The International Monetary Fund expects the Colombian economy to grow just 1% in 2023. Colombia’s Finance Minister Ricardo Bonilla told Latin Trade how he expects to see faster growth this year and how to build a new economic model based on manufacturing, employment stability and environmental sustainability.
1. Inflation, interest rates and household consumption
General strategy. The government is working on the recovery of two sectors, public works and housing construction, and expects them to recover in the second half of the year, said the Minister. Both sectors have the difficulty that high interest rates prevent them from having financial closings and, he pointed out, interest rates will go down as inflation subsides.
Inflation and interest rates. “Inflation has been declining for three months now,” he said. He anticipates that it will not go down as much as he would like, because he will maintain a policy of increasing the price of gasoline to cut the deficit produced by the fuel subsidy.
No more hikes “With the central bank we reached an agreement in June not to continue raising the intervention rate, [and to] monitor what happens with inflation in the following months”. The government and the Bank expect inflation to fall. This means that when they reconsider intervention rates in July, “they will probably remain unchanged”. The same would happen in September and October. “At that point we hope the Bank can send a message to start lowering.”
How much they would come down. The aim, he noted, is to end the year with inflation at 9.5%, i.e. down 300 basis points over the remainder of the year. “If that’s the case, I would expect the bank to start lowering rates and leave them around 11 or so,” he said.
Public spending. On the public spending side, the government made available about US$750 million (COP 3 billion). With these funds it will contract in the second half of the year, civil works that have financial closure. These are projects that the Ministry of Transportation had already identified as necessary. They are road recovery, paving processes and above all, he said, a very ambitious plan for tertiary roads.
Housing Subsidies: Minister Bonilla addressed the resolution of a gap between down payment subsidies and interest rate subsidies. Both subsidies will now complement each other, enabling financial closure for buyers. This agreement is expected to drive demand for between 35,000 and 65,000 homes in the second half of the year.
2. Labor reform
The discussion of the labor reform will most likely focus on employment stability, Ricardo Bonilla noted. In a previous proposal presented by the Ministry of Labor, which failed to pass in Congress, the major stumbling block was the sharp increase in the cost of dismissal, he pointed out.
Layoffs. Bonilla highlights a document from the central bank that shows that Colombian companies lay off employees with a mere one year and seven months of seniority, indicating a lack of investment in learning curves.
Stability, the crucial thing. “How do we encourage them [companies] to have greater stability and to build learning curves? Maybe the alternative is not to sanction layoffs, maybe the alternative is to create other incentives,” he said. “I think that is the discussion that will come from here on, but it is very worrying that in Colombia companies do not build learning curves.”
The Minister of Finance addresses the need for “reindustrialization” to recover a process initiated in the early 20th century but halted in the 90s due to trade liberalization, leading to deindustrialization. Taht is, the weakening of local manufacturing The goal is to revive sectors that were never fully consolidated in Colombia.
The sectors. He mentioned four key sectors to rebuild manufacture.
Textile and apparel. “Today we import fabrics, but we still have design. This means that in apparel we still have a huge advantage over other countries and this can be a basis for the recovery of this industry”. Leveraging Colombia’s design advantage, the focus will be on evaluating the feasibility of producing fabrics locally and considering the potential reintroduction of cotton cultivation.
Pharmaceuticals. “We used to have a pharma industry and we produced vaccines. That was cast aside and today we produce what the strategy of international laboratories dictates us to produce: only some products and we import the rest,” he said. The aim is to utilize national laboratories for producing medicines, particularly generic products.
Petrochemicals. He believes that this industry cannot be only a producer of gasoline and diesel. Diversification of the petrochemical industry beyond gasoline and diesel production, as electric and hybrid means of transportation advance.
Metalworking. “It is the most important,” he stressed. Significantly enhancing the half-built metal-mechanic chain in Colombia, focusing on the export potential, given its importance in countries like China, India, and Korea.
As far as vehicle manufacture, the Minister proposed introducing Fourth Industrial Revolution technology to rebuild the metal-mechanic chain, moving beyond conventional combustion car assembly to electric transportation equipment and individual vehicles like scooters and electric motorcycles. “Although these are not family solutions, they generate alternatives for everyday use. For the family there is either mass transportation or electric vehicles”.
Iron and steel. He maintained that the Colombian metal-mechanic chain has a steel industry, which is no longer a blast furnace industry. “It is another type of steelworks … We have the base mineral and we have scrap.”
Household appliances. “In Colombia there are appliance makers. We have to modernize them technologically to start producing energy-saving appliances”.
4.Transition to zero hydrocarbons
Colombia will continue exporting hydrocarbons, as there is still international demand. “Unfortunately it is not a short-term issue. What is absolutely certain today is that we depend and will continue to depend for about 15 years on coal and oil,” he said. “It would be foolish of the country not to take advantage of that market.” The government aims to generate conditions for building exportable supplies to replace coal and oil exports over time.
Fiscal dependence. The purpose of reindustrialization, he said, is to substitute imports but also to generate new exports. But in addition to increasing exports, the government has to reduce its dependence on hydrocarbons. “Today we are very dependent in terms of tax revenues on hydrocarbon taxes,” the Minister noted.
5. The Amazon
The priority. “President Petro’s international proposal is that the eight Amazonian countries should agree with the rest of the world to issue bonds to maintain the Amazon and sell its oxygen. That is the priority,” Ricardo Bonilla said. In addition, he added, the eight countries should develop activities to guarantee that “the Amazon continues to be the lungs of the world, and the rest of the world understands that this is there where oxygen is. Therefore, they must contribute to maintain it”.
Combatting Deforestation: The government proposes issuing carbon bonds to incentivize inhabitants of the Amazon to protect their environment. These bonds will fund efforts to reduce deforestation and promote reforestation, ensuring the communities become staunch defenders of the region. “The communities living in those places should understand that a tree is oxygen and not wood.”