Is It Time to Dollarize the Colombian Economy?

The Colombian peso has lost 12.5% of its value to the US dollar in the last five months.

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Colombia’s neighbors Panama and Ecuador have dollarized their economies, to critical acclaim (Twitter).

The US dollar’s rise against the Colombian peso on this Monday, August 5, is unprecedented. What different experts say is that the currency’s performance has several explanations. The main reason they suggest is the context of a trade war between the two economic superpowers: the United States and China.

The Colombian currency has lost about 12.5% ​​when compared to the year’s high in February, based on the Representative Market Rate (TRM). On Febuary 28, 2019, the dollar was worth 3,072 COP. Today it is trading at 3,459 COP.

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The phenomenon is worrisome for the domestic market, and the Colombian government appears unable to strengthen the peso, especially due to the increase in the cost of some goods and services and the increase in its outstanding debts.

Time to dollarize?

The PanAm Post spoke with Jorge Eduardo Castro, a founding member of the Libertarian Movement in Colombia, who said that the level of devaluation the peso is having against the dollar is an opportunity to structurally rethink the need for Colombia to have a currency of its own.

“When ten years ago in Colombia and in many countries there was a deep revaluation, the possibility of dollarization and even semi-dollarization was raised. It is not, therefore, a matter of devaluation or revaluation, but to recognize that in the face of the largest currency on the planet, the peso distorts short-term and long-term exchange relations,” said Castro.

He also said that the region is making progress in a de facto dollarization, regardless of the statements made by central bank officials or those protected from the financial sector:

“The initiative that is being studied between Brazil and Argentina to think about a common currency represents a call to review the assumption about having one’s own currency. Obviously because of the level of nationalism that these countries have it would be impossible to think about dollarization, but for the members of the Pacific Alliance, and in particular for Colombia, this is an alternative worth considering, especially considering that you have Panama, Ecuador, and even Venezuela with a certain level of dollarization, whether formal or informal.

Castro was emphatic in pointing out that dollarization in Colombia is increasingly deepening through the internationalization of the economy. “Whether or not members of the financial sector like it, people increasingly use the dollar in their daily economic calculation to evaluate purchases or investments. Those who unnecessarily restrict themselves are those in the financial sector, who view the dollar with prejudice, when they should be the ones most interested in increasing transactions, savings, and products traded in dollars, to and from Colombia.”

In his opinion, the Colombian peso has been punished beyond what it deserves, because Colombia’s financial outlook is much better than the current exchange rate level reflects. Additionally, one must consider the devaluation of the yuan, the Federal Reserve interest rate cuts, and the pressure to lower the dollar.

“In Colombia, unfortunately, the Bank of the Republic tried to have an objective exchange rate level around 3,100 COP feeling a little confident in inflation and now it has gotten a little bit out of hand. It would not be strange to see interest rate rises in Colombia while the pressure for a weak dollar continues, so in the crossing of trends there would be a strengthening, if and only if tensions do not continue to escalate, because that would involve withdrawal of funds from countries and sectors of risk, with investors seeking safe refuge, which would place us in a world pressing for expansive monetary engineering and facing intense geopolitical tensions. Everything indicates that the gold is beginning to shine again. And, of course, Colombia will also be full of surprises,” he said.

However, economist Jorge Arturo Saza told the PanAm Post that the present devaluation of the Colombian peso against the dollar puts it historically at neither a low nor a high, and that the current scenario is not sufficient grounds to propose dollarization.

The Real Exchange Rate Index (ITCR), discounting domestic inflation and weighted by inflation of business partners, is at a point similar to January 2019 or January 2016 (Source: Bank of the Republic)

In addition, he suggested that there are dilemmas for the Bank of the Republic, “inflation is rising, there is exchange pressure, and, finally, the economy is in an adverse environment.”

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