BOGOTA, Colombia (Reuters) -- In a long-awaited capitulation to market
forces, Colombia eliminated its closely-managed currency regime this
weekend and let its peso float freely.
The decision was announced by Finance Minister Juan Camilo Restrepo late
Saturday, just one day after the government said it had reached agreement
with the International Monetary Fund on a loan of up to $3 billion to help
pull the economy out of its worst recession in decades.
Restrepo and other officials, including central bank chief Miguel Urrutia,
repeatedly denied they planned to scrap the peso trading band, under which
the currency had moved within set limits against the dollar since 1994.
But Saturday's move followed a week in which the central bank sold more
than $400 million from its international reserves in a bid to defend the peso
from speculative attack, and reserves were set to fall below the
psychological support level of $8 billion.
The move also followed two de facto devaluations of the peso in less than
year, both of which had undermined the currency regime's credibility.
Colombia suspended the peso's trading band at a time of great turmoil in
domestic forex market. But analysts say the peso, which closed at an
all-time low of 1,994.49 to the dollar Friday, may eventually settle near that
level once it is past the baptism-of-fire typically meted out to newly-floated
The IMF agreement just put in place -- a formal deal will be signed next
month -- should provide some underpinning to the peso, which has already
depreciated by nearly 29 percent against the dollar this year.
But in the initial overkill by speculators, some analysts say the peso
first weaken to as much as 2,100 or 2,300 per dollar.
The elimination of Colombia's trading band system and its so-called crawling
peg currency regime is part of a regional trend that began when Mexico
scrapped its currency bands and devalued its peso in 1994.
Brazil axed a similar band regime in January and Chile suspended the trading
bands that surrounded its peso early this month.
Among Latin America's large economies, Venezuela, whose bolivar
currency is considered massively overvalued, is now alone in maintaining a
currency band system.
Colombia's adoption of a floating exchange rate could add to inflationary
pressures on the economy, since a weaker currency will be reflected in
higher prices on imported goods and services.
But Restrepo said the government would stick to its 10 percent inflation
for next year nonetheless.
Local media had long suggested that the IMF would insist on an elimination
of the forex bands as a condition of granting Colombia a contingency credit
Restrepo and central bank officials denied that the decision to float the
-- which could hurt companies that are heavily indebted in dollars -- had
been imposed on the country from outside.
But a bank statement, announcing the suspension of the trading band, said
been eliminated "to facilitate agreements with the Fund."
Despite the elimination of the trading band, Urrutia said the central bank
would continue to intervene in the local foreign exchange market to smooth
any abrupt changes in the exchange rate.
Urrutia did not elaborate. But he told Reuters in an interview earlier
month that he opposed a so-called "dirty float" of the peso, under which the
bank would intervene to lend the currency support, because it meant there
would be less transparency on the currency market.
Copyright 1999 Reuters.