Colombia: Squaring energy transition and fiscal credibility to transform the economy

Despite a robust institutional framework and a broadly sound policy mix, Colombia’s economic model is running out of steam. For over a decade, since the end of the commodities supercycle,growth has been trending downward and socioeconomic indicators have stagnated, signs that the economy is stuck in the middle-income trap. This stagnation has exposed structural problems relating to productivity and underinvestment. More importantly, questions remain about the sustainability of the Colombian economic model in the medium-to-long term. Dependence on fossil fuels remains high, and given the impending depletion of the country’s reserves (around seven years’ supply of oil and gas remains), the need to diversify the economy, and the fight against climate change, a paradigm shift is needed.Although Gustavo Petro’s government has announces a move away from fossil fuels and a reindustrialization plan, no real diversification seems yet to be underway.

The economy is also constrained by public finances pressures. Colombia lost its investment grade status in 2021, and despite a strengthened fiscal rule, it is struggling to reestablish its fiscal credibility in the eyes of investors.

The doubly challenging context of a faltering economic model and constrained public finances calls for far-reaching changes. The energy transition offers a genuine opportunity to transform the economy and address the former problem. But the authorities’ capacity to implement the various strategies that have been set out, in particular a recent energy transition roadmap, remains to be proven, especially given the difficult political (absence of consensus) and security (failure of the Total Peace policy) context. Restoring fiscal credibility will also be crucial to establish a favorable environment for private investment, which is needed as the main driver of a new, sustainable economic model.