Colombia Must Lower Interest Rates Warns Former Finance Minister

José Antonio Ocampo, the former Minister of Finance under President Petro, has joined the voices in Colombia calling for a reduction in interest rates to promote economic recovery and accelerate economic growth. The Central Bank of Colombia will have to make a decision on this matter this week.

It is worth noting that interest rates in Colombia have been at 13.25% since May of this year. The upward trend began tentatively in October 2021 when the central bank set the rate at 2%, following several months of low interest rates. It ended 2021 at 3%. In 2022, especially since the start of the war in Ukraine and the global inflationary surge, interest rates have been rising month by month, reaching 13.25%, a level not seen in Colombia in this century.

Currently, Jose Antonio Ocampo, who served as minister for the first 8 months of Gustavo Petro’s government, has joined the increasingly important voices, including those within the government, calling on the Central Bank of Colombia to reduce interest rates to facilitate cheaper credit circulation and help boost the stagnant economy.

Residual Economic Growth

It’s worth noting that Colombia’s economic growth, in terms of Gross Domestic Product (GDP), during the second quarter of 2023 was a nearly irrelevant 0.3% compared to the same period last year. This figure coincides with the decline in industrial production and retail sales, as reported by DANE.

Although Colombia’s main economic indicators remain positive for now, experts, including the former minister, are warning that they could soon turn negative if the Central Bank of Colombia does not change its monetary policy, leading to an inevitable economic stagnation in the country.

“It is essential, therefore, to adopt a recovery program, as I pointed out in a column in this newspaper a month ago, which has become the proposal of a broad group of analysts. As I said then, the three essential elements must be a reduction in interest rates, an acceleration in the government’s budget execution, especially in infrastructure and social housing sectors, and a more ambitious policy to promote non-traditional exports,” wrote former Minister Ocampo in a column for El Tiempo newspaper.

Request to Lower Interest Rates

In the same article for El Tiempo, José Antonio Ocampo explicitly called on the board of directors of the Central Bank of Colombia to reduce the interest rate this week after it remained unchanged at 13.25% for 4 months.

“I, therefore, join the Minister of Finance and various associations and analysts in pointing out that it is time to start reducing interest rates, as I recommended from July, the last time the Board made decisions on this issue and decided not to lower the rate,” stated Ocampo.

Ocampo justifies this reduction by the fact that inflation, although still high, has been showing signs of moderating for months. For the former minister, inflation, excluding food and beverages, is already below 10%, although the consolidated value with all items was 11.43%, according to the DANE’s report earlier this month.

Three Former Finance Ministers Support the Call

In addition to José Antonio Ocampo, former Finance Ministers Alberto Carrasquilla, who held the position for 78 months during President Duque’s tenure and previously with Álvaro Uribe, as well as Mauricio Cárdenas, who served as minister for 71 months during President Santos’s tenure, have expressed support for the government’s calls to lower interest rates.

For Cárdenas, “the problem of economic growth goes beyond the current moment; it is a problem of global growth. It will be difficult to achieve very high growth rates. We need to consider scenarios of low growth. We will also have high interest rates. The era of cheap money is over,” he said at the Capital Markets Symposium, where all three former ministers coincided.

Alberto Carrasquilla, on the other hand, stated that there is no data to suggest that the fiscal rule will not be met. “Institutionally, if it is not met, there is an obligation to explain why (…) What would worry me most is if the institutionality is not respected, but I also have no reason to believe that someone would do this,” said the former minister in reference to his current counterpart, Ricardo Bonilla.

The Necessary Rise in Gasoline Prices

One of the most controversial measures of the current government is the decision to gradually stop subsidizing gasoline. Prices have been steadily rising since the beginning of the year, and this does not help control inflation. However, former Minister Ocampo, who participated in this decision during his months in Petro’s government, has defended the measure.

“The reason why the contraction in demand has not resulted in a more rapid decline in inflation is because there are supply factors that are acting in the opposite direction, especially the correct decision to raise gasoline prices (…). There are also legal norms that require adjusting various prices for inflation, which will happen again in December, although now based on core inflation, as determined by the Development Plan,” Ocampo emphasized.

Where Ocampo disagrees is in the government’s decision to subsidize gasoline for taxi drivers. After significant protests, the taxi sector secured a commitment from the government to subsidize a special fuel for the industry. Ocampo has described this measure as “ridiculous.”

Growing Cocaine Exports?

Another point of agreement among the three former ministers is their questioning of data published by Bloomberg regarding the significant growth in cocaine exports. The media outlet recently claimed in a study that illegal cocaine exports would surpass oil as Colombia’s most exported product this year.

“Bloomberg is completely wrong on this matter. When the importance of illegal crops was analyzed in the past, more moderate estimates were made. These calculations have several errors, and what needs to be calculated are the FOB values of exports, which are much lower than what Bloomberg claims,” concluded Ocampo, a point on which the other two former Colombian finance ministers also agreed.