Later in this chapter, we will elaborate on the relationship between financial repression and monetary policy in Colombia. Figure 7. Financing. We exclude local governments and government-owned firms from our analysis for three main reasons. We assume that foreign debt is issued in US dollars and that domestic debt is issued in Colombian pesos, since debt issued in different currencies has little relevance.
The Colombian economy has been relatively less volatile than several of its Latin American peers: during this period, it has experienced no hyperinflationary episodes (although, as discussed, inflation was high and persistent during the seventies and the eighties), and growth has been relatively stable: the worst recession since records began occurred in 1999, with a trough in real growth of -4.2 percent in 1999, a relatively small contraction compared to other Latin American economies.1. Even so, since 2001 the share of domestic debt indexed to US dollars was always below 9 percent and as of August 2009, all domestic outstanding debt has been in Colombian pesos.
From 1967 to 1980, the Colombian economy, and particularly the coffee
circumstances that occurred in 1986. By the late 1980s, Colombia's short-term economic outlook had become more promising, in large part because of an unusual confluence of circumstances that occurred in 1986. and communications infrastructure and the first major attempts at In this case, seigniorage revenues would be interpreted as also including those earned as credit expansion from a repressed banking system. In June 1999, the width of the bands was increased to 14 percent, a few months before the band system was abandoned in September 1999 (see figure 15, where the band is depicted by a dotted red line). We also analyze the role played by the real exchange rate in debt dynamics. We would like to thank Mauricio Avella, Ricardo Kerguelen, Johanna Lpez Velandia, Ignacio Lozano, Marc Hofstetter, Laura Mojica, Jos Antonio Ocampo, Guillermo Perry, Hernn Rincn, Miguel Urrutia, Andrs Velasco, and the Centro de Apoyo a la Investigacin Econmica del Banco de la Repblica Colombia. Following the War of a Thousand Days (1899-1902), Colombia There is still a lot of fiscal stimulus in the pipeline to help households and businesses navigate the COVID crisis.. Land and wealth were still the privilege of a In analyzing how the government financed its fiscal deficit, we treat transfers as a residual. labor force, increased labor productivity, and accelerated investment. First, the constitution entailed a new arrangement between the central and the regional governments regarding their economic and political role. Colombia first became an exporting region in the sixteenth century, Source: Banco de la Repblica Colombia. In this sense, with higher financial repression, monetary emission would correspond to a larger share of seigniorage revenues. Colombias economy has recovered remarkably well from the COVID-19 crisis, and strong scal and monetary policy support have averted a stronger contraction of incomes. Simply enter your email address below and we'll send you a FREE REPORT: Beautiful, Diverse and Safe - Take Another Look at Colombia. Skewed income patterns would continue throughout the twentieth century, as manufacturing and services developed and became significant parts of the national economy. Before the 1950s, because of the steep terrain and a relatively primitive transportation network, Colombia's manufacturing sector was dominated by local industries that were only loosely linked to other regional businesses. The benefits of this floating have been twofold: monetary policy could focus on controlling inflation instead of reacting to the exchange rate, and the nominal exchange rate could respond to foreign shocks (figure 15). Three things are worth noting. Instead, large deficits created relatively large external imbalances, leaving the economy vulnerable to a sudden-stop shock of the sort that occurred in the late nineties, which drove the economy into a harsh recession without an easy resort to nominal depreciations or monetary finance. More recently, however, inflationary pressures have become increasingly widespread. in the gross domestic product (GDP). exporter of raw materials, particularly precious metals, to the mother Brtola and Ocampo (2012) and Kodama (2013) highlight the low macroeconomic volatility that Colombia has experienced. Fiscal deficit, 19602017. First, since 1970 foreign debt has been greater than domestic debt, up until the 1990s. Table 1 summarizes the budget accounting for the three periods that we analyze. Isolating effect of transfers on debt dynamics. Figure 16. Remarkably, the Colombian government did not default on its foreign or domestic debts during the period of study. Copyright 2020 by the Regents of the University of Minnesota, Powered by Manifold Scholarship. as a national entity. The combination of these elements forced the Colombian government to rely heavily on monetary emission from the central bank as its main source of financing after 1982. This was largely because the global national economy. Junguito and Rincn (2007), Banco de la Repblica Colombia. In the second period, an expanded fiscal deficit led to increased inflation under the frequent use of monetary emission to finance government expenditures. The nominal exchange rate followed this path as well. Since 1968 the central government has been required by law to transfer resources from value-added tax and social security to local governments, and with the new constitution of 1991, transfers increased. Basically, spending has been running in line with what the authorities have been budgeting, Almeida said. The rapid growth and development of the economy in the early noncoffee industrial sector and the service sector was accomplished in An important degree of exchange control was kept by the central bank in the form of crawling corridors for the nominal exchange rate, within which the nominal exchange rate was market determined, and the central bank intervened only in case the rate got close to the corridor limits. Hernndez Gamarra, Antonio and Juliana Jaramillo Echeverri, La Junta Monetaria y el Banco de la Repblica, in Jos Daro Uribe Escobar, ed., Historia del Banco de la Repblica, 1923-2015. local industries that were only loosely linked to other regional Junguito and Rincn (2007), Banco de la Repblica Colombia, authors' calculations. Learn more at. During the second period, the Colombian economy converged relatively quickly, especially during periods of coffee booms, and after avoiding negative economic growth during 1980s. among the leading recipients of World Bank loans, as well as direct Second, and especially during the first half of the 1990s, the government decided to privatize key industries (mainly energy and coal), thus obtaining temporary financing worth up to 1.6 percent in 1996. opening channels to world markets, a process that continued slowly but In addition to coffee production, economic expansion of both the noncoffee industrial sector and the service sector was accomplished in two distinct stages. Through Fogafn, the government nationalized, among other institutions, the largest bank of the system. other Latin American states. Throughout most of the 1980s, Colombia ranked concentrated in agriculture and commerce, two sectors that focused on Although this aid allowed Colombia to maintain a relatively higher rate of GDP growth than the rest of Latin America, aggregate production remained depressed. coffee export industries, which greatly enlarged the merchant class and Nevertheless, Colombian planners This was largely because the global recession that began in 1981 caused demand in external markets to fall precipitously. Despite the nominal independence of the central bank (the minister of finance only became a member of the board of directors of the central bank in 1931, and even then without the right to vote), in practice the borrowing limit was customarily bypassed by informal agreements between the government, Congress, and the central bank to enact laws that would allow the latter to directly purchase public debt instruments issued by the government (not included in the category of direct loans). concessional loans further relieved stress on Colombia's international Source: Bolt et al. expansion of exports and government revenues, as well as an overall rise Nevertheless, Colombia was one of the few Latin American countries not to suffer a debt crisis in the 1980s, and in many ways during that decade it had the healthiest economy in the region. Isolating effect of transfers on debt dynamics. In early 1983, the monetary board used monetary emission to provide discount credit to credit-choked productive sectors as well, in a context in which the default of domestic banks to international financial institutions created additional hardship for the ability of the central government to obtain financial support abroad. Similarly to how we deal with domestic and foreign debt, we assume that interest payments on foreign debt are in US dollars, while interest payments on domestic debt are in Colombian pesos. GDP grew by 4.5 percent in 1987, thanks in part to a particularly strong contribution by the construction industry. First, fiscal deficits were generally small and peaked at only around 6 percent of GDP at the end of the 1990s. The overall effect was a stronger national The Banco de Colombia was finally nationalized in January 1986. The benefits of economic growth accrued disproportionately to the export sector, cities, and manufacturing groups, with perhaps as much as 70 percent of the population receiving little or no benefit from this period of expansion. It will help move more people from informal employment to formal employment, decrease multi-level business taxes for small businesses, and eliminate the current wealth tax. Colombias unemployment rate (as reported by the countrys national statistics department, DANE), was just 8.5% in September 2016. It is interesting to note, though, that in 2016 the central bank had to increase its policy rate in part because of an important devaluation in the nominal exchange rate that resulted in a pass-through in inflation, even as the real growth of the economy was low.
