quickly spent. Pension funds report repeated requests from the finance ministry for additional funding. This context explains why pension reform has taken on fiscal urgency. The push towards a larger public pension pillar would allow the state to channel part of workers’ mandatory savings to cover its funding shortfalls. The precedent is not necessarily theoretical. In El Salvador, pension nationalisation offered some short-term relief, but it weakened the pension system and damaged investor confidence over time. Colombia is not El Salvador, but the logic of accessing captive savings is familiar.

Growth without investment

Macroeconomic performance offers a mixed picture. Growth has surprised modestly on the upside, driven by government spending growth above 10% and solid household consumption. Electricity demand points to continued activity, with growth forecasts near 3.4% next year.

However, the quality of growth is weaker. Investment remains subdued, barely expanding, and exports have stagnated even as commodity prices have offered some relief. Imports are rising faster than exports, pushing the current account deficit back towards 2.5% of GDP after a sharp post-pandemic correction. Remittances of roughly USD 14 billion have cushioned the imbalance, but the trend is negative.

These large wage increases also make it more attractive for firms to hire informally, outside the legal system, to avoid higher costs. Colombia’s government recently approved a roughly 23% minimum wage increase for 2026, far above both earlier expectations of 11–16% from negotiations and well above what the central bank’s technical wage rule (roughly 7% reflecting inflation plus productivity gains) would have implied. This jump, one of the largest in decades, amplifies cost pressures on employers, risks weakening formal employment, and can feed into inflation and fiscal stress.

A Central Bank under pressure

Monetary policy sits at the centre of these tensions. Banco de la República, Colombia’s Central Bank, maintains a restrictive policy rate, but the board is openly divided. Some members see scope for easing before the second half of 2026. Others argue that inflation risks could still justify tightening. Markets have priced aggressive hikes in coming months, a scenario few policymakers view as realistic given wage negotiations and political optics.

Credibility has suffered. Incremental moves have failed to anchor expectations, yet decisive action would collide with the electoral cycle and be framed as politically motivated. The likely outcome is caution in the form of directional guidance without bold moves, even if inflation dynamics argue otherwise.

The peso’s appreciation of roughly 15% this year reflects global dollar weakness more than domestic confidence. Volatility remains high, and misalignment between market expectations and policy could quickly reverse recent gains.

Politics with little wiggle room

This economic backdrop sets the stage for the upcoming elections. The timeline is clear. Coalitions form in January. Congressional elections and party primaries in March will define viable presidential candidates. The presidential vote follows in May.

On the left, figures such as Iván Cepeda and Roy Barreras represent continuity with the agenda of President Gustavo Petro. Cepeda, a long-time human rights advocate shaped by Colombia’s conflict years, has built his political identity around social justice, victims’ rights, and a sceptical view of market-led reform. Barreras, by contrast, is a more transactional operator, known in Congress for his tactical flexibility and ability to assemble majorities, but he has aligned himself closely with Petro’s project since the campaign. In different ways, both anchor a platform centred on expanded social spending, rapid wage growth, pension and health reform, and a strong state role in the economy. These policies continue to resonate with voters who have experienced tangible income gains and a greater sense of inclusion under the current administration.

The centre is likely to consolidate around Sergio Fajardo, a former academic and governor known for a technocratic style and a cautious approach to politics. His platform is expected to focus on restoring security, rebuilding institutions, and reopening channels with the private sector, alongside a gradual and rules-based fiscal adjustment.

The right remains fragmented. Abelardo de la Espriella has emerged as a visible figure, projecting a hard-line, law-and-order message rooted in media presence. However, there is little sign of early consolidation ahead of March. As security concerns intensify, particularly in rural areas, these themes are likely to gain traction and reinforce right-leaning narratives as the campaign moves forward.

Polls should be interpreted with caution given the prevalence of undecided voters. Greater visibility will follow coalition negotiations and the congressional elections. What is clear is that governability will be constrained. Current approval levels fall short of what would be needed to push through difficult reforms.

Colombia’s fiscal position is becoming increasingly unforgiving. Consumption and public spending can support growth for a time, but they cannot substitute for investment, credibility, and fiscal discipline. The next government will inherit limited fiscal room, elevated inflation expectations, and a central bank under scrutiny. Adjustment will be slower, more contested, and more painful than the political debate suggests. Colombia remains investable, but only marginally so. The coming year will reveal whether its institutions can reassert discipline before markets do it for them.

Summary Q&A

What is the current state of Colombia’s economy at the start of 2026? Colombia appears stable at a surface level, with resilient consumption, a stronger peso, and avoided recession, but underlying fiscal deterioration, worsening security, and political fragmentation weaken the overall outlook.

Why is Colombia’s fiscal position considered fragile despite moderate debt levels? Most government expenditure is locked in by law, limiting flexibility, while real investment is overstated and revenue underperforms, making meaningful fiscal adjustment difficult without structural reform.

How does inflation and labour market policy affect economic performance? Persistent inflation above target is driven partly by minimum wage increases outpacing productivity, which also raises costs for employers and contributes to informal hiring, feeding into higher public expenditure.

What role does the Central Bank play within these economic tensions? The Central Bank maintains restrictive policy, but internal divisions and political pressures reduce its ability to anchor inflation expectations, and market pricing of future interest rates may be misaligned with economic fundamentals.

How might the upcoming elections influence Colombia’s economic trajectory? Fragmented political coalitions and diverse electoral priorities suggest limited capacity for decisive fiscal reform, meaning the next government will face tight fiscal space, elevated inflation expectations, and constrained policy options.