Juan José Echavarría, Governor, Banco de la República: Interview

Interview: Juan José Echavarría

What mechanisms should Colombia establish to better guard against external global shocks?

JUAN JOSE ECHAVARRÍA: Monetary policy in Colombia is governed by an inflation targeting scheme and a flexible policy on the exchange rate since the peso was floated in September 1999, following a crisis that impacted our economy. The implementation of these policies changed the country’s macroeconomic trends, and stability has since been achieved.

However, this has not been the full extent of major shocks Colombia has weathered. For example, the country has been among those most affected by exchange rate volatility following the slowdown in global oil prices.

Additionally, the performance of some our neighbours, such as Venezuela and Ecuador, has also produced a big external shock that we have had to cope with. The cost of foreign loans also increased, partially as a result of the two shocks mentioned.

Colombia has also seen other risks, such as the rise in credit default swaps, which increases the cost of credit in the international markets. We are supervising indicators like this closely.

There are always going to be shocks, but we have a reliable and solid financial system that has been able to respond and adjust accordingly. To a certain extent this is because the private sector learned from the crisis of 1999. It is also due to the private sector being much more diversified, thanks to the expansion of multinational corporations, known locally as multilatinas in Central and South America.

On a local level, in 2014-16 we had large inflationary shocks. The devaluation of the exchange rate was close to 90% between March 2014 and March 2016, and food prices rose by 11% in 2015 and 7.2% in 2016. Consumer prices reached almost 9% in July 2016, much higher than our inflation target of 2-4%.

We have not reached our target in the past two years. However, inflation has been decreasing over the last eight months, and we expect to reach the target in due course. Indeed, the central bank will make every effort necessary in order to be within the inflation target range at the end of 2017.

How have the country’s macroeconomic indicators performed in 2016, and what are the biggest challenges to growth in 2017?

ECHAVARRÍA: The stability of Colombia’s macro indicators is a distinctive feature of our economy, which is odd given the dependency on commodities and the volatility that affects the region.

However, growth has not reached its potential in recent years: 2016 was a particularly weak year, as annual GDP growth reached just 2% compared to average growth of about 4.5% over the last two decades – although the country has performed relatively better than others in the region. If Colombia wants to see stronger growth, we require structural reforms in order to increase savings (fiscal policy and the pension system) and productivity.

On the fiscal side, in early 2017 a tax reform was implemented. Although total revenue was increased and taxes on firms reduced, some detractors thought that the reform fell short of our needs and that additional legislation would be required in a few years. Much depends on future expenditures, which is an area that requires additional work.

Reforming the pension system is probably the most pressing issue if we want greater savings. This is exacerbated by the fact that state subsidies usually end up benefitting high- and middle-income citizens rather than those who need them most, which has opened a substantial political debate.

Productivity is the top priority for further development in 2017. It involves boosting trade and promoting competition in the country. Even though many Colombians believe the economy is very open, the reality is that Colombia is among the most closed economies in Latin America, along with Brazil and Argentina.