CHANGING TIDES

Colombia 2015 | FINANCE | INTERVIEW

TBY talks to Mauricio Cárdenas, Minister of Finance and Public Credit, on fiscal discipline, structural and regulatory adjustments, and monetary policy.

Mauricio Cárdenas
BIOGRAPHY
Mauricio Cárdenas has been the Minister of Finance and Public Credit of the Republic of Colombia since September of 2012, having served as the Minister of Mines and Energy in the Santos Administration. Between 2008 and 2011, he was the Director of the Latin American Initiative of the Brookings Institution in the US. He earned his Master’s and PhD in Economics from Universidad del los Andes, in Bogotá, Colombia, and from the University of California at Berkeley, respectively. He has held numerous teaching positions, and published numerous books and academic articles on subjects related to the Colombian economy.

What fiscal and monetary measures is the government taking to redress the balance of imports and exports in order to maintain competitiveness in manufacturing and other industries?

Monetary policy is designed and implemented by an independent Central Bank following an inflation targeting regime. On the fiscal front, in April 2013, the government implemented a zero-tariff policy on imported capital goods and raw materials not produced domestically under the PIPE (Stimulus Plan for Employment and Productivity). This policy reduced tariffs to 0% for almost 3,100 items over a two-year period, with a deep impact on industrial activity and competitiveness, as it reduces costs for supply chains, which leads to a lower final product price. On the other hand, it represents relief in tax payments for the industry of approximately $550 million for this two-year period. Since its implementation in August of 2013, total imports of raw materials increased 9% in the first year of the policy, while capital goods have reverted their tendency and increased 3% during the same period.

What structural and regulatory adjustments need to be made to ensure that FDI—particularly in the hydrocarbons related industries—leads to a greater real contribution to GDP?

Different structural measures have already been enforced in the past years in order to eliminate barriers for oil production. The royalties reform allowed companies to redirect resources towards regional investments to increase competitiveness, mainly through transportation, road infrastructure, and greater warranties for producers. Additionally, in 2014, we took important steps toward reducing obstacles related to environmental licensing and problems with native communities. Furthermore, with the recent drop in oil prices, we are now structuring a plan to boost the oil industry in order to ease investments in oil exploration and production. This plan entails private and public initiatives, some of which have already been included in the current National Development Plan, such as the reduction of tax rates on royalties paid by oil companies. Another proposal is to allow adjustments in the production agreements for the National Hydrocarbons Agency (ANH). We are still studying additional proposals together with the private sector.

Given Colombia's relatively strong GDP growth on the continent, what are the greatest vulnerabilities facing the Colombian economy over the coming years, in terms of avoiding the same cyclical recession that has befallen its neighbors?

Although the drop in the oil price will definitely have an effect on economic growth, it is necessary to highlight that Colombia is not as commodity-dependent as other countries in the region. While oil extraction accounts for 5.2% of total GDP for Colombia, in Peru and Chile the mining sector represents almost 12% of their respective economies. Meanwhile, employment in our mining sector accounts for just 1% of national employment. Furthermore, the real depreciation of the Colombian peso will contribute to boost tradable non-oil related exports such as manufacturing products, which have already started to show recovery signs. On this front, vulnerabilities related to the behavior of Venezuela represent less of a threat to our local economic outlook. In 2014, Colombian exports to Venezuela represented just 3.6% of total exports and their contribution has been decreasing over the past few years. Moreover, imports from Venezuela have shrunk to just 0.7% of total imports. On the non-tradable side, construction, financial services, and retail continue to evidence strong leading indicators. Besides, the unemployment rate has achieved historical lows, while formal employment continues to grow. These achievements in the labor market and positive developments on poverty reduction have given birth to a stronger middle class that will support private consumption. In this sense, the biggest risk to the downside remains in the fiscal arena, especially if the drop in prices turns out to become structural at current low levels. Nevertheless, regardless of the scenario, the Ministry of Finance is completely committed to the fulfillment of fiscal rule in order to guarantee macroeconomic stability, as well as to continue nourishing confidence in our country.