LES BONS COMPTES, DES BONS AMIS

Colombia 2017 | FINANCE | INTERVIEW

TBY talks to Juan José Echavarría, Governor of Banco de la República (Central Bank of Colombia), on the bank's cultural role in securing a broader peace, the importance of saving, and why the economy must still open up even more.

Juan José Echavarría
BIOGRAPHY
Juan José Echavarría became the governor of the Central Bank in January 2017. He has a bachelor’s from the Escuela de Minas of Antioquia, a master’s degree in economics from Boston University, and a PhD in the same subject from Oxford University. He was director of Fedesarrollo, the most important think tank in economics in Colombia, and dean of the economics faculty at the National University. From 2003 to 2013, Echavarría was also a director of the Board of Directors at Banco de la República. He has taught macroeconomics, econometrics, and international trade at the universities of Los Andes and Rosario and the National University of Colombia, among others.

What are your priorities for the Central Bank and what legacy would you like to leave?

Priorities are the same at every central bank in the world: to keep inflation low, the economy close to its potential GDP, and to avoid crises. Financial and real shocks permanently hit our economies in Latin America. Additionally, and due to peculiar historic reasons, Colombia is the only country in the world where the central bank is in charge of many cultural activities like libraries and museums. Paradoxically, this protects our monetary policy role since the country loves what the central bank does in this area.

What is your strategy for reaching inflation targets whilst lowering interest rates to promote growth?

Colombia is again a special country in this area. We did not suffer from hyperinflation during the 1980s, similar to Peru, Brazil, or Bolivia, but inflation was close to 25% for more than 20 years during the 1970s and 1980s. This likely means the reduction of inflation to 3% (our long-term goal) was costly. This produces inflation inertia, and changes long-term expectations even when shocks are transitory. Our strategy, then, like any other central bank under inflation targeting, is to float the exchange rate, use short-term interest rates to keep the economy growing under stable inflation, and avoid bubbles, which is not an easy task. Some temporary shocks (food prices and exchange rate devaluations) have recently hit the economy and expectations have increased much less than observed inflation, but communications will be essential to explain to Colombians that shocks are transitory as inflation returns to acceptable levels.

Is your macroeconomic outlook more positive for 2017?

The year 2017 will be better than 2016; however, we still have to make great efforts to reduce inflation and improve economic growth. Every projection says that inflation will be within the 2-4% range at the end of the year or, if not, during the first half of 2018. This is important since inflation was higher than our 2-4% range during the last two years. Economic growth was close to 2% during 2016 and will probably be higher in 2017. Oil prices increased, and the uncertainty produced by the tax reform (already approved) and peace negotiations (already signed) will not hit the economy this year. We also believe a peace dividend will bring economic benefits in the following years, mainly in areas such as tourism, trade, rural development, and foreign investment. Industry and agriculture will benefit from the recent large devaluation of the exchange rate. But growth rates close to 2% are not enough, and Colombia has to regain the growth rates of 4-4.5% reached in the last 15 years. We have to save more, something related to fiscal surpluses and the pension system, and we have to open a closed economy. In addition to tariff reforms, we also need to modernize agriculture.

If there are cash flow issues, how well protected is Colombia compared to other countries in the region?

Shocks are always an important reason to be worried in Colombia and Latin America, but I do not see important unbalances at this moment. Colombia has always had good macroeconomic management. We have a flexible exchange rate, which eases the adjustment of the whole economy to shocks, and the deficit of the current account moved from 6.5% of GDP last year to less than 3.5% (which is still high). Foreigners own close to 35% of some parts of the domestic TES market, another reason to keep our economy in good shape. Many banks are involved in the construction of roads; we just hope the Odebrecht news does not adversely affect road construction, though corrupt people should be imprisoned. People say banks standards are great, and we are trying to move slowly to Basel III. We are not there yet.