In June 2022, left-wing candidate Gustavo Petro became the president of Colombia after defeating his right-wing opponent, Rodolfo Hernández, in a highly polarized presidential election. Petro secured 50.4% of the votes, while Hernández garnered 47.3%. This election was particularly significant given the slowing economy, rising inflation, and large internal and external deficits. Since taking office, Petro has launched a comprehensive economic reform program, a step that his predecessors had avoided.
In this context, Jean-Louis Martin discusses Petro’s economic and social policies in an analysis for the French Institute of International Relations in May 2023. The analysis explores Petro’s economic, energy, and social policies, one year after the presidential elections, to determine whether a new model for economic and energy transformation in Colombia can be identified, alongside the nature of its relationship with Venezuela.
Restoring Relations with Venezuela
With Petro’s rise to power, Colombia restored its diplomatic and consular ties with Venezuela. This development cannot be solely attributed to ideological proximity between Petro and his Venezuelan counterpart, Nicolás Maduro, but also to pragmatic interests. Firstly, there are about 2 to 2.5 million Venezuelan refugees in Colombia. Secondly, the border region between the two countries (including La Guajira, Cesar, Norte de Santander, and Arauca provinces) has become a hotbed for numerous armed groups (such as Los Rastrojos, the National Liberation Army (ELN), and dissidents from the Revolutionary Armed Forces of Colombia (FARC)), necessitating cooperation between the two nations to stabilize the area.
The third reason relates to economic factors. Approximately 28% of Colombia’s “non-traditional” exports (excluding oil, coal, and coffee) were directed to Venezuela between 2007 and 2008, with these exports reaching $6.1 billion in 2008, out of Colombia’s total exports of $36 billion that year. However, Colombia’s exports to Venezuela have since plummeted. Out of total exports of about $41 billion in 2021, exports to Venezuela had fallen to $330 million (just 0.6%). Colombian businesses are therefore highly motivated to restore normal relations with Venezuela to reopen these markets.
Reform Policies
Petro’s campaign emphasized social issues (such as women’s rights and minority issues) but was less specific about economic matters. Once in power, Petro prioritized certain economic policies, the most surprising of which was a rapid and far-reaching tax reform passed by the Colombian Congress on November 3, 2022. The reform had two main objectives: first, to ease public finances (which saw a slight decrease in the deficit, though it remains high at 6.4% of GDP for 2022), and second, to promote “equality and social justice.”
In terms of healthcare reform, Petro aimed to expand healthcare coverage, particularly in rural areas, by increasing the number of “primary care centers” and restoring the state’s role as an intermediary (particularly financial) between the healthcare system and users. Currently, this role is played by Health Promotion Entities (EPS), which are essentially private health insurance companies. However, the EPS system has several flaws, such as inadequate support for the most vulnerable populations, and it has been marred by corruption and embezzlement, prompting government intervention. This move has raised concerns among health sector specialists that increased state involvement could lead to inefficiency, corruption, and a decline in service quality.
Petro also seeks to implement comprehensive land reform. In October 2022, the Colombian government reached an agreement with the President of the Cattle Ranchers’ Federation (Fedegan) to purchase three million hectares from ranchers to initiate agrarian reform. The government is also considering purchasing other lands and integrating confiscated drug traffickers’ lands into the reform. Although agrarian reform is progressing slowly at present, Colombian authorities plan to redistribute one million hectares annually.
After a year of Petro’s presidency, most economic indicators remain in the red. Following two years of strong growth (10.7% in 2021 and 7.5% in 2022), which allowed Colombia’s economy to recover from the pandemic, GDP grew by just 2.9% year-on-year in the fourth quarter of 2022. Growth for 2023 is expected to be between 1% and 1.2%. Inflation appears to be stabilizing, but at 13.3% in March, it remains at its highest level since 1998. Unemployment has risen to 11.4% as of February, close to pre-pandemic levels, but the current economic slowdown will likely cause it to rise further.
Public finances have not yet recovered from the pandemic shock, with the deficit at 6.6% of GDP in 2022, and the balance of payments suffering from a large deficit (6.2% of GDP). Petro begins his term in a difficult economic environment, which critics often highlight. According to a recent poll, 39% of Colombians consider the country’s economic woes to be the main issue, followed by insecurity (16%) and corruption (12%). Petro’s public support has been declining, with approval ratings falling to 35% in April 2023, down from 56% when he took office.
Opportunities and Challenges in Energy:
The current discussion surrounding energy policy in Colombia focuses on two main points: the weight of the oil and coal sectors in the economy and electricity prices, as outlined below:
1- Resources and Energy Mix:
Colombia’s energy mix consists of small quantities of oil, slightly less gas, a bit of coal, significant hydraulic potential, and relatively important resources from solar and wind energy. Oil and gas resources are limited, estimated at around 2 billion barrels and 3 trillion cubic feet respectively, representing less than 20% of Brazil’s confirmed reserves and less than 1% of Venezuela’s.
