Posted by Newswires on Oct 19, 2010 Leave a comment

Colombia central bank rules out capital controls

Colombian news - Central Bank

The Colombian central bank moved to dispel the possibility that it could soon impose capital controls to cool off the peso, which has surged this year fueled by foreign investment in the country’s mining and oil industries.

Central bank chairman Jose Dario Uribe said Tuesday that “until this moment we have come to the conclusion that it’s not justified” to impose capital controls.

Uribe said the central bank weighs the costs and benefits of imposing capital controls. If the benefits outweigh the costs in the future, capital controls could be imposed, Uribe said.

The comment came after a presentation by Nicolas Eyzaguirre, director of the International Monetary Fund’s western hemisphere department, in which he defended the use of capital controls as a policy option to halt excessive currency appreciations.

“It’s hard to envision the Colombian peso depreciating against the dollar,” Eyzaguirre said in a conference. “Colombia needs to get used to a strong currency,” he said. Eyzaguirre added that if some macroeconomic conditions are met, such as fiscal discipline and a free-floating currency system, countries like Colombia should consider using capital controls.

There’s been recurrent speculation that Colombia could resort to capital controls to stem the appreciation of the peso, which has gained more than 12% this year against the dollar.

The country went through a major appreciation of the peso two years ago despite the central bank attempting to restrain the currency’s climb with the imposition of capital controls.

At that time, the central bank imposed capital control rules trying to curb foreign investment in Colombian stocks and bonds. The measure failed to restrain the peso and the central bank lifted the controls in late 2008.

The use of capital controls may be ineffective because the peso’s appreciation is being driven by foreign direct investment, not flows toward local stocks or bonds, some economists warn.

Instead, the central bank is so far attempting to push down the peso by buying a minimum of $20 million daily for at least four months to mop up U.S. currency from the foreign exchange market. Uribe insisted the central bank’s intervention had been highly successful in reining in the peso.

The government is also attempting to halt the peso’s appreciation by keeping more dollars abroad. Finance Minister Juan Carlos Echeverry said last week that the government would keep abroad $1.4 billion it is expected to receive as dividends from state oil firm Ecopetrol SA.

The government could also soon announce new measures to fight the peso’s rise President Juan Manuel Santos said in an interview Tuesday with a local newspaper that the government was readying a new package to curb the peso, without giving more details.

The peso retreated Tuesday to COP1,816.50 to the dollar from COP1,813.00.

(Darcy Crowe, Dow Jones)