In this way, the extra cash that was printed by the central bank did not necessarily translate into more loans. The argument proposed here of a policy mix of money growth and financial repression implies a broader understanding of money supply in the context of a simple government budget constraint, as detailed in earlier sections. Additionally, local governments are restricted regarding how much debt they can issue, as explained thoroughly in Sandoval, Gutirrez and Guzmn (2000). percent by the mid-1920s. Afterward, the solid and stable macroeconomic framework has allowed the economy to reach a relatively rapid degree of convergence. A key observation is that, for the period of analysis, large fiscal or monetary imbalances in Colombia, relative to other Latin American countries, were extremely rare in at least two aspects. We name this period convergent fiscal dominance. However, that wasnt the case. Since that time, the exchange regime has been (mostly) flexible, with occasional interventions from the central bank to mitigate excessive volatility in the foreign exchange market. From 1967 to 1980, the Colombian economy, and particularly the coffee industry, experienced sustained growth. accompanied the Great Depression of 1929. Despite the successes of the 1970s, the national economy began to The dramatic fiscal consequences of the eventual sudden stop are evident in figure 20, with an abrupt reversal of the current account deficit. The combination of domestic economic achievements in the 1970s and generous foreign aid, however, placed Colombia in a relatively favorable position to ride out the global recession, especially in comparison with other Latin American states. After decades of stability around US$1 per kilo, the price of Colombian coffee rose almost six times in real dollars over the course of just two years, from 1975 to 1977 (see figure 11). From 1950 until 1967, Colombia followed a impoverished. In the case of Colombia, the period between 1960 and 1990 is one in which the institutional structure of monetary policy clearly configured an equilibrium of fiscal dominance, chiefly through the lack of independence of the central bank from the government and its goal of promoting economic development in a context of heavily controlled foreign exchange markets. Junguito and Rincn (2007) and Banco de la Repblica Colombia, authors' calculations. Together with fiscal discipline, an enhanced prudential financial regulation since 1999 has also been a key factor behind the macroeconomic stability in Colombia, and behind a relatively rapid convergence to the GDP per capita of other Latin American economies. government and industry shifted the economic strategy to export In fact, for the first time ever, the central bank was able to implement a countercyclical policy and lower its policy rate as the growth of the economy decreased. 2. In 1977 the monetary board imposed a marginal reserve requirement of 100 percent on deposits over the level observed by January 31, 1977. The actual figure was over double that.. Learn more about Colombia and other countries in our daily postcard e-letter. Specifically, the first two periods were characterized by fiscal dominance, institutionally defined as a nonindependent central bank. Additionally, local governments are restricted regarding how much debt they can issue, as explained thoroughly in Sandoval, Gutirrez and Guzmn (2000). The real exchange rate of 2007 is close to the average real exchange rate across our sample, so the implied evolution of debt keeps the real exchange rate fixed to the observed real exchange rate of that year. Figure 5. Despite the successes of the 1970s, the national economy began to flounder in the early 1980s. The growth experience reflected in figure 4 also coincides with the division of our time window: During the first period, the Colombian economy diverged from other Latin American economies; by 1970, Colombian GDP per capita reached a minimum of slightly less than 0.8 times that of the region. Since 1968 the central government has been required by law to transfer resources from value-added tax and social security to local governments, and with the new constitution of 1991, transfers increased. significant growth phase in Colombian history, characterized by an Finally, the experience during the third period has been mixed: divergent during the first year and rapidly converging afterward (a trend that continues to this day). To address the negative effects of inflation, CAVs were authorized to issue loans denominated in UPACs (constant purchasing power units), indexed first to inflation and eventually to a measure of the nominal interest rate of the economy. Log nominal exchange rate, 19912017. 3. groups, with perhaps as much as 70 percent of the population receiving The government also promulgated laws to alleviate the debt service ratio of mortgage borrowers. America, aggregate production remained depressed. The rapid growth and development of the economy in the early twentieth century helped prepare Colombia for the economic problems that accompanied the Great Depression of 1929.
It is worth noting that both lines follow essentially the same path for most of the period, and at low levels. severe consequences. In fact, by the second quarter of 1999, there was a current account surplus. Alternative measure of financing. In particular, the government experienced an increase in the interest rate of foreign debt and a consequent increase in interest payments to international capital markets (figure 6). Forced labor continued in the mines, and various exploitative century, well-defined economic enterprises were under way. It has been argued elsewhere that a reason for the macroeconomic stability that Colombia endured throughout its history is the memory of a hyperinflation episode at the beginning of the twentieth century, during a civil war. Leaders from the U.S. and Colombian business communities shared key insights on how global trends will impact the Colombian economy in 2022 and beyond. Inflation, 19602017. Many professionals in the private sector assumed they were upstanding employers and business people, and if they paid their dues and taxes, that was enough contribution to society. businesses. Together, figures 23 and 24 suggest that when the monetary base increased, the monetary authorities also increased the reserve requirements. nations, facing similar deficits, borrowed heavily from both private previously had been satisfied by imports. The tradition also continued after 1963, when the board of directors was replaced by the monetary board, in practice composed fully by members of the government, and lasted until the constitution of 1991 made it harder for the central bank to make loans to the government (Hernndez Gamarra and Jaramillo Echeverri 2017). This is great for U.S. investment in Colombia. Beginning in 1992, interest payments on domestic debt as a share of the deficit increased, as did the share of interest payments on foreign debt a few years later (see figure 6). To explore the countrys economic outlook and recovery, the U.S. Chamber of Commerce's U.S.-Colombia Business Council (USCBC) hosted its first annual Colombia's Economic Outlook event.
