Bogotá — September 30 will be a key day in economic matters in Colombia. After a year and a half of stability in interest rates of the Central Bank, there could be an upward movement. At least that is what the Colombian financial market is expecting. Analysts expect that at the September Board meeting there will be an increase in intervention rates by at least 25 basis points.
In an interview with Bloomberg Línea, the gobernor of Banco de la República, Leonardo Villar, gave his vision regarding the current level of rates, the behavior of inflation and its expectations, as well as the labor market, among other issues.
Villar assures that it is very likely that in the coming months we will begin to see a less expansive monetary policy rate, but warns that the level of the rate must be reconciled at a point that avoids the de-anchoring of inflation expectations, but that maintains the impulse to the economy.
He also referred to the appointment of former Finance Minister Alberto Carrasquilla to the Board of Directors of the Issuer. He does not see any inconvenience in the recent passage by the government of Iván Duque and does not believe that changes in the way of selecting the codirectors of the Issuer are necessary, not even in cases as atypical as the one that happened during the current presidential term when the first president chose the five codirectors who accompany the general manager and the Minister of Finance on the Board.
Villar also commented on the lessons that the pandemic has taught central bankers, not only in relation to the operation of the bank itself, but also in terms of monetary policy, where he sees significant advances in digital payments. In addition, the bank manager gave his views on the advantages and disadvantages of regulating cryptoassets in Colombia.
Bloomberg Línea: One issue that concerns not only Colombia, but the world, is inflation. In the country, it has already surpassed the 2% to a 4% range. How much does this accelerate the Board’s intention to reduce the monetary stimulus?
Leonardo Villar: As you say, the increase in inflation has been quite generalized in Latin America and in the world in general, even in the United States, where it is currently much higher than in Colombia.
The diagnosis that most analysts have about the increase in inflation at a global level responds, on the one hand, to supply phenomena, in particular, to an enormous increase in costs related to logistics and transportation. On the other hand, together with the upturn in global economic activity, there has been a very significant increase in commodity prices, which is affecting us all at the same time. The expectation is that this will be a relatively short-lived phenomenon and that it will be fully reversed by 2022.
The concern that all countries have, and that we also have in Colombia, is that the transitory increase in prices increases expectations and ends up generating more persistent inflation pressures, which is why the Board, in the most recent monetary policy meeting, which was more than a month ago, stated that the field was running out to have a monetary policy as expansive as the one we have had in the last year and a half. This means that in the coming months we will probably see a somewhat less expansionary policy than the current one.
BL: The surge of the delta variant has increased uncertainties about the recovery of economies in the world and this could lead to a stagnation of economies, including Colombia’s, in a scenario of high and rising prices. What do you think should be the position of monetary policy in a stagflation scenario such as the one we are facing?
LV: At this moment, as it has happened in the last year and a half, decisions have to be taken in a scenario of high uncertainty.
The projection we have, and which we disclosed in the most recent monetary policy report, is a growth of 7.5%, which is much higher than the one we had a few months ago, but certainly with very strong risks such as the ones you mentioned.
These are risks that could be upside as well as downside. Among the downside risks is the possibility of a new wave of the pandemic and in particular associated with the delta variant. What the evidence of what is happening in the rest of the world with this variant seems to suggest, in any case, is that it has a complex health impact, about which we should be wary. But its economic impacts are rather less than what we saw, for example, in the second quarter of 2020 because societies have learned to better manage the situation of social isolation without it having such a strong impact on economic performance.
BL: One-year and two-years inflation expectations are still close to the 3% target, but have started to rise slightly toward 3.3%. Does that turn on the Board’s alerts to prevent them from going off-anchor or what level do you consider to be starting to be a concern to talk about expectations de-anchoring?
LV: Certainly the increase in expectations has been slight, when one looks at them for 2022, or longer terms, and that is reassuring. But there has been an increase and right now expectations are somewhat above the 3% target, which is one of the several considerations we had to say that the room to maintain such an expansionary monetary policy was shrinking.
BL: The labor market is recovering at a slower pace than the economy, what are you expecting for the unemployment rate at the end of the year and what will it depend on to consolidate a recovery path?
