BOGOTA Colombia's banks have called on the country's central bank to tackle liquidity issues amid lower-than-expected government spending and compliance with international regulatory framework Basel III, which strengthens bank risk management.

Colombian banking association Asobancaria suggested the central bank cut the reserves that financial institutions are required to hold, buy dollars at the spot market rate and allow foreign entities to purchase fixed-term certificates of deposit (CDTs).

Analysts attribute the financial system's decrease in liquidity to the government's slower budgetary spending and higher tax collection. The funds are stored in the central bank and have not flowed into the economy.

So far this year, the government has spent 47% of its planned budget, according to the finance ministry. However, some lawmakers warn some ministries have spent just 20%.

Furthermore, banks are required to retain a certain level of reserves under Basel III, adding to the liquidity strain, Asobancaria said.

"It's necessary to adopt a series of measures to guarantee liquidity in accordance with the needs of the economy," Asobancaria said in a report published on Tuesday.

The liquidity needs of banks have seen commercial interest rates rise above the central bank's benchmark rate of 13.25%.

(Reporting by Nelson Bocanegra; Writing by Oliver Griffin; Editing by Josie Kao)