Before the first shots of the dollar this month, former ministers such as Rudolf Hommes and Juan Camilo Restrepo expressed a fear: that we were seeing the prelude to the return of measures such as exchange controls.
Former ministers were quick to point this out, bearing in mind that the president himself Gustavo Petro aired the possibility of taxing the so-called “swallow capitals”that is, temporarily tax investments to prevent them from leaving the country.
Petro said this in the context of questioning the “increase in the internal interest rate by the Bank of the Republic that will only transfer the world recession to the Colombian economy”, which also opened a debate on the autonomy of the Issuer at the time.
The rise in the internal interest rate, which was opposed by the finance minister, but had the support of the entire board of directors of Banco de la República, will only transfer the world recession to the Colombian economy.
– Gustavo Petro (@petrogustavo) October 5, 2022
“Exchange controls on capital outflows, in addition to being useless, would be to run the first mile of the race that led Argentina to the prostration in which it finds itself,” said Juan Camilo Restrepo. “Everything that has been achieved since we repealed exchange control now threatens to become retro fashion: exchange control, directed or unrecovered credit, import prohibition”said Rudolf Hommes.
That controversy was fueled on October 6, when the president’s remarks resulted in a dollar climbing above $4,600.
Now, with a dollar that seems unattainable in its race towards $5,000, there are more reasons to understand what was the concern that the former ministers put on the table.
What is exchange control and what is its history in the country?
In very simple terms, it is about the imposition of restrictions on the inflow and outflow of capital. Namely, an intervention by the authorities in the foreign exchange market. This covered by the objective of protecting the national currency. Some examples are the stocks on the dollar in Argentina, whose Central Bank restricted the purchase of foreign currency. A measure that has also been applied in Venezuela.
The newspaper Cronista from Argentina, a member of the Ibero-American Network of Economic Journalism -Ripe, explained it this way:
“The dollar trap that has been in force in Argentina since September 2019 has only now reached Venezuela, the country with the highest inflation in the world with 686.4% for 2021: this was approved by the National Assembly -the Venezuelan “Congress”. A rate of 3% will be used for each operation in foreign currency carried out in Venezuela, whether they are bank transactions or purchases in stores by individuals or companies.
In addition, it showed two ways in which these exchange controls are applied:
“While in Argentina the official dollar purchase quota is renewed monthly with a cap of US$200 (US$2,400 per year), which also includes credit card payments in foreign currency, in Venezuela such amount is annual and reaches US$9,711.72 per year”.
These types of controls are applied in cases of financial crises, capital outflows or large currency devaluations, such as the one Colombia has been experiencing.
In Colombia they have their history. It was in the government of Carlos Lleras Restrepo, in 1966, when an Exchange Statute was established. With this, the free purchase and sale of foreign currency was restricted, prices were unified and there was government control over the market. In the end, it didn’t work out. The 1991 Constitution erased those controls, in favor of an exchange rate freely set by supply and demand.
The former ministers are concerned that the Petro government is setting the stage for reviving these controls, taking into account the increasingly costly situation it faces.