Colombia's finance minister looks for growth in equal measure
Colombia might boast one of the strongest economies in Latin America but the country's finance minister, Mauricio Cardenas, is more than aware that its economic growth – which is largely dominated by its energy and mining sectors, which benefit only a small proportion of the population – needs to be diversified and its rewards better distributed.
Q: What are the principal reasons why the Colombian economy is one of the most promising in Latin America today?
A: Essentially, since [Colombia’s own] financial crisis in the late 1990s, the country has had a much stronger fiscal framework and a stronger monetary framework. So we have had low inflation, low fiscal deficits, declining debt and simultaneously sound economic growth. In a nutshell, strong macroeconomic fundamentals.
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Q: What are the expectations for foreign investment and economic growth this year?
A: The level of foreign investment is hard to predict. We keep reaching new heights. In 2012, we had $16.8bn in foreign investment. It is highly concentrated on energy and mining but we are also seeing a lot now in retail, finance and infrastructure. We have a projection of 4.8% gross domestic product [GDP] growth this year. The International Monetary Fund is forecasting 4.4%. That is down from 2011 [when it was 6%], when we had a very rapid increase in oil production and the manufacturing sector was doing better than it is now.
Q: In spite of the evident achievements of the Colombian economy and its banking system, which proved resilient during the recent international crisis, total private sector credit as a percentage of GDP is still quite low in the country. Why is this?
A: The main reason has been the high degree of informality in the labour market. Now, the private sector credit-to-GDP ratio is about 40%. So, we still need to do a lot more in terms of financial inclusion to make sure that more Colombians are integrated in the financial sector, to reduce the degree of informality.
We are doing a lot. We have just passed a tax reform that cuts the payroll tax by half; [this tax] was very high before and a barrier to formalisation. We have cut that tax from 30% to 16% and we expect the number of formal jobs to increase in Colombia very significantly. The informal economy now represents about two-thirds of the labour market. It is very large.
Q: Despite Colombia’s high economic growth over the past decade, unlike most other Latin American countries, poverty in Colombia, at 34% of the population, and income inequality have been stagnant. Moreover, Colombia’s Gini coefficient, a measurement of inequality, was 55.9 in 2010, the highest in Latin America and the seventh highest worldwide, according to the World Bank. What is president Juan Manuel Santos’ government doing to change this?
A: We are very aware that while we need to preserve macroeconomic stability we need to take [a further] step [to reduce] poverty and inequality. And that pretty much sets our agenda. We cannot aspire to be a developed country if we don’t reduce the gap in incomes and assets.
For example, we have changed the way we allocate royalties. Previously, 80% of royalties went to producing regions and provinces, 20% to the rest of the country. We are completely reversing this; 80% is going to the whole country and 20% to the producing regions. Second, we raised personal income taxes significantly for individuals with high earnings, from an effective rate of 5%, which was very low, to a minimum income tax rate of at least 20%. And that in itself will lower the Gini coefficient by two points, from 56% to 54%, according to a World Bank study.
Q: Another challenge, according to some economists, is that Colombia may risk catching the so-called Dutch disease, as a result of high international commodity prices, with industrial and manufacturing output and exports dwindling due to the appreciation of the Colombian peso and the economy and public finances increasingly dependent on volatile oil and mining sectors?
A: One-quarter of our overall revenue comes from the energy and mining sectors. About three-quarters of our exports are also energy and mining related. We don’t like that dependence. But of course the question about the Dutch disease is about whether the expansion in mining and oil is creating some negative side-effects in manufacturing. And it is, through the appreciation of the currency. So we are actively engaged in offsetting that appreciation.
The antidote is saving. So we are saving part of the revenue we earn from our mining and energy sectors in a sovereign fund. We plan to set aside about $1bn a year in that fund. We are also increasing our level of foreign reserves. The central bank is very active in the foreign exchange market. And we are also actively managing our debt, reducing our debt in dollars and taking pesos to amortise our debt in dollars.
Last year, the appreciation in the peso was about 11%. It was one of the currencies that gained most in value in emerging markets. And that explains why, beginning in 2011 until the end of 2012, the manufacturing sector’s output has declined from a rate of 4.5% a year to zero.
