FINAL WORD: Juan Jose Echavarria

BRC: Colombia will build on peace dividend

  • By GlobalMarkets
  • 31 Mar 2017
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The new US administration is likely to lead to greater regional uncertainty and volatility, but Colombia will continue its fight against corruption and use the peace deal to cement its record of higher growth and lower inflation.

The Colombian economy has been traditionally very stable, especially when compared to other Latin American countries. Before 1991, inflation rates in Colombia were high — around 20%-25% — and they persisted at these levels for many years while other countries in the region suffered from hyperinflation. Inflation decreased slowly after the Constitution of 1991, which created our independent central bank, and after the 1999 crisis, we adopted the inflation-targeting regime. Inflation decreased from 30% in the 1990s to 3% two years ago. Today, we have an inflation of 5.18% after large shocks (food prices and exchange rate devaluation) hit the economy but it will return to our 2%-4% range. Growth rates have also been very stable during the last 50 years, mainly due to a sound macroeconomic management, even during the international crisis of 2008-2010. A flexible exchange rate, good supervision and an independent and strong central bank will help us face external shocks in this very uncertain environment.

For instance, as a result of the actions of the Trump administration, there will probably be greater international uncertainty and higher volatility. Foreign trade between the US and some large partners such as China and Mexico will be affected, but no major effects on Colombia are foreseen, unless there are large impacts on the international economy. We will be ready to respond to these possible changes and Colombia is well prepared to face external shocks. Our free trade agreement with the US will partially, although never fully, protect us from arbitrary trade measures against the country.

Our financial sector was one of the most resilient during the 2008/9 international crisis and seems to be well prepared to cope with the uncertain times we are facing at home and abroad. It has invested heavily in some Central American countries, and it is gradually adapting to international regulations such as Basel III.

Although current growth rates of the Colombian economy are certainly insufficient, infrastructure will be one of the country’s main drivers of productivity, competitiveness, and exports in the following years. This will help the country improve the international indicators that have shown that Colombia is well behind in this area when compared with most of its neighbours.

On a different front, the recent corruption scandals show that institutions are still very weak in Colombia and Latin America, deterring domestic and foreign investment. However, we can take advantage of this process by strengthening our institutions and judicial system, sending corrupt people to jail, and establishing additional controls and revisions for the different procedures of public contracting, especially in infrastructure. We hope that these scandals do not have a negative impact on investment.

There will be an important dividend from the peace agreement in Colombia, particularly in the medium and long term. Although it is difficult to estimate the magnitude, it is well known that countries suffering from wars grow much less than countries living in peace. Sectors such as agriculture and tourism will benefit immediately. In the medium term, greater investment, and the potential diversion of resources that are now spent on war to other activities such as education and health, will also benefit growth.

With all this in mind, I commit to the main objectives of any central bank: controlling inflation and achieving sustainable growth. As we do that we will strive to communicate our views and analyses in a highly transparent way.

Juan José Echavarría, governor of Banco de la Republica, Colombia

  • By GlobalMarkets
  • 31 Mar 2017

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