LV: Clearly, the labor market is one of the major points of concern. The recovery seen during the first half of this year in terms of economic activity was not reflected proportionally in the recovery of employment. Employment had recovered strongly in the second half of 2020, but stagnated during the first half of 2021. Fortunately, the most recent data we know, corresponding to the month of July, are somewhat better, but we still have extraordinarily high unemployment rates and employment levels that are below pre-pandemic levels by more than 1.3 million people.
The poor performance of labor indicators is an argument for maintaining an expansive monetary policy, but it must be reconciled with the inflationary pressures and the changes in inflation expectations that are occurring, which call for a moderation in the expansive stance of this policy. The idea is that we can continue to boost the economy and employment and, at the same time, avoid generating inflationary or other types of imbalances that could make the recovery unsustainable.
BL: The Tax Reform was passed, but there is still a need for a structural tax reform. How do you imagine that reform and what do you think that reform should have?
LV: I would not like to give my opinion from my position at Banco de la República on specific tax elements or tax policy aspects beyond those that concern us as monetary authority and as part of the actors that seek to guarantee the sustainability of the Colombian economy in the medium and long term.
The government itself has clearly stated that the approved reform is an important step, which will produce more than 1% of GDP in additional revenues as of 2023, but it is not enough to guarantee the magnitude of the adjustment required over the next few years and therefore it will have to be complemented with measures on the tax and public expenditure fronts.
The truth is that today we have a deficit that will probably be a historical record because it will be even higher than in 2020. In 2022 the government is projecting a deficit of 7% of GDP, which would still be one of the highest in many years, if we exclude 2020 and 2021. This has generated an increase in the level of public debt that if not adjusted may lead us to situations in which interest payments on that debt start to grow faster and faster and make the level of adjustment required more demanding.
Therefore, as the government itself has said, it will be very important that the reform approved during these weeks be complemented with additional measures in the future.
BL: The fact that former Minister Alberto Carrasquilla returned to the Board so soon after leaving the Ministry of Finance was criticized. Do you see any inconvenience in having government officials return to the Bank’s Board in such a short period of time?
LV: No. I can give you two opinions. First, the fact that we have faced some retirements of several Board members during the last few years is unfortunate because it generates more frequent changes than would be desirable. Fortunately, the appointments have been of people with the best qualities. In the case of Alberto Carrasquilla, he is a person who was technically the manager of Banco de la República, who has been committed to the functions of the central bank and its constitutional objectives and who, in addition, knows the State better than anyone else. In that sense, I have no concerns.
Second. The fact that the members of the Board have been in the government is not new. There are many examples of people who have joined the Board after participating in the government. That is perfectly admitted in the rules and has been a fairly common practice since the independent central bank was created. From that point of view I do not have any concern either.
The fact that Board members have been in government is not new. There are many examples of people who have joined the Board after participating in the government.
BL: To avoid suspicions regarding the independence of the Board, would it be convenient to seek changes in the rules that govern it to prevent the President from being able to make more than the two changes contemplated in the Constitution? That is to say, in the event of resignation, the replacement should be chosen by the Board or another mechanism should be designed.
LV: It seems to me that Banco de la República has worked well and the rules are adequate. I do not think it is convenient to reform details of what does not show any manifest fault. As the Americans say: what is not broken better not try to fix it.
BL: In addition to the tax reform, what other reforms do you think there should be from now on? What are the debates that Colombia should take on in the short term?
LV: There are debates of great importance that will have to come in the future. The pension issue is of enormous social importance and also has very important economic implications. Colombia is a country that spends a lot on pensions and has a very low coverage, unacceptably low, whose social implications will be increasingly noticeable for the simple reason that we are an aging society. At some point, the challenge of a reform on this front will have to be faced.
On the labor front, there are new elements that were seen as a result of the pandemic and adjustments have been made to some of them, but it will probably be necessary to continue moving forward to facilitate issues such as flexible and virtual work in a context of reducing informality. I think many of us have learned that these are entirely reasonable possibilities that work adequately and that labor standards must be adapted so that we can continue to do so in the environments and with the requirements that allow it in a productive and at the same time worker-friendly way.
BL: Would you agree with an increase in the retirement age?
LV: I made proposals on these issues in the past, but at that time I had a different position from that of manager of the Banco de la República. As manager, I do not want to give my opinion on that front, which is the responsibility of the government and the congress. I would only say that the pension issue is critical for social development, that it is important to take into account that the demographic structure of the country is changing rapidly towards an older society, that Colombians have an extremely low pension coverage and that the system we have today generates excessive fiscal costs.
