Colombia’s Twin Deficits Deepen as Fiscal and External Gaps Widen Together

The numbers arrived quietly from Colombia’s central bank on a routine quarterly release, but the picture they paint is anything but routine. The Banco de la República reported that the country’s current account deficit reached $10.883 billion in 2025, equivalent to 2.4% of GDP, up $3.871 billion and 0.7 percentage points from the previous year.

A current account gap of that size might not alarm economists in a mid-income commodity exporter. But Colombia is not dealing with one imbalance. It is dealing with two.

The Mechanics of a Widening Gap

The fourth quarter drove much of the deterioration. Between October and December, the current account deficit landed at $3.912 billion, or 3.1% of quarterly GDP. That was $1.095 billion more than the third quarter and 0.69 percentage points higher as a share of output.

Two forces pushed the deficit wider. Net outflows from factor income, essentially profits and dividends leaving the country, jumped $687 million. The trade balance in goods and services deteriorated by another $420 million, with exports falling $546 million while imports dropped only $126 million.

The one bright spot was remittances. Current transfers rose modestly, adding $76 million in income. But that was nowhere near enough to offset the outflows.

Where Fiscal Meets External

The fiscal side tells a parallel story. Colombia closed 2025 with a central government deficit of 6.4% of GDP, one of the highest in the region and a sharp escalation from 4.2% in 2023. That combination of a wide fiscal gap and a growing current account shortfall is what economists call twin deficits, and it carries specific risks.

Why Twin Deficits Matter

When a government spends far beyond its revenue while the country simultaneously imports more than it exports, the economy becomes doubly dependent on foreign capital. If investor sentiment shifts, both deficits reinforce each other: higher borrowing costs widen the fiscal gap, a weaker currency inflates external debt, and capital flight deepens the current account hole.

Colombia has already felt the early stages of that feedback loop. In June 2025, the government suspended its fiscal rule through 2027, arguing that rigid spending commitments made compliance impossible. The response was swift. Moody’s and S&P both downgraded Colombia’s sovereign debt to BB in late June. Fitch followed in December, pushing the rating one notch deeper into speculative territory.

The IMF Factor

The downgrades came alongside another blow. The IMF concluded that Colombia no longer qualified for its Flexible Credit Line, a roughly $8 billion safety net that had served as a backstop since 2024. The Fund cited the fiscal rule suspension and deteriorating policy framework as key reasons. President Gustavo Petro’s government canceled the arrangement outright, citing adequate international reserves of $65.5 billion, but economists warned that losing the external shielding would only intensify scrutiny of the deficit trajectory.

An Election Year Complication

All of this unfolds against a politically charged backdrop. Colombia enters 2026 with presidential elections on the horizon, and fiscal discipline rarely tightens during campaign season in the region. The government’s plan to return to the fiscal rule by 2028 requires consolidation of roughly 3.4 percentage points of GDP through tax reform and spending cuts.

The IMF has warned that further delays could trigger a sudden stop in capital inflows. Colombia’s net international investment position already stands at negative $200.4 billion, or 43.7% of GDP, a measure of accumulated dependence on foreign financing that grew $6.3 billion in the final quarter alone.

For a country that once held investment-grade status and an IMF credit line simultaneously, the trajectory is unmistakable. Colombia’s twin deficits are no longer an academic classification. They are a live constraint on policy, on borrowing costs, and on the economic choices available to whoever governs next.

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