Colombia Will Not Paralyze Economy to Comply with Fiscal Rule, Says Finance Minister
Colombia’s Finance Minister, German Avila, made clear on Friday that “paralyzing” the country’s economy to comply with its fiscal rule is not a viable option. In response to growing concerns about the nation’s fiscal policy, Avila emphasized that the government would take necessary steps, including increasing borrowing, to ensure continued economic growth, rather than strictly adhering to the fiscal limits.
His remarks come after reports suggesting that the government may temporarily suspend compliance with the fiscal rule, which governs government finances and limits spending to ensure fiscal stability. The fiscal rule, implemented in 2011, aims to prevent worsening public finances and provides constraints on budget deficits and government debt. However, Avila’s statement signals that the government may take a more flexible approach in light of current economic pressures.
“We are examining adjustments to spending, and there will likely be changes to the country’s debt,” Avila noted. He made it clear that the government would not be adhering to the fiscal rule’s limits, signaling a shift in approach. A decision to suspend the fiscal rule would be significant. It could potentially cause market turbulence, especially as investors are already wary of President Gustavo Petro’s handling of Colombia’s economy.
The decision on whether to suspend the rule will be discussed on Monday. The meeting will be held by the Superior Council for Fiscal Policy, which manages the country’s budget and oversees fiscal policies.
Colombia Bonds Drop Amid Fiscal Rule Suspension Reports
Colombia’s sovereign dollar bonds took a hit on Thursday, dropping across the curve following reports that the government may suspend its fiscal rule. The news caused a significant drop in bond prices, with notes due in 2054 slipping by 0.3 cents on the dollar, the largest drop in two weeks.
Local government peso bonds, known as TES, also saw declines. The reports suggested the government’s fiscal committee was considering an escape clause. This would temporarily suspend the fiscal rule under extraordinary circumstances. This move has sparked concerns among investors, particularly after Mauricio Villamizar, a member of the central bank’s board, warned against suspending the rule. Villamizar argued that the absence of a credible fiscal anchor could lead to destabilization, with risks to macroeconomic stability.
Many analysts now expect a larger fiscal deficit for 2025. Some have revised forecasts to over 7% of GDP, far above the government’s 5.1% target. The news about a possible suspension of the fiscal rule has raised investor concerns. As a result, Colombia’s long-dated TES bonds devalued.
Concerns Over Colombia’s Fiscal Sustainability
The debate over Colombia’s fiscal rule comes amid concerns about the government’s handling of public finances. Economic experts, including Luis Fernando Mejia, head of the economic think tank Fedesarrollo, have criticized the potential move to suspend the fiscal rule. Mejia pointed out that there is no extraordinary event that would justify activating the fiscal rule’s escape clause. He argued that doing so would send a negative signal to the market regarding Colombia’s commitment to fiscal sustainability.
Colombia’s fiscal challenges worsen due to lagging tax revenue and ongoing government spending. This has raised deficit forecasts. The recent resignation of the finance minister further underscores the pressure on the government to implement fiscal reforms. As a result, the country faces a growing fiscal gap, which could have long-term implications for Colombia’s economy and its ability to manage debt.
More…
- https://www.bloomberg.com/news/articles/2025-06-05/colombia-bonds-drop-on-reports-that-fiscal-rule-may-be-suspended
- https://www.bloomberg.com/news/articles/2025-06-06/colombia-assets-extend-drop-on-reports-fiscal-rule-may-be-paused
- https://www.reuters.com/world/americas/colombia-will-not-paralyze-economy-comply-with-fiscal-rule-says-minister-2025-06-06/
