Dr. Arturo Jose Galindo, former Member of the Board of Directors and Co-Chair of the Colombian Central Bank, shares his unique insights on the COVID19 crisis in Colombia.
How do you foresee the Colombian economic recovery?
In most Latin American countries, a significant economic recovery is expected in 2021. I agree with the average forecasts picturing a Colombian growth close to the 5% in 2021 - with potential slowdowns in 2022. It is a relatively usual dynamic after a systemic collapse as great as the one that occurred last year.
That projection, however, is not to be apprehended lightly. Beyond the uncertainty associated with the pandemic itself, which could lead to lower growth in the likely events of strong outbreaks and delays in the vaccination process, there are also risks concerning the interest rates’ behaviour in the industrialised world. Although the central banks of the world’s most powerful economies have stated that they are going to keep low rates for prolonged periods, there are some concerns regarding the inflation's behaviour, which could affect that decision, and lead to an increase in interest rates. This could eventually have a negative impact on capital flows and on the growth dynamics of countries like Colombia. Another very important matter regards the outcome of the fiscal reform currently being discussed in the Colombian congress. It is imperative to adjust public finances. Failure to do so could send a very bad signal to the markets and could also affect the country's economic activity.
Economically speaking, has 2020 been the most difficult year in Colombia's history?
Without a doubt, and not only in Colombia. It is an unprecedented crisis.
Conducting a tax refom in the country is essential. Who will have to assume the fiscal crisis?
It is. Over the last decade, the country has dealt with an enlarging mismatch in its fiscal accounts. The public debt’s trajectory demonstrates it. 10 years ago, the debt-to-GDP ratio was around 34%. Today, it is estimated at 64%. Between 2019 and 2020, it increased by about 15 percentage points - the pandemic has played an important role.
There are different exercises to determine this debt’s sustainability - i.e. to guarantee that, given certain expectations of growth and interest rates in the country, it would be able to repay it, suggesting that the government's net income should increase by approximately 2 percentage points of GDP. This could be achieved through a combination of higher revenues and lower expenditures, while the country's needs are growing - due to the pandemic - the bulk of the adjustment will have to come by way of income - higher taxes. This will have to be assumed by all citizens, and it will surely be in a progressive way, hence, the wealthiest will have to contribute more.
Inflation in 2020 was at its lowest rate in Colombian history and it is still well below the 3% goal established by the Central Bank. Will it reach it before 2022?
I don’t think so. Inflation expectations for 2021 are slightly below 3%. Analysts’ forecast tend to agree on 2.7% with a rebound - above the target - in 2022. The impact of 2020’s crisis on aggregate demand is profound, and it's barely recovering. That's reflected in the low levels of inflation last year and in the relatively low levels expected for 2021.
With a GDP far from its pre-pandemic level, a declining inflation, and a skyrocketing unemployment rate, is there a conscensus in the board on a way to stimulate the economy?
I don’t know the Board’s current agenda. I’m not a member anymore - since 28th February. What I can tell you is that consensus has always existed on concerns about the unemployment rate and its evolution throughout the pandemic. Partly as a result of this, the Board was very aggressive in adopting measures to promote strong economic stimuli. The continuous injections of liquidity, as well as the reduction in the monetary policy rate by 250 basis points highlight it. The fact that the interest rate has not continued to fall does not mean that the monetary stance has been reversed. In fact, at the current level of 1.75%, it continues to be strongly expansionary, precisely to support the recovery.
What has been your greatest achievement during your year as co-chair and board member?
In a collegiate body such as the Board of Directors of the “Banco de la República” (Central bank), decisions are debated arduously among a group of seven people and are taken jointly. Sometimes, there are discrepancies, and opinions can be divided, but at the end of the day, it is the collegiate body who makes the decisions. In addition, these are made with the support of extraordinary teams - the Banco de la República, the Ministry of Finance, and other entities in the country. In that sense it is impossible to speak of any individual achievement. Behind every decision there are many inputs and a lot of first-level discussion. The greatest achievement of the Board, I believe, was to react very quickly both with conventional instruments and innovative ones to avoid a big crash with terrible consequences. Although the economy suffered from a major contraction, it could have been much worse. I believe the decisions that were made prevented panic situations that could have hit our economy even harder.
Given your extensive and successful career as an economist at Asobancaria (the Inter-American Development Bank), a professor and a board member of Colombia’s Central Bank, what was the toughest challenge you have ever faced?
The 2020 crisis is unprecedent and could not be compared to any situation I have ever dealt with. Without a doubt, facing it and getting around it have been the greatest challenge of my professional life.