I would only say that the pension issue is critical for social development, that it is important to keep in mind that the demographic structure of the country is changing rapidly towards an older society.
BL: Technicians from Banco de la República have prepared documents that propose the implementation of differential minimum wages by regions. Do you think it is time for Colombia to have this debate?
LV: They are technical documents that analyze the implications of policy alternatives, but they are not positions of Banco de la República, but of their authors. The central bank has been characterized for having a very high quality technical team with a group of officials dedicated to research. They contribute ideas to the public debate, but when they do so they do not do so in the name of the Board or the manager, only in the name of the authors of the documents.
BL: A couple of boards ago they talked about there being no need to accumulate more international reserves, since SDRs came in, but were sold to the government. One would think that the debate could eventually be revived, whether to accumulate more reserves or not?
LV: The most interesting part of the sale we made to the government is that it did not imply a drop in international reserves with respect to what we had before. In fact, what happened is that on August 23 we received the equivalent of US$2,890 million from the International Monetary Fund (IMF) and that increased our international reserves.
This was simply the counterpart of the IMF decision in which we also participated together with the other 189 members of the IMF. Eight days after receiving those resources we sold them to the government. What we said is that this decision was facilitated by a diagnosis according to which we considered that the level of reserves was adequate before we received the IMF issue and therefore we could proceed with the operation we did with the government. Going forward, the assessment of whether or not to accumulate reserves will continue to be a routine debate. But as far as the operations carried out at the end of August with the IMF and with the government are concerned, it is clear that, if you look at those operations as a whole, the reserves remained unchanged.
These operations were a great example of coordination. The Bank transferred to the government the international liquidity it received from the IMF through a sale of dollars in exchange for TES that the government had at its disposal in the Treasury. The payment with these TES serves the Bank’s monetary policy, improves its profitability outlook and does not imply any type of monetary issuance or direct financing of the government. It was therefore a good decision for both parties.
BL: What is the Issuer’s position on cryptoassets? The Superfinanciera is advancing a test sandbox, but do you think Colombia should regulate it? What would it gain or lose if it does so?
LV: I think the issue of cryptoassets is something that should be looked at from many points of view. The work that is being done under the leadership of the Superintendency of Finance with the sandboxes that allow, in a very controlled space by the regulator, to detect possible positive elements of these cryptoassets that can be developed for the benefit of the financial system and the economy in general, and that, at the same time, allow to identify the risks involved in transactions with these types of assets, is very positive.
One of the most widely recognized risks in crypto-asset transactions is the difficulty of maintaining traceability. Transactions with crypto-assets can become mechanisms for money laundering and concealment of illegal operations which, of course, we must prevent. I have no doubt that the expansion of the use of cryptoassets, and in particular, their eventual entry into the financial sector, requires very careful regulation.
One of the most recognized risks in crypto-asset transactions is the difficulty of maintaining traceability. Transactions with cryptoassets can become mechanisms for money laundering and concealment of illegal operations, which, of course, we must prevent.
BL: In the case of the central bank, what are the lessons and what did the pandemic change forever in monetary policy?
There are lessons that range from the way the bank works on a day-to-day basis, the ability to work virtually, which has been a very positive surprise in the midst of the difficulties, to lessons in terms of monetary policy and intervention in the markets, which were also very positive. In Colombia and in other parts of the world, monetary policy was able to act in a bold, strongly countercyclical manner. The Bank’s actions were able to solve problems in the markets that at some point were not working properly and help the economy to recover much faster than would have been possible without the countercyclical measures adopted.
But there are also more operational issues in which we can draw lessons and they have to do with the importance of promoting digital payment mechanisms, of facilitating schemes that are very advanced in other countries and are just beginning to be developed here, such as immediate payment schemes through interoperable centralized platforms by all financial entities.
These are issues that can help to ensure that in situations such as those experienced during the pandemic, the entire payment infrastructure works even better than it did in the Colombian case, with a greater development of electronic commerce and with a more fluid and lower cost electronic payment system. The challenges remain great and the pandemic showed us how important it is to move forward decisively in this field.
