Colombia raises 2025 inflation, deficit projections

By Carlos Vargas and Nelson Bocanegra

BOGOTA, June 13 (Reuters) - Colombia's finance ministry on Friday significantly increased its 2025 inflation estimate and confirmed a rise in its fiscal deficit projection, as Latin America's fourth-largest economy faces lower tax revenue, high debt and difficulty reducing spending.

Sources said earlier this week that the government had activated a clause suspending compliance with its so-called fiscal rule, allowing an increase in its deficit target for 2025 to 7.1% of gross domestic product, from 5.1% of GDP, and sending the peso to a four-week low.

The government confirmed the new deficit target on Friday in a document outlining its mid-year adjustment of fiscal targets.

"We have taken the decision to activate the escape clause," Finance Minister German Avila said during a press conference about the target adjustments, adding that the government's goal is to boost the economy, especially agriculture and manufacturing.

The fiscal deficit projection for 2026 is 6.2% of GDP.

Growth in 2025 will be 2.7%, up from a previous estimate of 2.6%, the document said, while economic expansion in 2026 will be 3.0%.

Inflation is projected to be 4.5% this year, up from a previous forecast of 3.6%, and fall to 3.2% in 2026.

The fiscal rule was created in 2011 to implement policy constraints that prevent the deterioration of public finances.

The country is also weighing increasing its external and domestic debt by several billion dollars this year to cover a deepening fiscal deficit, three market sources told Reuters on Wednesday. Treasury bonds are Colombia's second-largest source of domestic financing for public spending, after taxes.

Tax collection will fall to 281.4 trillion pesos ($67.5 billion) this year, down from 299 trillion pesos, while total foreign debt will be $9.05 billion, an increase from $8.18 billion, the ministry said.

A tax reform bill set to be presented to congress will seek to raise between 19.6 trillion pesos ($4.7 billion) and 25.4 trillion pesos ($6.1 billion) to help fund the 2026 budget, the document showed.

($1 = 4,169.13 Colombian pesos)