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Economy

Central bank members disagree over use of capital controls

by Toni Peters May 4, 2011

Colombia News - Central Bank

Members of the Colombian central bank’s board have expressed disagreement over the use of short-term capital controls to slow strengthening of the peso in relation to the dollar, Reuters reported.

On Wednesday, Carlos Cano, one of the board’s seven members, presented arguments in favor of capital control measures, which would simultaneously place restrictions on locals acquiring foreign assets and on foreigners acquiring local assets.

Cano said that capital controls “limit the appreciation of the exchange rate and the vulnerability of the economy to external financing modalities that are considered high risk. Such controls have been a very useful complement for other micro-economic tools – fiscal, monetary and regulatory – under special and transitory circumstances.”

Meanwhile, Finance Minister Juan Carlos Echeverry, also a member of the bank’s board, said in April that he saw no need for capital controls to slow the strengthening of the peso, adding that he is “not fond” of using them.

The peso’s relative value has climbed 4.9% in the past month, and rose again Tuesday, currently standing at COP1,762,05 to $1.

A strong peso is bad for exporting sectors, such as the cut-flower industry, as money from transactions is received in dollars, while expenses must be paid in pesos.

Measures taken thus far by the central bank to stem the rise of the peso, such as buying $20 million daily among others, have not had the desired effect, according to Bloomberg.

In addition to advocating capital controls, Cano also warned that current major increases in capital inflows and commerce could create bubbles in real estate and financial asset prices.

A bubble may be developing in the coffee market, as cultivators are presently worried that the high price per pound of Colombian smooth arabica coffee beans is “unsustainable,” not suitable for growers and coffee may be overvalued.

capital controlscoffeeColombia pesoexportsJuan Carlos Echeverry

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