Colombia’s coal reserves amount to approximately 4.55 billion tons of high-quality coal (low ash and sulfur dioxide emissions), with most of the oil and coal production exported, while nearly all gas is consumed domestically. As a result, Colombia is the world’s fifth-largest coal exporter, mainly exporting to the United States. In 2021, oil, gas, and coal contributed 36.4%, 23.6%, and 6.9%, respectively, accounting for 67% of the primary energy consumed in Colombia. Hydroelectric power contributed about 29.7% of primary energy consumption, alongside non-conventional renewable energy sources (biomass, wind, solar, and geothermal energy). The transportation sector is the primary energy consumer in Colombia, representing 37% of total consumption.
2- Dynamics of the Electricity Sector:
Colombia has had a liberalized energy market since 1995, with regulations separating generation services from transmission, distribution, and marketing. This structure is based on Laws 142 (Public Utilities Law) and 143 (Electricity Law) of 1994. The Ministry of Mines and Energy is the main institution overseeing Colombia’s energy sector. Within this ministry, the “Mining and Energy Planning Unit” (UPME) studies future energy needs, supply scenarios, and develops the National Energy Plan. The “Energy and Gas Regulatory Commission” (CREG) is responsible for regulating the market, ensuring free access to the grid, transportation tariffs, wholesale market standards, and setting regulations that ensure consumer rights, environmental sustainability, social principles, and financial viability for participating entities.
According to the Ministry of Mines and Energy, Colombia’s installed generation capacity slightly exceeded 20 gigawatts in 2022, with 65.8% coming from renewable energy sources. In 2021, 73.8% of production was supplied by hydroelectric power and 2.8% by other renewable sources, mainly biomass. Hydroelectric power is thus dominant. Fossil fuel production (oil, gas, and coal) continues to play a significant role in stabilizing hydraulic output fluctuations in response to rising demand, which has grown at an average annual rate of 2.8% over ten years.
While Colombia’s hydraulic potential remains large, not all of it can be exploited, as some technical potential is located too far from consumption areas (Amazonia, Llanos Orientales) to be economically viable. Additionally, the operational difficulties of large dams, such as the Ituango Dam (expected to have a capacity of 2.4 gigawatts by 2025), discourage most potential investors from large hydroelectric projects.
Nevertheless, investor interest in large hydroelectric units could re-emerge in the medium term, especially as Colombia ranks 12th globally in hydroelectric capacity, due to the regularity of river flows and heavy rainfall. Among the generation projects currently under review by the Ministry of Mines and Energy, small-scale solar projects (196 out of 278 total) and medium-scale wind projects are predominant.
Responding to Social Constraints:
Since early 2021, energy consumption prices (electricity, domestic gas, vehicle fuel) have risen much faster than overall consumption prices. In March 2023, energy prices increased by 20.5% over one year, compared to 13.3% according to the general price index. This increase was more pronounced in certain regions, such as the Caribbean coast. The situation could worsen if the El Niño phenomenon, expected to begin this summer, reduces water reserves in dams. The government believes that rising prices are partly due to insufficient competition, or even monopolistic practices.
As for electricity prices, reforms may be negotiated by reviewing the impact of the wholesale price index on unit costs and possibly differentiating unit costs based on production methods. However, there is concern that the ministry, reflecting the president’s concerns about the social impact of rising consumption prices, may opt for unilateral measures. The expected slowdown in inflation over the next few months could help ease tensions, provided that reduced rainfall doesn’t deplete dam reservoirs. In terms of electricity generation, the main obstacle to the short-term development of solar and wind power is the opposition of some indigenous communities in La Guajira to the construction of transmission lines, although political and economic solutions could overcome this opposition.
A central debate in Colombia currently revolves around whether the country should reduce its dependence on oil, gas, and coal to “transition from an extractive economy to a productive economy,” according to President Petro’s policy. Many estimates suggest that Colombia will need to quickly move away from hydrocarbons, not only because of its limited reserves but also to preserve the environment and biodiversity.
These estimates persist even though oil revenues make up a significant share of public income (10% in 2022) and greatly affect the balance of payments, which currently suffers from a large deficit (6.2% of GDP in 2022). The country is heavily reliant on oil and coal exports, as a sharp drop in these exports would cause the currency (the peso) to collapse. The peso is sensitive to changes in oil prices and a sharp devaluation could have massive inflationary effects, despite its volatility.
In conclusion, it is unlikely that significant developments will occur in Colombia by the end of 2023. Politically, the government’s negotiations with various armed groups will likely progress very slowly. Economically, the Colombian economy could benefit from advances in negotiations between the Venezuelan government and the opposition, potentially leading to the gradual lifting of U.S. sanctions and a recovery in the Venezuelan economy and its imports from Colombia. Additionally, President Petro’s reforms in healthcare, agriculture, and social sectors will face financial constraints and a balance of payments deficit, driven by his desire to shift towards a productive economy and reduce reliance on hydrocarbon resources.
Source: Jean-Louis Martin, «La Colombie, nouveau modèle de transformation économique et énergétique en Amérique latine?», Ifri, Mai 2023.
