Colombia’s central bank has recently discussed and presented to members of congress the idea of a new peso. The measure would consist of slashing three zeros from the end of the current Colombian Peso (COP) to create the New Colombian Peso.
For newcomers to the country, especially North American and European natives, accounting in Colombia can be overwhelming at first. At an exchange rate of approximately $1,800 COP to $1 USD, trips to the grocery store can cost upwards of $250,000 pesos and a new car could cost you more than $45,000,000 pesos leaving many people’s heads spinning around all those zeros.
Most agree that dropping three zeros would make life easier for everyone but what are the consequences and are the rewards greater than the risks?
The minister of Colombia’s Treasury or Ministro de Hacienda, Juan Carlos Echeverry, has said that the government views the measure in favorable light but that its cost would need to be spread over a long-term period.
Portafolio reported that the estimated cost of printing an entire new stock of money would be $221 million pesos or $122,777 U.S. dollars at an exchange rate of $1,800 COP/$1 USD. While this figure is relatively small in terms of overall GDP, Colombia’s government runs on a tight budget so Mr. Echeverry’s concerns are merited.
Besides the one-time cost of printing the new currency, money would also have to be spent to advertise the new change and to assure that citizens understand what is happening and that they aren’t taken advantage of by sellers who might continue to charge them old peso prices.
Controlling inflation is another extremely important factor in currency redenomination as it could destroy the value of the new peso.
So what are the benefits?
Besides making accounting easier (an important benefit not to be overlooked), there is a wide array of benefits to a lower peso/dollar ratio.
Dropping three zeros from the peso would send a strong message locally as well as globally about Colombia’s current economic situation and its confidence about the future.
Although Colombia hasn’t been stricken by hyperinflation, some of its neighbors have, which leads to assumptions about the whole “neighborhood.” Argentina and Brazil have experienced serious bouts of hyperinflation causing them to use currency redenomination (four times in Argentina and six times in Brazil) as a method of fighting against inflationary trends. However, unless underlying causes of inflation are dealt with, cutting a few zeros from the end of a currency has proven to be ineffective in the long-run.
That being said, when foreigners see that with $1 USD they can buy $1,800 pesos, they tend to view the currency as very weak which has implications regarding their overall view of Colombia and its economy.
Currency redenomination, where $1 USD might equal only $1.8 pesos for example, sends a strong message to Colombians and the world alike that Colombia is emerging on the world stage and that it intends to be a world player in the 21st century.
It could serve as a reminder to people around the world that Colombia’s status as a poor developing nation will not hold forever and that it should be seen not as inferior but as equal to G-20 nations like Brazil and Argentina.
Successful currency redenomination could also have political implications for the Santos administration. It could be used as a political tool to mark the beginning of a “new era” and to show that Colombia is now a rejuvenated, stronger nation than it was before.
The central bank is arguing that, now more than ever, redenomination makes perfect sense. Economic outlook is positive, long-term inflation is expected to be stable, and Colombia is becoming an attractive country for foreign investment increasing its credibility on the world stage.
Still, besides political gains and symbolic advantages, the technical benefits are scarce.
Dropping a few zeros from the peso would certainly decrease accounting errors which can be costly in many cases and it would make life easier for first-timer users of the peso. Besides that, nothing really changes.
If you are earning the current minimum wage of $515,000 pesos per month and paying $150,000 per month in rent, your salary in new pesos would be $515 and you would pay $150 in rent. The only difference is that there are no longer a few extra zeros.
A paper by Layna Mosley of the University of North Carolina states that countries around the world chose to use currency redenomination approximately 70 times from 1960 to 2003. Reasons differed among countries but normally redenomination was used after stints of hyperinflation as was the case in Argentina in Brazil.
In other cases, governments used redenomination for political reasons or to send a message to their citizens that the days of hyperinflation are gone.
In the case of Colombia, which has traditionally been a very stable economy in Latin America, the reasons for redenomination are largely symbolic.
Past administrations of been content on letting citizens spend $4,000 instead of $4 pesos for a cup of coffee, and a high peso/dollar ratio has not proven to have negative effects thus far on the Colombian economy. Outlook is positive, foreign investment is increasing, inflation is low, Colombians are better off than previous generations and the peso is gaining strength against almost every major currency in the world today.
More than anything else, redenomination would be a symbolic move serving to reinforce Colombia’s changing image around the world and to add to its growing credibility in the international community.
What lawmakers have to decide is if the cost of printing the new money and the cost of advertising this change to the nation are really worth the potential benefits.
Author Matthew Helm is an American who moved to Colombia where he started the website relocationcolombia.com, specialized in information for potential expats and investors.