The finances of Latin America’s fourth-largest economy, Colombia, are in total disarray. Nearly four years of fiscal mismanagement by Colombia’s first elected leftist leader, President Gustavo Petro, sparked fears of a financial crisis engulfing the strife-torn Andean nation. A combination of dwindling tax revenue and excessive spending is rapidly depleting Bogota’s coffers. Even Petro’s tax hikes, which took on a worrying sense of regularity, did little to salvage government finances while sharply impacting economically crucial sectors, notably the oil and gas industry. Those negative developments are exacerbated by a tense relationship between Petro and U.S. President Donald Trump.
Petro’s controversial presidency is marked by a range of scandals, worrying incidents, and allegations of endemic corruption. This includes explosive claims of campaign money coming from organized crime. Then there are the regular implosions of Petro’s cabinets, which harmed continuity of policy, leading to many key issues impacting Colombia not being adequately addressed. Among the most damaging events is the derailment of Petro’s total peace initiative implemented in August 2022. This plan centered on negotiating an end to Colombia’s complex low-intensity multiparty civil war, reaching peace deals with a hotchpotch of illegal armed groups.
While considerable optimism surrounded Bogota’s ability to reach a deal with the National Liberation Army (ELN), FARC dissident groups who had repudiated the 2016 peace deal, and the Gulf Clan, little genuine progress was made. Indeed, by early 2025, peace talks had collapsed in their entirety with Petro confronted by a state of emergency as violence surged in rural Colombia, especially in regions where the state presence is weak, and communities have few opportunities. Conflict flashpoints, once again, emerged in the departments of Norte de Santander, Cauca, and Arauca, regions long associated with coca cultivation, which lack a strong state presence.
The intensity of the renewed fighting took Bogota by surprise, forcing the deployment of large volumes of troops at a time when a large portion of Colombia’s Blackhawk helicopter fleet was grounded due to a U.S. moratorium on foreign aid. That, along with other aid cuts by Washington, forced Bogota to substantially ratchet up spending on security, placing considerable pressure on already fragile finances. Defense spending between 2022, when Petro took office, and 2025 grew nearly 6% to around $17 billion. This not only represents a 25% increase over the last 10 years but is the highest amount budgeted in over a decade. Heightened internal conflict means spending will remain elevated, placing considerable pressure on Bogota’s finances.
As this was occurring, Petro pushed on with his ambitious social program in a country where a lack of opportunity and scant socio-economic mobility scar the lives of poorer Colombians. As a result, public spending ballooned to levels exceeding the massive budgets funded by Petro’s predecessor, Ivan Duque, who sought to stimulate an economic recovery from the 2020 COVID-19 pandemic through substantial fiscal spending. By September 2025, the Petro administration proposed additional tax hikes to cover the spending shortfall. Among them, a 1% levy is imposed on oil and coal extracted for sale. The application of value-added tax (VAT) was broadened while personal tax rates and capital gains were hiked.
In response to the worsening fiscal crisis, Petro issued Decree 1474, which increased taxes yet again, which is a regular event for the leftist administration. Among those tax hikes is the imposition of a higher VAT for liquor, cigarettes, and luxury vehicles. The 1% levy on petroleum and coal sales, which was to end on December 31, 2025, was extended until the end of 2026, making it more costly for extractive industries to operate in Colombia. These frequent tax hikes are creating a regulatory environment which deterring foreign direct investment (FDI) in Colombia, particularly for the economically crucial oil industry.
Foreign investment has declined substantially since Petro took office in August 2022. Data sourced by local media from Colombia’s central bank shows 2025 FDI plummeted by just over 14% compared to a year earlier to $9.2 billion. More worrying is that the number is a whopping 45.6% less than the $17.18 billion of offshore investment received for 2022. Much of that worrying decline can be attributed to a sharp drop in foreign drillers investing in Colombia’s oil patch. Indeed, the regulatory and operating conditions have become so difficult that energy companies are not only slashing capital expenditures but some, like Exxon, are exiting the strife-torn country.
This is having a knock-on effect, whereby as foreign investment falls, so too does Colombia’s taxable base, further impacting fiscal income. That is nowhere more apparent than for Colombia’s troubled oil industry, where production appears caught in a death spiral. Petroleum, according to government data, is responsible for a quarter of all exports by value for the first 11 months of 2025. That represents a sharp decline from earlier year where oil normally accounted for around a third of the value of Colombia’s total exports. Waning oil production, which during 2025 plunged to lows not seen since the pandemic, is responsible for a decline in petroleum exports that is weighing heavily on fiscal income and Colombia’s balance of trade.
For November 2025, Colombia pumped an average of 744,655 barrels per day, which is a 2% decline year over year and significantly less than the 771,008 barrels per day lifted for the same month 3 years earlier. This is further impacted by tensions between Bogota and Washington. Even after this marked decline, petroleum is still Colombia’s top export, earning $11.5 billion between January and November 2025, which is more than double that of coffee, the second largest export, which generated $5.3 billion. Colombia’s oil industry is a significant contributor to government income, which means falling production, exports, and profitability are sharply impacting the government.
This is occurring at a time when tax inflows and fiscal income are plummeting. According to Colombia’s tax authority, known by its Spanish initials as the DIAN, the 2025 tax revenue of $79 billion was $2.5 billion short of its target. The 2025 deficit is projected to be 7.5% of gross domestic product (GDP), the second worst on record, only surpassed by the 7.8% recorded for the 2020 pandemic. This dire situation, which continued from 2024 when the deficit soared to 6.8% of gross domestic product, exceeding the 5.6% target, forced Petro to suspend Colombia’s fiscal rule. The crisis is worsening with the 2026 budget unfunded and economists pegging that year’s fiscal deficit at a whopping 8.1% of GDP.
Colombia is on the verge of a financial catastrophe. Rising internal conflict, fueled by soaring cocaine production and exacerbated by a sharp drop in foreign aid, is placing considerable pressure on a fragile economy. As a result, investor sentiment has soured, causing foreign capital inflows to plummet, straining fiscal finances and the economy further. Those events are placing extreme fiscal pressure on Bogota at a time when tax income is plunging because key income-generating sectors such as Colombia’s oil industry are in decline. This means higher financing costs for Bogota at a time when it is struggling to manage a burdensome $118 billion of foreign debt.
By Matthew Smith for Oilprice.com
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