Colombia Suspends Fiscal Rule Amid Rising Deficits, Peso Slumps

Colombia has officially suspended its fiscal rule, a legal framework established in 2011 to cap public deficits and debt, due to worsening public finances and the need to prevent deeper economic contraction. The central government deficit reached 6.7-6.8% of GDP in 2024, surpassing targets, while public debt rose to over 61% of GDP, prompting agencies like Fitch Ratings to downgrade the outlook to negative and the IMF to suspend Colombia’s Flexible Credit Line. The suspension allows the government to increase the 2025 fiscal deficit target from 5.1% to around 7.1% of GDP, with plans to present a new medium-term fiscal framework outlining revised deficit and borrowing plans. Markets reacted negatively, with the Colombian peso experiencing its sharpest drop against the US dollar since April, increased government bond yields, and widened credit default swap spreads, reflecting higher perceived risk. The government justifies the move by citing falling tax revenues, increased spending pressures, and the risk of a deeper economic slowdown if the fiscal rule were strictly enforced. Analysts warn that market concerns may grow if fiscal deterioration continues, and Moody’s has cautioned that further slippage could lead to a credit downgrade.