Revaluation is no disease

admin marzo 1, 2012 Comentarios desactivados en Revaluation is no disease

Silverio Gómez Carmona

Director

 

In the first 45 days of the year, the Colombian peso (COP) has appreciated by just over seven percent; simply put, the closing US dollar exchange rate of 2011 was COP$1,942 and in mid-February it was below COP$1,800. This is a general trend, which is also evidenced in currencies of countries such as Brazil, Chile, Peru, and Argentina.

As is now customary, the first complaint came from exporters, who accurately reason currency appreciation is a factor (although not necessarily the only one) that hampers their competitiveness. However, the latter could be overcome through other means. 

The Central Bank’s Board of Directors, which includes the Minister of Finance, has chosen to increase interest rates, which is a decision that to some may seem as an extremely conservative move. However, many leading economists believe the Central Bank raises its interest rate to make credit more expensive and increase risk awareness, thereby decreasing the level of credit and the willingness of companies and individuals to increase their demand for credit, which reduces their desire for further debt. 

One fact that confirms this is the increase of household consumption in the third quarter of last year which was the second highest between the late twentieth century and the early twenty first century, and it was mainly supported on credit. Therefore, raising interest rates doesn’t seem out of line, considering the international crisis and in particular the current state of Europe.  

It is not necessary to make an analysis of prudent economics, but it is clear that currency revaluation is tied to the way the economy is being managed and it is even safe to say that it is a result of conscious and rational decision-making to protect the economy and ensure price stability, which is the primary objective of the Central Bank. Surprisingly as it may seem, the Minister of Finance, Juan Carlos Echeverry, has stated in his own casual way that the US dollar has not reached the pain threshold, which implies that there is still room for currency appreciation and there is little authorities can do about it. 

Colombia and Latin American economies in general are going through good times, being able to stand up alone to a crisis in developed economies for the first time ever. The latter cannot be interpreted as a sign of contagion, but of good financial health. Additionally, if there is to be a means to solving problems such as a diminishing competitiveness this should not imply lowering our guard, as it is necessary to strengthen our privileged position because in today’s global scenario nothing can be taken for granted.


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