These investments of foreign capital, so valued and hoped for by the economy, are generating problems for Colombia since they affect the type of change required to impact the competitiveness of the Colombian economy.Buenos Aires, Argentina June 3, 2008

The Colombian economy is going through one of its best economic periods in the last 50 years. Colombia is growing strong. In 2007 the economy grew by 7.52%, investments in the country multiplied, foreign direct investment in Colombia grew, and internal demand became more and more strong.

But in the midst of this moment of splendor for the Colombian economy, inflation hangs over it like a great black cloud that threatens to water down this good moment. The inflation in Colombia continues to increase and worrisome to its authorities, it creates several dilemmas that Colombia must face in resolving this problem of inflation. In the month of May, the Consumer Price Index (CPI) grew by 0.93%, the highest rate for that same month since 1999.

Already, in the first five months of this year, the retail inflation in Colombia has reached 5.12%, and 6.39% for the last 12 months. One needs to be sure to remember that the Central Bank of Colombia has a goal of 4% for inflation with a margin of a percentage point going either way. Clearlythe rate of inflation month to month has gone beyond this proposed goal.

It is for this very reason that one week ago the Central Bank of Colombia decided not to bother with raising interest rates. Currently they remain at 9.75%. In explaining this decision, the Central Bank stated: “Our meeting emphasized that inflation and the expectation of further inflation will continue at levels greater than our goals. This also appears to be happening with several other indicators of basic inflation”.

The Central bank is not only worried about the data present about inflation, but also about strong dynamics that are influencing the financing of consumption. That is a subject that the monetary authority is closely following, due to the impact that it has beyond the phenomenon in the internal demand (and consequently, in the inflationary pressures). This situation of major inflationary pressures and lending levels that encourage consumption is generating the sense that a period of a sustained rise of rates is approaching.

Market analysts are pessimistic about the inflation, since they think that the Central bank of Colombia cannot fulfill its goal of inflation for this year.

In this situation, a logical thing is to hope that the Central Bank of Colombia would decide to increase its interest rate, as the market is expecting. However the Central Bank of Colombia, and its monetary policy, seems to be facing a dilemma in considering whether to maintain or raise the interest rate. Some are pushing for high interest rates along with pressure to increase the currency’s rate of exchange in hopes of creating a context of stability within the Colombian economy. And that, in turn, it creates a situation where foreign investment capital becomes attractive.

These investments of foreign capital, so valued and hoped for by the economy, are generating problems for Colombia since they affect the type of change required to impact the competitiveness of the Colombian economy.

It is for that reason that the Treasury Department decided to elevate from 40% to 50% the minimum liquidity requirements that foreign investors are required to pay prior to creating a portfolio in the country. This policy was established by the Government for more than a year and additionally, the Government established a minimum time of permanence of two years for any Foreign Direct Investment (FDI) entering the country.

Logically these measures have generated a lot of criticism, mainly on the part of those harmed such as large foreign investment banks. However, from my perspective, it is a proper measure to take to limit the negative effects generated by raising interest rates.

It is true that these measures are an attempt to limit the free flow of capital, but I understand that sometimes this is one of the only valid alternatives that exist when dealing with speculative capital.

From my point of view, the message of Colombia is clear. “Colombia is willing to guarantee that foreign capital may enter the country, but at the same time it does not want that capital to work against the stability of the economy. For that reason, Colombia is encouraging those that invest capital in the country remain there for a substantial period of time.”

We will meet again tomorrow,

Horacio Pozzo

Editor’s note: Colombia has returned to its inflationary levels from 90s, and it is taking measures to avoid major inflationary pressures. But these measures are creating as much of a risk for the economy as a dissatisfaction for the international investors. You may leave your comments with us at: www.latinforme.com