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Colombia is setting a good stimulus example for Latin America. The country is trying to goose its slowing economy by spurring private pension funds to invest more abroad and inducing public ones to buy foreign exchange locally. It's a welcome contrast to protectionist measures used nearby. It should help Colombia win the currency wars.
The $365-billion (U.S.) economy has avoided mistakes made elsewhere. Colombia's budget deficit comes in at just 0.7 per cent of GDP, its public sector is relatively small and the short-term policy interest rate of 3.25 per cent comfortably exceeds inflation. With a broad-based array of commodity exports, from coffee to oil to precious metals, and encouraging signs from peace talks with insurgents, Colombia is attracting increased foreign investment to modernize its infrastructure and develop resource industries.
The exchange rate is the problem. Heavy inflows force its peso to rise and thus make Colombia's agricultural products in particular uncompetitive on world markets. A current account deficit of 3.5 per cent of GDP, as economists forecast for Colombia in 2013, isn't especially dangerous – unless of course global money markets seize up and make financing more difficult.
Brazil faces a similar problem, and has opted to restrict foreign capital. Colombia, by contrast, is lifting the cap on how much private pension funds can invest abroad and committing state-run regional pension funds to use mining and oil royalty receipts in international markets. This is expected to produce a funds outflow of some $5-billion. The central bank is buying $30-million of foreign exchange daily, or about $7.5-billion a year, so the reform seems to be sized appropriately.
Colombia's annual output growth slipped to 4 per cent in 2012 from 6.6 per cent a year earlier. Its purchasing-power GDP amounted to only about $10,000 per capita in 2011, according to the World Bank. It was 16 per cent stronger in Brazil and over 70 per cent bigger in Argentina and Chile. The sensible policy responses should help enable Colombia to harness its natural resources and close the gap.