Colombia's central bank ought to lower interest rates this week as losses tied to the collapse of local pyramid schemes, along with the global financial crisis, hurt economic growth, Finance Minister Oscar Ivan Zuluaga said.
As many as 500,000 Colombians face losses of money invested in Ponzi schemes that promised returns of as much as 200 percent in about a week, Zuluaga said in an interview today in Bogota with Bloomberg Television. As much as 2 trillion pesos ($850 million) may have been entrusted to the fraudulent financial companies, according to unofficial estimates, he said.
"The pyramid schemes will have an economic impact, especially in the regions where this problem is concentrated," Zuluaga said, adding that he hoped to have official numbers on the magnitude of the crisis in about a week. "The feeling is that the conditions are clearer, more adequate to begin to cut interest rates."
Two people were killed in mass protests across Colombia last week after the government shut down schemes that President Alvaro Uribe said were linked to the country's cocaine cartels. Banking regulator Cesar Prado resigned as a result of the scandal that has sparked riots among poor Colombians who, unable to open bank accounts, handed over their life savings to the unregulated financial groups. The government has declared a 30- day state of social emergency to restore order.
Zuluaga said the government wouldn't provide funds for people who were swindled. Instead, government efforts were aimed at prosecuting those responsible and making sure economically- hit areas recovered quickly with farming loans and housing subsidies.
"There will be no resources from the state or the budget because clearly these were illegal activities and citizens were conscious of the risk they were assuming," he said. "We are designing a plan for social investment in the regions that are most hurt."
Zuluaga said the expected economic fallout from the pyramid schemes, especially in rural southern Colombia, should bolster the government's argument for lower rates to stimulate growth. The magnitude of the losses may be equivalent to 3.7 percent of Colombia's foreign currency reserves of $23 billion.
Rate Cut Plan
"The discussion within the board is not if, but when, we should cut rates," said Zuluaga, who represents the government on the seven-member board. "Hopefully it's this Friday and the government will defend that position."
Policy makers have increased borrowing costs by 4 percentage points since April 2006 to rein in inflation that's held above the bank's 3.5-to-4.5 percent target range for more than a year.
At the bank board's meeting on Nov. 21, the board will hold the overnight lending rate at a seven-year high of 10 percent, according to 27 of 31 economists surveyed by Bloomberg. Four economists expect a quarter percentage point cut to 9.75 percent.
DMG, the larger of the two financial schemes shut down, has insisted that it followed the law and was the victim of a government campaign.
Colombia's chief federal prosecutor, Mario Iguaran, today ordered the arrest of the company's founder, David Murcia Guzman, along with six other executives on charges of money laundering. Two, including the company's spokesman and lawyer, have already been arrested and police in Panama are helping to hunt down Guzman there, Iguaran's office said in a statement.
Coca Region
Guzman, 27, started DMG three years ago in the sparsely populated southern state of Putumayo, epicenter of Colombia's coca trade. It gradually expanded with branches nationwide, luring money from a network of associates in exchange for points entitling them to everything from televisions to cars at approved vendors, Guzman said in an interview with Semana magazine in February.
The long-haired Guzman, who says he studied acting before devoting himself to helping the poor, vowed to fight what he called the aristocracy's "financial terrorism."
"I know they can kill me, believing that by eliminating me they will eliminate our family that has grown into an economic revolution," he said in a video posted on You Tube this week.
Gerson Arias, a political analyst for the Bogota-based Ideas for Peace Foundation, said Uribe's government faces more destabilizing violence stirred by class-based resentment.
"We're witnessing the same political discourse against the rich and powerful that Pablo Escobar wielded so effectively two decades ago," Arias said in a telephone interview. "It's unforgivable for Uribe, whose central strategy is to clamp down on illegal activities, to have allowed this thing to explode the way it has." (Bloomberg)
