Monday, September 25, 2023

Colombia’s Central Bank Has Shepherded the Nation’s Success Story

With the global economy in such disarray, the financial impacts on emerging economies become extremely difficult to fend off or eventually absorb.  Investment capital can flee in an instant to “safe havens”, disrupting capital flows and exchange rates for months to come.  It takes a proactive central bank to “buffer” a thriving local economy from such travails, and in Colombia, the Banco de la República, has guided and protected the nation’s stability, acting like a financial “shepherd” during these uncertain times.

As the major economies of the world search for the magic formula that will lead to economic growth, Colombia has been a financial success story for the past decade, thanks in part to the ongoing efforts of its central bank.  Maintaining a positive growth posture, even when the developed countries of the world are in recession, is quite a financial task, requiring a deliberate stewardship of national assets, the nation’s currency exchange rate, and a reasonable balance between inflation and domestic interest rates.

The responsibility for achieving this “balance” in both private and public activities falls squarely on the shoulders of the Banco de la República.  By design, the central bank is “independent from the other branches of public power, enjoys administrative, heritage and technical autonomy, and is subject to its own legal regulation.”  Simply stated, the mission of the group is to maintain currency purchasing power by executing the following functions that include:

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•    Fix and regulate reserve requirements for the various categories of credit establishments;
•    Arrange the carrying out of open market operations;
•    Regulate interbank credit to meet transitory liquidity requirements;
•    Establish the maximum remuneratory rates of interest for credit establishments;
•    Intervene in the foreign exchange markets to safeguard the maintenance of the purchasing power of the currency;

Has the bank achieved its primary objective?  The Colombian Peso weakened during the “Great Recession” to well over 2,000 pesos to the U.S. Dollar.  Nearly all currencies in the world behaved in a similar manner, as can be determined from free forex charts charts provided by currency brokers.  Since 2009, however, the peso has strengthened on a gradual basis, down to its present exchange rate of 1,765 pesos to the greenback, thereby improving the purchasing power of the peso for the past several years.

Within this carefully crafted scenario of strengthening exchange rates, the Colombian economy has also performed admirably over the past decade, never once slipping into recession, as the economies in North America and Europe suffered business downturns and contractions.  From 2002 to 2007, GDP growth averaged 5% due to increasing domestic security, judicious monetary policy, a growing export trade, and the influx of foreign investment.  In recent years that average declined to just under 4%, but projections for 2012 suggest more growth to the 4.7% level.  These growth rates are slightly above the average for other South American countries.

With growth comes inflation, and the central bank has been active in lowering these rates, as well.  With the exception of the brief recessionary period in 2008 and 2009, inflation in Colombia has been on the decline from 8% in 2001 down to as low as 2% in 2010, to its present level of 3.4%, well within the defined targets set by the central bank.  Interest rates had been raised over the past few months by the bank to curb increasing prices, but the bank recently left rates unchanged at 5.25%, based on favorable pricing activity.

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Colombia continues to represent an ongoing financial success story in South America, helped in part by its central bank, the Banco de la República.

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