Summary of Budget Accounting (percentage). Sources: Banco de la Repblica Colombia. Colombia first became an exporting region in the sixteenth century, under the Spanish system of mercantilism (see The Colonial Economy , ch. The nationalization of banks (among them, Granahorrarthe largest CAV) was administered on this occasion by Fogafn, which capitalized troubled banks issuing bond instruments backed by the government. Unfortunately, we can only identify the currency of the bonds issued until very recently. First, Colombia has a centralized government in which local governments finance their expenses mostly with transfers from the central government. This event occurred in the context of a newly independent central bank, increasingly flexible exchange markets, and a reorientation of deficit finance toward the domestic capital markets. GDP grew at an average annual Figure 21. Organisation for Economic Co-operation and Development (OECD), Economic Survey of Colombia (February 2022), essentially as a loosely related group of regional producers rather than We exclude local governments and government-owned firms from our analysis for three main reasons. The Colombian economy has been relatively less volatile than several of its Latin American peers: during this period, it has experienced no hyperinflationary episodes (although, as discussed, inflation was high and persistent during the seventies and the eighties), and growth has been relatively stable: the worst recession since records began occurred in 1999, with a trough in real growth of -4.2 percent in 1999, a relatively small contraction compared to other Latin American economies. The success of this arrangement in ensuring the stability of public finance is perhaps evident in the stability of the implicit interest rate on public debt (domestic and foreign) amid the global financial crisis of 20082009 and the continued ability of the central government to finance primary deficits throughout the period. In 2011, the most recent year of the World Banks statistic, 22.6% of Colombias labor force had tertiary level education. coffee, so that future downswings in the industry would not have equally According to the comptroller general of Colombia, by 2014 the debt of local governments represented around 3 percent of the debt of the national central government. The Economic Development of Latin America since Independence. One reason why financing needs were small throughout this period was the steady increase in tax revenues (see figure 8). Sources: Colombian Coffee Growers Federation, authors' calculations. A more stable macroeconomic environment did not, however, foster long-term macroeconomic performance in Colombia relative to the rest of Latin America. However, in total, the tax reform is actually a boost for both business and investing in Colombia. The second period of our analysis was characterized, first, by larger and more persistent inflation and fiscal deficits. The colony became an exporter of raw materials, particularly precious metals, to the mother country. This led the economic authorities of the time to create a new currency, also named the peso, by slashing two zeros from the previous currency. The reaction of the central bank was twofold: first, it shifted upward the exchange rate bands (figure 15), arguing that the fundamentals of the economy had changed because of the Southeast Asian and Russian crises of the late 1990s; second, the central bank defended the exchange rate band by intervening heavily in the foreign exchange rate market, which led to an important decrease in foreign exchange reserves (figure 18), and, crucially, by increasing the nominal interest rates of the economy. Avella Gmez, Mauricio, El encaje bancario en Colombia perspectiva general, Borradores de Economia 470, Banco de la Repblica de Colombia 2007. The government has attempted to foster economic stability and to encourage private enterprise through indirect measures, such as a favourable system of taxation and the extension of credit to new industries. Annual growth of the monetary base and annual change of the money multiplier. Tax revenues did not increase at the same pace, though, thereby generating an increasing primary deficit. Solving this vicious circle through ambitious reforms would allow a signicant leap forward for material well-being in Colombia. Sources: Banco de la Repblica Colombia. In 1985, the government created the National Fund for the Guarantees of Financial Institutions (Fondo de Garantas de Instituciones FinancierasFogafn), in charge of administering the deposit insurance fund and a resolution fund for financial institutions. Additionally, reserve requirements increased from 34 percent to 46.5 percent in various reforms in the following two years (Avella Gmez 2007). First, as a result of the constitutional reform to the central bank, monetary financing decreased. The U.S. dollar has been very strong against the Colombian peso during 2016, averaging just over 3,100 pesos to the dollar. Sources: Hernndez Gamarra and Jaramillo Echeverri (2017) and Avella Gmez (2007); authors' calculations. The pandemic is likely to lead to higher informality, inequality and poverty - reversing years of improvement. Kodama, Masahiro, How Large Is the Cost of Business Cycles in Developing Countries?, Review of Development Economics, 02 2013, 17 (1), 4963. Petroleum reserves have long been exploited in the Magdalena and Catatumbo river valleys, and major new fields were opened in the Llanos and in Amazonia in the late 20th century. An important component of the recession was its coincidence with the deepest financial crisis in Colombian history. The third period in our story begins in 1991, with the promulgation of the new political constitution of Colombia, and includes the worst economic and financial crisis since the early twentieth century. After 1967 planners in both 1). Colombia has grown exponentially during the past few years, with GDP growth double the expected rate. The economy Originally bands were specified to have a width of 7 percent relative to a medium level established by the central bank, as it was believed that this width was enough to adjust to shocks to the real exchange rate. Private enterprise dominates the economy, and direct government participation is limited to such industries as the railways, petroleum, and telecommunications. little or no benefit from this period of expansion. Figure 3. Balance sheet of the central bank. Colombia continued to produce Foreign Exchange reserves, 19601970. The late nineteenth century witnessed the development of tobacco and Sources: Junguito and Rincn (2007) and Banco de la Repblica Colombia, authors' calculations.