September 26, 1999
Colombia bows to pressure to float peso

                  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, had
                  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 a
                  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 the
                  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 could
                  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 goal
                  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 peso
                  -- 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 it
                  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 this
                  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.